Yesterday, Bloomberg featured the article, "Muni Money Market Funds Decimated by Rules Intended to Save Them." It says, "Municipal money market funds are hemorrhaging cash in advance of rules aimed at reducing the risk of runs on the pools. Assets have plunged $64 billion since the beginning of the year to the lowest levels since 1999 as investors pulled money from tax-exempt funds in 25 of the last 30 weeks and shifted into ones that buy only government debt." We review this and a cluster of Muni money fund liquidations from Northern, SEI and Western below, and we also add details to T. Rowe Price's recent Prime-to-Govt conversion of its internal money fund. (See yesterday's "Link of the Day for more on this, and see our last several Tax Exempt stories -- "BIF Liquidates Muni MMFs; Nicholas Closes; MS; PFM Prime Goes Govt (7/15)," "UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund (6/29)," and "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche (2/24).")
The Bloomberg piece continues, "These government-only funds are exempt from Securities and Exchange Commission rules effective in October that require floating net-asset values and impose liquidity fees and redemption suspensions under certain conditions. The new regulations are adding more pain to funds that have been plagued by seven years of the Federal Reserve's zero interest-rate policy." They quote Crane Data's Peter Crane, "They're in danger of going extinct, especially if you don't get a rate hike anytime in the next couple of years.... Municipal money market funds lobbied hard to get an exemption from the SEC's rules, but the SEC threw them under the bus.... Tax exemptions don't help you if there's no income to tax."
It explains, "The rules shocked muni money fund managers. The historical average for seven-day liquidity has been between 70 percent and 80 percent for decades, said Mary Jo Ochson, who oversees $14.7 billion in tax-exempt money funds at Pittsburgh-based Federated Investors Inc. The funds, which invest in highly rated short-term debt, remained liquid during the financial crisis, she said.... Colleen Meehan, who manages about $6 billion of muni money market funds at Dreyfus Corp., said investors are balking at the prospect of liquidity fees and redemption gates. In June, UBS Asset Management said it would transfer money in its tax-exempt sweep funds to a government money fund."
The most recent round of municipal money fund liquidations includes a prospectus supplement for Northern Institutional Funds' Tax-Exempt Portfolio. It states, "The Board of Trustees of Northern Institutional Funds (the "Trust") has determined, after consideration of a number of factors, that it is in the best interests of the Tax-Exempt Portfolio (the "Portfolio") and its shareholders that it be liquidated and terminated on or about October 14, 2016."
It continues, "The Portfolio will discontinue accepting orders from new investors for the direct purchase of Portfolio shares or exchanges into the Portfolio from other funds of the Trust after the close of business on July 29, 2016. For existing shareholders who purchase Portfolio shares through a Northern Trust sweep account, the Portfolio will remain available until October 7, 2016.... If no action is taken by a Portfolio shareholder prior to the Liquidation Date, the Portfolio will distribute to such shareholder, on or promptly after the Liquidation Date, a cash distribution."
SEI also recently completed the liquidation of its Tax Exempt Trust (as well as its Prime MMFs -- see our 3/29 News, "Another Two Bite the Dust: SEI Liquidates Prime; Wilmington Goes Govt"). Its prospectus supplement states, "As previously announced, at a meeting of the Board of Trustees of SEI Tax Exempt Trust (the "Board"), held on January 27, 2016, the Board approved the closing and liquidation of the Fund on or about July 22, 2016 ("Liquidation Date"). In connection with the Fund closing, at a meeting of the Board held on May 11, 2016, the Board approved the change of the Fund's fiscal year end from August 31 to June 30. As a result of activity associated with the planned liquidation, income earned after the close of the June 30, 2016 fiscal year end through the Liquidation Date of the Fund will be taxable. Shareholders wishing to avoid incurring taxable income during that period may elect to redeem their shares prior to July 1, 2016."
The prospectus supplement for the Prime Obligation Fund and one for SEI Daily Income Trust both say, "At a meeting of the Board of Trustees (the "Board") of SEI Daily Income Trust (the "Trust") held on January 27, 2016, the Board approved the closing and liquidation of the Funds, each a portfolio of the Trust. The U.S. Securities and Exchange Commission recently adopted amendments to the rules that govern money market funds, several key provisions of which are scheduled to go into effect later in 2016. These amendments will substantially change the way in which many money market funds operate and accordingly have resulted (and likely will continue to result) in significant changes to the money market fund industry as a whole. In general, any money market fund that does not limit its investors to natural persons and does not limit its investment portfolio to government securities (and equivalent instruments) will be required to incur significant compliance and operational costs. This changing regulatory environment was one of several factors that led SEI Investments Management Corporation ("SIMC"), the Funds' adviser, to recommend to the Board of the Trust that the Funds be closed and their portfolios be liquidated."
The release continues, "Accordingly, each Fund is commencing the orderly liquidation and distribution of its portfolio pursuant to a plan of liquidation approved by the Board. Each shareholder will receive its pro rata portion of the applicable Fund's liquidation proceeds. It is currently expected that the liquidation proceeds of the Money Market Fund will be distributed to shareholders on or about June 24, 2016 and that the liquidation proceeds of the Prime Obligation Fund will be distributed to shareholders on or about July 22, 2016. In anticipation of the Funds closing, each Fund will convert all or substantially all of its assets to cash or cash equivalents. Therefore, each Fund may not be managed in accordance with its stated investment strategy going forward, pending the distribution of the liquidation proceeds. SIMC will be available to consult with the current shareholders of the Funds regarding alternative investments."
Also, Western Asset liquidated the "B" shares of its Western Asset Tax Free Reserves and its Western Asset Liquid Reserves. Its filing says, "All outstanding Class B shares of the fund will be converted into Class A shares of the fund as soon as practicable on or about June 30, 2016 (the "Conversion Date"). The conversion of Class B shares into Class A shares will occur at the close of business on the Conversion Date. The conversion is not expected to be a taxable event for federal income tax purposes and should not result in recognition of gain or loss by converting shareholders. Effective as of the close of business two business days prior to the Conversion Date (approximately June 28, 2016), the fund will no longer offer Class B shares for incoming exchanges."
In other news, yesterday's Wall Street Journal wrote, "T. Rowe Price Prime Money Fund Switches to Government Focus." We found another mention of these recent shifts in T. Rowe Price's "An Annual Report on the Reserve Investment Funds." It explains, "While the funds' names are changing in response to new SEC money fund rules, the funds will retain the attractive features our investors have enjoyed, including a net asset value managed to stay at $1.00 per share and a focus on liquidity and stability of principal.... The Reserve Investment Fund will be changing its investment mandate to that of a government money market fund, with a new name -- T. Rowe Price Government Reserve Fund -- to reflect this."
TRP continues, "Effectively, this will limit the fund's investments to include U.S. Treasuries and U.S. government debt, as well as repurchase agreements backed by similar collateral. As nongovernment debt positions mature, we are moving the fund away from its current mandate and toward its future mandate, which becomes effective August 1, 2016. This mandate change, made in response to SEC rule changes, allows the fund to retain the attractive features our investors have enjoyed, including a net asset value (NAV) managed to stay at $1.00 per share and a focus on liquidity and stability of principal. Our hope is that this mandate change will not disrupt existing shareholders."
They states, "The Government Reserve Investment Fund will be changing its name to T. Rowe Price Treasury Reserve Fund, effective August 1, 2016. While this name change is made in response to SEC money fund rule changes, investors will see virtually no change in the way we manage the fund. As a government money market fund under the new SEC rules, it will invest almost exclusively in U.S. Treasuries and U.S. government debt, as well as repurchase agreements backed by similar collateral. Also, it will retain the attractive features our investors have enjoyed, including a net asset value (NAV) managed to stay at $1.00 per share and a focus on liquidity and stability of principal.”
Finally, the report tell us, "The Reserve Investment Fund and Government Reserve Investment Fund are not available for direct purchase by members of the public, and their shares are offered solely to institutional investors pursuant to an exemption from the registration requirements under the federal securities law. The investment in either fund is generally made by T. Rowe Price on behalf of its mutual funds and institutional clients. The disclosure of either of the fund's portfolio holdings shall not be deemed to be an offer or a solicitation to purchase shares of the fund."
