Industry Reluctantly Preps for MMF Reform Deadlines

Although money market fund (MMF) operators have until July 29, 2016, before all of the recent changes mandated by the U.S. Securities Commission (SEC) go into effect, some in the industry still are left wondering whether the new rules will enhance the MMF market’s fairness, transparency and resiliency as the regulator promised.
By Rob Daly(2147487629)
Although money market fund (MMF) operators have until July 29, 2016, before all of the recent changes mandated by the U.S. Securities Commission (SEC) go into effect, some in the industry still are left wondering whether the new rules will enhance the MMF market’s fairness, transparency and resiliency as the regulator promised.

“While we may question some aspects of the rules adopted, we strongly believe that the SEC has the long regulatory experience and deep technical expertise required to strike the proper balance, making money market funds more resilient in times of financial stress while preserving the utility and value of these funds for investors,” says Paul Schott Stevens, president and CEO of the Investment Company Institute (ICI). “We will work with the Commission and with ICI’s members to ensure a smooth transition to these new rules as they are implemented over the next two years.”

Many MMF firms, like Fidelity Investments, are doing the most they can to bring their products into line with the new regulations.

“The SEC has only recently issued the new rules, and it will take some time to gauge how specific funds may be affected by this further regulation,” says a Fidelity spokesperson. “Throughout the multi-year period, we will keep investors well-informed in advance of any changes and will continue to manage these funds as we always have.”

Fidelity already has posted an overview and further details of the new rules and to which funds they will apply.

“We will continue to provide timely, relevant perspective, information and updates to fund shareholders in coming weeks and months,” the spokesperson adds.

Many investors will need to educate themselves about new MMF concepts like the floating net asset value (NAV), which will replace the amortizing cost method and the penny round method in July 2016, as the way to value the their portfolio securities for institutional prime and institutional municipal MMFs.

The regulator designed the rule to reduce first-mover advantage inherent in a stable NAV fund. By using the floating NAV valuation, investors no longer have the incentive to try to redeem shares at a stable share price when the MMF has suffered a loss. Officials also believe the rule will reduce the chance of unfair investor dilution.

James McNamara, president of Goldman Sachs Mutual Funds, and David Fishman, managing director and co-head of global liquidity management at Goldman Sachs Asset Management, question if selecting the manner in which funds value their assets by its fund type is a wise decision.

“If the floating NAV does yield the benefit its proponents argue and a future run is limited to retail funds maintaining a stable NAV, the Commission may someday have the difficult task of explaining why it chose not to extend those benefits to funds that cater to the needs of retail investors,” according to a comment letter that both co-signed.

Under the new rules, MMFs must disclose their daily and weekly level of liquid assets; shareholder inflows and outflows; market-based NAV per share and any use of affiliate sponsor support on its website on a daily basis.

The regulator has also eliminated the 60-day wait for public disclosure of filed Form N-MFPs, the monthly filings used by MMFs to inform the SEC about their portfolio holdings. The form’s information will be publicly available immediately upon filing.

In addition, the SEC amended Form PF, which private fund advisers use to report on certain funds they advise, so that it could monitor any migration of investments out of the MMF market into private liquidity funds. Private fund advisers who manage at least $1 billion in combined MMF and liquidity assets will have to report similar information on Form PF that registered MMFs need to provide on their monthly Form N-MPF filings starting on January 29, 2016.

Ensuring Resiliency
To avoid a repeat of the 2008 financial crisis, the SEC has instituted a few operational changes to make sure that MMFs survive down markets better by lowering their diversification limits, except tax-exempt MMFs, from 25% to 10% and aggregating affiliated trading entities into a single issuer when complying with the MMF’s 5% issuer diversification limit.

The SEC wants MMFs to treat sponsors of asset-backed securities as guarantors subject to the fund’s 10% diversification limit unless the MMF’s board determine that the fund is not relying on the sponsor’s “financial strength or its ability or willingness to provide liquidity, credit or other support to determine the asset-backed security’s quality or liquidity.”

MMFs will have until January 29, 2016, before these diversification requirements go into force.

It is also the same date on which the SEC will require MMFs to be prepared for various stress tests to make sure that the funds are able to maintain their weekly liquid assets percentage at 10%.

If an MMF’s weekly liquid assets fall below 10% of its total assets outside of a stress test, the MMF is required to impose a 1% liquidity fee on all redemptions. However, if the MMF board does not believe that the fee is in the fund’s best interest or that 1% fee is not the proper amount, they can select not to institute the liquidity fee, lower it or raise it up to 2% liquidity fee.

The fund also must “promptly and publicly” disclose on its website if its weekly liquidity level has fallen below 10% as well as any liquidity fees imposed or removed, and the fund must also file the details using the newly created Form N-CR beginning on April 29, 2015.

Funds are also to use the new form to present the SEC with the factors that an MMF board took into account when making its decision regarding implementing and retiring liquidity fees, portfolio security defaults. fund affiliate support, the reason for the support and the amount of support received.

Government and retail MMFs also will have to file a Form N-CR if a fund’s market-base NAV per share is less than $0.9975.

If a MMF’s weekly liquidity assets fall below 30% of its total assists, the regulatory minimum, the MMF board, if determined to be in the fund’s best interest, may impose a fee up to 2% on all redemptions. The board also has the discretion to temporarily suspend, or gate, redemptions. The board may gate redemptions for up to 10 business days. However, no MMF can gate for more than 10 days in any 90-day period. MMFs also need to file a Form N-CR when instituting or ending a gate.

Government MMFs are the only type of MMF that are not subject to the new fee and gate provisions, which may opt into them voluntarily after they disclose the fact to their investors.

Yet, Goldman Sachs’ McNamara and Fishman see floating NAV calculations along with fees and gates as a dangerous recipe for the industry. “In our view, combining the two alternatives will significantly impair the utility of money market funds for most investors by removing both the price stability and promise of liquidity that continues to make money funds attractive investments for millions of investors despite the paltry yields those funds are now paying,” they warn.


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