We've seen 15 Prime Institutional money funds with over $250 billion in assets (over 1/3 of the sector) announce exits from the space to date, but now comes a decision by one to live with the new rules in a unique way. A Prospectus Supplement for First American's Institutional Prime Obligations Fund" tells us, "In July 2023, the U.S. Securities and Exchange Commission ('SEC') adopted amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended. Among other requirements, the Amendments will require institutional prime and institutional tax-exempt money market funds, including First American Institutional Prime Obligations Fund, to impose a mandatory liquidity fee when such funds experience daily net redemptions that exceed 5% of net assets based on net redemption information available within a reasonable period after the last computation of each such fund's net asset value on a particular day. Funds subject to the mandatory liquidity fee will not be required to apply such fee if the amount of the fee is less than 0.01% of the value of the shares redeemed."
It explains, "The mandatory liquidity fee requirement will become effective on October 2, 2024. In calculating the amount of the mandatory liquidity fee under Rule 2a-7, the fee amount must be based on a good faith estimate, supported by data available, of the costs the fund would incur if it sold a pro rata amount of each security in its portfolio to satisfy the amount of net redemptions. The calculation must factor in the spread costs and market impacts for each portfolio security, as described further in this supplement. A fund may assume a market impact of zero for its daily and weekly liquid assets."
A section titled, "Fund to Invest Solely in Daily or Weekly Liquid Assets," says, "In consideration of the mandatory liquidity fee requirement, the fund intends to transition its portfolio to invest solely in securities that are considered daily or weekly liquid assets under Rule 2a-7 (typically maturing in five business days or less or subject to a demand feature that is exercisable within five business days). Although it has no current intention of investing in securities maturing in greater than five business days, the fund may do so in accordance with the requirements of Rule 2a-7. Between the date of this supplement and the Compliance Date, the fund will increasingly transition its portfolio to securities that are considered daily or weekly liquid assets, so that the portfolio will be invested solely in such securities on or prior to the Compliance Date."
Under the heading, "Fund Subject to Discretionary and Mandatory Liquidity Fee Requirements," the filing tells us, "As noted in the prospectus supplement dated April 1, 2024, under authority delegated to the adviser by the fund's board of trustees, the adviser is also permitted to impose a liquidity fee on redemptions (up to 2%) if it determines it is in the best interests of the fund to impose a liquidity fee (the 'discretionary liquidity fee'). While the fund will be subject to the new mandatory liquidity fee requirement, to the extent the fund invests solely in securities that are considered daily or weekly liquid assets as intended, the market impact factor to be used in the calculation of the amount of the mandatory liquidity fee will be zero and, therefore, no liquidity fee will be required to be assessed. See 'Shareholder Information -- Additional Information on Purchasing and Redeeming Fund Shares -- Liquidity Fees,' included in this supplement, for more information on the discretionary and mandatory liquidity fees."
The filing also comments that the "Fund Will Have a Single Net Asset Value Calculation Time," stating, "Additionally, effective September 3, 2024, the fund will calculate the net asset value (NAV) per share of each share class of the fund at 2:00 p.m. Central time on each business day that the fund is open. As of this date, the fund will no longer calculate its NAV per share at 8:00 a.m. Central time or 11:00 a.m. Central time."
Under "Principal Investment Strategies," First American writes, "Institutional Prime Obligations Fund invests in high-quality short-term debt obligations, including: commercial paper; U.S. dollar-denominated obligations of domestic and foreign banks with total assets of at least $500 million (including fixed and variable rate certificates of deposit, time deposits, and bankers’ acceptances); non-convertible corporate debt securities; securities issued by the U.S. government or one of its agencies or instrumentalities; municipal securities, including variable rate demand notes, commercial paper, and municipal notes and other short-term municipal obligations; and repurchase agreements."
They add, "The fund intends to invest solely in securities that are considered daily or weekly liquid assets under Rule 2a-7 under the Investment Company Act of 1940, as amended (the '1940 Act') (typically maturing in five business days or less or subject to a demand feature that is exercisable within five business days). Although it has no current intention of investing in securities maturing in greater than five business days, the fund may do so in accordance with the requirements of Rule 2a-7."
For more, see the Crane Data News updates, "Schwab, JPM, Meeder Announce Prime Inst Conversions to Government" (7/18/24), "Invesco Files to Liquidate Prime Inst MMFs; UBS MF Converting to Retail" (6/13/24), "BlackRock Liquidates TempFund, LEAF" (6/10/24), "Federated Hermes Merging Prime Inst Money Funds; Prime Value To POF" (6/6/24), "Allspring to Merge Heritage MMF Into Govt MMF; UBS Converting Fund" (6/3/24), "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).
In other news, Investment News writes again on brokerage sweep accounts in "Higher rates on cash could cost LPL $380 million: analyst." They explain, "After a tumultuous week for broker-dealers facing higher yields on client cash, one securities analyst on Friday said that higher interest rates on clients' cash held in advisory accounts may cost LPL Financial Holdings Inc. as much as $380 million, shaving off $3.80 per share on the company's earnings in the future. The analyst, Jeff Schmitt of William Blair Equity Research, wrote the note about LPL in the wake of the company being sued by a client on Wednesday in federal court in San Diego, with the claim alleging that LPL's cash sweep program allows the company to unjustly enrich itself, which potentially constitutes a breach of fiduciary duty."
The article says, "Last Friday, Wells Fargo & co. said it expected to take a hit to spread income this year after recently raising sweep rates in client advisory accounts. Morgan Stanley on Tuesday said that, like Wells Fargo, it was raising rates on clients' cash in advisory sweep accounts. With LPL, Raymond James Financial Inc. and Ameriprise Financial Inc. all set to report earnings for the quarter ending in June next week, one senior industry executive expressed his concern over how significant the impact the repricing of clients' cash could be for each firm."
The analyst Schmitt wrote, "We make no claims on the validity of the lawsuit at this stage and await additional information from the company during its earnings call next Thursday. However, to the extent LPL does have to increase sweep rates on advisory accounts, we wanted to provide our initial thoughts on the company's potential exposure." The piece adds, "He estimated that LPL had about $23 billion of client cash in advisory accounts." (See also our July 19 News, "WSJ, Investment News on Brokerage Deposit, Advisory Sweep Pressures.")
