Jim Kaitz, President and Chief Executive Officer, AFP
Eight critical questions you need to ask
Among the steepest challenges finance professionals face today are the SEC’s recently issued market money fund (MMF) rules, which impose a floating net asset value (NAV) for institutional prime money market funds. The rules put us deep in uncharted waters, but by asking the right questions, we can start to form a map to navigate our way through them
Some elements of the rules—which will be implemented in two years—include the following:
The floating NAV applies to institutional prime and municipal tax-exempt money market funds, and not to government or retail funds.
Funds will be priced at a net asset value per share that can change or float based on underlying fund holdings—moving the calculation out to four decimal places.
Funds will use market-based value rather than amortized cost accounting for daily share prices.
If a fund’s weekly liquid assets fall below 30 percent of its total assets, it may impose redemption fees up to 2 percent.
A gate could suspend a redemption up to 10 business days in a 90-day period should the fund impose one.
A fund must publicly disclose if its weekly liquid assets falls below 10 percent of its total assets.
Even while changes to MMFs were under consideration, a survey AFP conducted with RBS Citizens/Citizens Bank shows liquidity on the rise. In 2007, the liquidity survey says, 31% of corporate cash and short-term investment holdings were maintained in MMFs. By 2014, that number dropped to 16%, with most cash rolling into banks. The primary driver for investing in an MMF, according to 73% of survey respondents, is potential yield.
The survey reveals further conservative practices regarding cash. Specifically, 68% of respondents said the most important aspect of their cash investment policy is safety. Asked if a floating NAV was imposed on prime funds, 27% of treasurers and CFOs said they would not invest in prime funds while 23% said they would move money out of prime. Also, 28% said they would move money into government funds while 21% said they would alter their investment policy.
At 860 pages, the SEC rules are, to say the least, dense and complex. Obviously, they require deep scrutiny. The good news is we have until October 24, 2016 to figure them out. The best place to start is asking a few questions that will illuminate the most important areas affecting your organization.
First, how will the new rules impact your investment policies? Should you move funds from MMFs to other instruments? Would it be prudent to transition your investments into Treasury bills or separately managed funds? Also important, you may need to change your policies to allow for funds that choose to gate or have redemption fees. This rule applies to all prime and government funds and leaves it to the discretion of the fund board if they choose to implement gates and fees.
Along those lines, should your organization review its investment policies more frequently? According to the liquidity survey, 43% review or update their cash investment policy only once a year. You may want to consider a review as frequently as quarterly to keep pace with the new SEC regulations. During a recent AFP webinar, we asked attendees what changes they might consider to their investment policy, and 25% responded that they would consider a more frequent policy review.
Depending on the size and structure of your organization (among other factors), there are several other questions you may want to address as you wade through the SEC rules:
At what level would you consider an appropriate number of funds or consider them as a percentage of your assets?
What is your fund mix, and are the exposure limits addressed?
What is your exposure to money fund-like products?
What is the potential tax policy impact?
While the new SEC rules may cause a few minor shock waves and some confusion among finance professionals, there is support and a number of resources to help provide clarity and map the way forward.
AFP provides abundant channels of information, guidance and clarity for a host of issues finance professionals face, including SEC regulations. Our thorough research, reports, insightful webinars, training and advocacy—as well as opportunities for professional networking and support—have long served as tools to guide finance professionals through uncharted waters and beyond.