Senators Raise Tax Issues On MMF Proposals; SEC to Weigh Rules July 23

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WASHINGTON — Four senators from both sides of the aisle are warning the Treasury Department that the tax consequences of proposed rules could deter state and local governments and businesses from using institutional money market funds for cash management.

They also warn the Securities and Exchange Commission against adopting final money-market fund rules until the tax issues and proposed remedies are fully aired through the public review and comment process.

The senators issued the warnings in three separate letters — one from Sens. Mark Warner, D-Va., and Robert Menendez, D-N.J., another from Sens. Pat Toomey, R-Pa., and a third from Mike Crapo, R-Idaho. But they were sent to Treasury Secretary Jack Lew just before the SEC announced it plans to consider whether to adopt money market fund rules, as well as a notice of proposed exemptive relief, on July 23.

Money market funds hold around $2.6 trillion in assets from 60 million investors, Warner and Menendez said in their shared letter. The SEC proposed rules for these funds last year in an effort to prevent runs on them such as occurred with the Reserve Primary Fund in 2008 during the financial crisis.

The senators' concerns center on an SEC plan to require prime and tax-exempt money market funds to adopt floating, instead of the current $1 per share stable, net asset values.

The Investment Company Institute, state and local governments and many other groups have opposed any shift to a floating NAV, warning it would wreak havoc in the market and deter investments in such funds. They have all urged the SEC to exclude tax-exempt money market funds from any such rules.

The senators hone in on the fact that shifting to a floating NAV would mean that investors would have small capital gains and losses from their investments in such funds, which they would have to report and possibly pay taxes on under the federal tax code.

"We have heard concerns that, under the current law, the tax record-keeping costs of a floating NAV could deter investors from using institutional money-market mutual funds for cash mangement, which could increase investors' cash management costs," Warner and Menendez said in their letter. "Because money market mutual funds serve as a significant source of capital for businesses and communities, these consequences also raise the possibility of introducing new costs and disruptions into the flow of many billions of dollars of short-term financing."

The senators noted that SEC and Treasury officials are working together to mitigate or lessen the tax consequences, but said even forcing investors to calculate and track capital gains and losses would deter them from investing in such funds. The lawmakers also urged the SEC and Treasury to provide sufficient opportunity for public input and comment on the potential tax consequences.

"It is critical that [Treasury] issue any guidance relating to the floating NAV concept in proposed form before the SEC finalizes its proposed rule," Toomey said in his letter. "Money-market mutual fund investors must be given an opportunity to review and comment on the proposed solution to the tax compliance burden, and the SEC and [Treasury] should have the benefit of those comments, before any type of floating NAV concept is adopted."

Crapo asked Lew to let him know what the SEC and Treasury have been working on with regard to these issues and he also wanted to know if the proposals will be issued to the public for review and comment.

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