Last week, we covered some of the major highlights from Crane Data' recent Money Fund Symposium event in Philadelphia. (See our June 28 News, "BlackRock's Novick at MF Symposium: NAVs Will "Wiggle"; Tools for Risk," and our June 30 News, "Prime Outflows, Spreads, and Liquidity Major Issues at MF Symposium.") Day 3 of our big show featured the sessions, "Money Fund Reform: Outstanding Issues," and "Reform Issues: Credit Ratings, Operations." The former, moderated by Joan Swirsky of Stradley Ronon, included commentary on frequently asked reform questions by panelists Jack Murphy of Dechert; Sarah ten Siethoff of the Securities & Exchange Commission; and Jane Heinrichs of the Investment Company Institute. The latter, moderated by Pete Crane of Crane Data, featured Charles Hawkins of BNY Mellon Asset Servicing on operational challenges; Jimmie Irby of JP Morgan AM, on credit ratings; and Sharon Pichler of the SEC on new disclosures. Our recap looks at a number of remaining issues, and some hot topics such as issue with ultra-short bond funds and why one aspect of reforms was like "open heart surgery" for the industry.
In the Outstanding Issues session, the panel addressed several issues with fees and gates. Swirsky said, "There are only two triggers in the rule -- if weekly liquid assets (WLA) fall below 30% then the board can impose a discretionary fee or gate, and if the WLA falls even lower to less than 10% there will be a mandatory fee unless the board decides otherwise. But funds can consider other triggers besides the two in the rule." She asked, "What would be the appropriate percentage [when] a committee or officers are informed of what's going on?"
Murphy responded, "We've seen clients that have accepted trip wires at 32%, 35%, and we have other clients that have not. Occasionally, the notice goes to the entire board. But usually it's a series of escalations starting with the chairman getting a notice. [The important thing is] spelling out the procedure ahead of time. With respect to the timing of fees and gates, this has been quite an issue in dealing with intermediaries. Many intermediaries are pushing back and saying they don't have the operational ability to put in place a fee or gate in the middle of the day.... Realistically the board is not going to be meeting before the end of the day." Heinrichs added that ICI's work stream on fees and gates was "clearly the most difficult and contentious" with most of the questions being about intraday gates and fees.
The SEC's ten Siethoff responded, "I think on all of these questions, the specifics of the rule don't speak to all of these individual board responsibilities. They have that 30% trigger ... and then the 10% default that only the board can opt around it, but otherwise they don't specify. [T]hat's meant to give lots of flexibility to boards and the funds themselves who are going to be facing a full range of facts and circumstances that we certainly could never anticipate in advance. My view is this is something that needs to be guided by a board's fiduciary duties and their state law responsibilities. We issued that FAQ just to clarify -- we didn't think there was some magic button that everybody hits in the room and the fee or gate instantly drops the second a board makes a decision. We're not going to play 'gotcha.' Beyond that, I think it's going to be up to fund groups and their boards weighing the facts and circumstances."
Swirsky also asked, "What is a retail [investor]?" ICI's Heinrichs answered, "We had 4 working groups.... One of the first things we did, because it was the biggest thing that people were concerned about, was splitting the retail and institutional investors. We started with the NSCC social codes.... We went through a very painstaking process with the members and intermediaries determining whether or not a social code should be in the retail or institutional category.... You can find it on our website. It's very useful, and while we understand it probably doesn't cover everything, it is a starting place."
Ten Siethoff said, "As people have come to the staff with questions about what qualifies as retail and institutional, we certainly have been trying to give clarity where we can. We're happy to entertain those types of requests. The one area we have probably declined more than any other to give any clarity is in some of the intricacies of trust and estate law because we are not experts in trust and estate law. We ask them to work with trust and estate lawyers on how to apply that.... We're just looking for you to have a good process."
Finally, there was a question on how the SEC views Ultra-Short bond funds. Ten Siethoff commented, "We are seeing a lot of filings of new products coming out in what I call the interim space between the old form of Ultra short Bond funds and money market funds -- all sorts of different models. We are definitely looking at each of these products as they come out ... happy to talk to anyone as they are in the stages of developing some of these. Basically, we are looking for where they are approximately the same as a money market fund. If you look at rule 2a-7 MMF ... the rule says you can't hold yourself out as the equivalent of a money market fund unless you comply with the rule."
She continued, "Basically if you're pretty much the same, we're going to say you're holding yourself out as the equivalent of a MMF.... So what is basically the same? There are clear cases where we would say, for example, you're a floating NAV MMF and the only thing you're not doing are the fees and gates. So we would say you're holding yourself out as a money market fund -- you just dropped the fees and gates.... You may be getting phone calls from us depending on how close."
She added that if you just have some things in common, then they are not going to say you have to comply with 2a-7. "I would advise people to think about this as your setting up these new products. If you have questions, feel free to contact us. I'm sure people would rather, before they launch, possibly know where it falls rather than getting a call from us after the fact." She also said they are in regular contact with FINRA, and they are looking at ads in this space "so just be aware that they are attuned to this as well."
In the "Reform Issues" session, BNY Mellon's Hawkins commented. "The one [operational issue] that's consumed 10 times the rest put together is: How do you cope with a fluctuating NAV fund and provide intraday liquidity with multiple NAV strikes in a day? This is open heart surgery. Transfer agent systems, intermediary systems are all built on the philosophy that there's one NAV strike per day. Basically, you had to take those systems, take all the operations and systems that occur in a processing cycle, which is 24 hours, to basically 3 hours -- and you have to do them 3 times a day."
He continued, "That created a whole new conversation amongst all the players -- the pricing services, the PMs, the accounting folks, the transfer agents, the clients, the intermediaries, the shareholders, all working together to figure out how to collapse that into a working model.... This is the part that’s still under construction -- and I would argue it will be under construction after the compliance date."
Hawkins clarified, "We will have in place before the compliance date the capability to do intraday liquidity in money market funds, but I think that what the funds have developed and what the shareholders need may not be 100% aligned. I say that because just two months ago, everybody was on 9 am, noon, and 3 pm [strike times] -- that was going to be the cycle." Then one firm came out with the first strike at 8am and a bunch of others followed. "So we're throwing stuff up on the wall, hoping it sticks. But I do think after the compliance date there is going to be some further tweaking in order to address customer need, number 1, and also to address efficiency."
He added, "The money market industry is a highly efficient, well-oiled machine -- it's taken decades to develop.... I think we'll get it done. But will it have the same efficiency at the outset that we enjoyed today? Probably not.... There's going to be some tweaking that has to occur."
JPMAM's Irby talked about changes to credit ratings requirements. He stated, "For much of my career, I've largely been an opponent of funds taking 'Tier 2' risk. We obviously had a very broad double-A rated universe to which we could find supply, but with the consolidation in the industry and the downgrades, that dynamic has changed. I think we're all interested to see how the industry evolves over the next 1 to 2 years. Tier 2 can offer fund managers and their clients much more diversity and therefore then much less NAV impact if and when a credit event occurs. A fuller use of the credit universe could be useful to the industry."
Finally, on the new disclosure rules, including Market NAVs (MNAVs), Weekly Liquid Assets (WLAs) and the revised Form N-MFP, the SEC's Pichler said, "I have personally looked at the websites of at least one fund at every money market fund complex and everyone is almost adequate. The big guys, of course, have interactive charts and everything ... some of the smaller ones I needed to remind that value now means market size."
Pete Crane added, "On weekly liquid assets, there's been an argument among fund companies that a 50% WLA is better than 40% WLA. I look at that and ask, 'Why do you need a 50% WLA?' Someone holding a giant WLA, to me, mean it's hot money. Don't just assume a 50% is better than a 40%... `Assume the portfolio managers know the shareholders; they know what they've got to hold, and some funds are hotter than others."
