On Monday, a "Notice of proposed rulemaking" was published by the Office of the Comptroller of the Currency on "Short-Term Investment Funds," or "STIFs". The proposal, which requests comments by June 8, 2012 (send to: regs.comments@occ.treas.gov), says, "The OCC is requesting comment on a proposal that would revise the requirements imposed on banks pursuant to 12 CFR 9.18(b)(4)(ii)(B), the short-term investment fund (STIF) rule (STIF Rule). The proposal would add safeguards designed to address the risk of loss to a STIF's principal, including measures governing the nature of a STIF's investments, ongoing monitoring of its mark-to-market value and forecasting of potential changes in its mark-to-market value under adverse market conditions, greater transparency and regulatory reporting about a STIF's holdings, and procedures to protect fiduciary accounts from undue dilution of their participating interests in the event that the STIF loses the ability to maintain a stable net asset value (NAV)."

The OCC writes, "A Collective Investment Fund (CIF) is a bank-managed fund that holds pooled fiduciary assets that meet specific criteria established by the OCC fiduciary activities regulation at 12 CFR 9.18. Each CIF is established under a "Plan" that details the terms under which the bank manages and administers the fund's assets. The bank acts as a fiduciary for the CIF and holds legal title to the fund's assets. Participants in a CIF are the beneficial owners of the fund's assets.... CIFs are designed to enhance investment management capabilities by combining assets from different accounts into a single fund with a specific investment strategy. By pooling fiduciary assets, a bank may lower the operational and administrative expenses associated with investing fiduciary assets and enhance risk management and investment performance for the participating accounts."

They explain, "A STIF is a type of CIF that permits a bank to value the STIF's assets on an amortized cost basis, rather than at mark-to-market value, for purposes of admissions and withdrawals. This is an exception to the general rule of market valuation. In order to qualify for this exception, a STIF's Plan must require the bank to: (1) Maintain a dollar weighted average portfolio maturity of 90 days or less; (2) accrue on a straightline or amortized basis the difference between the cost and anticipated principal receipt on maturity; and (3) hold the fund's assets until maturity under usual circumstances. These conditions are designed to protect fiduciary accounts from the risk of dilution of the value of their participating interests. In particular, by limiting the STIF's investments to shorter-term assets and generally requiring those assets to be held to maturity, realized differences between the amortized cost and mark-to-market value of the assets will be rare, absent atypical market conditions or an impaired asset."

The Proposal continues, "The OCC's STIF Rule governs STIFs managed by national banks. In addition, regulations adopted by the Office of Thrift Supervision, now recodified as OCC rules pursuant to Title III of the Dodd-Frank Wall Street Reform and Consumer Protection Act, have long required federal savings associations (FSAs) to comply with the requirements of the OCC's STIF Rule. Thus, the proposed revisions to the national bank STIFs Rule would apply to a federal savings association that establishes and administers a STIF fund. As of December 31, 2011, there was approximately $112 billion invested in STIFs administered by national banks [15 total] and there were no STIFs administered by FSAs reported."

It says, "The OCC is proposing to revise the requirements of the STIF Rule. While fiduciary accounts participating in a STIF have an interest in the fund maintaining a stable net asset value (NAV), ultimately the participating interests remain subject to the risk of loss to a STIF's principal. The OCC is proposing additional safeguards designed to address this risk in several ways. These include measures governing the nature of a STIF's investments, ongoing monitoring of the STIF's mark-to-market value and assessment of potential changes in its mark-to-market value under adverse market conditions, greater transparency and regulatory reporting about the STIF's holdings, and procedures to protect fiduciary accounts from undue dilution of their participating interests in the event that the STIF loses the ability to maintain a stable NAV."

The OCC explains, "There are other types of funds that seek to maintain a stable NAV. By far, the most significant of these from a financial market presence standpoint are "money market mutual funds" (MMMFs). These funds are organized as open-ended management investment companies and are regulated by the U.S. Securities and Exchange Commission ("SEC") pursuant to the Investment Company Act of 1940, particularly pursuant to the provisions of SEC Rule 2a–7 thereunder ("Rule 2a–7"). MMMFs seek to maintain a stable share price, typically $1.00 a share. In this regard, they are similar to STIFs."

They add, "However, there are a number of important differences between MMMFs and STIFs; most significantly, MMMFs are open to retail investors, whereas, STIFs only are available to authorized fiduciary accounts. MMMFs may be offered to the investing public and have become a popular product with retail investors, corporate money managers, and institutional investors seeking returns equivalent to current short-term interest rates in exchange for high liquidity and the prospect of protection against the loss of principal. In contrast to the approximately $112 billion currently held in STIFs administered by national banks, MMMFs, as of December 2011, held approximately $2.7 trillion dollars of investor assets."

The Notice states, "Based on the market turmoil from 2007 through 2009 and the work done by the PWG, among others, the SEC adopted amendments to Rule 2a–7 to strengthen the resilience of MMMFs. The OCC's proposed changes to the STIF Rule are informed by the SEC's revisions to Rule 2a–7, but differ in certain respects in light of the differences between the money market mutual fund as an investment product and the STIF, e.g., a bank's fiduciary responsibility to a STIF and requirements limiting STIF participation to eligible accounts under the OCC's fiduciary account regulation at 12 CFR part 9."

It continues, "The proposed changes to the STIF Rule would enhance protections provided to STIF participants and reduce risks to banks that administer STIFs. The proposed changes add new requirements or amend existing requirements that a CIF must meet to be considered a STIF and value assets on an amortized cost basis. The OCC believes many banks that offer STIFs are already engaged in the risk mitigation efforts set forth in this proposed rule."

OCC explains, "The proposal would amend the "dollar-weighted average portfolio maturity" requirement of the STIF Rule to 60 days or less.... The proposal would add a new maturity requirement for STIFs, which would limit the dollar-weighted average portfolio life maturity to 120 days or less.... In determining the dollar-weighted average portfolio maturity of STIFs under the current rule, national banks generally apply the same methodology as required by the SEC for MMMFs pursuant to Rule 2a–7."

It adds, "To ensure that banks managing STIFs include practices designed to limit the amount of credit and liquidity risk to which participating accounts in STIFs are exposed, the proposal would require adoption of portfolio and issuer qualitative standards and concentration restrictions.... The proposal would require a bank managing a STIF to adopt shadow pricing procedures. These procedures require the bank to calculate the extent of the difference, if any, between the mark-to-market NAV per participating interest using available market quotations (or an appropriate substitute that reflects current market conditions) from the STIF's amortized cost value per participating interest.... The proposal would require a bank managing a STIF to adopt procedures for stress testing the fund's ability to maintain a stable NAV for participating interests."

It says, "The proposal would require banks managing STIFs to disclose information about fund level portfolio holdings to STIF participants and to the OCC within five business days after each calendar month-end. Specifically, the bank would be required to disclose the STIF's total assets under management (securities and other assets including cash, minus liabilities); the fund's mark-to- market and amortized cost NAVs, both with and without capital support agreements; the dollar-weighted average portfolio maturity; and dollar-weighted average portfolio life maturity as of the last business day of the prior calendar month. The current STIF Rule does not contain a similar disclosure requirement."

The Proposed Rule adds, "Also, for each security held by the STIF, as of the last business day of the prior calendar month, the bank would be required to disclose to STIF participants and to the OCC within five business days after each calendar month-end at a security level: (1) The name of the issuer; (2) the category of investment; (3) the Committee on Uniform Securities identification Procedures (CUSIP) number or other standard identifier; (4) the principal amount; (5) the maturity date for purposes of calculating dollar-weighted average portfolio maturity; (6) the final legal maturity date (taking into account any maturity date extensions that may be effected at the option of the issuer) if different from the maturity date for purposes of calculating dollar-weighted average portfolio maturity; (7) the coupon or yield; and (8) the amortized cost value."

Finally, the OCC writes, "The proposal would require a bank that manages a STIF to notify the OCC prior to or within one business day after certain events. Those events are: (1) Any difference exceeding $0.0025 between the NAV and the mark-to-market value of a STIF participating interest based on current market factors; (2) when a STIF has re-priced its NAV below $0.995 per participating interest; (3) any withdrawal distribution-in-kind of the STIF's participating interests or segregation of portfolio participants; (4) any delays or suspensions in honoring STIF participating interest withdrawal requests; (5) any decision to formally approve the liquidation, segregation of assets or portfolios, or some other liquidation of the STIF; and (6) when a national bank, its affiliate, or any other entity provides a STIF financial support, including a cash infusion, a credit extension, a purchase of a defaulted or illiquid asset, or any other form of financial support in order to maintain a stable NAV per participating interest.... The proposal would require a bank managing a STIF to adopt procedures for suspending redemptions and initiating liquidation of a STIF as a result of redemptions."

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