While the mutual fund industry trade group says funds are ready to comply with the Securities and Exchange Commission's new rules for money market funds that kicked in Friday, advisors and investors are being warned to tread carefully in the new territory.
Coupled with the 2010 money market fund reforms, the rule passed in 2014 and effective Friday required funds "to make a number of significant operational changes on a very aggressive timeframe," said ICI president and CEO Paul Schott Stevens in a Thursday statement. "Thanks to substantial effort, planning, and execution within the industry, funds are prepared to meet the new requirements on time."
ICI explained in a recent blog post that the new SEC rules "are pushing investors toward government money market funds — those that invest principally in securities issued by the U.S. Treasury or government agencies (or repurchase agreements backed by government securities)."
Institutional investors who prefer money market funds with stable $1.00 NAVs, and retail investors who want to avoid even the remote chance of redemption fees or gates, "will have no choice but to invest in a government money market fund," ICI states.
Indeed, "as of right now, the minimal yield difference between prime and government funds is such that investors aren't being properly compensated for assuming the (possible) risk and (possible) lack of liquidity," Brad McMillan, chief investment officer for Commonwealth Financial Network, told ThinkAdvisor Friday.
Most advisors "are concerned about the floating NAV and explaining to their clients some of the potential pitfalls of the prime funds," McMillan said. "As such, they are generally sticking with government funds. That said, if the FOMC raises rates one or two times, the payoff will be more appealing and potentially worth it."
The SEC's new rules, which become effective Friday, center around two key reforms:
- Prime and tax-exempt money market funds that are sold to institutional investors must price their shares and transactions using a "floating" net asset value (NAV), rather than the stable $1.00 NAV that such funds have long maintained.
- All nongovernment money market funds (i.e., prime and tax-exempt funds, whether retail or institutional) can impose delays ("gates") or redemption fees on redeeming shareholders under limited situations. A fund is required to impose redemption fees if the fund's weekly liquid assets fall below 10% of its total assets, unless the fund's board decides a redemption fee is not in the fund's best interests.
ICI's Steven's noted that with the new rules, "three things" are clear: "Today's money market funds are very different products than their pre-crisis predecessors; investors value the vital role that money market funds play in helping meet their cash management needs; and money market funds do not need further reform."
The SEC's new rules "add layers of transparency and redundant safeguards that more than adequately address any risks" that may have existed when the global financial crisis hit in 2008, and the largest money market fund, the Reserve Primary Fund "broke the buck" because of exposure to Lehman Brothers debt securities.
"Funds have worked overtime to prepare for the new regulatory landscape," Stevens said. "By entrusting $2.6 trillion in assets to these funds, investors continue to register their confidence in money market funds' ability to meet their needs for years to come."
Brandon Swensen, vice president and co-head of U.S. Fixed Income at RBC Global Asset Management, told ThinkAdvisor in an email that "because of fees and gates, Prime Funds no longer offer unconditional access to cash. If a fund has liquidity issues, cash could be unavailable to settle trades in a sweep account."
