Staff of the U.S. Securities and Exchange Commission have met with the Internal Revenue Service to discuss tax implications if money-market mutual funds were to adopt a floating share price, two people familiar with the talks said.
Discussions have centered on the tax treatment of small gains and losses for investors in funds, said the people, who asked not to be named because the talks weren’t public. IRS officials have told the securities regulator that they don’t have much flexibility to interpret current tax law, one of the people said.
The discussions suggest SEC staffers are developing a more detailed proposal to force money funds to adopt a floating share price, a move the industry has said would destroy their appeal. One such proposal prepared last year under the direction of former SEC Chairman Mary Schapiro was rejected by three of her four fellow commissioners in August, even before they were presented with a formal draft.
“The tax treatment of a floating fund is one of the main reservations expressed in comment letters” filed recently with regulators by fund companies, Joan Swirsky, an attorney at Philadelphia law firm Stradley, Ronon, Stevens & Young LLP, who specializes in money-fund oversight, said in an interview. “This will be a fully baked proposal by the time it comes out.”
John Nester, a spokesman for the SEC, declined to comment.
Schapiro’s Plan
Regulators have worked to impose tighter restrictions on money funds since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers Holdings Inc., triggered a wider run on money funds that helped freeze global credit markets.
Schapiro’s plan aimed to make funds less susceptible to runs and better able to absorb losses. It would have offered funds a choice of replacing their fixed $1 share price with a floating price that reflects the market value of holdings, or creating capital reserves and restricting redemptions.
Following the rejection, Schapiro appealed for help from the Financial Stability Oversight Council, a super-panel of regulators formed by the Dodd-Frank Act and headed by the Treasury secretary. The council, whose job it is to identify systemic financial threats, acted in November, pressuring the SEC to revisit the issue and recommending several reform options, including a floating share value and capital buffers.
Cash Status