15
Morningstar FundInvestor
August 2
014
Since September
2008
, when Reserve Primary Fund
sparked a panic by “breaking the buck” when its
Lehman notes plunged in value, the
SEC
has sought
changes that would prevent such a calamity from
occurring in the future. The delivery was a laborious,
politically charged process. The mutual fund industry
liked money market funds just fine the way they
were, banks wanted them gutted, and
SEC
staffers
and politicians were caught in the middle. It took
many iterations to arrive at yesterday’s barely accept-
able compromise, which passed by the minimum
margin of
3
to
2
.
As the
SEC
did not publish the new rules until after
they were ratified, media coverage has been some-
what muddy. Several reports seem to suggest,
as does the
SEC
’s press release, that the rules apply
only to institutional funds. Not so—the most notable
modification, requiring some money funds to float
their net asset values rather than fix the price at a
constant
$1
.
00
, is indeed for institutional funds only.
But provisions for liquidity fees and redemption
gates apply to all funds, both institutional and retail.
For Retail and Institutional Funds
Required Liquidity Fees
If a money-fund’s holding can be easily and readily
converted to true cash, the
SEC
designates that
holding as being either a “daily liquid” or “weekly
liquid” asset. Should a fund run low on these liquid
securities, such that its weekly liquid assets are
calculated to be less than
10%
of its total assets,
then under the new rules the fund must impose a
liquidity fee of
1%
on redemption requests.
Effectively, those redeeming will receive
99
cents
on the dollar, with the remaining penny staying in the
fund as a payment to existing shareholders. A fund
may escape this provision only if its board of directors,
including a majority of independent directors, over-
rides the automatic imposition of the fee.
Optional Liquidity Fees
If a fund’s weekly liquid assets are calculated to be
less than
30%
of its total assets, then that fund may
impose an optional liquidity fee. The optional fee, for
reasons that remain unclear, would be
2%
—double
that of the required liquidity fee when the fund
breaches the
10%
liquidity threshold. Once again, this
fee must be supported by the fund’s board of directors,
including a majority of its independent directors.
Optional Redemption Gates
With funds that have less than
30%
in weekly liquid
assets, fund boards (including, you guessed it, the
majority of independent directors) may also vote for
the stronger measure of shutting down redemptions
altogether. Such gates, as they are called, can be
imposed for no more than
10
days within a given
90
-
day period. When activated, though, they have the
effect of completely cutting off all transfers, so that
shareholders wishing to gain access to their money
funds for any reason are shut down until the gate
is lifted.
The fear of the event outweighed the event itself.
These changes are modest.
Floating the
NAV
may complicate an institution’s
accounting or tax situation, thereby pushing it toward
other cash options, but it doesn’t alter a money fund’s
basic investment characteristics. Neither does calcu-
lating an
NAV
with more decimals, imposing liquidity
fees, or creating a redemption gate. The latter two
items will no doubt prove irksome when implemented,
but they are unlikely to be so common as to actively
discourage money-fund investors.
In short, money funds’ future looks much the same
today as it did a month ago. The funds are currently
unattractive to both investors and their sponsor-
ing fund companies (which often find themselves
rebating management fees to support the funds’
meager yields) because short-term interest rates are
low. When rates rise, and thereby boost money
fund yields, the new legislation is unlikely to stand
in the way of sales. Unfortunately, it also will not
do more than slow future market panics.
œ
