shareholders in a crisis and so that the fund's liquidity is not
depleted, but low enough to permit investors who wish to redeem despite
the cost to receive their proceeds without bearing disproportionate
costs.\297\ Based on the comments we received on the proposal, we
believe that a default fee of 1% strikes this balance. Although we have
looked to the DERA study as confirming our decision based on comments
we received supporting the 1% fee, we recognize commenters' critiques
of the methodology used in the DERA analysis. We also note, however,
that DERA acknowledged in its memorandum that its samples were not
perfectly analogous to money market fund holdings, but that the samples
nevertheless ``provide estimates for costs of liquidity during market
stress since the selected securities have similar time-to-maturity and
credit risk characteristics as those permitted under Rule 2a-7.'' \298\
Moreover, at least one commenter who took issue with DERA's samples
agreed, based on its own independent analysis, that a default liquidity
fee of 1% is appropriate.\299\ Furthermore, because we recognize that
establishing any fixed fee level may not precisely address the
circumstances of a particular fund in a crisis, we are permitting (as
in the proposal) fund boards to alter the level of the default
liquidity fee and to tailor it to the specific circumstances of a fund.
As amended, rule 2a-7 will permit fund boards to increase (up to 2%),
decrease (to, for example, 0.50% as suggested by a commenter), or not
impose the default

1% liquidity fee if it is in the best interests of the fund.
---------------------------------------------------------------------------

    \297\ See, e.g., SIFMA Comment Letter; Fidelity Trustees Comment
Letter; Fidelity Comment Letter (suggesting a 2% fee would be
punitive); see also supra note 281.
    \298\ See DERA Liquidity Fee Memo, supra note 111. Some
commenters suggested we should analyze liquidity spreads in actual
money market fund portfolios. See Federated DERA II Comment Letter;
BlackRock DERA Comment Letter; Fidelity DERA Comment Letter.
However, as one commenter acknowledged, this information is not
publicly available, and we note that only one commenter on the DERA
Liquidity Fee Memo provided specific information in this area. See
BlackRock DERA Comment Letter; Fidelity DERA Comment Letter
(providing specific information on spreads during the financial
crisis and stating that a 1% default liquidity fee is appropriate).
We believe one data point is not adequate for us to draw conclusions
on liquidity costs in money market funds during the crisis.
    \299\ See Fidelity DERA Comment Letter.
---------------------------------------------------------------------------

    As proposed and supported by commenters,\300\ we are limiting the
maximum liquidity fee that may be imposed by a fund to 2%. As with the
default fee, we seek to balance the need for liquidity costs to be
allocated to redemptions with shareholders' need to redeem absent
disproportionate costs. We also believe setting a limit on the level of
a liquidity fee provides notice to investors about the extent to which
a liquidity fee could impact their investment. In addition, as
recognized by at least one commenter,\301\ the staff has noted in the
past that fees greater than 2% raise questions regarding whether a
fund's securities remain ``redeemable.'' \302\ We note that if a fund
continues to be under stress even with a 2% liquidity fee, the fund
board may consider imposing a temporary redemption gate under amended
rule 2a-7 or liquidating the fund pursuant to amended rule 22e-3.
---------------------------------------------------------------------------

    \300\ See, e.g., SIFMA Comment Letter.
    \301\ See NYC Bar Assoc. Comment Letter.
    \302\ Section 2(a)(32) defines the term ``redeemable security''
as a security that entitles the holder to receive approximately his
proportionate share of the fund's net asset value. The Division of
Investment Management informally took the position that a fund may
impose a redemption fee of up to 2% to cover the administrative
costs associated with redemption, ``but if that charge should exceed
2 percent, its shares may not be considered redeemable and it may
not be able to hold itself out as a mutual fund.'' See John P.
Reilly & Associates, SEC Staff No-Action Letter (July 12, 1979).
This position is currently reflected in rule 23c-3(b)(1), which
permits a maximum 2% repurchase fee for interval funds and rule 22c-
2(a)(1)(i),which similarly permits a maximum 2% redemption fee to
deter frequent trading in mutual funds.
---------------------------------------------------------------------------

    As recognized in the Proposing Release, there are a number of
factors a board may want to consider in determining the level of a
liquidity fee. These may include, but are not limited to: changes in
spreads for portfolio securities (whether based on actual sales, dealer
quotes, pricing vendor mark-to-model or matrix pricing, or otherwise);
the maturity of the fund's portfolio securities; changes in the
liquidity profile of the fund in response to redemptions and
expectations regarding that profile in the immediate future; whether
the fund and its intermediaries are capable of rapidly putting in place
a fee of a different amount from a previously set liquidity fee or the
default liquidity fee; if the fund is a floating NAV fund, the extent
to which liquidity costs are already built into the NAV of the fund;
and the fund's experience, if any, with the imposition of fees in the
past. We note that fund boards should not consider our 1% default
liquidity fee as creating the presumption that a liquidity fee should
be 1%. If a fund board believes based on market liquidity costs at the
time or otherwise that a liquidity fee is more appropriately set at a
lower or higher (up to 2%) level, it should consider doing so. Once a
liquidity fee has been imposed, the fund's board would likely need to
monitor the imposition of such fee, including the size of the fee, and
whether it continues to be in the best interests of the fund.\303\
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    \303\ A board may change the level of a liquidity fee at any
time if it determines it is in the best interests of the fund to do
so. Similarly, once a gate is imposed, the fund's board would likely
monitor the imposition of the gate and whether it remains in the
best interests of the fund to continue imposing the gate.
---------------------------------------------------------------------------

    Other commenters argued for even more flexible approaches and/or
entirely different standards for setting a fee.\304\ For example, a
commenter argued against having any default fee and instead supported
allowing the board to tailor the fee to encompass the cost of liquidity
to the fund.\305\ Different commenters similarly argued that liquidity
fees should be carefully calibrated in relation to a fund's actual cost
of liquidity.\306\ A commenter noted this calibration could be achieved
by, rather than setting a fixed fee in advance, delaying redemptions
for up to seven days to allow the fund to determine the size of the fee
based on actual transaction costs incurred on each day's
redemptions.\307\ Finally, a commenter proposed a flexible redemption
fee whereby redemptions would occur at basis point NAV (i.e., NAV to
the fourth decimal place) plus 1%.\308\
---------------------------------------------------------------------------

    \304\ See, e.g., Fin. Svcs. Roundtable Comment Letter; Schwab
Comment Letter; Santoro Comment Letter; Invesco Comment Letter.
    \305\ See Fin. Svcs. Roundtable Comment Letter.
    \306\ See Invesco Comment Letter; Ropes & Gray Comment Letter.
    \307\ See Ropes & Gray Comment Letter.
    \308\ See Capital Advisors Comment Letter.
---------------------------------------------------------------------------

    As discussed above, the amendments we are adopting today
incorporate substantial flexibility for a fund board to determine when
and how it imposes liquidity fees. We believe that including in the
amended rule a 1% default fee that may be modified by the board is the
best means of directing fund boards to a liquidity fee that may be
appropriate in stressed market conditions, while at the same time
providing flexibility to boards to lower or raise the liquidity fee if
a board determines that a different fee would better and more fairly
allocate liquidity costs to redeeming shareholders. We would encourage
a fund board, if practicable given any timing concerns, to consider the
actual cost of providing liquidity when determining if the default
liquidity fee is in the fund's best interests. In addition, we note
that under today's amendments, a fund board also could, as suggested by
a commenter, determine that the default fee is not in the best
interests of the fund and instead gate the fund for a period of time,
possibly later imposing a liquidity fee.
    Furthermore, we have determined not to explicitly tie the default
liquidity fee to market indicators. As discussed in the Proposing
Release, we believe there are certain drawbacks to such a ``market-
sized'' liquidity fee.\309\ First, it may be difficult for money market
funds to rapidly determine precise liquidity costs in times of stress
when the short-term financing markets may generally be illiquid.\310\
Similarly, the additional burdens associated with computing a market-
sized liquidity fee could make it more difficult for funds and their
boards to act quickly and proactively to stem heavy redemptions.
Second, a market-sized liquidity fee does not signal in advance the
size of the liquidity fee shareholders may have to pay if the fund's
liquidity is significantly stressed.\311\ This lack of transparency may
hinder shareholders' ability to make well-informed investment decisions
because investors may invest funds without realizing the extent of the
costs they could incur on their redemptions.
---------------------------------------------------------------------------

    \309\ See Proposing Release, supra note 25, at 183; see also
HSBC FSOC Comment Letter (suggesting that the amount of the
liquidity fee charged could be based on the anticipated change in
the market-based NAV of the fund's portfolio from the redemption,
assuming a horizontal slice of the fund's portfolio was sold to meet
the redemption request).
    \310\ Our staff gave no-action assurances to money market funds
relating to valuation during the financial crisis because
determining pricing in the then-illiquid markets was so difficult.
See Investment Company Institute, SEC Staff No-Action Letter (Oct.
10, 2008) (not recommending enforcement action through January 12,
2009, if money market funds used amortized cost to shadow price
portfolio securities with maturities of 60 days or less in
accordance with Commission interpretive guidance and noting: ``You
state that under current market conditions, the shadow pricing
provisions of rule 2a-7 are not working as intended. You believe
that the markets for short-term securities, including commercial
paper, may not necessarily result in discovery of prices that
reflect the fair value of securities the issuers of which are
reasonably likely to be in a position to pay upon maturity. You
further assert that pricing vendors customarily used by money market
funds are at times not able to provide meaningful prices because
inputs used to derive those prices have become less reliable
indicators of price.'').
    \311\ A liquidity fee based on market indicators would not
provide notice to shareholders of the potential level of a liquidity
fee like our maximum 2% fee and default fee level of 1% provide.
---------------------------------------------------------------------------

    Finally, commenters proposed various potential exemptions from the
default

liquidity fee. For example, a commenter suggested an exemption for all
shareholders to redeem up to $1 million for incidental expenditures
without a fee.\312\ Other commenters argued that a fee should not be
imposed on newly purchased shares.\313\ For several independent
reasons, we do not currently believe that there should be exemptions to
the default liquidity fee. First, because the circumstances under which
liquidity becomes expensive historically have been infrequent, we
believe the imposition of fees and gates will also be infrequent. As
long as funds' weekly liquid assets are above the regulatory threshold
(i.e. 30%), fund shareholders should continue to enjoy unfettered
liquidity for money market fund shares.\314\ The likely limited and
infrequent use of liquidity fees leads us to believe exemptions are
generally unnecessary. Second, liquidity fees are meant to impose at
least some of the cost of liquidity on those investors who are seeking
liquidity by redeeming their shares. Allowing exemptions to the default
liquidity fee would run counter to this purpose and permit some
investors to avoid bearing at least some of their own costs of
obtaining liquidity and could serve to further harm the liquidity of
the fund, potentially requiring the imposition of a liquidity fee for
longer than would otherwise be necessary. Third, as suggested by
commenters and discussed in section III.C.7.a below, exemptions to the
default liquidity fee would increase the cost and complexity of the
amendments for funds and intermediaries because funds would have to
develop the systems and policies to track, for example, the amount of
each shareholder's redemption, and could facilitate gaming on the part
of investors because investors could attempt to fit their redemptions
within the scope of an exemption.\315\
---------------------------------------------------------------------------

    \312\ See Capital Advisors Comment Letter.
    \313\ See ABA Business Law Section Comment Letter; Wilmington
Trustees Comment Letter; Federated V Comment Letter.
    \314\ See Proposing Release, supra note 25, at n.342.
    \315\ See, e.g., Federated V Comment Letter (``Any attempt to
create exceptions, such as allowing redemptions free of any
liquidity fee up to a set dollar amount or percentage of the
shareholder's account balance, would add significant operational
hurdles to the proposed reform. In order to be applied equitably,
prime [money market funds] would have to take steps to assure that
intermediaries were implementing the exceptions on a consistent
basis.''); Fidelity Comment Letter (urging the Commission not to
adopt partial gates, which like an exception to a liquidity fee,
would, for example, except a certain amount of redemptions (e.g., up
to $250,000 per shareholder) from a gate that has been imposed). The
commenter stated ``that the challenges and costs associated with
[partial gates] outweigh the benefits. The systems enhancements
necessary to track holdings for purposes of determining each
shareholder's redemption limit would be more complicated,
cumbersome, and costly than the changes required to implement the
full gate, [and] that this complicated structure lends itself to
arbitrary or inconsistent application across the industry and
potential inequitable treatment among shareholders.'' Id.
---------------------------------------------------------------------------

d. Duration of Fees and Gates
    We are adopting, as proposed, a requirement that any fee or gate be
lifted automatically once the fund's weekly liquid assets have risen to
or above 30% of the fund's total assets. We are also adopting, with
certain modifications from the proposal as discussed below, a
requirement that a money market fund must lift any gate it imposes
within 10 business days and that a fund cannot impose a gate for more
than 10 business days in any 90-day period. As proposed, the amendments
would have allowed funds to impose a gate for up to 30 days in any 90-
day period.
    Several commenters noted positive aspects of the Commission's
proposed duration for fees and gates.\316\ Some commenters, however,
suggested that the duration of liquidity fees, like the duration of
redemption gates, should be limited to a number of days.\317\ We
continue to believe that the appropriate duration limit on a liquidity
fee is the point at which a fund's assets rise to or above 30% weekly
liquid assets. Thirty percent weekly liquid assets is the minimum
required under rule 2a-7 and thus a fee (or gate) would appear to no
longer be justified once a fund's level of weekly liquid assets has
risen to this level. If we were to limit the imposition of liquidity
fees to a number of days, a fund might have to remove a liquidity fee
while it is still under stress and thus it would not gain the full
benefits of imposing the fee.\318\ Additionally, if a fund was required
to remove the fee while it was still under stress, it may have to re-
impose the fee shortly thereafter, which could cause investor
confusion.\319\ We note that a fund's board can always determine that
it is in the best interests of the fund to lift a fee before the fund's
level of weekly liquid assets is restored to 30% of its total assets.
---------------------------------------------------------------------------

    \316\ See, e.g., HSBC Comment Letter; Dreyfus Comment Letter;
SIFMA Comment Letter; UBS Comment Letter.
    \317\ See BlackRock II Comment Letter (``We would also recommend
that a MMF not be open with a liquidity fee for more than 30
days.''); Federated V Comment Letter (suggesting that liquidity fees
should be subject to the same duration limits as redemption gates
and proposing a limit of 10 calendar days); J.P. Morgan Comment
Letter; see also UBS Comment Letter (noting that ``there should be a
maximum time period during which the liquidity fee . . . could be
imposed'').
    \318\ We note that, unlike a redemption gate, a liquidity fee
does not prohibit a shareholder from accessing its investment; this
distinction, in our view, justifies imposing a limited duration on
the imposition of a gate while not doing so for the imposition of
fees. We also note that, once a fund's weekly liquid assets drop
below the regulatory minimum (30%), it is limited to purchasing only
weekly liquid assets, which should increase the fund's liquidity and
potentially bring it back above the weekly liquid asset threshold.
See rule 2a-7(d)(4)(iii).
    \319\ As discussed in the Proposing Release, we considered
whether a fee or gate should be lifted automatically before a fund's
weekly liquid assets were completely restored to their required
minimum--for example, after they had risen to 25%. However, we
believe that such a requirement would be inappropriate for the same
reasons we are not limiting the length of time the fee is imposed.
---------------------------------------------------------------------------

    We also received a number of comments on the duration of redemption
gates.\320\ For example, some commenters described the maximum 30-day
term for gating as reasonable,\321\ including a commenter that noted it
would not be in favor of a shorter time period.\322\ Another commenter
stated its support for the Commission's proposed 30-day time limit for
redemption gates.\323\ In addition, an industry group commented that
although its members had varying views, some stressed the importance of
the maximum 30-day period to allow the fund adequate time to replenish
its liquidity as securities mature.\324\
---------------------------------------------------------------------------

    \320\ See, e.g., UBS Comment Letter (supporting a maximum time
period that would require a gated fund to reopen or liquidate
thereafter).
    \321\ See, e.g., Dreyfus Comment Letter; Page Comment Letter.
    \322\ See Dreyfus Comment Letter (noting that shortening the
maximum gating period might not be enough time for a fund's
liquidity levels to adequately recover).
    \323\ See HSBC Comment Letter.
    \324\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    On the other hand, in response to our request for comment on the
appropriate duration of redemption gates, including our request for
comment on a 10-day maximum gating period, some commenters raised
concerns with the proposed 30-day maximum gating period.\325\ For
example, one commenter noted that ``denying investors access to their
cash for more than a brief period'' would ``create serious hardships.''
\326\ This commenter expressed doubt that it would take boards ``much
more than a week to resolve what course of action would best serve the
interest of their shareholders'' and suggested an alternate maximum
gating period of up to 10 calendar days.\327\ A second

commenter added that the potential total loss of liquidity for up to 30
days could further exacerbate pre-emptive runs and even be
destabilizing to the short-term liquidity markets, and suggested an
alternative maximum gating period of up to 10 calendar days.\328\
Additionally, some members of an industry group suggested that gating
for a shorter period of time would be more consistent with investors'
liquidity needs and the requirements of the Investment Company
Act.\329\
---------------------------------------------------------------------------

    \325\ See, e.g., SIFMA Comment Letter; J.P. Morgan Comment
Letter; Fla. CFO Comment Letter; Federated V Comment Letter.
    \326\ See Federated II Comment Letter; Federated V Comment
Letter.
    \327\ See Federated II Comment Letter (``Federated had
previously proposed limiting any suspension of redemptions to five
or ten business days. Alternative 2, on the other hand, would set
the limit in terms of calendar days. Federated therefore recommends
limiting a temporary suspension of redemptions to not more than ten
calendar days.''); Federated V Comment Letter; Federated X Comment
Letter; see also Federated Funds Trustees Comment Letter; J.P.
Morgan Comment Letter (suggesting a 10-day gating period).
    \328\ See J.P. Morgan Comment Letter.
    \329\ See SIFMA Comment Letter.
---------------------------------------------------------------------------

    We have carefully considered the comments we received, both on the
duration of gates and on the possibility of pre-emptive runs as a
result of potential gates, and have been persuaded that gates should be
limited to a shorter time period of up to 10 business days.\330\ As
discussed in the Proposing Release and reiterated by commenters,\331\
we recognize the strong preference embodied in the Investment Company
Act for the redeemability of open-end investment company shares.\332\
Additionally, as was echoed by a number of commenters,\333\ we
understand that investors use money market funds for cash management
and a lack of access to their investment for a long period of time can
impose substantial costs and hardships. Indeed, many shareholders in
the Reserve Primary Fund informed us about these costs and hardships
during that fund's lengthy liquidation.\334\ As discussed above, it
remains one of our goals to preserve the benefits of money market funds
for investors. Accordingly, upon consideration of the comments
received, we have modified the final rules to limit the redeemability
of money market fund shares for a shorter period of time.\335\
---------------------------------------------------------------------------

    \330\ In a change from the proposal, the maximum gating period
in the final amendments uses business days rather than calendar days
to better reflect typical fund operations and to mitigate potential
gaming of the application of gates during weekends or periods during
which a fund might not already typically accept redemption requests.
If a fund imposes a gate, it is not required to impose the gate for
10 business days. Rather, a fund can lift a gate before 10 business
days have passed and we would expect a board would promptly do so if
it determines that it is in the best interests of the fund. We note
that a money market fund board would likely meet regularly during
any period in which a redemption gate is in place. See supra note
303. Additionally, a fund's board may also consider permanently
suspending redemptions in preparation for fund liquidation under
rule 22e-3 if the fund approaches the 10 business day gating limit.
    \331\ See, e.g., SIFMA Comment Letter.
    \332\ See Investment Trusts and Investment Companies: Hearings
on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and
Currency, 76th Cong., 3d Sess. 291-292 (1940) (statement of David
Schenker, Chief Counsel, Investment Trust Study, SEC); see also
section 22(e) (limiting delays in payments on redemptions to up to
seven days).
    \333\ See, e.g., Federated II Comment Letter; Federated V
Comment Letter; SIFMA Comment Letter.
    \334\ See Kevin McCoy, Primary Fund Shareholders Put in a Bind,
USA Today, Nov. 11, 2008, available at http://usatoday30.usatoday.com/money/perfi/funds/2008-11-11-market-fund-side_N.htm (discussing hardships faced by Reserve Primary Fund
shareholders due to having their shareholdings frozen, including a
small business owner who almost was unable to launch a new business,
and noting that ``Ameriprise has used `hundreds of millions of
dollars' of its own liquidity for temporary loans to clients who
face financial hardships while they await final repayments from the
Primary Fund''); John G. Taft, Stewardship: Lessons Learned From the
Lost Culture of Wall Street (2012), at 2 (``Now that the Reserve
Primary Fund had suspended redemptions of Fund shares for cash, our
clients had no access to their cash. This meant, in many cases, that
they had no way to settle pending securities purchases and therefore
no way to trade their portfolios at a time of historic market
volatility. No way to make minimum required distributions from
retirement plans. No way to pay property taxes. No way to pay
college tuition. It meant bounced checks and, for retirees,
interruption of the cash flow distributions they were counting on to
pay their day-to-day living expenses.'').
    \335\ We recognize that rule 22e-3 does not limit gates to a
short period of time, but under that rule, a gate is permanent and a
fund must liquidate thereafter. See rule 22e-3.
---------------------------------------------------------------------------

    Some commenters suggested that the longer a potential redemption
gate may be imposed, the greater the possibility that investors may try
to pre-emptively redeem from a fund before the gate is in place.\336\
We recognize this concern and believe that if gates are limited to 10
business days, investors may be less inclined to try to redeem before a
gate is imposed because 10 business days is a relatively short period
of time and after that time investors will have access to their
investment.\337\
---------------------------------------------------------------------------

    \336\ See, e.g., J.P. Morgan Comment Letter; Federated XI
Comment Letter.
    \337\ See, e.g., Federated V Comment Letter (``[A 10-day maximum
gating period] would also be consistent with the comments of some of
the investors who indicated to Federated that they probably could
not go more than two weeks without access to the cash held in their
[money market fund].'') In addition, we note that 10 business days
is not significantly longer than funds are statutorily permitted to
delay payment on redemptions. See section 22(e).
---------------------------------------------------------------------------

    We also believe that by limiting gates to 10 business days,
investors may be better able to account for the possibility of
redemption gates when determining their investment allocations and cash
management policies. For example, an employer may determine that money
market funds continue to be a viable cash management tool because even
if a fund imposes a gate, the employer could potentially still meet its
payroll obligations, depending on its payroll cycle. Similarly, a
retail investor may determine to invest in a money market fund for cash
management purposes because a money market fund's potential for yield
as compared to the interest on a savings or checking account outweighs
the possibility of a money market fund imposing a gate and delaying
payment of the investor's bills for up to 10 business days.
    While we believe temporary gates should be limited to a short
period of time, we also recognize that gates may be the most effective,
and probably only, way for a fund to stop a run for the duration of the
gating period. As one commenter stated, ``[s]uspending redemptions
would allow a [b]oard to deal with large-scale redemptions directly, by
effectively calling a `time out' until the [b]oard can decide how to
deal with the circumstances prompting the redemptions.'' \338\
Accordingly, we believe gates, even those that are limited to up to 10
business days, will be a valuable tool for funds to limit heavy
redemptions in times of stressed liquidity.\339\
---------------------------------------------------------------------------

    \338\ See Federated V Comment Letter.
    \339\ As discussed in supra note 148, as necessary, the
Commission also has previously granted orders allowing funds to
suspend redemptions to address exigent circumstances. See, e.g., In
the Matter of: Centurion Growth Fund, Inc., Investment Company Act
Release Nos. 20204 (Apr. 7, 1994) (notice) and 20210 (Apr. 11, 1994)
(order); In the Matter of Suspension of Redemption of Open-End
Investment Company Shares Because of the Current Weather Emergency,
Investment Company Act Release No. 10113 (Feb. 7, 1978).
---------------------------------------------------------------------------

    We also recognize, as suggested by some commenters,\340\ that
temporary gates should provide a period of time for funds to gain
internal liquidity. In this regard, we note that weekly liquid assets
generally consist of government securities, cash, and assets that will
mature in five business days,\341\ and that once a fund has dropped
below 30% weekly liquid assets (the required regulatory minimum, and
the threshold for the imposition of gates), the fund can purchase only
weekly liquid assets.\342\ Accordingly, because the securities a fund
may purchase once it has imposed a gate will mature, in large part, in
five business days, we believe a limit of 10 business days for the
imposition of a gate should provide a fund with an adequate period of
time in which to generate internal liquidity.\343\
---------------------------------------------------------------------------

    \340\ See, e.g., SIFMA Comment Letter; Dreyfus Comment Letter.
    \341\ See rule 2a-7(a)(34).
    \342\ See rule 2a-7(d)(4)(iii).
    \343\ See J.P. Morgan Comment Letter (``Ten (10) calendar days
should provide [money market funds] an opportunity to rebuild
significant amounts of liquidity since the 2010 amendments to Rule
2a-7 require [money market funds] to invest at least 30% of their
portfolios in assets that can provide weekly liquidity.'').

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

    We further recognize that 10 business days is not significantly
longer than the seven days funds are already permitted to delay payment
of redemption proceeds under section 22(e) of the Investment Company
Act. We note, however, that while section 22(e) allows funds to delay
payment on redemption requests, it does not prevent shareholders from
redeeming shares. Even if a fund delays payment on redemptions pursuant
to section 22(e), redemptions can continue to mount at the fund.\344\
Unlike payment delays under section 22(e), the temporary gates we are
adopting today will allow a fund a cooling off period during which
redemption pressures do not continue to mount while the fund builds
additional liquidity, and the fund's board can continue to evaluate the
best path forward. Additionally, temporary gates may also provide a
cooling off period for shareholders during which they may gather more
information about a fund, allowing them to make more well-informed
investment decisions after a gate is lifted.
---------------------------------------------------------------------------

    \344\ For example, if on day one, fifty shareholders place
redemptions requests with a fund, there is nothing to stop another
fifty shareholders from placing redemption requests on day two. The
fund's liquidity may continue to be strained because it is required
to pay out redemption proceeds to all fifty shareholders from day
one within seven days (and the next day, to all fifty shareholders
from day two) and it must do so at day one's NAV (and the next day,
at day two's NAV).
---------------------------------------------------------------------------

    Finally, one commenter asked the Commission to clarify that the
time limit for redemption gates may ``occur in multiple separate
periods within any ninety-day period (as well as consecutively), and if
so, whether the ninety-day period is a rolling period which is
recalculated on a daily basis.'' \345\ As indicated in the Proposing
Release, the intent of the 90-day limit on redemption gates is to
ensure that funds do not circumvent the time limit on redemption gates
\346\--for example, by reopening on the 9th business day for one
business day before re-imposing a gate for potentially another 10
business day period. Accordingly, when determining whether a fund has
been gated for more than 10 business days in a 90-day period, the fund
should account for any multiple separate gating periods and assess
compliance with the 90-day limit on rolling basis, calculated daily.
---------------------------------------------------------------------------

    \345\ See Comment Letter of Stradley Ronon Stevens & Young, LLP
(Sept. 17, 2013) (``Stradley Ronon Comment Letter'').
    \346\ See Proposing Release, supra note 25, at 189.
---------------------------------------------------------------------------

3. Exemptions to Permit Fees and Gates
    The Commission is adopting, as proposed, exemptions from various
provisions of the Investment Company Act to permit a fund to institute
liquidity fees and redemption gates.\347\ In the absence of an
exemption, imposing gates could violate section 22(e) of the Act, which
generally prohibits a mutual fund from suspending the right of
redemption or postponing the payment of redemption proceeds for more
than seven days, and imposing liquidity fees could violate rule 22c-1,
which (together with section 22(c) and other provisions of the Act)
requires that each redeeming shareholder receive his or her pro rata
portion of the fund's net assets. The Commission is exercising its
authority under section 6(c) of the Act to provide exemptions from
these and related provisions of the Act to permit a money market fund
to institute liquidity fees and redemption gates notwithstanding these
restrictions.\348\ As discussed in the Proposing Release and in more
detail below, we believe that such exemptions do not implicate the
concerns that Congress intended to address in enacting these
provisions, and thus they are necessary and appropriate in the public
interest and consistent with the protection of investors and the
purposes fairly intended by the Act.
---------------------------------------------------------------------------

    \347\ See rule 2a-7(c)(2).
    \348\ Section 6(c). To clarify the application of liquidity fees
and redemption gates to variable contracts, we are also amending
rule 2a-7 to provide that, notwithstanding section 27(i) of the Act,
a variable insurance contract issued by a registered separate
account funding variable insurance contracts or the sponsoring
insurance company of such separate account may apply a liquidity fee
or redemption gate to contract owners who allocate all or a portion
of their contract value to a subaccount of the separate account that
is either a money market fund or that invests all of its assets in
shares of a money market fund. See rule 2a-7(c)(2)(iv). Section
27(i)(2)(A) makes it unlawful for any registered separate account
funding variable insurance contracts or the sponsoring insurance
company of such account to sell a variable contract that is not a
``redeemable security.''
---------------------------------------------------------------------------

    We do not believe that the temporary gates we are allowing in
today's amendments will conflict with the purposes underlying section
22(e), which was designed to prevent funds and their investment
advisers from interfering with the redemption rights of shareholders
for improper purposes, such as the preservation of management
fees.\349\ Rather, under today's amendments, the board of a money
market fund can impose gates to benefit the fund and its shareholders
by making the fund better able to protect against redemption activity
that would harm remaining shareholders, and to allow time for any
market distress to subside and liquidity to build organically.
---------------------------------------------------------------------------

    \349\ See 2009 Proposing Release, supra note 66, at n.281 and
accompanying text.
---------------------------------------------------------------------------

    In addition, gates will be limited in that they can be imposed only
for limited periods of time and only when a fund's weekly liquid assets
are stressed. This aspect of gates, therefore, is akin to rule 22e-3,
which also provides an exemption from section 22(e) to permit money
market fund boards to suspend redemptions of fund shares to protect the
fund and its shareholders from the harmful effects of a run on the
fund, and to minimize the potential for disruption to the securities
markets.\350\
---------------------------------------------------------------------------

    \350\ See 2010 Adopting Release, supra note 17, at text
following n.379.
---------------------------------------------------------------------------

    We are also providing exemptions from rule 22c-1 to permit a money
market fund to impose liquidity fees because such fees can benefit the
fund and its shareholders by providing a more systematic and equitable
allocation of liquidity costs.\351\ In addition, based on the level of
the liquidity fee imposed, a fee may secondarily benefit a fund by
helping to repair its market-based NAV.
---------------------------------------------------------------------------

    \351\ See rule 2a-7(c)(2) (providing that, notwithstanding rule
22c-1, among other provisions, a money market fund may impose a
liquidity fee under the circumstances specified in the rule).
---------------------------------------------------------------------------

    We are permitting money market funds to impose fees and gates in
limited situations because they may provide substantial benefits to
money market funds, the short-term financing markets for issuers, and
the financial system, as discussed above. However, we are adopting
limitations on when and for how long money market funds can impose
these restrictions because we recognize that fees and gates may impose
hardships on investors who rely on their ability to freely redeem
shares (or to redeem shares without paying a fee).\352\ We did not
receive comments suggesting changes to the proposed exemptions and,
thus, we are adopting them as proposed.\353\
---------------------------------------------------------------------------

    \352\ See rule 2a-7(c)(2)(i) and (ii); cf. 2010 Adopting
Release, supra note 17, at text following n.379 (``Because the
suspension of redemptions may impose hardships on investors who rely
on their ability to redeem shares, the conditions of [rule 22e-3]
limit the fund's ability to suspend redemptions to circumstances
that present a significant risk of a run on the fund and potential
harm to shareholders.'')
    \353\ But see NYC Bar Committee Comment Letter (discussing
section 22(e) and the Commission's authority to allow gates under
that section). As discussed above, we are adopting the proposed
amendments to rule 22e-3 pursuant to section 6(c).
---------------------------------------------------------------------------

4. Amendments to Rule 22e-3
    Currently, rule 22e-3 allows a money market fund to permanently
suspend redemptions and liquidate if the fund's board determines that
the deviation between the fund's amortized cost price per share and its
market-based NAV per

share may result in material dilution or unfair results to investors or
existing shareholders.\354\ Today, we are amending rule 22e-3 to also
permit (but not require) the permanent suspension of redemptions and
liquidation of a money market fund if the fund's level of weekly liquid
assets falls below 10% of its total assets.\355\ As proposed, the
amendments would have allowed for permanent suspension of redemptions
and liquidation after a money market fund's level of weekly liquid
assets fell below 15%.\356\
---------------------------------------------------------------------------

    \354\ See rule 22e-3(a)(1).
    \355\ See id.
    \356\ The proposed weekly liquid asset threshold corresponded
with the proposed threshold for the imposition of a default fee and/
or redemption gates.
---------------------------------------------------------------------------

    Commenters generally supported our proposed retention of rule 22e-3
\357\ and did not suggest changes to our proposed amendments. We are
making a conforming change in the proposed weekly liquid asset
threshold below which a fund may permanently gate and liquidate,
however, in order to correspond to other changes in the proposal
related to weekly liquid asset thresholds for fees and gates. For the
reasons discussed above, we have determined to raise the initial
threshold below which a fund board may impose fees and gates, but lower
the threshold for imposition of a default liquidity fee. Due to the
absolute and significant nature of a permanent suspension of
redemptions and liquidation, we believe the lower default fee threshold
would also be the appropriate threshold for board action under rule
22e-3.\358\ A permanent suspension of redemptions could be considered
more draconian because there is no prospect that the fund will re-
open--instead the fund will simply liquidate and return money to
shareholders. Therefore, we do not believe that the 30% weekly liquid
asset threshold for discretionary fees and gates, which is designed to
provide boards with significant flexibility to restore a fund's
liquidity in times of stress, would be an appropriate threshold under
which fund boards could permanently close a fund.
---------------------------------------------------------------------------

    \357\ See, e.g., ICI Comment Letter (supporting the retention of
rule 22e-3); Stradley Ronon Comment Letter, (discussing rule 22e-3
and master/feeder funds); Dreyfus Comment Letter; but see Peirce &
Green Comment Letter (suggesting that the requirement in rule 22e-3
that ``a fund's board have made an irrevocable decision to liquidate
the fund . . . unnecessarily dissuades boards from using redemption
suspensions'').
    \358\ Cf. Proposing Release supra note 25, at 195-196.
---------------------------------------------------------------------------

    Amended rule 22e-3 will allow all money market funds, not just
those that maintain a stable NAV as currently contemplated by rule 22e-
3, to rely on the rule when the fund's liquidity is significantly
stressed. A money market fund whose weekly liquid assets have fallen
below 10% of its total assets (whether that fund has previously imposed
a fee or gate, or not) may rely on the rule to permanently suspend
redemptions and liquidate.\359\ Under amended rule 22e-3, stable value
funds also will continue to be able to suspend redemptions and
liquidate if the board determines that the deviation between its
amortized cost price per share and its market-based NAV per share may
result in material dilution or other unfair results to investors or
existing shareholders.\360\ Thus, a stable value money market fund that
suffers a default will still be able to suspend redemptions and
liquidate before a credit loss leads to redemptions and a fall in its
weekly liquid assets.
---------------------------------------------------------------------------

    \359\ We note that a money market fund would not have to impose
a fee or a gate before relying on rule 22e-3. For example, if the
fund drops below the 10% weekly liquid asset threshold, its board
may determine that a liquidity fee is not in the best interests of
the fund and instead decide to suspend redemptions and liquidate.
    \360\ See rule 22e-3(a)(1).
---------------------------------------------------------------------------

5. Operational Considerations Relating to Fees and Gates
a. Operational Costs
    As discussed in the Proposing Release, we recognize that money
market funds and others in the distribution chain (depending on the
structure) will incur some operational costs in establishing or
modifying systems to administer a liquidity fee or temporary gate.\361\
These costs may relate to the development of procedures and controls
for the imposition of liquidity fees or updating systems for
confirmations and account statements to reflect the deduction of a
liquidity fee from redemption proceeds.\362\ Additionally, these costs
may relate to the establishment of new or modified systems or
procedures that will allow funds to administer temporary gates.\363\ We
also recognize that money market funds may incur costs in connection
with board meetings held to determine if fees and/or gates are in the
best interests of a fund.
---------------------------------------------------------------------------

    \361\ Some commenters also suggested that affected money market
funds may have to examine whether shareholder approval is required
to amend organizational documents, investment objectives or
policies. See, e.g., Ropes & Gray Comment Letter; Fidelity Comment
Letter.
    \362\ See, e.g., ICI Comment Letter (``[T]he nature of the
liquidity fee would entail changes to support a separate fee type,
appropriate tax treatment, and investor reporting, including
transaction confirmation statements that reference fees charged and
applicable tax information for customers.'').
    \363\ See ICI Comment Letter (``Temporary gating also would
require fund transfer agent and intermediary system providers to
ensure that their systems can suppress redemption activity while
supporting all other transaction types.'').
---------------------------------------------------------------------------

    In addition, operational costs may be incurred by, or spread among,
a fund's transfer agents, sub-transfer agents, recordkeepers,
accountants, portfolio accounting departments, and custodian.\364\
Funds also may seek to modify contracts with financial intermediaries
or seek certifications from intermediaries that they will apply a
liquidity fee on underlying investors' redemptions. Money market fund
shareholders also may be required to modify their own systems to
prepare for possible future liquidity fees, or to manage gates,
although we expect that only some shareholders will be required to make
these changes.\365\
---------------------------------------------------------------------------

    \364\ See ICI Comment Letter; see also Comment Letter of State
Street Corporation (Sept. 17, 2013) (``State Street Comment
Letter'') (suggesting that transfer agents and intermediaries will
need to modify their systems to accommodate fees and gates).
    \365\ Many shareholders use common third party-created systems
and thus would not each need to modify their systems.
---------------------------------------------------------------------------

    A number of commenters suggested that the operational costs and
burdens of implementing and administrating fees and gates would be
manageable.\366\ Some commenters noted that liquidity fees and
redemption gates would be more practicable, and less costly and
burdensome to implement and maintain than the other proposed reform
alternative (floating NAV).\367\ Another commenter added that the
systems modifications for fees and gates, especially absent a
requirement to net each shareholder's redemptions each day, would be
``far less costly and onerous'' than the operational challenges posed
by the floating NAV reform alternative.\368\ One commenter estimated
that implementing fees and gates would require only ``minimal
enhancements'' to its core custody/fund accounting systems at ``minimal
costs.'' \369\ This commenter further noted that most systems
enhancements would likely be required with respect to the systems of
transfer agents and

intermediaries, although their systems would likely already include
``basic functionality to accommodate liquidity fees and gates.'' \370\
Similarly, another commenter noted that the operational issues of fees
and gates could be solved if the industry and all its stakeholders were
given sufficient implementation time.\371\ This commenter cited its
ongoing efforts to implement liquidity fees at its Dublin-domiciled
money market fund complex as an example that the operational challenges
and costs would not be prohibitive.\372\
---------------------------------------------------------------------------

    \366\ See, e.g., ICI Comment Letter; HSBC Comment Letter,
Federated X Comment Letter; Invesco Comment Letter.
    \367\ See, e.g., SunTrust Comment Letter; Federated X Comment
Letter; Angel Comment Letter. One commenter argued that for
investors, intermediaries and fund complexes alike, the estimated
costs of fees and gates ``are dramatically lower'' than under the
proposed floating NAV alternative. See Federated X Comment Letter.
    \368\ See, e.g., ICI Comment Letter (``System modifications for
liquidity fees and gates, especially absent the net redemption
requirement, are far less onerous and costly, however, than the
extensive programming and other system changes necessary to
implement a floating NAV as contemplated by the SEC's proposal.'')
    \369\ See State Street Comment Letter.
    \370\ See id.
    \371\ See HSBC Comment Letter. The commenter also noted that a
variable liquidity fee, if available in a timely manner, should not
create any operational impediments.
    \372\ See id.
---------------------------------------------------------------------------

    Conversely, a number of commenters expressed concern over the
operational burdens and related administrative costs with the fees and
gates requirements.\373\ Some commenters argued that the implementation
and administration of fees and gates would present significant
operational challenges, in particular with respect to omnibus accounts,
sweep accounts, intermediaries and the investors that use them.\374\
One commenter argued that, to reduce operational burdens, a liquidity
fee should be applied to each redemption separately--rather than net
redemptions--in an affected money market fund.\375\ This commenter also
expressed concern that intermediaries would not know whether their
sweeps would be subject to a liquidity fee or temporary gate until
after the daily investment is made.\376\ For example, the possibility
of a liquidity fee would require intermediaries to develop trading
systems to ensure that for each transaction ``the investor has
sufficient funds to cover the trade itself plus the possibility of a
liquidity fee.'' \377\ Commenters also suggested that a fee or gate
could not be uniformly applied within omnibus accounts,\378\ and
certain commenters expressed concern over transparency with respect to
fees and gates for shareholders investing through omnibus
accounts.\379\
---------------------------------------------------------------------------

    \373\ See, e.g., Comment Letter of TIAA-CREF (Sept. 17, 2013)
(``TIAA-CREF Comment Letter''); J.P. Morgan Comment Letter; Fin.
Svcs. Roundtable Comment Letter; Goldman Sachs Comment Letter.
    \374\ See, e.g., SunTrust Comment Letter; Comment Letter of
Coalition of Mutual Fund Investors (Sept. 17, 2013) (``Coal. of
Mutual Fund Invs. Comment Letter''); Schwab Comment Letter.
    \375\ See ICI Comment Letter (expressing concern that funds,
record keepers and intermediaries would have to develop complex
operational systems that could apply a fee with respect to a
shareholder's net redemptions for a particular day and tracking the
``shareholder of record'' to whom such a fee would apply).
    \376\ See id.
    \377\ See Fin. Svcs. Roundtable Comment Letter; see also Fin.
Info. Forum Comment Letter (suggesting liquidity fees could cause
investors [to] over-trade their account by settling an amount
greater than their balance due to a liquidity fee not known at the
time of order entry).
    \378\ See Coal. of Mutual Fund Invs. Comment Letter; SunTrust
Comment Letter.
    \379\ See Coal. of Mutual Fund Invs. Comment Letter; Goldman
Sachs Comment Letter.
---------------------------------------------------------------------------

    We understand that the implementation of fees and gates (as with
any new regulatory requirement) is not without its operational
challenges; however, we have sought to minimize those challenges in the
amendments we are adopting today. Based on the comments discussed
above, we now recognize that a liquidity fee could either be applied to
each redemption separately or on a net basis. As indicated by the
relevant commenter, our proposal contemplated net redemptions as an
investor-friendly manner of applying a liquidity fee.\380\ However, in
light of the comments, we are persuaded that such an approach may be
too operationally difficult and costly for funds to apply and, thus, we
are not requiring funds to apply a liquidity fee on a net basis.\381\
---------------------------------------------------------------------------

    \380\ See Proposing Release, supra note 25, at n.373 (discussing
the application of a liquidity fee and stating that ``[i]f the
shareholder of record making the redemption was a direct shareholder
(and not a financial intermediary), we would expect the fee to apply
to that shareholder's net redemption for the day.''); see also ICI
Comment Letter (``Currently, systems used to process money market
fund transactions do not have the ability to assess a fee by netting
one or more purchases against one or more redemptions. This process
would be highly complex and require a significant and costly
redesign of the processing functionality used by funds and
intermediaries today.'' (footnote omitted)).
    \381\ See ICI Comment Letter (noting that ``[a]bsent further
definition, it would be challenging for funds (and intermediaries
assessing the fee) to determine how a shareholder of record
requirement applies to multiple accounts of a given beneficial
owner. . . .'').
---------------------------------------------------------------------------

    We also recognize commenters' concerns regarding the application of
fees and gates in the context of sweep accounts. We note that during
normal market conditions, fees and gates should not impact sweep
accounts' (or any other investor's) investment in a money market
fund.\382\ We also note that, unlike our proposal, the amendments we
are adopting today will allow fund boards to institute a fee or gate at
any time during the day.\383\ To the extent a sweep account's daily
investment is made at the end of the day, we believe this change should
reduce concerns that the sweep account holder will find out about a
redemption restriction only after it has made its daily investment and
may lessen the difficulty and costs related to developing a trading
system that can ensure an account has sufficient funds to cover the
trade itself plus the possibility of a liquidity fee.
---------------------------------------------------------------------------

    \382\ As discussed herein, however, we recognize that sweep
accounts may be unwilling to invest in a money market fund that
could impose a gate. See supra section III.A.1.c.iv and infra note
641.
    \383\ See rule 2a-7(c)(2)(i).
---------------------------------------------------------------------------

    With respect to omnibus accounts, we continue to believe that
liquidity fees should be handled in a manner similar to redemption
fees, which currently may be imposed to deter market timing of mutual
fund shares.\384\ As discussed in the Proposing Release, we understand
that financial intermediaries themselves generally impose redemption
fees to record or beneficial owners holding through that
intermediary.\385\ We recognize commenters' concerns regarding the
uniform application of liquidity fees through omnibus accounts. We
believe, however, that the benefits and protections afforded to funds
and their investors by the fees and gates amendments justify the
application of these amendments in the context of omnibus accounts. In
this regard, we note, as we did in the Proposing Release, that funds or
their transfer agents may contract with intermediaries to have them
impose liquidity fees. As we also noted in the Proposing Release, we
understand that some money market fund sponsors may want to review
their contractual arrangements with their funds' financial
intermediaries and service providers to determine whether any
contractual modifications are necessary or advisable to ensure that
liquidity fees are appropriately applied to beneficial owners of money
market fund shares. We further understand that some money market fund
sponsors may seek certifications or other assurances that these
intermediaries and service providers will apply any liquidity fees to
the beneficial owners of money market fund shares. We also recognize
that money market funds and their transfer agents and intermediaries
may need to engage in certain communications regarding a liquidity fee.
---------------------------------------------------------------------------

    \384\ See rule 22c-2. Our understanding of how financial
intermediaries handle redemption fees in mutual funds is based on
Commission staff discussions with industry participants and service
providers.
    \385\ See Proposing Release, supra note 25, at 191.
---------------------------------------------------------------------------

    With respect to those commenters who expressed concern over the
transparency of fees and gates for omnibus investors, we note that fees
and gates will be equally transparent for all investors. Investors,
both those that invest directly and those that invest through omnibus
accounts, should have access to information about a fund's weekly
liquid assets, which will be

posted on the fund's Web site. All money market fund investors also
should receive copies of a fund's prospectus, which will include
disclosure on fees and gates.
    We note that some commenters expressed concern about the costs and
burdens associated with the combination of fees and gates and a
floating NAV requirement for institutional prime funds.\386\ As we
stated in the Proposing Release, we do not expect that there will be
any significant additional costs from combining the two approaches that
are not otherwise discussed separately with respect to each of the fees
and gates and floating NAV reforms.\387\ As we discussed in the
Proposing Release, it is likely that implementing a combined approach
will save some percentage over the costs of implementing each
alterative separately as a result of synergies and the ability to make
a variety of changes to systems at a single time. We do not expect that
combining the approaches will create any new costs as a result of the
combination itself.\388\ Accordingly, we estimate, as we did in the
proposal, that the costs of implementing a combined approach would at
most be the sum of the costs of each alternative, but may likely be
less.
---------------------------------------------------------------------------

    \386\ See, e.g., Dreyfus Comment Letter (suggesting the
combination of both proposed reform options would be ``excessive and
unduly harmful to the utility of [money market funds] without
offering any additional benefit''); Northern Trust Comment Letter
(suggesting the combination of both proposed reform options would
``be very costly to implement''). For a discussion of the possible
movement out of money market funds as result of today's reforms, see
infra section III.K. But see State Street Comment Letter (``State
Street does not believe there would be any new costs other than
those listed by the staff from a fund accounting, custody or fund
administrator point of view by combining the two alternatives.'').
    \387\ See Proposing Release, supra note 25, at 249; see also
infra section III.B.8 for a discussion of the costs associated with
the floating NAV requirement.
    \388\ See State Street Comment Letter.
---------------------------------------------------------------------------

b. Cost Estimates
    As we indicated in the Proposing Release, the costs associated with
the fees and gates amendments will vary depending on how a fee or gate
is structured, including its triggering event and the level of a fee,
as well as on the capabilities, functions and sophistication of the
systems and operations of the funds and others involved in the
distribution chain, including transfer agents, accountants, custodians
and intermediaries. These costs relate to the development of procedures
and controls, systems' modifications, training programs and shareholder
communications and may vary among funds, shareholders and their service
providers.
    In the Proposing Release, we estimated a range of hours and costs
that may be required to perform activities typically involved in making
systems modifications, such as those described above. We estimated that
a money market fund (or others in the distribution chain) would incur
one-time systems modification costs that range from $1,100,000 to
$2,200,000.\389\ We further estimated that the one-time costs for
entities to communicate with shareholders about the liquidity fee or
gate would range from $200,500 to $340,000.\390\ In addition, we
estimated that the costs for a shareholder mailing would range between
$1.00 and $3.00 per shareholder.\391\
---------------------------------------------------------------------------

    \389\ We estimated that these costs would be attributable to the
following activities: (i) Project planning and systems design; (ii)
systems modification, integration, testing, installation, and
deployment; (iii) drafting, integrating, implementing procedures and
controls; and (iv) preparation of training materials. See also
Proposing Release, supra note 25, at n.245 (discussing the bases of
our estimates of operational and related costs in Proposing
Release).
    \390\ We estimated that these costs would be attributable to the
following activities: (i) Modifying the Web site to provide online
account information and (ii) written and telephone communications
with investors. See also Proposing Release, supra note 25, at n.245
(discussing the bases of our estimates of operational and related
costs in Proposing Release).
    \391\ Total costs of the mailing for individual funds would vary
significantly depending on the number of shareholders who receive
information from the fund by mail (as opposed to electronically).
---------------------------------------------------------------------------

    We also recognized in our proposal that depending on how a
liquidity fee or gate is structured, mutual fund groups and other
affected entities already may have systems that can be adapted to
administer a fee or gate at minimal cost, in which case the costs may
be less than the range we estimated above. For example, some money
market funds may be part of mutual fund groups in which one or more
funds impose deferred sales loads under rule 6c-10 or redemption fees
under rule 22c-2, both of which require the capacity to administer a
fee upon redemptions and may involve systems that could be adapted to
administer a liquidity fee. We estimated that a money market fund
shareholder whose systems required modifications to account for a
liquidity fee or gate would incur one-time costs ranging from $220,000
to $450,000.\392\
---------------------------------------------------------------------------

    \392\ We estimated that these costs would be attributable to the
following activities: (i) Project planning and systems design; (ii)
systems modification, integration, testing, installation; and (iii)
drafting, integrating, implementing procedures and controls. See
also Proposing Release, supra note 25, at n.245 (discussing the
bases of our estimates of operational and related costs in Proposing
Release).
---------------------------------------------------------------------------

    Some of the comments we received regarding the costs of fees and
gates included alternate estimates of implementation costs.\393\ For
example, one commenter indicated that its costs for implementing fees
and gates would likely be in the range of $400,000 to $500,000.\394\
This commenter further explained that cost of the fees and gates
alternative ``reflects the ability of the affected entity to custom-
design its own approach to implementation, as well as the fact that the
necessary changes would not be for use in day-to-day operations, but
only for rare occasions.'' \395\
---------------------------------------------------------------------------

    \393\ We note that some commenters provided industry-wide
estimates of approximately $800 million to $1.75 billion for initial
implementation of fees and gates, and estimates of approximately $80
to $350 million for annual ongoing costs. See ICI Comment Letter;
Invesco Comment Letter. As discussed herein, we have analyzed a
variety of commenter estimates and provided cost estimates on a per-
fund basis (including a fund's distribution chain). We are unable,
however, to verify the accuracy or make a relevant comparison
between our per-fund cost estimates and the broad range of costs
provided by these commenters that apply to all U.S. prime money
market fund investors and/or the entire industry because we are
unable to estimate how many intermediaries will be affected by the
fees and gates amendments.
    \394\ See Federated X Comment Letter.
    \395\ See id. As discussed above, another commenter indicated
that implementing fees and gates would only require ``minimal
enhancements'' to its core custody/fund accounting systems at
``minimal costs,'' and that most transfer agency and intermediary
systems would likely already include ``basic functionality to
accommodate liquidity fees and gates.'' See State Street Comment
Letter. Also as discussed above, an additional commenter noted that,
with respect to its Dublin-domiciled money market fund complex that
is currently implementing the ability to impose liquidity fees, the
implementation process has created costs but that these costs have
not been prohibitive. See HSBC Comment Letter.
---------------------------------------------------------------------------

    A number of other commenters, however, expressed concern that the
fees and gates amendments would impose significant costs and burdens,
higher than those estimated in the Proposing Release.\396\ For example,
one commenter estimated that it would cost it a total of approximately
$11 million in largely one-time costs, reflecting costs of $9 million
to implement fees and gates as well as $2 million for the related
modifications in disclosure.\397\ Another commenter indicated that the
implementation costs of fees and gates would be an estimated
$1,697,000.\398\ Similarly, an industry group conducting a survey of
its members found that the

implementation costs relating to liquidity fees would likely be $2
million or more, according to 36% of survey respondents.\399\ The group
also noted that initial costs would be particularly significant for
distributors and intermediaries, with 60% of respondents estimating
initial costs at $2 million or more.\400\ In addition, the survey found
initial costs associated with gates to range from $1 million to $10
million.\401\
---------------------------------------------------------------------------

    \396\ See, e.g., IDC Comment Letter; Comment Letter of Dechert
LLP (Sept. 17, 2013) (``Dechert Comment Letter''); SPARK Comment
Letter.
    \397\ See Fidelity Comment Letter.
    \398\ See Comment Letter of Financial Information Forum (Sept.
17, 2013) (``Fin. Info. Forum Comment Letter'') (``Based on the
available information, one back office processing service provider
estimates the implementation cost of . . . Alternative 2 at
$1,697,000.'')
    \399\ SIFMA Comment Letter. The survey also included the
following results for implementation costs: 24% in the $2 million to
$5 million range, 8% in the $5 million to $10 million range, and 4%
in the $10 million to $15 million range.
    \400\ Id. The commenter's survey indicated that 40% of asset
managers would incur $2 to $5 million in initial costs.
    \401\ Id. The survey indicated costs of $1 million to $2 million
according to 17% of respondents, $2 million to $5 million according
to another 17% of respondents, and $5 million to $10 million
according to 8% of respondents.
---------------------------------------------------------------------------

    Based on the information provided by commenters, as well as the
operational changes in the final rule, we are increasing our estimates
for implementation costs for fees and gates. Three of the four
commenters who provided estimates suggested that the implementation
costs would be around $2,000,000 or more.\402\ In addition, we estimate
that a fund's ability to impose a fee or gate intra-day (as opposed to
the end of the day, as contemplated by the proposal) may result in
increased operational costs related to the implementation of fees and
gates. Accordingly, we have increased our original estimate of
$1,100,000 to $2,200,000 \403\ for one-time systems modification costs
to a higher estimate of $1,750,000 to $3,000,000.\404\ We continue to
estimate that the one-time costs for entities to communicate with
shareholders (including systems costs related to communications) about
fees and gates would range from $200,500 to $340,000. In addition, we
are increasing the estimated cost for a shareholder mailing from
between $1.00 and $3.00 per shareholder to between $2.00 and $3.00 per
shareholder, recognizing that it is unlikely such a mailing would cost
$1.00. We continue to estimate one-time costs of $220,000 to $450,000
for a money market fund shareholder whose systems (including related
procedures and controls) required modifications to account for a
liquidity fee or redemption gate.
---------------------------------------------------------------------------

    \402\ See supra notes 394-401 and accompanying text.
    \403\ We note that, in the Proposing Release, our estimate was
based on a money market fund that determined it would only impose a
flat liquidity fee of a fixed percentage known in advance and have
the ability to impose a gate. This estimate was based on our
proposal, which included less flexibility than today's amendments.
Accordingly, our revised estimates account for a money market fund
that has the ability to vary the level of a fee at imposition or
thereafter, or impose a gate.
    \404\ As with our estimate in the Proposing Release, these
amounts reflect the costs of one-time systems modifications for a
money market fund and/or others in its distribution chain.
---------------------------------------------------------------------------

    We recognized in our proposal that adding new capabilities or
capacity to a system will entail ongoing annual maintenance costs and
understand these costs generally are estimated as a percentage of
initial costs of building or expanding a system. We also recognized
that ongoing costs related to fees and gates may include training
costs. In the proposal, we estimated that the costs to maintain and
modify the systems required to administer a fee or gate (to accommodate
future programming changes), to provide ongoing training, and to
administer the fee or gate on an ongoing basis would range from 5% to
15% of the one-time costs. We understand that funds may impose varying
liquidity fees and that the cost of varying liquidity fees could exceed
this range, but because such costs depend on to what extent the fees
might vary, we do not have the information necessary to provide a
reasonable estimate of how much more (if any) varying fees might cost
to implement.
    One commenter indicated a lower estimate of approximately $164,000
for annual ongoing costs.\405\ Another commenter, an industry group
that surveyed its members, indicated that ongoing annual costs of
implementing a liquidity fee are likely to range from 10% to 20% of
initial costs.\406\ The same commenter indicated that ongoing annual
costs related to redemption gates were estimated as 10% to 20% of
initial cost by 33% of survey respondents.\407\ Based on these
estimates, which are largely similar to our estimates of 5-15% in the
Proposing Release, we continue to believe our estimates in the
Proposing Release are appropriate.
---------------------------------------------------------------------------

    \405\ See Federated X Comment Letter.
    \406\ See SIFMA Comment Letter. The survey indicated 10% to 15%
of initial costs for 17% of respondents, 15% to 20% of initial costs
for 12% of respondents, and 20+% of initial costs for 8% of
respondents. With respect to distributor/intermediary respondents,
the commenter indicated that ongoing annual costs for a liquidity
fee are estimated as 10% to 20% of initial costs by 29% of
distributor/intermediary respondents (evenly split between those who
estimate 10% to 15% of initial cost and those who estimate 15% to
20%). For asset managers, the commenter indicated that ongoing
annual costs for a liquidity fee are estimated to be 10% to 15% of
initial costs by 20% of respondents, 15% to 20% of initial costs by
10% of respondents and 20+% of initial costs by 20% of respondents.
    \407\ See SIFMA Comment Letter. The commenter note that the 33%
of survey respondents were evenly split between those who estimated
10% to 15% of initial cost and those who estimated 15% to 20% of
initial cost.
---------------------------------------------------------------------------

    We also recognize that funds may incur costs in connection with
board meetings held to determine if fees and/or gates are in the best
interests of the fund. In the Proposing Release, we estimated an
average annual time cost of approximately $9,895 per fund in connection
with each such board meeting.\408\ We did not receive comments on this
estimate. As discussed in section IV.A.3 herein, we are revising our
estimate from $9,895 per fund to $10,700 as result of updated industry
data.\409\
---------------------------------------------------------------------------

    \408\ See Proposing Release, supra note 25, at 549.
    \409\ See infra section IV.A.3 (discussing the PRA estimates for
board determinations under the fees and gates amendments and noting
that certain estimates have increased from those in the proposal as
a result of the increased number of funds that may cross the higher
weekly liquid assets threshold of 30% (as compared to 15%) for the
imposition of fees and gates).
---------------------------------------------------------------------------

    Although we have estimated the costs that a single affected entity
would incur, we anticipate that many money market funds, transfer
agents, and other affected entities may not bear the estimated costs on
an individual basis. Instead, the costs of systems modifications likely
would be allocated among the multiple users of the systems, such as
money market fund members of a fund group, money market funds that use
the same transfer agent or custodian, and intermediaries that use
systems purchased from the same third party. Accordingly, we expect
that the cost for many individual entities may be less than the
estimated costs due to economies of scale in allocating costs among
this group of users.
6. Tax Implications of Liquidity Fees
    As discussed in the Proposing Release, we understand that liquidity
fees may have certain tax implications for money market funds and their
shareholders.\410\ We understand that for federal income tax purposes,
shareholders of mutual funds that impose a redemption fee pursuant to
rule 22c-2 under the Investment Company Act generally treat the
redemption fee as offsetting the shareholder's amount realized on the
redemption (decreasing the shareholder's gain, or increasing the
shareholder's loss, on redemption).\411\

Consistent with this characterization, funds generally treat the
redemption fee as having no associated tax effect for the fund.\412\ We
understand that a liquidity fee will be treated for federal income tax
purposes consistently with the way that funds and shareholders treat
redemption fees under rule 22c-2.
---------------------------------------------------------------------------

    \410\ As discussed above, the liquidity fee we are adopting
today is analogous to a redemption fee under rule 22c-2, which
allows mutual funds to recover costs associated with frequent mutual
fund share trading by imposing a redemption fee on shareholders who
redeem shares within seven days of purchase.
    \411\ Cf. 26 CFR 1.263(a)-2(e) (commissions paid in sales of
securities by persons who are not dealers are treated as offsets
against the selling price); see also Investment Income and Expenses
(Including Capital Gains and Losses), IRS Publication 550, at 44
(fees and charges you pay to acquire or redeem shares of a mutual
fund are not deductible. You can usually add acquisition fees and
charges to your cost of the shares and thereby increase your basis.
A fee paid to redeem the shares is usually a reduction in the
redemption price (sales price).), available at http://www.irs.gov/pub/irs-pdf/p550.pdf.
    \412\ See ICI Comment Letter (``Pursuant to section 311(a)(2) of
the Internal Revenue Code, corporations (including investment
companies) do not recognize gain or loss upon a redemption of their
shares.'').
---------------------------------------------------------------------------

    If, as described above, a liquidity fee has no direct federal
income tax consequences for the money market fund, that tax treatment
will allow the fund to use 100% of the fee to help repair a market-
based NAV per share that was below $1.00. If redemptions involving
liquidity fees cause a stable value money market fund's shadow price to
reach $1.0050, however, the fund may need to distribute to the
remaining shareholders sufficient value to prevent the fund from
breaking the buck on the upside (i.e., by rounding up to $1.01 in
pricing its shares).\413\ We understand that any such distribution
would be treated as a dividend to the extent that the money market fund
has sufficient earnings and profits. Both the fund and its shareholders
would treat these additional dividends the same as they treat the
fund's routine dividend distributions. That is, the additional
dividends would be taxable as ordinary income to shareholders and would
be eligible for deduction by the funds.
---------------------------------------------------------------------------

    \413\ See rule 2a-7(g)(2).
---------------------------------------------------------------------------

    In the absence of sufficient earnings and profits, however, some or
all of these additional distributions would be treated as a return of
capital. Receipt of a return of capital would reduce the recipient
shareholders' basis (and thus could decrease a loss, or create or
increase a gain for the shareholder in the future when the shareholder
redeems the affected shares). Thus, in the event of any return of
capital distributions, as we noted in the Proposing Release, there is a
possibility that the fund, other intermediaries, and the shareholders
might become subject to tax-reporting or tax-payment obligations that
do not affect stable value money market funds currently operating under
rule 2a-7.\414\
---------------------------------------------------------------------------

    \414\ See Proposing Release, supra note 25, at 207. Funds that
strive to maintain a stable NAV per share currently are not subject
to these transaction reporting requirements. We have been informed
that, today, the Department of the Treasury and the IRS are
proposing new regulations to exempt all money market funds from
transaction reporting obligations. As we describe below, funds and
brokers may rely on this exemption immediately. We note that at
least one commenter indicated that funds and intermediaries may want
to provide certain tax information to their investors even if it is
not required. See ICI Comment Letter.
---------------------------------------------------------------------------

    Commenters were concerned with this possibility--that investors may
have to recognize capital gains or reduced losses if a fund makes a
distribution to shareholders in order to avoid ``breaking the buck'' on
the upside as a result of excessive fees.\415\ Commenters noted that
such distributions and the resulting capital gains or losses upon
disposition of investors' shares would require funds and intermediaries
to start tracking investors' basis in shares of a fund.\416\ In order
to avoid such basis tracking, commenters suggested that the Treasury
Department and the Internal Revenue Service (``IRS'') issue guidance
stating that when a money market fund is required to make a payment of
excess fees in order to avoid breaking the buck, the fund should be
deemed to have sufficient earnings and profits to treat the
distribution as a taxable dividend.\417\
---------------------------------------------------------------------------

    \415\ See, e.g., Fidelity Comment Letter; BlackRock II Comment
Letter; Wells Fargo Comment Letter.
    \416\ See, e.g., ICI Comment Letter; Fidelity Comment Letter;
BlackRock II Comment Letter; SIFMA Comment Letter; but see, e.g.,
State Street [Appendix 4] (suggesting that a liquidity fee causing
the shadow price to exceed $1.0049 would not result in special
distribution to shareholders but most likely be recorded as income
to the fund and paid out to shareholders as an ordinary income
distribution).
    \417\ See, e.g., BlackRock II Comment Letter; ICI Comment
Letter; Wells Fargo Comment Letter.
---------------------------------------------------------------------------

    Although these events are hypothetically possible, the scenario
that would lead to a payment of excess fees to fund shareholders
without sufficient earnings and profits is subject to many
contingencies that make it unlikely to occur. First, as we discussed
above, under normal market conditions, we believe funds will rarely
impose liquidity fees. Second, we believe it is highly unlikely that
shareholders would redeem with such speed and in such volume that the
redemptions would create a danger of breaking the buck on the upside
before a fund could remove a fee. Third, the distributions to avoid
breaking the buck might not exceed the fund's earnings and profits. For
this purpose, we understand that the fund's earnings and profits take
into account the fund's income through the end of the taxable year.
Thus, unless the additional distribution occurs very close to the end
of the taxable year, some of the money market fund's subsequent income
during the year will operate to qualify these distributions as
dividends.\418\
---------------------------------------------------------------------------

    \418\ A portion of this subsequent income may also have to be
distributed to avoid breaking the buck on the upside. However, if
the fund attracts new shareholders, we understand that some of the
subsequent income can be retained, with its associated earnings and
profits qualifying the earlier distributions as dividends.
---------------------------------------------------------------------------

    Finally, as discussed in the Proposing Release, we understand that
the tax treatment of a liquidity fee may impose certain operational
costs on money market funds and their financial intermediaries and on
shareholders. However, we have been informed that the Treasury
Department and the IRS today will propose new regulations exempting all
money market funds from certain transaction reporting
requirements.\419\ This exemption is to be formally applicable for
calendar years beginning on or after the date of publication in the
Federal Register of a Treasury Decision adopting those proposed
regulations as final regulations. The Treasury Department and the IRS
have informed us, however, that the text of the proposed regulations
will state that persons subject to transaction reporting may rely on
the proposed exemption for all calendar years prior to the final
regulations' formal date of applicability. Therefore, the Treasury
Department and IRS relief described above is available immediately.
---------------------------------------------------------------------------

    \419\ See infra section III.B.6.a.
---------------------------------------------------------------------------

    Thus, even in the unlikely event that some shareholders' bases in
their shares change due to non-dividend distributions, neither fund
groups nor their intermediaries will need to track the tax bases of
money market fund shares. On the other hand, if there are any non-
dividend distributions by money market funds, the affected shareholders
will need to report in their annual tax filings any resulting gains
\420\ or reduced losses upon the sale of affected money market fund
shares. We are unable to quantify with any specificity the tax and
operational costs discussed in this section because we are unable to
predict how often liquidity fees will be imposed by money market funds
and how often redemptions

subject to liquidity fees would cause the funds to make returns of
capital distributions to the remaining shareholders (although, as noted
above, we believe such returns of capital distributions are unlikely).
Commenters did not provide any such estimates.
---------------------------------------------------------------------------

    \420\ Redemptions subject to a liquidity fee would almost always
result in losses, but gains are possible in the unlikely event that
a shareholder received a return of capital distribution with respect
to some shares. Because a later redemption of the shares by the
shareholder would be for $1.00 each, there would be small gains with
respect to those redemptions. If the money market fund making such a
non-dividend distribution is a floating NAV money market fund and if
a shareholder uses the simplified aggregate method discussed below
in section III.B.6.a, then the shareholder would be able to report
the gain or loss without having to track the basis of individual
shares.
---------------------------------------------------------------------------

7. Accounting Implications
    A number of commenters questioned whether an investment in a money
market fund subject to a possible fee or gate, or in a money market
fund that in fact imposes a fee or gate, would continue to qualify as a
``cash equivalent'' for purposes of U.S. Generally Accepted Accounting
Principles (``U.S. GAAP'').\421\ We understand that classifying money
market fund investments as cash equivalents is important because, among
other things, investors may have debt covenants that mandate certain
levels of cash and cash equivalents.\422\ To remove any uncertainty,
several commenters requested that the Commission, the Financial
Accounting Standards Board (``FASB'') and/or Government Accounting
Standards Board (``GASB'') issue guidance to clarify whether
investments in money market funds will continue to qualify as cash
equivalents under U.S. GAAP.\423\ Various commenters on our proposal,
including the American Institute of Certified Public Accountants
(``AICPA'') and each of the ``Big Four'' accounting firms, stated that
a money market fund's ability to impose fees and gates should not
preclude an investment in the fund from being classified as a ``cash
equivalent'' under U.S. GAAP.\424\
---------------------------------------------------------------------------

    \421\ See, e.g., Invesco Comment Letter; BlackRock II Comment
Letter; Wells Fargo Comment Letter; see also Proposing Release,
supra note 25, at 246 (stated that ``we expect the value of floating
NAV funds with liquidity fees and gates would be substantially
stable and should continue to be treated as a cash equivalent under
GAAP.''); ICI Comment Letter (suggesting that any such Commission
guidance should also ``discuss whether a money market fund that
imposes a liquidity fee and/or gate would continue to be considered
a cash equivalent investment and whether the amount of the fee or
the length of the gate would affect the analysis.'')
    \422\ In addition, some corporate investors may perceive cash
and cash equivalents on a company's balance sheet as a measure of
financial strength.
    \423\ See, e.g., ICI Comment Letter; Fidelity Comment Letter;
Fin. Svcs. Roundtable Comment Letter; see also Proposing Release,
supra note 25, at 246 (suggesting that funds with the ability to
impose fees and gates should still be considered cash equivalents).
As discussed in section III.C.4 herein, we do not have authority
over the actions that GASB may or may not take with respect to
LGIPs.
    \424\ See Comment Letter of American Institute of Certified
Public Accountants, Financial Reporting Executive Committee (Sept.
16, 2013) (``AICPA Comment Letter); Comment Letter of Ernst & Young
LLP (Sept. 12, 2013) (``Ernst & Young Comment Letter''); Comment
Letter of Deloitte & Touche LLP (Sept. 17, 2013) (``Deloitte Comment
Letter''); Comment Letter of KPMG LLP (Sept. 17, 2013) (``KPMG
Comment Letter''); Comment Letter of PricewaterhouseCoopers LLP
(Sept. 16, 2013) (``PWC Comment Letter'').
---------------------------------------------------------------------------

    Current U.S. GAAP defines cash equivalents as ``short-term, highly
liquid investments that are readily convertible to known amounts of
cash and that are so near their maturity that they present
insignificant risk of changes in value because of changes in interest
rates.'' \425\ U.S. GAAP includes an investment in a money market fund
as an example of a cash equivalent.\426\ The Commission's position
continues to be that, under normal circumstances, an investment in a
money market fund that has the ability to impose a fee or gate under
rule 2a-7(c)(2) qualifies as a ``cash equivalent'' for purposes of U.S.
GAAP.\427\ However, as is currently the case, events may occur that
give rise to credit and liquidity issues for money market funds. If
such events occur, including the imposition of a fee or gate by a money
market fund under rule 2a-7(c)(2), shareholders would need to reassess
if their investments in that money market fund continue to meet the
definition of a cash equivalent. A more formal pronouncement (as
requested by some commenters) to confirm this position is not required
because the federal securities laws provide the Commission with plenary
authority to set accounting standards, and we are doing so here.\428\
---------------------------------------------------------------------------

    \425\ See FASB Accounting Standards Codification (``FASB ASC'')
paragraph 305-10-20.
    \426\ Id.
    \427\ We are also amending the Codification of Financial
Reporting Policies to reflect our interpretation under U.S. GAAP, as
discussed below. See infra section VI.
    \428\ The federal securities laws provide the Commission with
authority to set accounting and reporting standards for public
companies and other entities that file financial statements with the
Commission. See, e.g., 15 U.S.C. 77g, 77s, 77aa(25) and (26); 15
U.S.C. 78c(b), 78l(b) and 78m(b); section 8, section 30(e), section
31, and section 38(a) of the Investment Company Act.
---------------------------------------------------------------------------

    If events occur that cause shareholders to determine that their
money market fund shares are not cash equivalents, the shares would
need to be classified as investments, and shareholders would have to
treat them either as trading securities or available-for-sale
securities.\429\ For example, during the financial crisis, certain
money market funds experienced unexpected declines in the fair value of
their investments due to deterioration in the creditworthiness of their
assets and, as a result, portfolios of money market funds became less
liquid. Investors in these money market funds would have needed to
determine whether their investments continued to meet the definition of
a cash equivalent.
---------------------------------------------------------------------------

    \429\ See FASB ASC paragraph 320-10-25-1. This accounting
treatment would not apply to entities to which the guidance in FASB
ASC Topic 320 does not apply. See FASB ASC paragraph 320-10-15-3.
---------------------------------------------------------------------------

B. Floating Net Asset Value

1. Introduction
    As discussed earlier in this Release, absent an exemption
specifically provided by the Commission from various provisions of the
Investment Company Act, all registered mutual funds must price and
transact in their shares at the current NAV, calculated by valuing
portfolio instruments at market value, in the case of securities for
which market quotations are readily available, or, at fair value, as
determined in good faith by the fund's board of directors, in the case
of other securities and assets (i.e., use a floating NAV).\430\ Under
rule 2a-7, the Commission has exempted money market funds from this
floating NAV requirement, allowing them to price and transact at a
stable NAV per share (using the amortized cost and penny rounding
methods), provided that they follow certain risk-limiting
conditions.\431\ In doing so, the Commission was statutorily required
to find that such an exemption was in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Investment Company
Act.\432\ Accordingly, when providing this exemption in 1983, the
Commission considered the benefits of a stable value product as a cash
management vehicle for investors, but also imposed a number of
conditions designed to minimize the risk inherent in a stable value
fund that some shareholders may redeem and receive more than their
shares are actually worth, thus diluting the holdings of remaining
shareholders.\433\ At the time, the Commission was persuaded that
deviations in value that could cause material dilution to investors
generally would not occur, given the risk-limiting

conditions of the rule.\434\ Experience, however, has shown that
deviations in value do occur, and at times, can be significant.
---------------------------------------------------------------------------

    \430\ See supra section I.
    \431\ Id.
    \432\ Section 6(c) of the Investment Company Act provides the
Commission with broad authority to exempt persons, securities or
transactions from any provision of the Investment Company Act, or
the regulations thereunder, if and to the extent that such exemption
is in the public interest and consistent with the protection of
investors and the purposes fairly intended by the policy and
provisions of the Investment Company Act. See Commission Policy and
Guidelines for Filing of Applications for Exemption, SEC Release No.
IC-14492 (Apr. 30, 1985).
    \433\ See Proposing Release, supra note 25, at n.9. The
Commission was similarly concerned with the risk that redeeming
shareholders may receive less than their shares were worth and that
purchasing shareholders may pay too little for their shares,
diluting remaining shareholders.
    \434\ Id.
---------------------------------------------------------------------------

    As discussed above, money market funds' sponsors on a number of
occasions have voluntarily chosen to provide financial support for
their money market funds for various reasons, including to keep a fund
from re-pricing below its stable value, suggesting that material
deviations in the value in money market funds have not been a rare
occurrence.\435\ This historical experience, combined with the events
of the financial crisis, has caused us to reconsider the exemption from
the statutory floating NAV requirement for money market funds in light
of our responsibilities under the Act in providing this exemption. In
doing so, we again took into account the benefits of money market funds
as a stable value cash management product for investors, but also
considered all of the historical and empirical information discussed in
section I above, the Investment Company Act's general obligation for
funds to price and transact in their shares at the current NAV, and
developments since 1983.
---------------------------------------------------------------------------

    \435\ See supra section II.B.4
---------------------------------------------------------------------------

    We considered the many reasons shareholders may engage in heavy
redemptions from money market funds--potentially resulting in the
dilution of share value that the Investment Company Act's provisions
are designed to avoid--and have tailored today's final rules
accordingly. In particular, while many investors may redeem because of
concerns about liquidity, quality, or lack of transparency--and our
fees and gates, disclosure, and reporting reforms are primarily
intended to address those incentives--an incremental incentive to
redeem is created by money market funds' current valuation and pricing
methods. As discussed below, this incremental incentive to redeem
exacerbates shareholder dilution in a stable NAV product because non-
redeeming shareholders are forced to absorb losses equal to the
difference between the market-based value of the fund's shares and the
price at which redeeming shareholders transact. For the reasons
discussed below, we believe that this incentive exists largely in prime
money market funds because these funds exhibit higher credit risk that
make declines in value more likely (compared to government money market
funds).\436\ We further believe history shows that, to date,
institutional investors have been significantly more likely than retail
investors to act on this incentive.\437\ Thus, given the tradeoffs
involved in requiring that any money market fund transact at a floating
NAV, we are limiting this reform (and thus the repeal of the special
exemptive relief allowing these funds to price other than as required
under the Investment Company Act) to institutional prime funds.
---------------------------------------------------------------------------

    \436\ See infra section III.C.1; see also, e.g., Fidelity
Comment Letter; ICI Comment Letter; Comm. Cap. Mkt. Reg. Comment
Letter.
    \437\ See infra section III.C.2 and DERA Study, supra note 24;
see also, e.g., Schwab Comment Letter; Fin. Svcs. Roundtable Comment
Letter; Vanguard Comment Letter.
---------------------------------------------------------------------------

    As discussed previously, the first investors to redeem from a
stable value money market fund that is experiencing a decline in its
NAV benefit from a ``first mover advantage'' as a result of rule 2a-7's
current valuation and pricing methods, which allows them to receive the
full stable value of their shares even if the fund's portfolio value is
less.\438\ One possible reason that institutional prime funds may be
more susceptible to rapid heavy redemptions than retail funds is that
their investors are often more sophisticated, have more significant
money at stake, and may have a lower risk tolerance due to legal or
other restrictions on their investment practices.\439\ Institutional
investors may also have more resources to carefully monitor their
investments in money market funds. Accordingly, when they become aware
of potential problems with a fund, institutional investors may quickly
redeem their shares among other reasons, to benefit from the first
mover advantage.\440\ When many investors try to redeem quickly,
whether to benefit from the first mover advantage or otherwise, money
market funds may experience significant stress. As discussed above,
even a few high-dollar redemptions by institutional investors (because
of their greater capital at stake) may have a significant adverse
effect on a fund as compared with retail investors whose investments
are typically smaller and would therefore require a greater number of
redemptions to have a similar effect.\441\ This can lead to the very
dilution of fund shares that we were concerned about when we first
provided the exemptions in rule 2a-7 permitting funds to use different
valuation and pricing methods than other mutual funds to facilitate
maintaining a stable value.\442\
---------------------------------------------------------------------------

    \438\ See supra section II.B.3. This first mover advantage does
not have the same degree of value in other mutual funds that do not
have a stable value because investors receive the market value of
their shares when redeeming from a floating NAV fund.
    \439\ See, e.g., Systemic Risk Council Comment Letter.
    \440\ Id.; see, e.g. TIAA-CREF Comment Letter; Systemic Risk
Council Comment Letter.
    \441\ See supra text following note 66.
    \442\ See infra section III.B.3.b; see, e.g., Schwab Comment
Letter.
---------------------------------------------------------------------------

    As discussed in the previous section, our fee and gate reform is
designed to address some of the risks associated with money market
funds that we have identified in this Release, but does not address
them all. In particular, fees and gates are intended to enhance money
market funds' ability to manage and mitigate potential contagion from
high levels of redemptions and make redeeming investors pay their share
of the costs of the liquidity that they receive. But those reforms do
not address the incremental incentive to redeem from a fund with a
shadow price below $1.00 that is at risk of breaking the buck. As a
result of their sophistication, risk tolerance, and large investments,
institutional investors are more likely to redeem at least in part due
to this first mover advantage.\443\
---------------------------------------------------------------------------

    \443\ See, e.g. Comment Letter of United Services Automobile
Association (Feb. 15, 2013) (available in File No. FSOC-2012 0003)
(``USAA FSOC Comment Letter''); see, e.g., Systemic Risk Council
Comment Letter; but see, e.g., HSBC Comment Letter (arguing that
first mover advantage that results from the valuation and pricing
methods in rule 2a-7 is overstated in light of the real world issues
with information and time to act, and that other motivations are the
primary driver of redemptions); Dreyfus Comment Letter.
---------------------------------------------------------------------------

    This has led to us re-evaluate our decision to provide an exemption
allowing amortized cost valuation and penny rounding pricing for money
market funds with these specific kinds of investors.\444\ As discussed
above, this exemption was originally premised on our expectation that
funds that followed the requirements of rule 2a-7 would be unlikely to
experience material deviations from their stable value. With respect to
prime funds in particular, this expectation has proven inaccurate with
enough regularity to cause concern, especially given the potentially
serious consequences to investors and the markets that can and has
resulted at times. Accordingly, for the reasons discussed above and in
other sections of this Release,\445\ we no longer believe that
exempting institutional prime

money market funds under section 6(c) of the Act is appropriate--i.e.,
we find that such an exemption is no longer in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Investment Company
Act.\446\ As discussed in detail in the sections that follow, we are
now rescinding the exemption that allows institutional prime funds to
maintain a stable NAV and are requiring them to price and transact in
their shares at market-based value, like all other mutual funds.\447\
---------------------------------------------------------------------------

    \444\ A number of commenters agreed with our proposed approach
of only targeting the funds most susceptible to runs (institutional
prime) with the floating NAV requirement. See, e.g., Fin. Svcs.
Roundtable Comment Letter (``. . . a floating NAV confined to
institutional prime funds represents a reasonable targeting of
reform efforts at the segment of the market that has shown the most
proclivity to runs.''); Vanguard Comment Letter.
    \445\ See supra section II; infra sections III.B.3.a and
III.B.3.b.
    \446\ See supra note 432.
    \447\ See, e.g., Systemic Risk Council Comment Letter (``A
floating NAV (for all funds) is the same simple regulatory framework
that applies to all other mutual funds . . .'').
---------------------------------------------------------------------------

    This reform is intended to work in concert with the liquidity fees
and gates reforms discussed above (as well as other reforms discussed
in section III.K.3). The floating NAV requirement, applicable only to
institutional prime funds, balances concerns about the risks of heavy
redemptions from these funds in times of stress and the resulting
negative impacts on short-term funding markets and potential dilution
of investor shares, with the desire to preserve, as much as possible,
the benefits of money market funds for investors.\448\ Consistent with
a core objective of the Investment Company Act, the floating NAV reform
may also lessen the risk of unfairness and potential wealth transfers
between holding and redeeming shareholders by mutualizing any potential
losses among all investors, including redeeming shareholders. We do not
intend, and the floating NAV reform does not seek, to deter redemptions
that constitute rational risk management by shareholders or that
reflect a general incentive to avoid loss.\449\ Instead, as discussed
below, the requirement is designed to achieve two independent
objectives: (1) To reduce the first mover advantage inherent in a
stable NAV fund due to rule 2a-7's current valuation and pricing
methods by dis-incentivizing redemption activity that can result from
investors attempting to exploit the possibility of redeeming shares at
the stable share price even if the portfolio has suffered a loss; and
(2) to reduce the chance of unfair investor dilution, which would be
inconsistent with a core principle of the Investment Company Act. An
additional motivation for this reform is that the floating NAV may make
it more transparent to certain of the impacted investors that they, not
the fund sponsors or the federal government, bear the risk of loss.
Many commenters suggested that, among the reform alternatives proposed,
the floating NAV reform is the most meaningful.\450\
---------------------------------------------------------------------------

    \448\ See infra section III.B.3 (discussing the benefits of a
floating NAV requirement).
    \449\ A number of commenters agreed with this goal. See, e.g.,
Schwab Comment Letter; Systemic Risk Council Comment Letter.
    \450\ See, e.g., Boston Federal Reserve Comment Letter; Systemic
Risk Council Comment Letter; Thrivent Comment Letter.
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2. Summary of the Floating NAV Reform
    The liquidity fees and gates amendments apply to all money market
funds (with the exception of government money market funds). Today we
are also adopting a targeted reform designed to address the specific
risks associated with institutional prime money market funds.\451\ We
are doing so by amending rule 2a-7 to rescind certain exemptions that
have permitted these funds to maintain a stable price by use of
amortized cost valuation and/or penny-rounding pricing--as a result,
institutional prime money market funds will transact at a floating
NAV.\452\
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    \451\ The floating NAV reform will not apply to government and
retail money market funds. See rule 2a-7(a)(16) (defining
``government money market fund''); rule 2a-7(a)(25) (defining
``retail money market fund''). Government and retail money market
funds are discussed infra in sections III.C.1 and III.C.2.
    \452\ Rule 2a-7(c)(1) (Share price calculation). As discussed
below, an institutional prime money market fund may continue to call
itself a ``money market fund'' provided that it follows the other
conditions in rule 2a-7. But it may not use the amortized cost and
penny rounding methods to maintain a stable NAV. See rule 2a-7(b);
infra note 629 and accompanying text (discussing rule 35d-1, the
``names rule'').
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    Under our reform, institutional prime money market funds will value
their portfolio securities using market-based factors and will sell and
redeem shares based on a floating NAV.\453\ Under the final rules, and
as we proposed, institutional prime funds will round prices and
transact in fund shares to four decimal places in the case of a fund
with a $1.00 target share price (i.e., $1.0000) or an equivalent or
more precise level of accuracy for money market funds with a different
share price (e.g., a money market fund with a $10 target share price
could price its shares at $10.000). Institutional prime money market
funds will still be subject to the risk-limiting conditions of rule 2a-
7.\454\ Accordingly, they will continue to be limited to investing in
short-term, high-quality, dollar-denominated instruments, but will not
be able to use the amortized cost or penny rounding methods to maintain
a stable value. Finally, funds subject to the floating NAV reform will
be subject to the other reforms discussed in this Release.
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    \453\ See rule 2a-7(c)(1). We discuss floating NAV money market
fund share pricing in section III.B.4. A money market fund that
currently chooses to use amortized cost valuation typically also
uses a penny-rounding convention to price fund shares. See 1983
Adopting Release, supra note 3. Although not generally used, a money
market fund may also currently choose to maintain a stable NAV
solely by using penny-rounding pricing. As discussed below, these
money market funds would be able to use amortized cost valuation
only to the same extent other mutual funds are able to do so--where
the fund's board of directors determines, in good faith, that the
fair value of debt securities with remaining maturities of 60 days
or less is their amortized cost, unless the particular circumstances
warrant otherwise. See ASR 219, supra note 5; we discuss the use of
amortized cost below. See infra section III.B.5.
    \454\ See rule 2a-7(d) (risk-limiting conditions).
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    As discussed in section III.B.9 below, institutional prime money
market funds will have two years to comply with the floating NAV
reform. Although some commenters, including some sponsors of money
market funds, expressed general support for the floating NAV reform as
it was proposed,\455\ the majority of commenters generally opposed
requiring institutional prime money market funds to implement a
floating NAV.\456\ Below, we address the principal considerations and
requirements of the floating NAV reform, discuss comments received, and
how if applicable, the amendments have been revised to address
commenter concerns.
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    \455\ See, e.g., Goldman Sachs Comment Letter; Schwab Comment
Letter; T. Rowe Price Comment Letter; Vanguard Comment Letter;
Comment Letter of CFA Institute (Sept. 19, 2013) (``CFA Institute
Comment Letter'').
    \456\ See, e.g., Federated II Comment Letter; Comment Letter of
Arnold & Porter LLP on behalf of Federated Investors (Floating NAV)
(Sept. 13, 2013) (``Federated IV Comment Letter''); Federated X
Comment Letter; J.P. Morgan Comment Letter; Comment Letter of U.S.
Chamber of Commerce, Center for Capital Markets Competitiveness
(Aug. 1, 2013) (``Chamber I Comment Letter''); Chamber II Comment
Letter.
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3. Certain Considerations Relating to the Floating NAV Reform
a. A Reduction in the Incentive To Redeem Shares
    When a money market fund's shadow price is less than the fund's
$1.00 share price, shareholders have an economic incentive to redeem
shares ahead of other investors. In the Proposing Release, we noted
that the size of institutional investors' holdings and their resources
for monitoring funds provide the motivation and means to act on this
incentive, and observed that institutional investors redeemed shares at
a much higher rate than retail investors from prime money market funds
in both September 2008 and June 2011.\457\ We also noted, as some
market

observers had suggested, that the valuation and pricing techniques
currently permitted by rule 2a-7 may underlie this incentive to redeem
ahead of other shareholders and to obtain $1.00 per share when
investors become aware (or expect) that the actual value of the fund's
shares is below (or will fall below) $1.00.\458\ As discussed below, to
address this incentive, the floating NAV reform mandates that
institutional prime funds transact at share prices that reflect current
market-based factors (not amortized cost or penny rounding, as
currently permitted) and therefore remove investors' incentives to
redeem early to take advantage of transacting at a stable value.
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    \457\ But see supra note 68.
    \458\ See Proposing Release, supra note 25, at n.139.
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    Some commenters agreed that a floating NAV mitigates the first
mover incentive to redeem ahead of other shareholders that results from
current rule 2a-7's valuation and pricing methods.\459\ Two commenters
also noted that requiring institutional prime funds to adopt a floating
NAV would force investors who cannot tolerate any share price movement
into other products that better match their risk tolerances.\460\
According to these commenters, investors who remain in floating NAV
funds may have a greater tolerance for loss and may be less likely to
redeem quickly in times of market stress.\461\
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    \459\ See, e.g., Thrivent Comment Letter; TIAA-CREF Comment
Letter; Fin. Svcs. Roundtable Comment Letter; SIFMA Comment Letter;
Systemic Risk Council Comment Letter.
    \460\ See Thrivent Comment Letter; Vanguard Comment Letter; see
infra section III.B.3.c.
    \461\ See Vanguard Comment Letter.
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    Several commenters generally objected to our reasoning that our
floating NAV reform (by addressing the economic incentive inherent in
rule 2a-7) would reduce the incentive for shareholders to redeem ahead
of other investors in times of market stress, observing that a floating
NAV may not eliminate investors' incentive to redeem to the extent that
it results from the desire to move to investments of higher quality or
greater liquidity.\462\ Both the DERA Study and Proposing Release
discussed this concern.\463\ As the DERA Study noted, the incentive for
investors to redeem ahead of other investors may be heightened by
liquidity concerns--when cash levels are insufficient to meet
redemption requests, funds may be forced to sell portfolio securities
into illiquid secondary markets at discounted or even fire-sale
prices.\464\ The floating NAV reform may not fully address the
incentive to redeem because market-based pricing may not capture the
likely increasing illiquidity of a fund's portfolio as it sells its
more liquid assets first during a period of market stress to defer
liquidity pressures as long as possible.\465\
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    \462\ See, e.g., Dreyfus Comment Letter; Federated IV Comment
Letter; Chamber II Comment Letter; Comment Letter of The Squam Lake
Group (Sept. 17, 2013) (``Squam Lake Comment Letter''); Ropes & Gray
Comment Letter.
    \463\ See Proposing Release, supra note 25, at section
III.A.1.c.
    \464\ See DERA Study, supra note 24, at 4 (noting that most
money market fund portfolio securities are held to maturity, and
secondary markets in these securities are not deeply liquid).
    \465\ Id.
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    We acknowledge that a floating NAV does not eliminate the incentive
to redeem in pursuit of higher quality or greater liquidity--indeed, we
intend to address the risks associated with these incentives primarily
through our fees and gates reform. However, we continue to believe that
a floating NAV should mitigate the incentive to redeem due to the
mismatch between the stable NAV price and the actual value of fund
shares because shareholders will receive a market value for their
shares rather than a fixed price when they redeem. Importantly, the
complementary liquidity fees and gates aspect of our money market
reforms would also apply to institutional prime funds that are subject
to a floating NAV. As discussed previously, while not intended to stem
investors' desire to move to more liquid or higher quality investments,
liquidity fees are specifically designed to ensure that redeeming
investors pay the costs of the liquidity they receive, and redemption
gates are designed as a tool to allow funds to manage heavy redemptions
in times of stress and thus reduce the chance of harm to the fund and
investors. In this way, we believe that the totality of our money
market fund reforms addresses comprehensively many features of money
market funds, including the characteristics of their investor base that
can make them susceptible to heavy redemptions, and gives fund boards
new tools for addressing a loss of liquidity that may develop in
funds.\466\
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    \466\ Some commenters agreed that a floating NAV alone is not
enough to address these incentives. See, e.g., Americans for Fin.
Reform Comment Letter (``[w]hile the floating NAV has clear benefits
in making clear that investor assets are at risk of loss, we are
concerned that a floating NAV alone will not create a sufficient
disincentive for investors to engage in `runs' on MMFs.'').
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    One commenter submitted a white paper concluding that (i) liquidity
fees and gates, if implemented effectively, could stop and prevent
runs; and (ii) although a variable NAV would not stop a run, it could
mitigate the first mover advantage associated with the motivation to
run that results from small shadow price departures from $1.00.\467\
The authors of the paper concluded further that the ability of a
variable NAV to mitigate this first mover advantage is overstated when
viewed in light of the real-world costs of moving between investments
that investors will face and, in a significant stress event, such
effect is a minor determinant of behavior.\468\ We acknowledge this
view and agree, as discussed above, that a floating NAV cannot stop
redemptions when (as assumed in the paper) investors are redeeming in a
flight to quality due to a continuing deterioration of the credit risk
in a fund's portfolio. However, the floating NAV reform reduces the
benefit from redeeming ahead of others to at most one half of a
hundredth of a cent per share \469\--100 times less than it is
currently--which investors would weigh against the cost of switching to
an alternative investment.\470\ As we discuss above, the floating NAV
reform is designed to supplement the fees and gates reform only for
those funds that are more vulnerable to credit events (compared to
government funds) and that have an investor base more likely to engage
in heavy redemptions (compared to retail investors) because of, among
other reasons, the first mover advantage created by the funds' current
valuation and pricing practices. Specifically, compared to the current
stable NAV environment, a variable NAV will significantly limit the
value of the first mover advantage. Although this first mover advantage
may not be the main driver of investor decisions to redeem, it
strengthens the incentive to redeem for those investors with the most
at stake from a decline in a fund's value, which increases the chance
of unfair investor dilution in contravention of a core principle of the
Investment Company Act. We continue to believe that a floating NAV
will, for institutional prime funds, reduce the impact of the first
mover advantage associated with money market funds' current valuation
and pricing practices and thus is consistent with our

obligation to seek to prevent investor dilution of fund shares (as
discussed in more detail in the section below).
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    \467\ See Treasury Strategies III Comment Letter (submitting a
white paper: Carfang, et al., Proposed Money Market Mutual Fund
Regulations: A Game Theory Assessment (using ``game theory''
analysis to evaluate whether a variable NAV and/or a constant NAV,
with or without the ability to impose a liquidity fee or gate, can
prevent or stop a run on money market fund assets).
    \468\ Id.
    \469\ For example, the floating NAV at 4 decimals will adjust
from $1.0000 to $0.9999 as soon as the value reaches $0.99995.
Hence, the most an investor can benefit from redeeming ahead of
others and switching to an alternative investment is $1.0000-
$0.99995 = $0.00005.
    \470\ We discuss the costs associated with institutional
investors transferring between investment alternatives in section
III.K.3.
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    A few commenters also suggested that shareholders in a floating NAV
fund would have the same incentive to redeem if a floating NAV fund
deviates far enough from the typical historical range for market-based
pricing, particularly if they believe the fund may continue to drop in
value.\471\ We note, however, that the floating NAV reform, one part of
our broader reforms to money market funds, is designed to address a
particular structural incentive that exists as a result of existing
valuation and pricing methodologies under rule 2a-7. As we stated in
our proposal and in this Release, the floating NAV reform is not
intended to deter redemptions that constitute rational risk management
by shareholders or that reflect a general incentive to avoid loss.
---------------------------------------------------------------------------

    \471\ See, e.g., Federated IV Comment Letter (arguing that,
unlike a stable NAV fund, shareholders may have a greater incentive
to redeem from a declining floating NAV fund because shareholders
would ``realize'' the small declines in value); Chamber II Comment
Letter.
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    Several commenters argued that shareholders may choose not to
redeem from a stable NAV money market fund during times of stress to
avoid contributing to the likelihood that their fund breaks the
buck.\472\ Although this may be the case for some shareholders, as
shown during the financial crisis, other shareholders do redeem from
stable value money market funds, regardless of the impact on the
fund.\473\ It is the actions of those shareholders that have led to our
re-evaluation of the appropriateness of exempting all money market
funds from the valuation and pricing provisions that apply to all other
mutual funds.
---------------------------------------------------------------------------

    \472\ See, e.g., Wells Fargo Comment Letter; Ropes & Gray
Comment Letter; ICI Comment Letter.
    \473\ See supra section II.
---------------------------------------------------------------------------

    One commenter also argued that rule 2a-7 already places a number of
detailed remedial obligations on the board of a money market fund, in
the event a credit event occurs, that are designed to prevent any first
mover advantage related to money market funds' current valuation and
pricing methods.\474\ This commenter discussed, for example, the
existing requirement that fund boards periodically calculate the fund's
shadow price and take action in the event it deviates from the market-
based NAV per share by more than 50 basis points. We note, however,
that the floating NAV reform is designed to proactively address a
structural feature of money market funds that may incentivize heavy
redemptions in times of market stress (and the resulting shareholder
inequities) before a significant credit event occurs or the fund re-
prices its shares using market-based values (i.e., breaks the buck).
Under current rule 2a-7, there remains a first mover advantage until