FAQs Don't Alter Federated's Path
Federated Investors' CIO, Global Money Markets, Deborah Cunningham, writes on "New SEC Guidance Not Clear Enough" in her latest "Month in Cash" column. She says, "When a regulator releases a final ruling that runs hundreds of pages long, you'd expect some questions to arise. Last summer, the SEC presented the mutual fund industry with more than 800 pages of new rules on money funds that will go into effect in 2015 and 2016.... We have all been waiting for another voluminous document explaining the vaguer elements in the original ruling. Well, last month, we finally got it. Sort of. The SEC released 53 frequently asked questions (FAQ), yet they brought less clarity than hoped. While some of them are quite helpful, others are not. Even worse, some muddy things further. Among the useful: Two questions address 60-day funds, which are designed to have very little change in daily per-share valuation. The FAQ basically says that, even if a portfolio for all intents and purposes maintains a stable NAV, you can't claim that in an objective or sell it that way. You have to make sure that clients understand that these are floating NAV funds. The document also clarifies that the collateral used in the overnight reverse repo program (RRP) will be considered a government security." Cunningham continues, "Among the confusing: The role of intermediaries in regard to retail investors is now clouded. It had been thought that a fund is considered to be retail if it sells to "natural persons" <b:>`_. These are defined as those who have a social security number, as opposed to an institution. But the FAQ suggests that if a natural person is "controlled" by an institution, the fund must float its NAV. This is obviously at the heart of the distinction between retail and institutional funds. If the SEC is still debating that, it's a serious issue for the industry. There's also incomplete guidance on government funds. What happens if, by no fault of your own, the fund temporarily dips below the required 99.5% of investments in government securities, even though you are actively working to get it back into compliance? Also, the timing of some reporting to the SEC doesn't make sense. It's not that the SEC staff isn't trying; it's just that it seems to be mired in the process of interpreting the new rules. That presents problems for the money market fund industry that is working hard to conform to those. We expect future guidance, but in the meantime I want to emphasize that nothing we saw in the FAQ has altered our path. We still intend to merge some funds, add share classes, render some to be 60-day-and-under and reconfigure some to be private funds that fall outside the 2014 rulemaking. In short, there is nothing in the FAQ that has caused us to do an about-face."
