U.S. global fund managers are not prepared for new money market rules that will go into effect next year.
SimCorp, a provider of investment management solutions and services for the global financial services industry, found in its recent poll of 100 investment managers across North America, that 85% said they had limited or no understanding of the Securities and Exchange Commission’s final ruling 2a-7 and 75% said their organizations are not completely prepared for the rules to go into effect.
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All of the changes have to do with administration of money market mutual funds, says Marc Mallett, vice president of product and managed services for North America at SimCorp.
The SEC put the reforms in place last year in response to the market crash in 2008. The rule changes were adopted “ultimately to protect the investor and ensure [that] if there is significant market volatility that investors are able to liquidate that investment from these funds in an orderly manner,” says Mallett.
The amendments to the SEC rule require a floating net asset value (NAV) for institutional prime money market funds, which allow the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets and provide non-government money market fund boards new tools — liquidity fees and redemption gates — to address runs on the funds, according to the SEC.
Fees and gates would give fund boards the ability to impose liquidity fees or suspend redemptions temporarily (also known as a gate), if a fund’s level of weekly liquid assets falls below a certain threshold.
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“For quite some time, the money market funds had a fixed NAV. There was no change in price. Now that will be a floating NAV and [fund managers will] be required to calculate that NAV on a daily basis like most mutual funds do and on an intraday basis,” Mallett says. “The impact is significant from an operational and technical perspective for mutual fund companies and administrators.”
Plan sponsors and plan fiduciaries need to take note as well, said Bruce Ashton, a partner with Drinker Biddle & Reath LLP, in a brief to clients. When doing their due diligence on their plan’s investment lineup, fiduciaries must look at all relevant issues, including “where the particular fund fits within the plan’s investment strategy, the net yield received and how well the fund performs compared to relevant benchmarks, the stability of the investment team, liquidity of the fund, including issues such as redemption fees and restrictions, and the cost of the fund and compensation paid to its investment manager,” Ashton wrote.
If the new rules are too problematic, he points out that there are alternatives that are just as stable and don’t have as many hoops to jump through, including cash-separate accounts, private money market funds, stable-value funds and short-term bond funds.
The rules won’t just affect the portfolio manager or the accountants but will involve the money managers’ risk departments, compliance departments, sales and distribution departments “because they will have to ensure they are in compliance with the transparency and reporting requirements” of the new regulations, Mallett says.
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Implementation of the rules is staggered, with stress testing and diversification going into effect in April 2016 and the floating NAV requirement going into effect in October 2016.
“I think most firms are well aware that there have been changes. The floating NAV probably had the most understanding; most people realize that is happening. I’m not sure how many people understand liquidity fees, stress testing and diversification,” says Mallett.
The stress testing rule requires funds to be able to perform stress tests to prove their fund won’t react in a particularly negative way if short-term interest rates are increased or a certain security is downgraded or defaults.
It is imperative that plan sponsors know the administrators of their retirement plan and know the investment managers that are running funds in those plans “and be at least aware these rule changes are coming into effect … and ensuring that the administrators and investment managers themselves are prepared to deal with them,” Mallett says.
Paula Aven Gladych is a freelance writer based in Denver.
