the fund breaks the buck and re-prices its shares using market-based
valuations. One commenter also noted that any reduction in the
incentive to redeem early from the fund's stable pricing would be
marginal and contingent upon the type of stress experienced.\475\ We
note that the floating NAV reform is targeted towards the funds that
have been most susceptible to heavy redemptions in the past. We believe
that the risks associated with these funds have shown that the first
mover advantage that results from current rule 2a-7's valuation and
pricing methods needs to be addressed. This is particularly true in
light of the Investment Company Act mandate to ensure that investors
are treated fairly and the impact that the first mover advantage has on
investor dilution.
---------------------------------------------------------------------------

    \474\ See Federated IV Comment Letter.
    \475\ See ABA Business Law Section Comment Letter.
---------------------------------------------------------------------------

    Finally, a number of commenters suggested that the evidence of
heavy redemptions in European floating NAV money market funds and U.S.
ultra-short bond funds during 2008, taken together, may be the best
means available to predict whether a floating NAV will reduce
shareholder incentives to redeem shares in times of stress.\476\ These
commenters suggest, therefore, that a floating NAV alone likely would
not stop investors from redeeming shares.\477\ We recognize that many
European floating NAV money market funds and U.S. ultra short bond
funds experienced heavy redemptions during the financial crisis.\478\
We note that, as discussed above, the floating NAV reform is not
intended to wholly prevent heightened redemptions or deter redemptions
that constitute rational risk management by shareholders or that
reflect a general incentive to avoid loss. Instead, our floating NAV
reform is intended to address the incremental incentive to redeem
created by money market funds' current valuation and pricing methods
(and not incentives to redeem that relate to flights to quality and
liquidity) and that exacerbates shareholder dilution.
---------------------------------------------------------------------------

    \476\ See, e.g., Federated IV Comment Letter; HSBC Comment
Letter.
    \477\ See supra note 475 and accompanying text.
    \478\ As we discussed in the Proposing Release, we understand
that many European floating NAV money market funds are priced and
managed differently than floating NAV funds (as we proposed, and as
adopted today). We also noted that Europe has several different
types of money market funds, all of which can take on more risk than
U.S. money market funds as they are not currently subject to
regulatory restrictions on their credit quality, liquidity,
maturity, and diversification as stringent as those imposed under
rule 2a-7. Finally, we noted in the Proposing Release that empirical
analysis yields different opinions on whether floating NAV funds, as
compared with stable NAV funds, are less susceptible to run-like
behavior. See Proposing Release, supra note 25, at section
III.A.1.d. Accordingly, we note that the fact that some ultra-short
bond funds and European floating NAV funds experienced heavy
redemptions during the financial crisis does not necessarily suggest
that investors in floating NAV money market funds (as adopted today)
also would redeem heavily in a financial crisis.
---------------------------------------------------------------------------

b. Risks of Investor Dilution
    As discussed earlier, one of the Commission's most significant
concerns when originally providing the exemption permitting the use of
amortized cost valuation and penny rounding pricing for money market
funds was to minimize the risks of investor dilution.\479\ A primary
principle underlying the Investment Company Act is that sales and
redemptions of redeemable securities should be effected at prices that
are fair and do not result in dilution of shareholder interests or
other harm to shareholders.\480\ Absent an exemption, a mutual fund
must sell and redeem its redeemable securities only at a price based on
its current net asset value, which equals the value of the fund's total
assets minus the amount of the fund's total liabilities.\481\ A mutual
fund generally must value its assets at their 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.\482\
---------------------------------------------------------------------------

    \479\ See Proposing Release, supra note 25.
    \480\ See Investment Trusts and Investment Companies: Hearings
on S. 3580 before a Subcommittee of the Senate Committee on Banking
and Currency, 76th Cong., 3d Sess. 136-38 (1940) (hearings that
preceded the enactment of the Company Act). In addition, all funds
must accurately calculate their net asset values to ensure the
accuracy of their payment of asset-based fees, such as investment
advisory fees, as well as the accuracy of their reported
performance. Statement Regarding ``Restricted Securities,''
Investment Company Act Release No. 5847 (Oct. 21, 1969).
    \481\ Rule 22c-1. When calculating its net asset value for
purposes of rule 22c-1: (i) An open-end fund adds up the current
values of all of its assets (using their market values or fair
values, as appropriate), which reflect any unrealized gains; and
(ii) subtracts all of its liabilities, which include any federal
income tax liability on any unrealized gains. If the open-end fund
understates a liability, among other consequences, the price at
which the fund's redeemable securities are redeemed will be higher,
so that redeeming shareholders will receive too much for their
shares while the net asset value of shares held by the remaining
shareholders may be reduced correspondingly when the full amount of
the liability must be paid.
    \482\ Rule 2a-4; see also section 2(a)(41) defining the term
``value.''
---------------------------------------------------------------------------

    A fund that prices and transacts in fund shares valued at amortized
cost value and rounded to the nearest penny poses a risk of dilution of
investor shares because investors may redeem for the stable value of
their shares even where the underlying market value of the fund's
portfolio may be less. If such a redemption occurs, the value of the
remaining shareholders' shares can be diluted, as remaining
shareholders effectively end up paying redeeming shareholders the
difference between the stable value and the underlying market value of
the fund's assets.\483\ This result is illustrated in the example
provided in the Proposing Release, where we discussed how redeeming
shareholders can concentrate losses in a money market fund.\484\
---------------------------------------------------------------------------

    \483\ See TIAA-CREF Comment Letter (``Allowing investors to
transact at daily using amortized pricing in times of stress could
lead to dilution of the remaining investors' shares as the first
redeemers in a run on a money market fund would get a higher
valuation for their shares based on amortized cost than would
subsequent redeemers.'').
    \484\ See Proposing Release, supra note 25, at section II.B.1.
---------------------------------------------------------------------------

    This risk of dilution is magnified by the ``cliff effect'' that can
occur if a stable value fund is required to re-price its shares. If,
due to heavy redemptions, losses embedded in a fund's portfolio cause
it to re-price its shares from its stable value, remaining money market
fund investors will receive at most 99 cents for every share remaining,
while redeeming investors received the full $1.00, even if the market
value of the fund's portfolio had not changed. In a mutual fund that
transacts using a floating NAV, this cliff effect is minimized because
(assuming pricing to four decimal places) the ``cliff'' is a 1/100th
the size compared to when a money market fund is priced using penny
rounding. In other words, in a floating NAV fund the risk of investor
dilution is far less, in part, because the cliff occurs earlier and is
significantly smaller (at $0.9999 cents, or one hundred times sooner
and smaller than a stable value fund that drops from $1.00 to 99
cents). Thus, the ``cliff effect'' is significantly mitigated in a
floating NAV fund that prices and rounds share prices to four decimal
places.
    As we discuss in more detail below, applying a floating NAV only to
institutional investors investing in prime funds and allowing retail
investors to continue to invest in a stable value product recognizes
the historical differences between these types of investors, and
cordons off some of the risks, reducing the chance that heavy
redemptions by institutions will result in disruption or material
dilution of retail investors' shares.\485\ We also recognize that
institutional investors are not always similarly situated, with some
institutions having more or less investment at risk, resources to
monitor their investments, tolerance for losses, or proclivity to
redeem, which makes certain institutional investors less likely to be
among the first movers.\486\ A floating NAV should also help reduce the
risks of material dilution to this subset of institutional investors,
as it will reduce the first mover advantage associated with current
rule 2a-7's valuation and pricing methods, which can prompt heavy
redemptions and can have the effect of diluting the shares of slower-
to-redeem institutional investors.\487\
---------------------------------------------------------------------------

    \485\ See infra section III.C.2; see also Schwab Comment Letter
(agreeing that segregating institutional investors from retail
investors would ``reduce the chance that retail investors, who tend
to be slower to react to market events, will absorb a
disproportionate share of the losses if a fund breaks the buck.'').
    \486\ See, e.g., ABA Business Law Comment Letter (``It is more
likely, however, that larger institutions have greater analytical
resources than other institutional investors, such as small pension
plans and companies.'').
    \487\ Several commenters supported our belief that a floating
NAV treats shareholders more equitably than under current rule 2a-7.
See, e.g., Deutsche Comment Letter; TIAA-CREF Comment Letter;
Systemic Risk Council Comment Letter.
---------------------------------------------------------------------------

    A floating NAV might also prompt investors who are the least
tolerant of losses, and thus the most likely to redeem early to avoid a
decline in a fund's NAV per share, to shift into other investment
products, such as government money market funds or other stable value
products that may more appropriately match their risk profile. Such a
shift would further reduce the risks of dilution for the remaining
investors, mitigating the chances that rapid heavy redemptions will
result in negative outcomes for these funds and their investors.
    We recognize that our liquidity fees and gates reforms also address
the risks of dilution to some extent. However, fees and gates may not
address the incentives that cause rapid heavy redemptions to occur in
certain money market funds in the first place (although they should
help manage the results). They also are not primarily designed to
address the risks associated with deviations in a fund's NAV caused by
portfolio losses or other credit events; rather, they are designed to
ensure that investors pay the costs of their liquidity and allow funds
time to manage heavy redemptions. A floating NAV requires redeeming
investors to receive only their fair share of the fund when there are
embedded losses in the portfolio (avoiding dilution of remaining
shareholders), even in cases where the fund has sufficient liquidity
such that fees or gates would not be permitted. We believe that the
risks associated with institutional prime money market funds--including
the incentives associated with the first mover advantage that results
from current rule 2a-7's valuation and pricing methods, and associated
heavy redemptions that can worsen a decline in a fund's stable NAV--are
significant enough that they need to be addressed through the targeted
reform of a floating NAV.
c. Enhanced Allocation of Principal Volatility Risk
    Today, the risks associated with the principal volatility of a
money market fund's portfolio securities can be obscured by the pricing
and valuation methods that allow these funds to maintain a stable NAV.
In non-money market funds, investors may look to historical principal
volatility as an indicator of fund risk because changes in the
principal may be the dominant source of the total return.\488\
Historical principal volatility in money market funds may not have been
as fully appreciated by investors, because they do not experience any
principal volatility unless the fund breaks the buck (even if such
volatility has in fact occurred).\489\
---------------------------------------------------------------------------

    \488\ Mutual funds earn money through dividend payments, capital
gains distributions (increases in the price of the fund's portfolio
securities), and increased NAV. See SEC Office of Investor Education
and Advocacy, Mutual Funds, A Guide for Investors (Aug. 2007),
available at http://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf. Money market fund investors may be more likely to focus
on the other components of total return in a fund, such as interest
or dividends.
    \489\ Such principal volatility may be even less apparent if the
fund's sponsor provides support for the fund. See supra section
II.B.4.
---------------------------------------------------------------------------

    Some commenters suggested, and we agree, that transacting at prices
based on current market values means that institutional investors who
invest in floating NAV funds will be more aware of, and willing to
tolerate, occasional fluctuations in fund share prices (largely
resulting from volatility in principal that had been previously
obscured).\490\ This may result in more efficient allocation of risk
through a ``sorting effect'' whereby institutional investors in prime
funds either remain in a floating NAV money market fund and accept the
risks of regular principal

volatility \491\ or move their assets into alternative investment
products better suited to their actual risk tolerance.\492\
Accordingly, the shareholders who remain in institutional prime money
market funds must be prepared to experience gains and losses in
principal on a regular basis, which may result in those remaining
investors being less likely to redeem at the first sign that a money
market fund may experience such principal volatility.
---------------------------------------------------------------------------

    \490\ See, e.g. Vanguard Comment Letter.
    \491\ We acknowledge, however, that although we expect money
market fund shares priced to four decimal places likely will
fluctuate on a somewhat regular basis, they are not likely to
fluctuate daily primarily due to the high quality and short duration
of the fund's underlying portfolio securities. A few commenters
argued that a floating NAV will not necessarily inform investors
because NAVs may not fluctuate much. See, e.g., Federated IV Comment
Letter; HSBC Comment Letter; ICI Comment Letter. Our staff
estimates, based on a historical analysis of money market fund
shadow prices, that money market funds would have floated just over
50% of the time if priced to four decimal places. See infra note 502
and accompanying text.
    \492\ See, e.g. Vanguard Comment Letter (``The reason the
floating NAV would mitigate the risk of disruptive shareholder
redemptions in institutional prime MMFs is that the process of
moving from a stable NAV to a floating NAV will force the
shareholders of those funds, which tend to be concentrated with
professional investors who cannot withstand any share price
movement, into different investment vehicles. The shareholders who
remain will have a greater tolerance for loss, making them less
likely to flee at the first sign of stress.'').
---------------------------------------------------------------------------

    Some commenters recognized that making principal gains and losses
more apparent to investors could recalibrate investors' perceptions of
the risks inherent in money market funds.\493\ A number of commenters
argued, however, that institutional investors who invest in money
market funds that will be subject to a floating NAV are well aware of
the risks of money market funds and that money market fund shares may
fluctuate in value.\494\ But contrary to institutional investors'
purported existing knowledge of those risks, when the reality of
potential principal losses became more apparent during the financial
crisis, many of them redeemed heavily from money market funds.\495\ Our
floating NAV reform, by requiring that investors experience any gains
or losses in principal when they transact in money market fund shares,
will more fully reveal the risk from changes in the fund's principal
value to shareholders.
---------------------------------------------------------------------------

    \493\ See, e.g., Schwab Comment Letter; Fin. Svcs. Roundtable
Comment Letter; Boston Federal Reserve Comment Letter.
    \494\ See, e.g., Federated IV Comment Letter (citing to comments
submitted on the FSOC Proposed Recommendations); Hanson et al.
Comment Letter. Commenters also noted that investors already
understand that money market funds can ``break the buck.'' See,
e.g., Comment Letter of OFI Global Asset Management, Inc. (Sept. 17,
2013) (``Oppenheimer Comment Letter''); Dreyfus Comment Letter; UBS
Comment Letter; Wells Fargo Comment Letter; Comment Letter of Key
Bank, NA (Sept. 16, 2013) (``Key Bank Comment Letter'').
    \495\ Some commenters agreed with this view. See, e.g., American
Bankers Ass'n Comment Letter; Angel Comment Letter.
---------------------------------------------------------------------------

    Finally, some commenters also suggested that enhanced disclosure
(including daily Web site reporting of shadow NAVs), rather than a
floating NAV, would be a more efficient and less costly way to achieve
the same goal.\496\ We agree that daily disclosure of funds' shadow
NAVs does improve visibility of risk to some degree, by making the
information about NAV fluctuations available to investors should they
choose to seek it out. But the mere availability of this information
cannot provide the same effect that is provided by institutions
experiencing actual fluctuations in the value of their investments (or
acknowledging, through their investment in a fully disclosed floating
NAV investment product, their willingness to accept daily fluctuations
in share price value), which will be provided by a floating NAV.
---------------------------------------------------------------------------

    \496\ See, e.g., Federated IV Comment Letter; ICI Comment
Letter; J.P. Morgan Comment Letter; SIFMA Comment Letter; Chamber II
Comment Letter. A few commenters suggested that money market funds
be required to transact in fund shares to the same level of
precision as disclosed on fund Web sites, which is the approach that
we are adopting today. See, e.g., Fidelity Comment Letter (stating
that money market funds should disclose (on fund Web sites) the NAV
to the same precision as it prices its shares for transactions in
order to avoid arbitrage opportunities based on asymmetry of
information).
---------------------------------------------------------------------------

4. Money Market Fund Pricing
    Having determined to adopt the floating NAV reform for
institutional prime funds, there is a separate (albeit related) issue
of how to price the shares for transactions. Today, for the reasons
discussed previously in this section, we are amending rule 2a-7 to
eliminate the exemption that currently permits institutional prime
funds to maintain a stable NAV through amortized cost valuation and/or
penny rounding pricing.\497\ We are also adopting, as proposed, an
additional requirement that these money market funds value their
portfolio assets and price fund shares by rounding the fund's current
NAV to four decimal places in the case of a fund with a $1.0000 share
price 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).\498\
Accordingly, the final amendments change the rounding convention for
money market funds that are required to adopt a floating NAV--from
penny rounding (i.e., to the nearest one percent) to ``basis point''
rounding (i.e., to the nearest 1/100th of one percent), which is a more
precise standard than other mutual funds use today.
---------------------------------------------------------------------------

    \497\ As discussed further below, under our final rule
amendments, government and retail money market funds will be
permitted to use the amortized cost method and/or penny-rounding
method to maintain a stable price per share as they do today.
    \498\ See rule 2a-7(c)(1)(ii). Mutual funds that are not relying
on the exemptions provided by rule 2a-7 today are required to price
and transact in fund shares rounded to a minimum of 1/10th of 1
percent, or three decimal places. See ASR 219, supra note 5.
---------------------------------------------------------------------------

    We proposed to require that institutional prime funds use basis
point rounding and we noted that basis point rounding appeared to be
the level of sensitivity that would be required if gains and losses
were to be regularly reflected in the share price of money market funds
in all market environments, including relatively stable market
conditions. We also noted that this level of precision may help more
effectively inform investor expectations regarding the floating nature
of their shares.\499\ In money market funds today, there is no
principal volatility unless the fund breaks the buck, and thus this
indicator of risk may not have always been readily apparent.\500\
---------------------------------------------------------------------------

    \499\ See Proposing Release, supra note 25, at section III.A.2.
    \500\ Some commenters recognized that making gains and losses
more apparent to investors could help recalibrate investors'
perceptions of the risks inherent in money market funds. See, e.g.,
Schwab Comment Letter; Fin Svcs. Roundtable Comment Letter; Boston
Federal Reserve Comment Letter.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, we considered, as an
alternative to the basis point rounding requirement that we are
adopting today (which is a condition for relying on rule 2a-7 for
institutional prime money market funds), requiring institutional prime
funds to price and transact in fund shares at a precision of 1/10th of
one percent (which is typically the equivalent of three decimal places
at $10.00 share price) (``10 basis point rounding''), like other mutual
funds. But in the Proposing Release, we noted our concern that 10 basis
point rounding may not be sufficient to ensure that investors can
regularly observe the investment risks that are present in money market
funds, particularly if funds manage themselves in such a way that their
NAVs remain constant or nearly constant.\501\
---------------------------------------------------------------------------

    \501\ See supra note 491.
---------------------------------------------------------------------------

    In considering whether to require basis point rounding or, instead,
to allow 10 basis point rounding, we have looked to the potential for
price

fluctuations under the two approaches. Based on our staff analysis of
Form N-MFP data between November 2010 and November 2013, 53% of money
market funds have fluctuated in price over a twelve-month period with a
NAV priced using basis point rounding, compared with less than 5% of
money market funds that would have fluctuated in price using 10 basis
point rounding.\502\ We recognize that, either way, this limited
fluctuation in prices is the result of the nature of money market fund
portfolios, whose short duration and/or high quality generally results
in fluctuations in value primarily when there is a credit deterioration
or other significant market event.\503\ Because of the nature of money
market fund portfolios, pricing with the accuracy of basis point
rounding should better reflect the nature of money market funds as an
investment product by regularly showing market gains and losses in an
institutional prime money market fund's portfolio.\504\
---------------------------------------------------------------------------

    \502\ Our staff has updated its analysis from the discussion in
the Proposing Release. See Proposing Release, supra note 25, at
section III.A.2 and n.164.
    \503\ See, e.g., Comment Letter of Arnold & Porter LLP on behalf
of Federated Investors (Elimination of the Use of Amortized Cost
Method of Valuation by Stable Value Money Market Funds) (Sept. 16,
2013) (``Federated VI Comment Letter'').
    \504\ See HSBC Comment Letter.
---------------------------------------------------------------------------

    After considering the results of the staff's analysis, we are
persuaded to require basis point rounding. We believe that some of the
institutional investors in these funds may not appreciate the risk
associated with money market funds.\505\ As for this subset of
institutional investors, we believe that the basis point rounding
requirement may accentuate the visibility of the risks in money market
funds by causing these shareholders to experience gains and losses when
the funds' value fluctuates by 1 basis point or more.\506\ We further
believe this may, in turn, have two potential effects that are
consistent with our overall goal of addressing features in money market
funds that can make them susceptible to heavy redemption. First, to the
extent that some of these investors become more aware of the risks,
they may develop an increased risk tolerance that could help make them
less prone to run.\507\ Second, by helping make the risk more apparent
through periodic price fluctuations, basis point rounding may help
signal to those investors who cannot tolerate the risk associated with
the fluctuating NAV that they should migrate to other investment
options, such as government funds.\508\ Because basis point rounding
is, as the staff's study demonstrated, more likely to produce price
fluctuations than 10 basis point rounding, we believe it is more likely
to have these desired effects.\509\
---------------------------------------------------------------------------

    \505\ To be sure, this may not generally include the more
sophisticated institutional investors who have professional
financial experts advising them and carefully monitoring their
investments. See, e.g., Federated IV Comment Letter (citing to
comments submitted on the FSOC Proposed Recommendations; Hanson et
al. Comment Letters). But within the class of institutional
investors, we understand that there are many less sophisticated
investors--e.g., smaller, closely held corporations--who rely on
money market funds to manage their cash flow but who are not fully
aware of the risks and the potential for loss.
    \506\ See, e.g., Report of the President's Working Group on
Financial Markets, Money Market Fund Reform Options (Oct. 2010)
(``PWG Report''), available at http://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf, at 22
(``Investors' perceptions that MMFs are virtually riskless may
change slowly and unpredictably if NAV fluctuations remain small and
rare. MMFs with floating NAVs, at least temporarily, might even be
more prone to runs if investors who continue to see shares as
essentially risk-free react to small or temporary changes in the
value of their shares.''); Comment Letter of Federated Investors,
Inc. (May 19, 2011) (available in File No. 4-619) (``Federated May
2011 Comment Letter'') (stating that ``managers would employ all
manners of techniques to minimize the fluctuations in their funds'
NAVs'' and, therefore, ``[i]nvestors would then expect the funds to
exhibit very low volatility, and would redeem their shares if the
volatility exceeded their expectations''). As discussed above, we
believe that our floating NAV reform improves the allocation of risk
and should result in better-informed investors that, by choosing to
invest in a floating NAV, appreciate and are willing to tolerate the
risks of principal volatility, even if those fluctuations do not
occur on a daily basis. See supra section III.B.3.c.
    \507\ Several commenters agreed with this position. See, e.g.,
Comment Letter of Eric S. Rosengren, President, Federal Reserve Bank
of Boston, et al. (Sept. 12, 2013) (``Fed Bank President Comment
Letter'') (``We agree with the SEC's position that a floating NAV
requirement, if properly implemented, could recalibrate investors'
perception of the risks inherent in a fund by `making gains and
losses a more regularly observable occurrence'.''); HSBC Comment
Letter.
    \508\ See, e.g., Fed Bank President Comment Letter (``Because a
constant NAV MMMF generally draws risk-averse investors, it is
likely that given an appropriate transition period, the investor
base would either change or become more tolerant of NAV
fluctuations, lowering the chance of destabilizing runs.'').
    \509\ We are concerned that, were we to adopt 10 basis point
rounding, institutional prime money market funds would not regularly
float during normal market times, in which case certain
institutional investors may not fully appreciate that the investment
has risks and they might thus invest in the product despite their
lower risk tolerance. See, e.g., PWG Report, supra note 506, at 10
(``Investors have come to view MMF shares as extremely safe, in part
because of the funds' stable NAVs and sponsors' record of supporting
funds that might otherwise lose value. MMFs' history of maintaining
stable value has attracted highly risk-averse investors who are
prone to withdraw assets rapidly when losses appear possible.'').
---------------------------------------------------------------------------

a. Other Considerations
    We recognize that 10 basis point rounding would provide certain
benefits. For example, it could provide consistency in pricing among
all floating NAV mutual funds and this could reduce investors'
incentives to reallocate assets into other potentially riskier floating
NAV mutual funds (e.g., ultra-short bond funds) that some commenters
suggested may appear to present less volatility. A number of commenters
argued for this alternative, suggesting that money market funds should
not be required to use a more precise rounding convention than what is
required of other mutual funds.\510\
---------------------------------------------------------------------------

    \510\ See, e.g., BlackRock II Comment Letter; Legg Mason &
Western Asset Comment Letter; Fidelity Comment Letter.
---------------------------------------------------------------------------

    Notwithstanding these potential benefits, as discussed above we
believe there are sufficient countervailing considerations that make it
appropriate to require basis point rounding for institutional prime
money market funds. Further, we are requiring this additional level of
precision because institutional prime money market funds are distinct
from other mutual funds in their regulatory structure, purpose, and
investor risk tolerance, as well as the risks they pose of investor
dilution and to well-functioning markets. Accordingly, we believe on
balance that it is appropriate to require these money market funds to
use a more precise pricing and rounding convention than used by other
mutual funds.
    Some commenters also argued that enhanced disclosure (including
daily Web site reporting of shadow NAVs), would be a more efficient and
less costly way to achieve the same goal.\511\ We agree that daily
disclosure of funds' shadow NAVs does improve visibility of risk to
some degree, by making the information about NAV fluctuations available
to investors should they choose to seek it out. But we are skeptical
that, as to the subset of institutional investors who are less aware of
the risks, the mere availability of this information can provide the
same level of impact than is provided by actually experiencing
fluctuations in the investment value (or acknowledging, through these
investors' investment in a fully disclosed floating NAV investment
product, their willingness to accept daily fluctuations in share price
value), which will be provided by a floating NAV priced using basis
rounding. In a similar vein, one commenter suggested that, as an
alternative to a floating NAV, we consider a modified penny-rounding
pricing method whereby a money market fund would be permitted to
calculate an unrounded NAV once each

day and therefore, absent a significant market event, use the previous
day's portfolio valuation for any intraday NAV calculations.\512\ Under
this approach, money market funds would disclose their basis-point
rounded price, but only transact at the penny-rounded price.\513\
Although we recognize that such an approach would likely retain the
efficiencies associated with amortized cost valuation, this alternative
is not without other risks, including the use of potentially stale
valuation data. More significantly, unlike our floating NAV reform,
this alternative does not address the first-mover advantage or risks of
investor dilution discussed above.\514\
---------------------------------------------------------------------------

    \511\ See, e.g., Federated IV Comment Letter; ICI Comment
Letter; J.P. Morgan Comment Letter; SIFMA Comment Letter; Chamber II
Comment Letter.
    \512\ See Comment Letter of Federated Investors, Inc. (Nov. 6,
2013); see also Comment Letter of Arnold & Porter LLP on behalf of
Federated Investors (July 16, 2014). We note that this alternative,
if combined with fees and gates, is very similar to the fees and
gates alternative we proposed (which included a requirement for
penny-rounded pricing). We discuss why we have chosen not to adopt
that alternative in section III.L.1.
    \513\ Id.
    \514\ See supra section III.B.3.
---------------------------------------------------------------------------

    Several commenters argued that basis point rounding is an
artificial means to increase the volatility of floating NAV funds and
would mislead investors by exaggerating the risks of investing in money
market funds compared to ultra-short bond funds, and suggested that
instead we should adopt 10 basis point rounding.\515\ For example, one
commenter noted that basis point rounding is so sensitive that it might
produce price distinctions among funds that result merely from the
valuation model used by a pricing service, rather than from a
difference in the intrinsic value of the securities (``model
noise'').\516\ We do not believe that basis point rounding will mislead
investors, nor do we believe that price changes at the fourth decimal
place will generally be a result of ``model noise'' rather than
reflecting changes in the market value of the fund's portfolio.\517\ We
note that today many money market funds are voluntarily disclosing
their shadow price with basis point rounding, and they are prohibited
from doing so if the shadow price was misleading to investors. Funds
have also been required to report their shadow NAVs to us on Form N-MFP
priced to the fourth decimal place since the inception of the form, and
we have found the shadow NAVs priced at this level useful and relevant
in our risk monitoring efforts. For example, reporting of shadow prices
to four decimal places provides a level of precision (as compared with
three decimal place rounding) needed for our staff to fully evaluate
and monitor the impact of credit events on money market fund share
prices.\518\
---------------------------------------------------------------------------

    \515\ See, e.g., Schwab Comment Letter; Stradley Ronon Comment
Letter; SIFMA Comment Letter; Legg Mason & Western Asset Comment
Letter; Fidelity Comment Letter.
    \516\ See Goldman Sachs Comment Letter.
    \517\ See, e.g., HSBC Comment Letter (noting that basis point
rounding would ``better reflect gains and losses'' than 3 decimal
place rounding).
    \518\ Basis point precision will also enable our staff to
monitor the effect of shifts in interest rates on money market fund
share prices (particularly in more regular market conditions).
---------------------------------------------------------------------------

    Some commenters also stated that ultra-short bond funds priced
using 10 basis point rounding might appear less volatile than money
market funds priced using basis point rounding.\519\ As a result, these
commenters noted what they viewed as the undesirable effect that
investors might be incentivized to move their assets into ultra-short
bond funds that have similar investment parameters to money market
funds but are not required to adhere to the risk-limiting conditions of
rule 2a-7.\520\ Based on our staff analysis of Morningstar data between
November 2010 and November 2013, 100% of ultra-short bond funds have
fluctuated in price over a twelve-month period with a NAV priced using
10 basis point rounding, compared with 53% of money market funds that
would have fluctuated in price using basis point rounding.\521\
Accordingly, we do not believe that it is likely investors will view
ultra-short bond funds as less volatile than money market funds priced
using basis point rounding. We also note, however, that because
floating NAV money market funds and ultra-short bond funds invest in
different securities and are subject to different regulatory
requirements (including risk-limiting conditions), investors may
consider these factors when evaluating the risk profile of these
different investment products.\522\ Existing disclosure requirements,
along with the amendments to money market fund disclosure requirements
we are adopting today, are designed to help investors understand these
differences and the associated risks.
---------------------------------------------------------------------------

    \519\ See, e.g., BlackRock II Comment Letter; Stradley Ronon
Comment Letter; SIFMA Comment Letter; Fidelity Comment Letter.
    \520\ We note that other features of ultra-short bond funds may
counter this incentive, including that they are generally not a cash
equivalent for accounting purposes and their less favorable tax
treatment than what the Treasury Department and IRS have proposed
and issued today. See infra section III.B.6.
    \521\ Using Morningstar data, our staff analyzed the monthly NAV
fluctuations of 54 active ultra-short bond fund share classes during
November 2010 and November 2013. The money market fund data was
obtained using Form N-MFP data. See supra note 502 and accompanying
text.
    \522\ As discussed in infra section III.B.6, the Treasury
Department and the IRS will issue today a revenue procedure that
exempts from the wash sale rule dispositions of shares in any
floating NAV money market fund. This exemption does not apply to
ultra-short bond funds.
---------------------------------------------------------------------------

b. Implementation of Basis Point Rounding
    One commenter noted that basis point rounding ``should be
relatively straightforward for the industry to accommodate.'' \523\ A
number of commenters, however, objected to our proposed amendment to
require that floating NAV money market funds price and transact their
shares at the fourth decimal place. Commenters stated that pricing and
transacting at four decimal places (as opposed to reporting only their
shadow price at four decimal places) would be operationally expensive
and overly burdensome because money market fund systems are typically
designed for processing all mutual funds,\524\ which generally process
and record transactions rounded to the nearest penny (which is
typically the equivalent of three decimal places at a $10.00 share
price).\525\ We acknowledge that money market funds, intermediaries,
and shareholders will likely incur significant costs in order to modify
their systems to accommodate pricing and transacting in fund shares
rounded to four decimals. We discuss these costs in section III.B.8.a
below. We understand, however, that because virtually all mutual funds
(including money market funds), regardless of price, round their NAV to
the nearest penny, these system change costs will be incurred if we
require money market funds to float their NAV, regardless of whether we
require the use of basis point rounding (unless funds were to re-price
to $10.00 per share).\526\
---------------------------------------------------------------------------

    \523\ Comment Letter of Interactive Data Corporation (Sept. 17,
2013) (``Interactive Data Comment Letter'').
    \524\ See supra note 500.
    \525\ See, e.g., BlackRock II Comment Letter; Invesco Comment
Letter; Schwab Comment Letter; Legg Mason & Western Asset Comment
Letter; ICI Comment Letter.
    \526\ We understand that virtually all systems round to the
nearest penny when processing fund share transactions. See ICI
Comment Letter. Accordingly, if a money market fund continued to be
priced at a dollar, even if rounded to the third decimal place, we
understand that similar significant systems changes would be
necessary to transact and report in fund shares priced at $1.000. We
note that money market funds would be able to avoid these costs and
move floating NAV money market funds to existing mutual fund systems
by re-pricing fund shares to $100.00 per share, under a basis point
rounding requirement. See id. We recognize that such a transition
might create other costs, such as proxy solicitation if the fund's
charter prohibits such a re-pricing and potential investor
resistance to using a cash management product that prices based on a
$100.00 initial share price. See id. (noting that basis point
rounding would be workable (without significant costs) if money
market funds moved to a $100.00 price per share, but suggesting that
investors would be unlikely to use a cash management product priced
at this level). We agree with this commenter that it is unlikely
that investors would invest in a money market fund that implements
an initial $100.00 share price in a floating NAV money market fund.
If a money market fund chose to do so, we estimate that each fund
would incur one-time proxy solicitation costs of $100,000. See infra
note 735 and accompanying text.

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

    A few commenters also noted that although basis point rounding may
convey the risk of a floating NAV to investors more clearly by
reflecting very small fluctuations in value, it does so at a
significant cost--increasing the tax and accounting burdens associated
with the realized gains and losses that would result from more frequent
changes in a money market fund's NAV per share.\527\ As discussed in
section III.B.6.a below, however, the Treasury Department and IRS are
today proposing a new regulation that would permit investors to elect
to use a ``simplified aggregate mark-to-market method'' to determine
annual realized gains or losses and therefore eliminate the need to
track purchase and sale transactions. Therefore, it is unlikely that
there will be increased operational burdens that result from tax or
accounting costs associated with more frequent realized gains or
losses.\528\
---------------------------------------------------------------------------

    \527\ See, e.g., BlackRock II Comment Letter; UBS Comment
Letter.
    \528\ As discussed in section III.B.6.a.i, however, investors
are likely to incur additional, although small, realized gains and/
or losses as a result of more frequent fluctuations in the share
price under a floating NAV priced to four decimal places.
---------------------------------------------------------------------------

c. Economic Analysis
    Under our final amendments, 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. During normal market
conditions, rounding prices and transacting in fund shares at four
decimal places will provide investors an opportunity to better
understand the risks of institutional prime funds as an investment
option and will provide investors with improved transparency in
pricing. This should positively affect competition. During times of
stress, it will reduce much of the economic incentive for shareholders
to redeem shares ahead of other investors at a stable net asset value
when the market value of portfolio holdings fall and will reduce
shareholder dilution. As such, the risk of heavy share redemptions
should decrease, and shareholders will be treated more equitably as
they absorb their proportionate share of gains, losses, and costs. In
addition, rounding prices and transacting in fund shares at four
decimal places may help to further reduce the incentive for
shareholders to redeem shares ahead of other investors by helping less
informed investors better understand the inherent risks in money market
funds. As such, the risk of heavy share redemptions may decrease as
investors experience greater information efficiency and allocative
efficiency by better understanding the risks more closely and directing
their investments accordingly. Reducing the risk of heavy share
redemptions by removing the first-mover advantage should promote
capital formation by making money market funds a more stable source of
financing for issuers of short-term credit instruments. We recognize,
however, that as discussed below in section II.K, to the extent that
money flows out of institutional prime floating NAV funds and into
alternative investment vehicles, capital formation may be adversely
affected.
5. Amortized Cost and Penny Rounding for Stable NAV Funds
    As discussed above, all money market funds that are not subject to
our targeted floating NAV reform may continue to price fund shares as
they do today and use the amortized cost method to value portfolio
securities.\529\ This approach differs from our 2013 proposal, in which
we proposed to eliminate the use of the amortized cost method of
valuation for all money market funds. At that time, we stated that
amortized cost valuation or penny rounding pricing alone effectively
provides the same 50 basis points of deviation from a fund's shadow
price before the fund must ``break the buck'' and re-price its shares.
Accordingly, and in light of the fact that, under our proposal, all
money market funds (including stable NAV funds) would be required to
disclose on a daily basis their fund share prices with their portfolios
valued using market-based factors (rather than amortized cost), we
proposed to eliminate the use of amortized cost for stable NAV funds
(but to continue to permit penny rounding pricing).\530\
---------------------------------------------------------------------------

    \529\ Stable NAV money market funds may also choose to use the
penny rounding method of pricing fund shares. Under our amendments,
government and retail money market funds will be permitted to
maintain a stable NAV. See infra sections III.C.1 and III.C.2.
    \530\ See Proposing Release, supra note 25, at section III.A.3.
---------------------------------------------------------------------------

    A number of commenters objected to eliminating amortized cost
valuation for stable NAV funds.\531\ Most significantly, commenters
argued that prohibiting the use of amortized cost valuation would
hinder money market funds' ability to provide for intraday purchases
and redemptions and same-day settlement because of the increased time
required to strike a market-based price.\532\ One commenter noted, for
example, that if a money market fund prices at the close of the New
York Stock Exchange, the fund may not be able to complete the penny
rounding process, wire redemption proceeds, and settle fund trades
before the close of the Fedwire.\533\ Commenters also argued that
substituting penny rounding pricing for amortized cost valuation would
increase costs and operational complexity without providing
corresponding benefits.\534\ A few commenters also suggested that, in
assessing whether to eliminate amortized cost valuation for securities
that mature in more than 60 days, we should consider the broader
systemic implications of a potential shift in money market fund
portfolio holdings towards securities that mature within 60

days (in order to avoid the need to use market-based values).\535\
---------------------------------------------------------------------------

    \531\ See generally BlackRock II Comment Letter; Dreyfus Comment
Letter; Federated VI Comment Letter; Wells Fargo Comment Letter;
SIFMA Comment Letter. A number of commenters suggested that
amortized cost is an appropriate valuation method for money market
funds because the characteristics of typical portfolio holdings
(i.e., high quality, short duration, and typically held-to-maturity)
result in minimal differences between a money market fund's NAV
calculated using amortized cost and a fund's market-based NAV. See,
e.g., Legg Mason & Western Asset Comment Letter; UBS Comment Letter;
Chamber II Comment Letter. Commenters also suggested that amortized
cost valuation may increase objectivity and consistency across the
fund industry because money market instruments do not often trade in
the secondary markets and therefore the market-based prices may be
less reliable. See, e.g., Federated VI Comment Letter; Goldman Sachs
Comment Letter; Legg Mason & Western Asset Comment Letter.
    \532\ See, e.g., Federated VI Comment Letter (suggesting that it
would take a minimum of three to four hours to strike a market-based
NAV (assuming there are no technology problems), compared with as
little as one hour for a fund using penny-rounded pricing and
amortized cost valuation). See also, e.g., Legg Mason & Western
Asset Comment Letter; SunGard Comment Letter; UBS Comment Letter;
ICI Comment Letter; BlackRock II Comment Letter.
    \533\ See Federated VI Comment Letter.
    \534\ See, e.g., Federated VI Comment Letter (noting that June
2012 survey data from Form N-MFP filings shows that approximately
72% of prime money market fund assets had maturities of less than 60
days). As a result, this commenter suggests that substituting penny
rounding for amortized cost imposes disproportionately high costs
without incremental benefits because a large portion of fund
portfolios will continue to use amortized cost under current
Commission guidance. See also, e.g., Legg Mason & Western Asset
Comment Letter; SunGard Comment Letter; UBS Comment Letter; ICI
Comment Letter.
    \535\ See, e.g., Stradley Ronon Comment Letter; SIFMA Comment
Letter. As discussed in this section, we are not eliminating, as
proposed, the use of amortized cost valuation for stable NAV money
market funds under our final amendments.
---------------------------------------------------------------------------

    We no longer believe that, as we stated in the Proposing Release,
there would be little additional cost to funds if we eliminated
amortized cost valuation (and permitted only penny rounding) for all
money market funds (including stable NAV money market funds). Our
belief was, in part, based on the fact that, as proposed (and as we are
adopting today), all money market funds would be required to post on
their Web sites daily shadow prices (determined using market-based
values) rounded to four decimal places. Because, under our proposal
money market funds would be required to obtain daily market-based
valuations in order to post daily shadow prices to fund Web sites, we
believed that funds would have this information readily available (and
therefore not require the use of amortized cost). Notwithstanding this,
commenters noted, however, the ability to use amortized cost valuation
provides a significant benefit to money market funds when compared to
penny rounding pricing--the ability to provide intraday liquidity to
shareholders in a cost-effective and efficient manner. We agree with
commenters that eliminating amortized cost valuation would likely
hinder the ability of funds to provide frequent intraday liquidity to
shareholders and may impose unnecessary costs and operational burdens
on stable NAV money market funds. This is particularly true in light of
the fact that under existing regulatory restrictions and guidance, a
material intraday fluctuation would still have to be recognized in fair
valuing the security. We therefore believe that eliminating amortized
cost valuation in the context of stable NAV funds would be contrary to
a primary goal of our rulemaking--to preserve to the extent feasible,
while protecting investors and the markets, the benefits of money
market funds for investors and the short-term funding markets by
retaining a stable NAV alternative.
    Accordingly, we are not adopting the proposed amendments that would
prohibit stable NAV money market funds from using amortized cost to
value portfolio securities. Rather, under the final amendments, stable
NAV funds may continue to price fund shares as they do today, using the
amortized cost method to value portfolio securities and/or the penny
rounding method of pricing. Given the continued importance of amortized
cost valuation under our final rules, we are providing expanded
valuation guidance related to the use of amortized cost and other
related valuation matters in section III.D.
6. Tax and Accounting Implications of Floating NAV Money Market Funds
a. Tax Implications
    In the Proposing Release, we discussed two principal tax
consequences of requiring certain money market funds to implement a
floating NAV, potentially causing shareholders to experience taxable
gains or losses. First, under tax rules applicable at the time of the
Proposing Release, floating NAV money market funds (or their
shareholders) would be required to track the timing and price of
purchase and sale transactions in order to determine and report capital
gains or losses. Second, floating NAV funds would be subject to the
``wash sale'' rule, which postpones the tax benefit of losses when
shareholders sell securities at a loss and, within 30 days before or
after the sale, buy substantially identical securities. These tax
consequences generally do not exist today, because purchases and sales
of money market fund shares at a stable $1.00 share price do not
generate gains or losses. Because we are today adopting the floating
NAV requirement for certain money market funds as part of our reforms,
we have continued to analyze the related tax effects. As discussed
below, the Treasury Department and IRS will address these tax concerns
to remove almost all tax-related burdens associated with our floating
NAV requirement.
i. Accounting for Net Gains and Losses
    As we discussed in the Proposing Release, we expected taxable
investors in floating NAV money market funds, like taxable investors in
other types of mutual funds, to experience gains and losses.
Accordingly, we expected shareholders in floating NAV money market
funds to owe tax on any realized gains, to receive tax benefits from
any realized losses, and to be required to determine those amounts.
However, because it is not possible to predict the timing of
shareholders' future transactions and the amount of NAV fluctuations,
we were not able to estimate with any specificity the amount of any
increase or decrease in shareholders' tax burdens. Because we expect
that investors in floating NAV money market funds will experience
relatively small fluctuations in value, and because many money market
funds may qualify as retail and government money market funds, any
changes in tax burdens likely would be minimal.
    In the Proposing Release, we also noted that tax rules generally
require mutual funds or intermediaries to report to the IRS and
shareholders certain information about sales of shares, including sale
dates and gross proceeds. If the shares sold were acquired after
January 1, 2012, the fund or intermediary would also have to report
basis and whether any gain or loss is long or short term.\536\ At the
time of the Proposing Release, Treasury regulations excluded sales of
stable value money market funds from this transaction reporting
obligation.\537\ We noted that mutual funds and intermediaries (and, we
anticipated, floating NAV money market funds) are not required to make
reports to certain shareholders, including most institutional
investors. The regulations call these shareholders ``exempt
recipients.'' \538\
---------------------------------------------------------------------------

    \536\ The new reporting requirements (often referred to as
``basis reporting'') were instituted by section 403 of the Energy
Improvement and Extension Act of 2008 (Division B of Pub. L. 110-
343) (26 U.S.C. 6045(g), 6045A, and 6045B); see also 26 CFR 1.6045-
1; Internal Revenue Service Form 1099-B. These new basis reporting
requirements and the pre-2012 reporting requirements are
collectively referred to as ``transaction reporting.''
    \537\ See 26 CFR 1.6045-1(c)(3)(vi).
    \538\ See 26 CFR 1.6045-1(c)(3)(i).
---------------------------------------------------------------------------

    We have been informed that the Treasury Department and the IRS
today will propose new regulations to make all money market funds
exempt from this transaction reporting requirement, and the 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. Importantly,
the Treasury Department and the IRS have informed us 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 and IRS relief described above is available
immediately.
    We noted in the Proposing Release our understanding that the
Treasury Department and the IRS were considering alternatives for
modifying forms and guidance: (1) To include net transaction reporting
by the funds of realized gains and losses for sales of all mutual fund
shares; and (2) to allow summary income tax reporting by shareholders.
Many commenters argued that this potential relief does not go far
enough and noted that, because institutions are exempt recipients,
these

investors would still incur costs to build systems to track and report
their own basis information and calculate gains and losses.\539\ We
recognized in the Proposing Release the limitations of this potential
tax relief.
---------------------------------------------------------------------------

    \539\ See, e.g., BlackRock II Comment Letter; Schwab Comment
Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    We have been informed that the Treasury Department and the IRS
today will propose new regulations that will provide more comprehensive
and effective relief than the approaches described in the Proposing
Release. These regulations will, as suggested by one commenter,\540\
make a simplified aggregate method of accounting available to investors
in floating NAV money market funds and are proposed to be formally
applicable for taxable years ending after the publication in the
Federal Register of a Treasury Decision adopting the proposed
regulations as final regulations. Importantly, the Treasury Department
and the IRS have informed us that the text of the proposed regulations
will state that taxpayers may rely on the proposed rules for taxable
years ending on or after the date that the proposed regulations are
published in the Federal Register. That is, because investors may use
this method of accounting before final regulations are published, the
Treasury Department and IRS relief is available as needed before then.
---------------------------------------------------------------------------

    \540\ See Comment Letter of George C. Howell, III, Hunton &
Williams LLP, on behalf of Federated Investors (Tax Compliance
Issues Created by Floating NAV) (May 1, 2014) (``Federated XII
Comment Letter'') (suggesting that a ``mark to market'' tax
accounting method would meaningfully resolve the more significant
tax issue (as compared with ``wash sale'' provisions) resulting from
the floating NAV reform).
---------------------------------------------------------------------------

    The simplified aggregate method will allow money market fund
investors to compute net capital gain or loss for a year by netting
their annual redemptions and purchases with their annual starting and
ending balances. Importantly, for shares in floating NAV money market
funds, the simplified aggregate method will enable investors to
determine their annual net taxable gains or losses using information
that is currently provided on shareholder account statements and--most
important--will eliminate any requirement to track individually each
share purchase, each redemption, and the basis of each share redeemed.
We expect that the simplified aggregate method will significantly
reduce the burdens associated with tax consequences of the floating NAV
requirement because funds will not have to build new tracking and
reporting systems and shareholders will be able to calculate their tax
liability using their existing shareholder account statements, rather
than tracking the basis for each share. We have also considered the
effect of this relief on the tax-related burdens associated with
accounting for net gains and losses in our discussion of operational
implications below.\541\
---------------------------------------------------------------------------

    \541\ See infra section III.B.8.
---------------------------------------------------------------------------

    The Treasury Department and IRS have informed us of their intention
to proceed as expeditiously as possible with the process of considering
comments and issuing final regulations regarding the simplified
aggregate method of accounting for floating NAV money market funds. We
note that money market funds and their shareholders may begin using the
simplified method of accounting as needed before the regulations are
finalized. Were the Treasury Department and IRS to withdraw or
materially limit the relief in the proposed regulations, the Commission
would expect to consider whether any modifications to the reforms we
are adopting today may be appropriate.
ii. Wash Sales
    As discussed in the Proposing Release, the ``wash sale'' rule
applies when shareholders sell securities at a loss and, within 30 days
before or after the sale, buy substantially identical securities.\542\
Generally, if a shareholder incurs a loss from a wash sale, the loss
cannot be recognized currently and instead must be added to the basis
of the new, substantially identical securities, which postpones the
loss recognition until the shareholder recognizes gain or loss on the
new securities.\543\ Because many money market fund investors
automatically reinvest their dividends (which are often paid monthly),
virtually all redemptions by these investors would be within 30 days of
a dividend reinvestment (i.e., purchase) and subject to the wash sale
rule.
---------------------------------------------------------------------------

    \542\ See 26 U.S.C. 1091.
    \543\ Id.
---------------------------------------------------------------------------

    Subsequent to our proposal, the Treasury Department issued for
comment a proposed revenue procedure under which redemptions of
floating NAV money market fund shares that generate losses below 0.5%
of the taxpayer's basis in those shares would not be subject to the
wash sale rule (de minimis exception).\544\ Many commenters noted,
however, that the de minimis exception to the wash sale rule does not
mitigate the tax compliance burdens and operational costs that would be
required to establish systems capable of identifying wash sale
transactions, determining if they meet the de minimis criterion, and
adjusting shareholder basis when they do not.\545\
---------------------------------------------------------------------------

    \544\ See IRS Notice 2013-48, Application of Wash Sale Rules to
Money Market Fund Shares (proposed July 3, 2013), available at
http://www.irs.gov/pub/irs-drop/n-13-48.pdf.
    \545\ See, e.g., ICI Comment Letter; BlackRock II Comment
Letter; Schwab Comment Letter.
---------------------------------------------------------------------------

    We understand that these concerns will not be applicable to
floating NAV money market funds. First, under the simplified aggregate
method of accounting described above, taxpayers will compute aggregate
gain or loss for a period, and gain or loss will not be associated with
any particular disposition of shares. Thus, the wash sale rule will not
affect any shareholder that chooses to use the simplified aggregate
method. Second, for any shareholder that does not use the simplified
aggregate method, the Treasury Department and the IRS today will
release a revenue procedure that exempts from the wash sale rule
dispositions of shares in any floating NAV money market fund. This
wash-sale tax relief will be available beginning on the effective date
of our floating NAV reforms (60 days after publication in the Federal
Register). We have also considered the effect of this relief from the
tax-related burdens associated with the wash sale rule in our
discussion of operational implications below.\546\
---------------------------------------------------------------------------

    \546\ See infra section III.B.8.
---------------------------------------------------------------------------

b. Accounting Implications
    In the Proposing Release, we noted that some money market fund
shareholders may question whether they can treat investments in
floating NAV money market funds as ``cash equivalents'' on their
balance sheets. As we stated in the Proposing Release, and as we
discuss below, it is the Commission's position that, under normal
circumstances, an investment in a money market fund with a floating NAV
under our final rules meets the definition of a ``cash equivalent.''
\547\
---------------------------------------------------------------------------

    \547\ See supra section III.A.7 for a discussion of accounting
implications related to the liquidity fees and gates aspect of our
final rules.
---------------------------------------------------------------------------

    Many commenters agreed with our position regarding the treatment of
investments in floating NAV money market funds as cash
equivalents.\548\ Most of these commenters, however, suggested that the
Commission issue a more formal pronouncement and/or requested that FASB
and GASB codify our position.\549\ A few commenters

suggested that our floating NAV requirement raises uncertainty about
whether floating NAV money market fund shares could continue to be
classified as cash equivalents,\550\ and one commenter disagreed and
suggested that it is likely that under present accounting standards
investors would have to classify investments in shares of floating NAV
money market funds as trading securities or available-for-sale
securities (rather than as a cash equivalent).\551\ We have carefully
considered commenters' views and, for the reasons discussed below, our
position continues to be that an investment in a floating NAV money
market fund under our final rules, under normal circumstances, meets
the definition of a ``cash equivalent.'' A more formal pronouncement
(as requested by some commenters) is not required because the federal
securities laws provide the Commission with plenary authority to set
accounting standards, and we are doing so here.\552\ We reiterate our
position below.\553\
---------------------------------------------------------------------------

    \548\ See, e.g., BlackRock II Comment Letter; Fidelity Comment
Letter; Deloitte Comment Letter; Ernst & Young Comment Letter.
    \549\ See, e.g., ICI Comment Letter; BlackRock II Comment
Letter; Fidelity Comment Letter. We do not have authority over the
actions that GASB may or may not take with respect to local
government investment pools (``LGIPs''). See infra section III.C.4.
    \550\ See, e.g., J.P. Morgan Comment Letter; Northern Trust
Comment Letter; Boeing Comment Letter.
    \551\ See, Federated X Comment Letter (citing to Statement on
Financial Accounting Standards No. 115); see also infra note 429 and
accompanying text.
    \552\ 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 29(e), section
30, and section 37(a) of the Investment Company Act.
    \553\ 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.
---------------------------------------------------------------------------

    The adoption of a floating NAV alone for certain rule 2a-7 funds
will not preclude shareholders from classifying their investments in
money market funds as cash equivalents, under normal circumstances,
because fluctuations in the amount of cash received upon redemption
would likely be small and would be consistent with the concept of a
`known' amount of cash. As already exists today with stable share price
money market funds, events may occur that give rise to credit and
liquidity issues for money market funds so that shareholders would need
to reassess if their investments continue to meet the definition of a
cash equivalent.
7. Rule 10b-10 Confirmations
    Rule 10b-10 under the Securities Exchange Act of 1934 (``Exchange
Act'') addresses broker-dealers' obligations to confirm their
customers' securities transactions.\554\ Under Rule 10b-10(a), a
broker-dealer generally must provide customers with information
relating to their investment decisions at or before the completion of a
securities transaction.\555\ Rule 10b-10(b), however, provides an
exception for certain transactions in money market funds that attempt
to maintain a stable NAV and where no sales load or redemption fee is
charged. The exception permits broker-dealers to provide transaction
information to money market fund shareholders on a monthly basis
(subject to certain conditions) in lieu of immediate confirmations for
all purchases and redemptions of shares of such funds.\556\
---------------------------------------------------------------------------

    \554\ 17 CFR 240.10b-10.
    \555\ 17 CFR 240.10b-10(a).
    \556\ 17 CFR 240.10b-10(b).
---------------------------------------------------------------------------

    Because share prices of institutional prime money market funds
likely will fluctuate, absent exemptive relief, broker-dealers will not
be able to continue to rely on the current exception under Rule 10b-
10(b) for transactions in floating NAV money market funds.\557\
Instead, broker-dealers will be required to provide immediate
confirmations for all such transactions. We note, however, that
contemporaneous with this Release, the Commission is providing notice
and requesting comment on a proposed order that, subject to certain
conditions, would grant exemptive relief from the immediate
confirmation delivery requirements of Rule 10b-10 for transactions
effected in shares of any open-end management investment company
registered under the Investment Company Act that holds itself out as a
money market fund operating in accordance with rule 2a-
7(c)(1)(ii).\558\
---------------------------------------------------------------------------

    \557\ See generally Money Market Fund Reform; Amendments to Form
PF, Securities Act Release No. 9408, Investment Advisers Act Release
No. 3616, Investment Company Act Release No. 30551 (June 5, 2013),
78 FR 36834, 36934 (June 19, 2013); see also Exchange Act rule 10b-
10(b)(1), (limiting alternative monthly reporting to money market
funds that attempt[] to maintain a stable net asset value) (emphasis
added).
    \558\ See Notice of Proposed Exemptive Order Granting Permanent
Exemptions Under the Securities Exchange Act of 1934 from the
Confirmation Requirements of Exchange Act Rule 10b-10 for Certain
Money Market Funds, Exchange Act Release No. 34-72658 (July 23,
2014) (``Notice of Proposed Exemptive Order'').
---------------------------------------------------------------------------

    In the Proposing Release, we requested comment on whether, if the
Commission adopted the floating NAV requirement, broker-dealers should
be required to provide immediate confirmations to all institutional
prime money market fund investors. Commenters generally urged the
Commission not to impose such a requirement, arguing that there would
be significant costs associated with broker-dealers providing immediate
confirmations.\559\ Commenters noted that there would be costs of
implementing new systems to generate confirmations and ongoing costs
related to creating and sending trade-by-trade confirmations.\560\ We
estimate below the costs to broker-dealers associated with providing
securities transaction confirmations for floating NAV money market
funds.\561\
---------------------------------------------------------------------------

    \559\ See ICI Comment Letter; SIFMA Comment Letter at Appendices
1 and 2; Dreyfus Comment Letter; Federated X Comment Letter.
    \560\ See, e.g., Federated X Comment Letter.
    \561\ Broker-dealers may not incur all of these costs if the
exemptive relief we propose today is adopted.
---------------------------------------------------------------------------

    We believe that the initial one-time cost to implement, modify, or
reprogram existing systems to generate immediate confirmations (rather
than monthly statements) will be approximately $96,650 on average per
affected broker-dealer, based on the costs that the Commission has
estimated in a similar context of developing internal order and trade
management systems so that a registered security-based swap entity
could electronically process transactions and send trade
acknowledgments.\562\ In addition, we estimate that 320 broker-dealers
that are clearing customer transactions or carrying customer funds and
securities would be affected by this requirement because they would
likely be the broker-dealers responsible for providing trade
confirmations.\563\ As a result, the

Commission estimates initial costs of $30,928,000 for providing
immediate confirmations for shareholders in institutional prime money
market funds.\564\
---------------------------------------------------------------------------

    \562\ This estimate is based on the following: [(Sr. Programmer
(160 hours) at $285 per hour) + (Sr. Systems Analyst (160 hours) at
$251 per hour) + (Compliance Manager (10 hours) at $294 per hour) +
(Director of Compliance (5 hours) at $426 per hour) + (Compliance
Attorney (20 hours) at $291 per hour)] = $96,650 per broker-dealer.
See Trade Acknowledgement and Verification of Security-Based Swap
Transactions, Exchange Act Release No. 63727, 76 FR 3859, 3871 n.81
(Jan. 21, 2011). (We note that the original estimate in the Trade
Acknowledgment release contained a technical error in the
calculation stating a cost of $66,650 instead of $96,650 for a
security-based swap entity.) A SIFMA survey also indicates that the
costs are likely to be below $500,000 per firm. See SIFMA Comment
Letter, at Appendices 1 and 2. According to this commenter, after
surveying its members, it found that the vast majority of
respondents estimated that initial costs associated with providing
confirmation statements would fall below $500,000. However, based on
the data provided, it was unclear at what level below $500,000 its
members considered to be the actual cost and whether the firms were
a representative sample (e.g., in terms of size and sophistication)
of the type of firms that would be affected.
    \563\ Based on FOCUS Report data as of December 31, 2013, the
Commission estimates that there are approximately 320 broker-dealers
that are clearing or carrying broker-dealers that do not claim
exemptions pursuant to paragraph (k) of Exchange Act rule 15c3-3.
Because not all of these clearing or carrying broker-dealers would
necessarily provide rule 10b-10 confirmations to customers of
institutional prime money market funds, the Commission anticipates
that this is a conservative estimate of the number of clearing or
carrying broker-dealers that would provide trade confirmations to
customers in money market funds subject to the floating NAV
requirement.
    \564\ This estimate is based on the following: $96,650 x 320
firms = $30,928,000.
---------------------------------------------------------------------------

    To estimate ongoing costs of providing immediate confirmations, one
commenter stated that, based on the data it had gathered, the median
estimated ongoing annual cost associated with confirmation statements
would constitute between 10% and 15% of the initial costs.\565\ To be
conservative, we have estimated that the ongoing annual costs would
constitute 15% of the initial costs. Applying that figure to the
initial costs, the Commission estimates ongoing annual costs of
$4,639,200 for providing immediate confirmations for shareholders in
institutional prime money market funds.\566\
---------------------------------------------------------------------------

    \565\ See SIFMA Comment Letter, at Appendices 1 and 2.
    \566\ This estimate is based on the following: $30,928,000 x 15%
= $4,639,200.
---------------------------------------------------------------------------

    The Commission notes that benefits related to the immediate trade
confirmation requirements under Rule 10b-10 with respect to
institutional prime money market funds are difficult to quantify as
they relate to the additional value to investors provided by having
more timely confirmations with respect to funds that we expect will
experience relatively small fluctuations in value. While the Commission
did not receive any comments regarding these potential benefits, given
that institutional prime money market funds likely will fluctuate in
price, some investors may find value in receiving information relating
to their investment decisions at or before the completion of a
securities transaction.\567\
---------------------------------------------------------------------------

    \567\ The Commission acknowledges that shareholders that invest
in institutional prime money market funds will continue to have
extensive investor protections separate and apart from the
protections provided under rule 10b-10, including that (1) funds
subject to the floating NAV requirement will continue to be subject
to the ``risk-limiting'' conditions of rule 2a-7, and (2)
information on prices will be available through other means (for
example, under the new fund disclosure requirements of Investment
Company Act Rule 2a-7(h)(10), investors will be able to access a
fund's daily market-based NAV per share on a money market fund's Web
site). See Notice of Proposed Exemptive Order, at 6-7.
---------------------------------------------------------------------------

8. Operational Implications of Floating NAV Money Market Funds
a. Operational Implications to Money Market Funds and Others in the
Distribution Chain
    In the Proposing Release, we stated that we expect that money
market funds and transfer agents already have laid the foundation
required to use floating NAVs because they are required under rule 2a-7
to have the capacity to redeem and sell fund shares at prices based on
the funds' current NAV pursuant to rule 22c-1 rather than $1.00, i.e.,
to transact at the fund's floating NAV.\568\ Intermediaries, although
not subject to rule 2a-7, typically have separate obligations to
investors with regard to the distribution of proceeds received in
connection with investments made or assets held on behalf of
investors.\569\ We also noted that before the Commission adopted the
2010 amendments to rule 2a-7, the ICI submitted a comment letter
detailing the modifications that would be required to permit funds to
transact at the fund's floating NAV.\570\
---------------------------------------------------------------------------

    \568\ See current rule 2a-7(c)(13). See also 2010 Adopting
Release, supra note 17, at nn.362-363.
    \569\ See, e.g., 2010 Adopting Release, supra note 17, at
nn.362-363. Examples of intermediaries that offer money market funds
to their customers include broker-dealers, portals, bank trust
departments, insurance companies, and retirement plan
administrators. See Investment Company Institute, Operational
Impacts of Proposed Redemption Restrictions on Money Market Funds,
at 13 (2012), available at http://www.ici.org/pdf/ppr_12_operational_mmf.pdf (``ICI Operational Impacts Study'').
    \570\ See, e.g., Comment Letter of the Investment Company
Institute (Sept. 8, 2009) (available in File No. S7-11-09) (``ICI
2009 Comment Letter'') (describing the modifications that would be
necessary if the Commission adopted the requirement, currently
reflected in rule 2a-7(c)(13), that money market funds (or their
transfer agents) have the capacity to transact at a floating NAV,
to: (i) Fund transfer agent recordkeeping systems (e.g., special
same-day settlement processes and systems, customized transmissions,
and reporting mechanisms associated with same-day settlement systems
and proprietary systems used for next day settlement); (ii) a number
of essential ancillary systems and related processes (e.g., systems
changes for reconciliation and control functions, transactions
accepted via the Internet and by phone, modifying related
shareholder disclosures and phone scripts, education and training
for transfer agent employees and changes to the systems used by fund
accountants that transmit net asset value data to fund transfer
agents); and (iii) sub-transfer agent/recordkeeping arrangements
(explaining that similar modifications likely would be needed at
various intermediaries).
---------------------------------------------------------------------------

    Commenters noted, as we recognized in the Proposing Release,
however, that some funds, transfer agents, intermediaries, and others
in the distribution chain may not currently have the capacity to
process constantly transactions at floating NAVs, as would be required
under our proposal.\571\ Accordingly, consistent with our views
reflected in the Proposing Release and as discussed below, we continue
to expect that sub-transfer agents, fund accounting departments,
custodians, intermediaries, and others in the distribution chain would
need to develop and overlay additional controls and procedures on top
of existing systems in order to implement a floating NAV on a continual
basis.\572\ In each case, the procedures and controls that support the
accounting systems at these entities would have to be modified to
permit those systems to calculate a money market fund's floating NAV
periodically each business day and to communicate that value to others
in the distribution chain on a permanent basis.
---------------------------------------------------------------------------

    \571\ See, e.g., ICI Comment Letter; Comment Letter of Chapin
Davis, Inc. (Aug. 28, 2013) (``Chapin Davis Comment Letter'');
Federated IV Comment Letter.
    \572\ Even though a fund complex's transfer agent system is the
primary recordkeeping system, there are a number of additional
subsystems and ancillary systems that overlay, integrate with, or
feed to or from a fund's primary transfer agent system, incorporate
custom development, and may be proprietary or vendor dependent
(e.g., print vendors to produce trade confirmations). See ICI
Operational Impacts Study, supra note 569, at 20. The systems of
sub-transfer agents and other parties may also require modifications
related to the floating NAV requirement. We have included these
anticipated modifications in our cost estimates below.
---------------------------------------------------------------------------

    Some commenters noted that our floating NAV requirement would
adversely affect cash sweep programs, in which customer cash balances
are automatically ``swept'' into investments in shares of money market
funds (usually through a broker-dealer or other intermediary). For
example, one commenter suggested that sweep programs cannot accommodate
a floating NAV because such programs are predicated on the return of
principal.\573\ Another commenter suggested that the substantial cost
and complexity associated with intraday pricing makes it likely that
many intermediaries will discontinue offering floating NAV
institutional prime money market funds as sweep options, and instead
turn to alternative investment products, including stable NAV
government funds.\574\ Although we do not know to

what extent, if at all, intermediaries will continue to offer sweep
accounts for floating NAV money market funds, we acknowledge that there
are significant operational costs involved in order to modify sweep
platforms to accommodate a floating NAV product. Accordingly, we
anticipate that sweep account assets currently invested in
institutional prime money market funds will likely shift into
government funds that will maintain a stable NAV under our final rules.
We discuss in the Macroeconomic Effects section below potential costs
related to a migration of assets away from floating NAV funds into
alternative investments, including stable NAV money market funds such
as government funds. Because the amount of sweep account assets
currently invested in institutional prime money market funds is not
reported to us, nor are we aware of such information in the public
domain, we are not able to provide a reasonable estimate of the amount
of sweep account assets that may shift into alternative investment
products.
---------------------------------------------------------------------------

    \573\ See, e.g., ICI Comment Letter. Another commenter noted
that the sweep investment product is only feasible in the current
stable-NAV environment because the client knows at the time of
submitting the purchase order how many shares it has purchased, and
how many shares it will receive the next day upon redemption, absent
a break-the-buck event. See State Street Comment Letter.
    \574\ See, e.g., Wells Fargo Comment Letter (acknowledging that,
as we stated in the Proposing Release, sweep products may continue
to be viable for floating NAV money market funds because fund
sponsors and other intermediaries will make modifications to price
fund shares periodically during the day, but suggesting that the
costs for broker-dealers to reprogram their systems would be
significant and the operational complexity could be made worse to
the extent that fund sponsors do not standardize the times of day at
which they price shares).
---------------------------------------------------------------------------

    In the Proposing Release, we also estimated additional costs under
our floating NAV reform that would be imposed on money market funds and
other recordkeepers to track portfolio security gains and losses,
provide ``basis reporting,'' and monitor for potential wash-sale
transactions. As discussed above, we have been informed that, today,
the Treasury Department and the IRS will propose new regulations that
will eliminate the need for money market funds and others to track
portfolio gains and losses and basis information, as well as issue
today a revenue procedure that exempts money market funds from the
wash-sale rules. Accordingly, our cost estimates for the floating NAV
reform have been revised from our proposal to reflect this fact.\575\
---------------------------------------------------------------------------

    \575\ See supra section III.B.8.a.
---------------------------------------------------------------------------

    We understand that the costs to modify a particular entity's
existing controls and procedures will vary depending on the capacity,
function and level of automation of the accounting systems to which the
controls and procedures relate and the complexity of those systems'
operating environments.\576\ Procedures and controls that support
systems that operate in highly automated operating environments will
likely be less costly to modify while those that support complex
operations with multiple fund types or limited automation or both will
likely be more costly to change. Because each system's capabilities and
functions are different, an entity will likely have to perform an in-
depth analysis of the new rules to calculate the costs of modifications
required for its own system. While we do not have the information
necessary to provide a point estimate \577\ of the potential costs of
modifying procedures and controls, we expect that each entity will bear
one-time costs to modify existing procedures and controls in the
functional areas that are likely to be impacted by the floating NAV
reform.
---------------------------------------------------------------------------

    \576\ See, e.g., Chamber I Comment Letter.
    \577\ We are using the term ``point estimate'' to indicate a
specific single estimate as opposed to a range of estimates.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that the one-time costs of
implementation for an affected entity would range from $1.2 million
(for entities requiring less extensive modifications) to $2.3 million
(for entities requiring more extensive modifications) and that the
annual costs to keep procedures and controls current and to provide
continuing training would range from 5% to 15% of the one-time
costs.\578\ In addition, we noted that we expect money market funds
(and their intermediaries) would incur additional costs associated with
programs and systems modifications necessary to provide shareholders
with access to information about the floating NAV per share online,
through automated phone systems, and on shareholder statements and to
explain to shareholders that the value of their money market funds
shares will fluctuate.\579\ We estimated that the costs for a fund (or
its transfer agent) or intermediary that may be required to perform
these activities would range from $230,000 to $490,000 and that the
ongoing costs to maintain automated phone systems and systems for
processing shareholder statements would range from 5% to 15% of the
one-time costs.\580\ In sum, we estimated that the total range of one-
time implementation costs to money market funds and others in the
distribution chain would be approximately $1,430,000 to $2,790,000 per
entity, with ongoing costs that range between 5% to 15% of these one-
time costs.\581\
---------------------------------------------------------------------------

    \578\ See Proposing Release, supra note 25, nn.285-86 and
accompanying text. We estimated that these costs would be
attributable to the following activities: (i) Drafting, integrating,
and implementing procedures and controls; (ii) preparation of
training materials; and (iii) training. As noted throughout this
Release, we recognize that adding new capabilities or capacity to a
system (including modifications to related procedures and controls)
will entail ongoing annual maintenance costs and understand that
those costs generally are estimated as a percentage of initial costs
of building or expanding a system.
    \579\ See id. at n.287 and accompanying text. We expect these
costs would include software programming modifications, as well as
personnel costs that would include training and scripts for
telephone representatives to enable them to respond to investor
inquiries.
    \580\ See id. at n.288 and accompanying text. We estimate that
these costs would be attributable to the following activities: (i)
Project assessment and development; (ii) project implementation and
testing; and (iii) written and telephone communication. See also
supra note 578.
    \581\ This estimate is calculated as follows: less extensive
modifications ($1,200,000 + $230,000 = $1,430,000); more extensive
modifications ($2,300,000 + $490,000 = $2,790,000).
---------------------------------------------------------------------------

    Commenters did not generally disagree with the type and nature of
costs that we estimated will be imposed by our floating NAV reform. One
commenter noted that the costs required to make the necessary systems
changes would not be prohibitive and could be completed within two to
three years.\582\ A number of commenters, however, provided a wide
range of estimated operational costs to money market funds,
intermediaries, and others in the distribution chain. These commenters
suggested that estimated one-time implementation costs would be between
$350,000 to $3,000,000, depending on the affected entity.\583\ One
commenter estimated that it could cost up to $2,300,000 per fund,
transfer agent, or intermediary, to modify systems procedures and
controls to implement a floating NAV.\584\ Another commenter estimated
that it would cost each back office processing service provider
$1,725,000 in one-time costs to implement a floating NAV.\585\ We also
received from commenters some cost estimates provided on a fund complex
level. Two fund complexes estimated their total one-time costs to
implement a floating NAV to be between $10,000,000 to $11,000,000, and
one of the largest money market fund sponsors approximated its one-time
costs to be $28,000,000. Averaged across the number of money market
funds offered, these one-time implementation costs

range from $306,000 to $718,000.\586\ Another commenter provided survey
data stating that 40% of respondents (asset managers and
intermediaries) estimated that it would cost $2,000,000 to $5,000,000
in one-time costs to implement a floating NAV.\587\ Finally, a few
commenters estimated the one-time costs to the entire fund industry
related to implementing our floating NAV reform.\588\
---------------------------------------------------------------------------

    \582\ See HSBC Comment Letter.
    \583\ See Chamber II Comment Letter (citing Treasury Strategies,
Operational Implications of a Floating NAV across Money Market Fund
Industry Key Stakeholders (Summer 2013) (``TSI Report'')). This
commenter estimated costs for various intermediaries in order to
implement a floating NAV: Corporate treasury management system
vendors ($350,000-$400,000); fund accounting service providers
($400,000-$425,000); broker-dealers and portals ($500,000-$600,000);
transfer agent systems ($2,000,000-$2,500,000); and sweep account
software providers ($2,000,000-$3,000,000). Another commenter
estimated that it would cost approximately $2,000,000 in one-time
costs for a large trust group to implement a floating NAV. See
Treasury Strategies Comment Letter.
    \584\ See Federated II Comment Letter.
    \585\ See Fin. Info. Forum Comment Letter.
    \586\ See Federated X Comment Letter (estimating its one-time
costs to implement a floating NAV to be $11,200,000); Schwab Comment
Letter (estimating its one-time costs to implement a floating NAV to
be $10,000,000); Fidelity Comment Letter (estimating its one-time
costs of implement a floating NAV to be $28,000,000). Based on Form
N-MFP data as of February 28, 2014, the per fund costs are:
Federated $311,000 ($11,200,000 / 36 money market funds); Schwab
$588,000 ($10,000,000 / 17 money market funds); and Fidelity
$718,000 ($28,000,000 / 39 money market funds).
    \587\ See SIFMA Comment Letter (stating that another 20% of
survey respondents estimated that one-time implementation costs for
a floating NAV would be between $5,000,000 to $15,000,000). Because
we do not have access to the names of the survey respondents or
their specific cost estimates, we are unable to approximate these
costs on a per fund basis.
    \588\ See, e.g., TSI Report (estimating $1.8 to $2.0 billion in
total upfront costs for U.S. institutional money market fund
investors to modify operations in order to comply with a floating
NAV requirement); Angel Comment Letter (estimating $13.7 to $91.5
billion in initial upfront costs related to implementing a floating
NAV reform). As discussed above, we have analyzed a variety of
commenter estimates and provided cost estimates on a per-fund basis.
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.
institutional money market fund investors and/or the entire fund
industry.
---------------------------------------------------------------------------

    We estimated in the Proposing Release that it would cost each money
market fund, intermediary, and other participant in the distribution
chain approximately $1,430,000 (for less extensive modifications) to
$2,790,000 (for more extensive modifications) in one-time costs to
implement a floating NAV.\589\ Based on staff analysis and experience,
we are revising the estimated operational costs for our floating NAV
reform downward by 15% to reflect the tax relief discussed above.\590\
In addition, as discussed above (and, in a change from our proposal),
our final rules will permit retail and government money market funds to
continue to maintain a stable NAV as they do today and to use amortized
cost valuation and/or penny-rounding pricing. A number of commenters
noted that eliminating the ability of stable NAV funds to use amortized
cost valuation, as we proposed, would impose significant operational
costs on these funds.\591\ Accordingly, based on staff analysis and
experience, we are also revising the estimated operational costs
downward by 5% to reflect the ability of stable NAV funds to continue
to use amortized cost valuation as they do today. We therefore estimate
that it will cost each money market fund, intermediary, and other
participant in the distribution chain approximately $1,144,000 (for
less extensive modifications) to $2,232,000 (for more extensive
modifications) in one-time costs to implement the floating NAV
reform.\592\
---------------------------------------------------------------------------

    \589\ See supra note 581.
    \590\ See supra section III.B.6.a. We note that many commenters
suggested that a primary drawback (and cost) of our floating NAV
reform is the substantial operational costs associated with
complying with tax tracking requirements in a floating NAV fund.
See, e.g., Fin. Svcs. Roundtable Comment Letter; Federated IV
Comment Letter; Fidelity Comment Letter. Although we attribute a 15%
reduction in estimated operational costs to tax-related costs, the
cost savings could be higher or lower than our estimate.
    \591\ See supra note 534.
    \592\ This estimate is calculated as follows: $1,430,000 x 80% =
$1,144,000 (less extensive modifications); $2,790,000 x 80% =
$2,232,000 (more extensive modifications). A few commenters also
noted that our floating NAV requirement would also result in
significant lost management fees. See, e.g., Federated X Comment
Letter (suggesting that a shift of one-third of assets away from
institutional prime funds would result in annual lost management
fees of approximately $578 million for money market fund advisers
nationwide). We acknowledge that, to the extent there is a
significant outflow of assets from the institutional prime funds
into non-money market funds as a result of the floating NAV
requirement, money market fund managers may experience declines in
management fee income. We discuss the possibility of such shifts in
money market fund assets in our discussion of macroeconomic effects
below.
---------------------------------------------------------------------------

    We believe that this range of estimated costs generally fits within
the range of costs suggested by commenters as described above (after
accounting for estimated costs savings related to tax relief and the
increased availability of amortized cost valuation, not contemplated by
commenters in their estimates). We note, however, that many money
market funds, transfer agents, custodians, and intermediaries in the
distribution chain may not bear the estimated costs on an individual
basis and therefore will likely experience economies of scale.
Accordingly, we expect that the cost for many individual entities that
would have to process transactions at a floating NAV will likely be
less than these estimated costs.\593\
---------------------------------------------------------------------------

    \593\ For example, the costs will likely be allocated among the
multiple users of affected systems, such as money market funds that
are 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.
---------------------------------------------------------------------------

    In addition to the estimated one-time implementation costs, we
estimate that funds, intermediaries, and others in the distribution
chain will incur annual operating costs of approximately 5% to 15% of
initial costs. Accordingly, we estimate that funds and other
intermediaries will incur annual operating costs as a result of the
floating NAV reform that range from $57,200 to $334,800.\594\ Most
commenters that addressed this issue directly did not disagree with our
estimate of ongoing costs, although we note that a few commenters
estimated the new annual operating costs to the entire fund industry
related to implementing our floating NAV reform.\595\ One commenter
provided survey data showing that 66% of respondents (asset managers
and intermediaries) estimated that annual costs would approximate 10%
to 15% of initial costs.\596\ Another commenter, however, disagreed
with our estimate of annual operating costs of approximately 5% to 15%
of initial costs and suggested that the annual costs to fund sponsors
will actually be close to the costs of initial implementation. We
disagree. This commenter noted that most of the ongoing cost would
result from the elimination of amortized cost accounting (generally)
and more frequent price calculations using market-based factors.\597\
Because stable NAV money market funds may continue to use amortized
cost valuation under our final rules (unlike our proposal), we believe
this commenter has overstated the ongoing costs under our final
rules.\598\ Therefore, we believe consistent with the comments
received, that it is more appropriate to continue to estimate the
ongoing operational

costs as approximately 5% to 15% of the initial implementation costs
and are not revising the ongoing cost estimates from our proposal.
---------------------------------------------------------------------------

    \594\ This estimate is calculated as follows: less extensive
modifications = $57,200 ($1,144,000 x 5%); more extensive
modifications = $334,800 ($2,232,000 x 15%).
    \595\ See, e.g., Chamber II Comment Letter (estimating $2.0 to
$2.5 billion in new annual operating costs relating to the FNAV
reform). As discussed above, most commenters did not specifically
object to our estimated range of ongoing costs on a per-fund basis.
We do not, however, have information available to us to evaluate the
accuracy of cost estimates to the entire fund industry or make a
meaningful comparison of such estimates with our per-fund cost
ongoing cost estimates.
    \596\ See SIFMA Comment Letter.
    \597\ See Federated X Comment Letter (noting, however, that it
estimates annual operating costs of approximately $231,000 per fund
($5.7 million for pricing services + $1.5 million for transfer agent
services + $2.5 million for technology, training, and other
monitoring costs = $9.7 million / 42 money market funds managed by
Federated = approximately $231,000 per fund). This estimate is
consistent with our estimated range of ongoing costs. See supra note
594.
    \598\ We recognize, however, that under our final rules,
floating NAV money market funds will incur increased costs as a
result of the elimination of amortized cost valuation. These costs,
discussed above, are significantly lower than those that funds would
incur under our proposal (that would have eliminated amortized cost
valuation for all money market funds, including those funds not
subject to our floating NAV reform).
---------------------------------------------------------------------------

b. Operational Implications to Money Market Fund Shareholders
    In addition to money market funds and other entities in the
distribution chain, each money market fund shareholder will also likely
be required to analyze our floating NAV proposal and its own existing
systems, procedures, and controls to estimate the systems modifications
it would be required to undertake. Because of this, and the variation
in systems currently used by institutional money market fund
shareholders, we do not have the information necessary to provide a
point estimate of the potential costs of systems modifications. We
describe below the types of activities typically involved in making
systems modifications and estimate a range of hours and costs that we
anticipate will be required to perform these activities. We sought
comment in the Proposing Release regarding the potential costs of
system modifications for money market fund shareholders, and the
comments we received, along with the differences between our proposal
and the final rules, have informed our estimates.
    In the Proposing Release, we prepared ranges of estimated costs,
taking into account variations in the functionality, sophistication,
and level of automation of money market fund shareholders' existing
systems and related procedures and controls, and the complexity of the
operating environment in which these systems operate. In deriving our
estimates, we considered the need to modify systems and related
procedures and controls related to recordkeeping, accounting, trading,
and cash management, and to provide training concerning these
modifications. We estimated that a shareholder whose systems (including
related procedures and controls) would require less extensive
modifications would incur one-time costs ranging from $123,000 to
$253,000, while a shareholder whose systems (including related
procedures and controls) would require more extensive modifications
would incur one-time costs ranging from $1.4 million to $2.9
million.\599\
---------------------------------------------------------------------------

    \599\ We estimate that these costs would be attributable to the
following activities: (i) Planning, coding, testing, and installing
system modifications; (ii) drafting, integrating, implementing
procedures and controls; (iii) preparation of training materials;
and (iv) training.
---------------------------------------------------------------------------

    Most commenters did not disagree with our cost estimates. One
commenter stated that it expects at least 50% of institutional
investors in money market funds will require some systems development
to be able to invest in a floating NAV money market fund. This
commenter also noted that having sufficient time to implement the
changes is a more important factor than cost in determining the extent
to which corporate treasurers, for example, would use a floating NAV
fund product.\600\ Another commenter acknowledged our range of
estimated costs and suggested that while these estimates may not appear
substantial at first glance, when viewed in the context of current
money market fund returns, such costs represent a significant
disincentive to continued investment in institutional prime funds.\601\
Although we acknowledge that the costs to money market fund
shareholders may make investing in floating NAV money market funds
uneconomical given the current rates of return, we note that we are
adopting a two-year compliance period that may, to the extent that
interest rates return to more typical levels, counter any disincentive
that may exist currently.\602\
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    \600\ See HSBC Comment Letter.
    \601\ See Wells Fargo Comment Letter.
    \602\ See infra section III.N.2. for a discussion of the
floating NAV compliance date.
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    The TSI Report \603\ provided ranges of costs that it expects would
be imposed on floating NAV money market fund shareholders. These costs
ranged from $250,000 for a U.S. business that invests in floating NAV
money market funds and makes the fewest changes possible, to $550,000
for a government-sponsored entity money market fund shareholder.\604\
We have carefully considered this range of costs to shareholders
provided by the commenter and the changes from the proposal to the rule
that we are adopting today, and we now believe that it is appropriate
to decrease our cost estimates from the proposal. Accordingly, we
estimate that a shareholder whose systems (including related procedures
and controls) would require less extensive modifications would incur
one-time costs ranging from $212,500 to $340,000, while a shareholder
whose systems (including related procedures and controls) would require
more extensive modifications would incur one-time costs ranging from
$467,500 to $850,000. We believe that these estimates better reflect
the changes in our final rules from those that we proposed.\605\ We
also recognize that these estimates are more consistent with the range
of cost estimates provided by this commenter. We estimate that the
annual maintenance costs to these systems and procedures and controls,
and the costs to provide continuing training, will range from 5% to 15%
of the one-time implementation costs.\606\
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    \603\ See supra note 583.
    \604\ See id., TSI Report (estimating that the one-time
implementation costs would range from $350,000 to $370,000 for a
corporate investor; $275,000 to $300,000 for a public university
investor; $325,000 to $350,000 for a municipality investor; and
$400,000 to $425,000 for a fiduciary investor).
    \605\ Consistent with our cost estimates discussed above for
funds, intermediaries, and others in the distribution chain, we have
considered in these estimates cost savings related to the tax relief
discussed above. See supra section III.B.8.a.
    \606\ See supra note 578. Commenters did not address
specifically our estimate of ongoing costs to money market fund
shareholders in floating NAV funds. Accordingly, we are not amending
our estimate from the proposal.
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c. Intraday Liquidity and Same-Day Settlement
    As discussed below, we believe that floating NAV money market funds
should be able to continue to provide shareholders with intraday
liquidity and same-day settlement by pricing fund shares periodically
during the day (e.g., at 11 a.m. and 4 p.m.). In the Proposing Release,
we noted that money market funds' ability to maintain a stable value
also facilitates the funds' role as a cash management vehicle and
provides other operational efficiencies for their shareholders.
Shareholders generally are able to transact in fund shares at a stable
value known in advance, which permits money market fund transactions to
settle on the same day that an investor places a purchase or sell order
and determine the exact value of his or her money market fund shares
(absent a liquidation event) at any time. These features have made
money market funds an important component of systems for processing and
settling various types of transactions.
    Some commenters have expressed concern that intraday liquidity and/
or same-day settlement would not be available to investors in floating
NAV money market funds. These commenters point to, for example,
operational challenges such as striking the NAV multiple times during
the day while needing to value each portfolio security using market-
based values.\607\ A few commenters also noted that pricing services
may not be able to provide periodic pricing throughout the day.\608\
Some commenters also raised concerns about the additional costs
involved with striking the NAV multiple times per

day, including, for example, costs for pricing services to provide
multiple quotes per day and for accounting agents to calculate multiple
NAVs.\609\ On the other hand, one commenter who provides pricing
services noted that, while providing intraday liquidity and same-day
settlement for floating NAV funds would require some investment, they
believe that calculating NAVs multiple times per day is feasible within
our proposed two-year compliance period.\610\ A few commenters further
noted that transfer agents will need to enhance their systems to
account for floating NAV money market funds and condense their
reconciliation and audit processes (which may, for example, increase
the risk of errors).\611\
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    \607\ See, e.g., BlackRock II Comment Letter; ICI Comment
Letter; Chamber II Comment Letter.
    \608\ See, e.g., Federated IV Comment Letter; Interactive Data
Comment Letter; Chamber II Comment Letter.
    \609\ See, e.g., BlackRock II Comment Letter; Dreyfus Comment
Letter; State Street Comment Letter.
    \610\ See Interactive Data Comment Letter. Another commenter
noted that money market funds would still be able to provide same-
day settlement in floating NAV funds. See State Street Comment
Letter.
    \611\ See J.P. Morgan Comment Letter; Dreyfus Comment Letter;
Comment Letter of DST Systems, Inc. (Sept. 18, 2013) (``DST Systems
Comment Letter'').
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    A few commenters also asserted that if floating NAV funds are
unable to provide same-day settlement, this could affect features that
are particularly appealing to retail investors, such as ATM access,
check writing, and electronic check payment processing services and
products.\612\ First, as discussed below, we believe that many floating
NAV money market funds will continue to be able to provide same-day
settlement. Second, we note that under the revised retail money market
fund definition adopted today, retail investors should have ample
opportunity to invest in a fund that qualifies as a retail money market
fund and thus is able to maintain a stable NAV. As a result, this
should significantly alleviate concerns about the costs of altering
these features and permit a number of funds to continue to provide
these features as they do today. Nonetheless, we recognize that not all
funds with these features may choose to qualify as retail money market
funds, and therefore, some funds may need to make additional
modifications to continue offering these features. We have included
estimates of the costs to make such modifications below.
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    \612\ See, e.g., Fidelity Comment Letter (``[B]roker-dealers
offer clients a variety of features that are available generally
only to accounts with a stable NAV, including ATM access, check
writing, and ACH and Fedwire transfers. A floating NAV would force
MMFs that offer same-day settlement on shares redeemed through wire
transfers to shift to next day settlement or require fund advisers
to modify their systems to accommodate floating NAV MMFs.'').
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    We understand that many money market funds currently permit same-
day trading up until 5 p.m. Eastern Time. These funds do so because
amortized cost valuation allows funds to calculate their NAVs before
they receive market-based prices (typically provided at the end of the
day after the close of the Federal Reserve Cash Wire). We recognize
that, under the floating NAV reform, closing times for same-day
settlement will likely need to be moved earlier in the day to allow
sufficient time to calculate the NAV prior to the close of the Federal
Reserve Cash Wire. One commenter suggested that it will take a minimum
of three to four hours to strike a market-based NAV price.\613\ As a
result, investors in floating NAV money market funds may not have the
ability to redeem shares late in the day, as they can today. We also
recognize that floating NAV money market funds may price only once a
day, at least until such time as pricing vendors are able to provide
continuous pricing throughout the day.\614\ We considered these
potential costs as well as the benefits of our floating NAV reform and
believe that, as discussed above, it is appropriate to address, through
the floating NAV reform, the incremental incentive that exists for
shareholders to redeem in times of stress from institutional prime
money market funds. We note, however, that because stable NAV money
market funds may continue to use amortized cost as they do today (as
revised from our proposal), these same-day settlement concerns raised
by commenters here would be limited to institutional prime funds--the
only money market funds subject to the floating NAV reform.\615\
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    \613\ See Federated II Comment Letter.
    \614\ See SIFMA Comment Letter (noting that in its survey of
members, 60% of asset managers expect to price their floating NAV
money market funds only once per day, which is less frequent than
currently offered by most money market funds). See also
Institutional Cash Distributors, ICD Commentary: Operational and
Accounting Issues with the Floating NAV and the Impact on Money
Market Funds (July 2013), available at http://www.sec.gov/comments/
;s7-03-13/s70313-40.pdf. One commenter noted that they are already
investing in new technology that includes real-time debt security
evaluations. See Comment Letter of Interactive Data.
    \615\ See SIFMA Comment Letter (noting that, under our proposal,
the impediment to same-day settlement exists for stable NAV money
market funds as well as floating NAV money market funds because both
types of funds would be prohibited from using amortized cost for
securities with remaining maturities over 60 days). As noted above,
we are no longer prohibiting stable NAV funds from using amortized
cost.
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    We sought comment in the Proposing Release on the costs associated
with providing same-day settlement and for pricing services to provide
prices multiple times each day. One commenter provided survey data that
estimated the range of costs for floating NAV funds to offer same-day
settlement. Seventy-five percent of respondents estimated the one-time
costs to be approximately $500,000 to $1 million, and 25% of
respondents estimated the one times costs to be approximately $1
million to $2 million.\616\ Sixty-six percent of respondents
approximated ongoing costs that would range between 10-15% of initial
costs.\617\ We did not receive other quantitative estimates
specifically on the costs associated with modifying systems to allow
for same-day settlement by floating NAV funds.\618\ We have carefully
considered this survey data with respect to same-day settlement issues
in arriving at our aggregate operational cost estimates discussed above
in section III.B.8.a.\619\
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    \616\ As discussed supra in note 587, we do not have access to
the names of the survey respondents or their specific cost estimates
and are therefore unable to approximate these costs on a per fund
basis. Accordingly, the costs on a per fund basis will likely be
significantly lower than the figures provided here.
    \617\ See SIFMA Comment Letter.
    \618\ We note that some commenters may have included costs
associated with enabling floating NAV funds to provide same-day
settlement in their cost estimates of operational implications
generally. These costs are discussed above.
    \619\ We have based our cost estimates for same-day settlement
principally on staff experience and expertise. In assessing the
reasonableness of our estimates, we considered as an outer bound the
survey data provided by SIFMA (although as noted above, the survey
respondents likely represent fund complexes and thus we are not able
to determine these costs on a per fund basis). We estimate that
money market funds will likely establish twice per day pricing as
the appropriate balance between current money market fund practice
to provide multiple settlements per business day and the additional
costs and complexities involved in pricing money market fund shares
using market-based values.
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9. Transition
    We are providing a two-year compliance date (as proposed) for money
market funds to implement the floating NAV reform. A long compliance
period will give more time for funds to implement any needed changes to
their investment policies and train staff, and also will provide more
time for investors to analyze their cash management strategies. This
compliance period will also give time for retail money market funds to
reorganize their operations and establish new funds. Importantly, this
compliance period will allow additional time for the Treasury
Department and IRS to consider finalizing rules addressing certain tax
issues relating to a floating NAV described above and for the

Commission to consider final rules removing NRSRO ratings from rule 2a-
7,\620\ so that funds could make several compliance-related changes at
one time.
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    \620\ See Removal of Certain References to Credit Ratings and
Amendment to the Issuer Diversification Requirement in the Money
Market Fund Rule, Investment Company Act Release No. IC-31184 (July
23, 2014).
---------------------------------------------------------------------------

    We acknowledge, as discussed in the Proposing Release and as noted
by some commenters, that a transition to a new regulatory regime could
itself cause the type of heavy redemptions that the amendments,
including the floating NAV reform, are designed to prevent.\621\ In the
proposal, we noted that our proposed two-year compliance period would
benefit money market funds and their shareholders by allowing money
market funds to make the transition to a floating NAV at the optimal
time and potentially not at the same time as all other money market
funds. In addition, we stated our belief that money market fund
sponsors would use the relatively long compliance period to select an
appropriate conversion date that would minimize the risk that
shareholders may pre-emptively redeem shares at or near the time of
conversion if they believe that the market value of their shares will
be less than $1.00. Several commenters reiterated this concern, with
one commenter noting that shareholders in floating NAV money market
funds may be incentivized to redeem in order to avoid losses or realize
gains, depending on the expected NAV at the time of conversion.\622\ A
few commenters suggested that money market funds will likely be
unwilling or unable to stagger their transitions over our proposed two-
year transition period, but did not provide any survey data or other
support for their beliefs.\623\
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    \621\ See, e.g., Dreyfus Comment Letter; Goldman Sachs Comment
Letter. The PWG Report suggests that a transition to a floating NAV
could itself result in significant redemptions. See PWG Report,
supra note 506, at 22.
    \622\ See Stradley Ronon Comment Letter.
    \623\ See, e.g., Stradley Ronon Comment Letter; SIFMA Comment
Letter.
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    We continue to believe that an extended compliance period (as
adopted, two years) should help mitigate potential pre-emptive
redemptions by providing money market fund shareholders with sufficient
time to consider the reforms and decide, if they determine that a
floating NAV investment product is not appropriate or desirable, to
invest a stable NAV retail or government money market fund or an
alternative investment product. We recognize that, although money
market funds may comply with the rule amendments at any time between
the effective date and the compliance date, in practice, money market