We wrote on Monday about Allspring filing to liquidate its Prime Institutional Money Market Fund (see our "Allspring to Merge Heritage MMF Into Govt MMF; UBS Converting Fund"), which brought the number of funds either liquidating or converting to Government to 10 (totaling $227.5 billion). While not a liquidation or conversion, Federated Hermes filed this week to consolidate two Prime Inst MMFs. A Prospectus Supplement for the $12.3 billion Federated Hermes Institutional Prime Value Obligations Fund explains, "We recommend that you read the Prospectus/Information Statement in its entirety; this information will help you understand the upcoming Reorganization. Federated Hermes Institutional Prime Value Obligations Fund ... will be reorganized into Federated Hermes Institutional Prime Obligations Fund.... Both the Reorganizing Fund and the Surviving Fund are money market funds and are portfolios of Federated Hermes Money Market Obligations Trust. Please refer to the enclosed Prospectus/Information Statement as well as the highlighted information below for details on the Reorganization." (Note: We hope to see you next week at our big Money Fund Symposium show in Pittsburgh, June 12-14. Attendees and Crane Data subscribers can access the conference binder and materials via our "Money Fund Symposium 2024 Download Center.")
A Q&A tells us, "Why has the Board of Trustees approved the Reorganization? In determining whether to approve the Reorganization, the Board of Trustees, including the Independent Trustees, of the Reorganizing Fund and the Surviving Fund considered a variety of factors, including, but not limited to, the following: Since 2017, the Reorganizing Fund has invested substantially all of its assets in the Surviving Fund in a 'fund-of-funds' structure in reliance on Rule 12d1-1 under the Investment Company Act of 1940 Act, as amended."
It continues, "In July 2023, the Securities and Exchange Commission amended Rule 2a-7, the primary rule under the 1940 Act governing money market funds. As a result, institutional money market funds, such as the Reorganizing Fund and the Surviving Fund, will be required to adopt procedures to implement mandatory liquidity fees by October 2, 2024. The Board has received and considered information from the Adviser (as defined below) regarding the impact these changes will have on the Reorganizing Fund and the Surviving Fund."
Federated Hermes states, "Because the Reorganizing Fund invests substantially all of its assets in the Surviving Fund in a Rule 12d1-1 fund-of-funds structure, the Adviser believes there is a risk that redemption activity at the Reorganizing Fund level could trigger the imposition of a mandatory liquidity fee for the Surviving Fund, the Reorganizing Fund or both, which could cause additional operational challenges if mandatory fees are implemented and could potentially have a negative effect on shareholders. If it is necessary to impose a mandatory liquidity fee, the fee would apply to all shares that are redeemed at that day's net asset value ('NAV')."
They write, "As the Reorganizing Fund's investments in the Surviving Fund represented approximately 75% of the total assets of the Surviving Fund as of February 29, 2024, the Adviser believes the Reorganization represents the most efficient and shareholder beneficial approach to ending this fund-of-funds structure, rather than the liquidation of the Reorganizing Fund or the redemption of the Reorganizing Fund's position in the Surviving Fund, which would result in a taxable event for Reorganizing Fund shareholders."
The filing adds, "The Reorganizing Fund will transfer all or substantially all of the Reorganizing Fund's assets (which consist almost entirely of shares of the Surviving Fund) to the Surviving Fund, and the Surviving Fund will issue new shares to the Reorganizing Fund. Immediately following the Reorganization, the Surviving Fund will continue to invest the same assets pursuant to the same strategies it currently implements, and the Reorganizing Fund shareholders will maintain the same exposure to these investments as direct investors in the Surviving Fund. The Adviser believes the proposed Reorganization is in the best interests of the Reorganizing Fund and Surviving Fund and the interests of the existing Reorganizing Fund and Surviving Fund shareholders would not be diluted as a result of the Reorganization."
It also says, "The Reorganizing Fund's shareholders will become shareholders of the Surviving Fund that, as compared to the Reorganizing Fund, has lower gross total operating expenses and the same or lower net total expenses for each share class. The Surviving Fund's net total operating expenses could increase after the expiration of the Surviving Fund's expense limitation agreement on August 1, 2025, if such expense limitation agreement is not renewed. In addition, because the Reorganizing Fund invests substantially all of its assets in the Surviving Fund, the Reorganizing Fund's historical performance generally tracks the Surviving Fund's performance, `with the exception of the 10-year average annual total return period, in which the Reorganizing Fund slightly outperformed the Surviving Fund, reflecting the period prior to creation of the Rule 12d1-1 fund-of-funds structure during which the Reorganizing Fund was managed pursuant to different investment strategies."
Federated tells us, "The Board considered the terms and conditions of the Plan of Reorganization, including that the Reorganization will not dilute the interests of the shareholders of the Reorganizing Fund or the Surviving Fund because a Reorganizing Fund shareholder will become the owner of shares of the Surviving Fund having a total NAV equal to the total NAV of his or her holdings in the Reorganizing Fund on the date of the Reorganization, and the assets to be acquired by the Surviving Fund will have a total NAV equal to the total NAV of the Reorganizing Fund.... The Board considered that the Reorganization does not require, and would be completed without incurring the costs associated with, holding a special meeting of the Reorganizing Fund's shareholders."
They state, "After careful consideration of these and other factors, the Board determined that the proposed Reorganization is in the best interests of the Reorganizing Fund and the Surviving Fund and that the interests of the existing shareholders of the Reorganizing Fund and the Surviving Fund would not be diluted as a result of the Reorganization. Please see the section entitled "Summary–Reasons for the Reorganization" in the attached Prospectus/Information Statement for more information regarding the Board's considerations in determining to approve the Reorganization."
Finally, the filing asks, "Who is the investment adviser to the Surviving Fund?" It answers, "The investment adviser to both the Reorganizing Fund and the Surviving Fund is Federated Investment Management Company.... In addition, the same portfolio managers are jointly and primarily responsible for the day-to-day management of both the Reorganizing Fund and the Surviving Fund."
For more on recent Prime Institutional MMF liquidations and conversions, see these Crane Data News stories: "DWS Liquidating ESG Liquidity Fund, 7th Prime Inst to Exit" (5/22/24), "Dreyfus Files to Liquidate Cash Management Prime Inst MMF, Tax Exempt" (5/13/24), "Goldman Files to Liquidate Prime Inst MMFs; Barron's: MMFs Tempting" (4/22/24), "Federated Liquidating Money Mkt Trust" (4/1/24), "Vanguard Market Liquidity Fund Files to Go Government, Joins American" (3/20/24) and "American Funds Central Cash to Convert to Govt to Avoid Liquidity Fees" (2/6/24).
