We were reminded by Bob Plaze, Director of the SEC's Division of Investment Management, that money funds should continued to annualize using 365 days even during a leap year (like the current one) with 366 days. Plaze cites a 1984 by former SEC staffer Gene Gohlke to former ICI Chairman Matt Fink, which says, "It has come to our attention that some money market funds in calculating their advertised yields are using a multiplier of 366/7 rather than the 365/7 multiplier specified by applicable Commission rules. As we learn of such funds we are sending them the attached letter."
The 1984 letter explains, "We have been informed that a number of money market funds, including the Registrant, have recently begun advertising and publishing annualized 7-day yield quotations based on a multiplier 366/7 rather than the 365/7 multiplier specified by applicable Commission rules. Apparently, those funds using the 366 multiplier are doing so because 1984 is a leap year with 366 days." (Money funds must include an annualized 7 day yield in any performance advertising. The formula is: 7-Day Yield = Past 7 days of dividends * 365 * 100 / 7.)
It explains, "Computations for advertised yields of money market mutual funds were standardized by pertinent provisions of Forms N-1 and N-1A and Rule 482. Rule 482 does not provide for the use of 366 days in leap years (and no comments were received during the relevant comment periods suggesting that such a provision was required). The use by some funds of a 366 day multiplier impairs the comparability of advertised yield quotations, which was the reason for their standardization in the first place. Therefore, the staff believes that all money market funds should adhere to the prescribed formula in computing their advertised yields. If the Registrant is using a 366 day multiplier, please switch back to 365 as soon as possible."
In other news, BlackRock, the 4th largest money fund manager globally (with $436 billion) and the 7th largest (with $146 billion) U.S. money fund manager (according to Crane Data's Money Fund Intelligence XLS and MFI International), released its 4th quarter earnings and hosted a conference call last Thursday. While there wasn't as much discussion of money market funds as usual, there was a brief exchange in the Q&A section.
Citigroup Analyst Bill Katz commented, "[Y]ou didn't really discuss the money market reform. [I'm] sort of curious where your thoughts are today, and what you think the most likely outcome will be for the industry given some of the dialogue between floating rate and NAV, capital buffers and redemption restrictions."
BlackRock CEO Larry Fink responded, "I think it's really fluid. We've had conversation with different regulators, and I don't think there's a consistent view from all the different regulators at the moment. But there is a consistent view that there must be some change.... I think every regulator says we need to find ways to stabilize society from the risk of money market funds, and we can't have the same risks that we exhibited in 2008. How you implement, whether as you suggested variable NAV or capital or some form of restrictions, each, I would say there are biases by the different regulators. So I don't know where it's going to come out."
He continued, "We have been a strong advocate of having capital put aside.... We believe no different than the Basel standards, whereby you have multi-years to build your capital standard. From our vantage point, the regulators should have allow managers to build capital associated with the money market fund business over many years, maybe reserving a component of the fees to build that capital buffer. I think it'll make the money market fund industry a stronger one. And so we have been, for 2, 3 years, a strong advocate of that."
Finally, Fink added, "As you know, at this moment, FASB does not allow us to retain any of our fees for a capital buffer. So ... right now, under accounting standards, we can't do that. So we need changes in not only regulatory, but we need changes in accounting to get that done. And we have been fighting our -- this is one of the issues that I've always had with the accounting standard board related to why can't we have capital buffers. But we have not been permitted. So we'll see.... I really don't have a final view, but we are advocating for change."
