HSBC, the 21st largest manager of U.S. money funds with $13 billion ($5.7B in Prime) and 16th largest manager globally with approximately $50 billion, is the latest fund manager to exit the "Prime" money market fund space entirely. (HSBC liquidated its Tax Exempt MMFs in March 2013.) The manager joins a host of others, including Deutsche, TDAM, RBC, Franklin, American Funds, PNC, Oppenheimer, SEI, CNR, and Wilmington, that have given up the Prime "ghost". Outside of the 16 largest money fund managers, almost all of those ranked 17 through 64 appear to be "going government." Since Fidelity Cash Reserves converted into Fidelity Government Cash Reserves in Nov. 2015, Prime MMFs have seen over $300 billion in Prime fund conversions to Government and another $370 billion in outflows and liquidations. In the coming days, overall outflows should approach the 50% level as total Prime assets (currently at $790 billion) drop below $750 billion (they had been $1.5 trillion late last year).
A Prospectus Supplement for HSBC Prime Money Market Fund announces the "Reorganization of the HSBC Prime Money Market Fund with and into the HSBC U.S. Government Money Market Fund." It says, "Upon the recommendation of HSBC Global Asset Management (USA) Inc. ("HSBC"), the Board of Trustees (the "Board") of the HSBC Funds (the "Trust") approved the reorganization of the HSBC Prime Money Market Fund (the "Prime Fund") with and into the HSBC U.S. Government Money Market Fund (the "Government Fund" and, together with the Prime Fund, the "Funds") (the "Reorganization"). Under the Agreement and Plan of Reorganization, (1) the assets of the Prime Fund will be transferred to the Government Fund in exchange solely for shares of the Government Fund and the assumption of the Prime Fund's liabilities; and (2) the shares of the Government Fund received by the Prime Fund will be distributed by the Prime Fund to its shareholders in complete liquidation of the Prime Fund and in cancellation of all of the Prime Fund’s shares."
HSBC's filing continues, "The Reorganization does not require shareholder approval. The Reorganization will be consummated on or about October 7, 2016 (the "Closing Date"). Shareholders of the Prime Fund may redeem or exchange their shares at any time prior to the Closing Date. If you have any questions, please call the Trust at 1-800-782-8183 for Retail Investors and 1-877-244-2424 for Institutional Investors."
On the "Background of the Reorganization," it explains, "HSBC, an investment adviser registered with the U.S. Securities and Exchange Commission ("SEC"), serves as the investment adviser to the Funds. Each Fund is a money market fund registered under the Investment Company Act of 1940 (the "1940 Act") and currently seeks to maintain a stable net asset value ("NAV") of $1.00 per share. HSBC recommended to the Board that it approve the Reorganization because of recent changes to the rules that govern money market funds. On or before October 14, 2016 (i.e., the final compliance date for these changes), the Prime Fund would have been required to price its shares at a floating NAV rounded to the fourth decimal (e.g., $1.0001 or $0.9999) and the Board, on behalf of the Prime Fund, would have been permitted to impose a "liquidity fee" (up to a maximum of 2%) or "redemption gate" that temporarily restricts redemptions from the Fund, if weekly liquid assets fall below the required regulatory threshold."
The supplement continues, "HSBC believes that, because of shareholder preference for a money market fund that seeks to maintain a stable NAV per share (e.g., $1.00) without the potential for the imposition of liquidity fees and redemption gates, the Reorganization is in the best interests of the shareholders of the Prime Fund and preferable to liquidating the Prime Fund, as it will provide shareholders with the opportunity to continue to invest in a money market fund that seeks to maintain a stable NAV of $1.00 per share. In addition, HSBC believes that the Reorganization is in the best interests of the shareholders of the Government Fund because the Reorganization may provide enhanced opportunities for the Government Fund to realize greater economies of scale in the form of lower total operating expenses over time and also would enable the combined Fund to be better positioned for asset growth."
It adds, "As part of the Reorganization, the Board evaluated and discussed multiple factors, including (but not limited to) the following: (1) the recent changes to the rules that govern money market funds adopted by the SEC (as discussed above); (2) shareholder preference for a product that seeks to maintain a stable NAV per share (e.g., $1.00); (3) alternatives to the Reorganization (e.g., liquidation of the Prime Fund); (4) information provided by HSBC regarding the Reorganization and its effect on the existing shareholders of the Funds; (5) the limited growth potential of the Prime Fund without the consummation of the Reorganization; (6) the investment objectives, strategies, risks and policies of each Fund; (7) the fact that the Funds are managed by the same portfolio management team; (8) the potential economies of scale of reorganizing the Prime Fund with and into the Government Fund; and (9) the growth potential of the Government Fund upon consummation of the Reorganization. In addition, while the fees and expenses of the Funds are mostly identical, the Government Fund currently has a lower total expense ratio as compared with the Prime Fund."
Finally, HSBC tells us, "Prior to the Closing Date, the Prime Fund will seek to invest its assets in cash, securities issued or guaranteed by the United States or certain U.S. government agencies or instrumentalities ("U.S. Government Securities") and/or repurchase agreements that are collateralized by cash and U.S. Government Securities.... After the close of business on the Closing Date, each shareholder of the Prime Fund will become the owner of a number of full and fractional shares of the Government Fund of the same class of shares that the shareholder held in the Prime Fund immediately prior to the Reorganization and will no longer own shares of the Prime Fund.... Shareholders of the Prime Fund who do not wish to own shares of the Government Fund may: (1) redeem their shares prior to the Closing Date; or (2) exchange their shares for shares of another series of the Trust prior to the Closing Date."
To see previous Prime fund liquidations, see the following Crane Data News articles: Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes (8/15), TDAM Does About Face, Liquidates Inst MMF and Inst Muni; More Filings (8/12), BIF Liquidates Muni MMFs; Nicholas Closes; MS; PFM Prime Goes Govt (7/15), Deutsche Daily Assets to Float; CNR Prime, Wells, GS Munis Liquidate (7/7), Northern Streamlines MMFs: One Prime to Govie, Two T-E Liquidations (6/2), Another Two Bite the Dust: SEI Liquidates Prime; Wilmington Goes Govt (3/29), Even More Prime to Govie: Great West; Columbia, ProFund, Rydex File (3/16), Harbor, Payden Convert from Prime to Govt; JPM on Flows; iTreasurer (3/15), Hits Keep Coming to Prime, Tax-Ex: UBS Sweeps Filings, Putnam T-E Exit (2/25), and More Funds Jump on Prime to Govt Conversion Bandwagon; Mergers (12/15).
In other news, a BlackRock Liquidity Funds TempFund, FedFund, and T-Fund filing reminds us about the pending ratings changes in the October 14 reform deadline, including the removal of "First Tier" and "Second Tier" definitions. A new Prospectus Supplement says, "Effective September 22, 2016, BlackRock Advisors, LLC intends to comply with certain amendments to Rule 2a-7 (the "Rule") under the Investment Company Act of 1940, as amended, that remove references in the Rule to credit ratings issued by Nationally Recognized Statistical Rating Organizations ("NRSROs"), remove references in the Rule to first tier and second tier securities and amend the definition of "Eligible Securities" in the Rule to eliminate references to NRSRO ratings, among other amendments." (See our March 3, 2011 News, "SEC Redefines First, Second Tier, Removes NRSRO References from 2a-7.)
It continues, "Accordingly, effective September 22, 2016 the following changes are made to the Funds' Prospectuses: The section entitled "Details About the Funds -- How Each Fund Invests" is amended to delete the fifth bullet of that section in its entirety. The section entitled "Details About the Funds -- Investment Process" is amended to delete the last sentence of the first paragraph of that section in its entirety and replace it with the following: Each Fund will purchase securities (or issuers of such securities) that are Eligible Securities that present minimal credit risk as determined by BlackRock pursuant to guidelines approved by the Board. For a discussion of Eligible Securities, please see the Glossary."
BlackRock explains, "The section entitled "Details About the Funds -- How Each Fund Invests -- Principal Investment Strategies -- TempFund and MuniFund" is amended to add the following after the first paragraph of that section: Additionally, a security purchased by each Fund (or the issuers of such securities) will be: a security that has ratings at the time of purchase (or which are guaranteed or in some cases otherwise supported by credit supports with such ratings) in the highest rating category by at least two unaffiliated nationally recognized statistical rating organizations ("NRSROs"), or one NRSRO, if the security or guarantee was only rated by one NRSRO; a security that is issued or guaranteed by a person with such ratings; a security without such short-term ratings that has been determined to be of comparable quality by BlackRock; a security issued by other open-end investment companies that invest in the type of obligations in which the Fund may invest; or a security issued or guaranteed as to principal or interest by the U.S. Government or any of its agencies or instrumentalities."
Finally, they add, "The Glossary is amended by deleting the definition of "First Tier Securities" in its entirety and deleting the definition of "Eligible Securities" in its entirety and replacing it with the following: Eligible Securities -- Applicable Eligible Securities include: securities with a remaining maturity of 397 calendar days or less (with certain exceptions) that BlackRock determines present minimal credit risks to the fund after considering certain factors; securities issued by other registered investment companies that are money market funds; or securities issued or guaranteed as to principal or interest by the U.S. Government or any of its agencies or instrumentalities."
