Treasury Strategies just published a white paper called, "Money Market Fund Regulatory Changes: The Impact of 2014 Regulations on Investment Policies," which examines what corporate treasurers need to know about money market fund reform. The 20-page paper was sponsored by Federated Investors, who wrote the introduction. They tell us, "Federated Investors' corporate clients are asking how these regulations impact them: What is needed to "adapt" to these new regulations? And must our investment policies be revised? We asked Treasury Strategies, the well-respected treasury management consulting firm, to help our clients address this question. This paper represents their suggested approach for corporate investors who are currently permitted to use Institutional Prime and Municipal MMFs in their short-term investment Portfolios."
Section I of the paper is an overview of the 2014 MMF reforms called "Understand the New Rules." Section II says "Examine Your Current Investment Policies" to make sure that money funds are still permitted after the implementation of new money fund rules. Section III, "Have a Conversation with Your CFO," talks about how to discuss the value proposition of MMFs.
Section III says, "Based on the policies we reviewed, we think few companies will have to formally change their investment policies to continue investing in MMFs. However, even if this is the case for your firm, it is certainly wise to brief your CFO (or head of the Investment Policy Committee or other appropriate person) about continuing to use MMFs. We suggest this discussion center around three ideas: The value proposition of using MMFs has not changed; Even with changes, MMFs still compare favorably with other permitted investments; New products are likely to be introduced and may need to be incorporated in the investment policy."
To the latter point, the paper says, "A logical consequence of the new MMF regulations is that fund companies, banks and other investment firms will devise new short-term investment products aimed at the corporate investor. We expect most new products will have features similar to money funds but with some structural differences. Some may be separately managed accounts (SMAs) with investment characteristics of money funds. Others may be commingled cash pools, again with MMF characteristics. Still others might register with the SEC as a type of ultra-short bond fund."
The paper continues, "Funds taking advantage of the conditions of the private offering exemption will be able to offer their units at $1.00 per share. In addition, funds that undertake to hold only portfolio securities with maturities of under 60 days may affect purchases and redemptions at $1.0000 per share, so long as each security's amortized cost is approximately the same as its market value, and the fund is not required to dispose of securities for more or less than their amortized cost.... To include a new product in your investment policy, it may suffice to incorporate "2a-7-like" language into the investment policy statement."
In section 4, "Develop an Action Plan," Treasury Strategy says, "Having talked with your CFO, you will hear four possible outcomes to the question of what is required to continue investing in Institutional Prime and Municipal MMFs. 1. No policy changes needed; continue investing as usual. This is straightforward. No change to the investment policy statement is required. Based on the investment policies we reviewed, we believe this may be the case for most U.S. corporations.... 2. No policy changes needed, but let's inform our Board about the regulatory changes.... 3. Let's tweak the policy to allow continued use of MMFs. If any of the new MMF attributes make them "prohibited investments" as specified in your policy, you need to update or eliminate that language."
The fourth possible outcome is "Let's tweak the policy to allow for new managers or new products." It says, "As discussed earlier, it is likely that during the two-year implementation period, several new 2a-7-like products will be developed. If your policy is not sufficiently broad, now would be a good time to modify it. What you choose to include here is a matter of your company's preference."
In summary, the paper comments, "Regulatory changes to Institutional Prime and Municipal MMFs are far less onerous than we once feared they would be. The value proposition of money funds remains intact, and the U.S. Treasury action will mitigate most, if not all, tax and recordkeeping concerns for the corporate investor. MMF changes have been regularly covered in the financial press, frequently with bits of misinformation or hyperbole. CFOs and Investment Committees are bound to wonder how their corporate treasurer views this issue and whether they will continue investing in MMFs. It makes sense to have a discussion with them about the MMF value proposition constancy, the parallels between post-change MMFs and your other permitted investments, and the continued valuable role you see for MMFs in your firm's short-term investment strategy."
It adds, "Historically, MMFs enjoyed an advantage over other money market instruments from net asset value, tax and recordkeeping perspectives. While some of those advantages are now diminished because of the fluctuating net asset value, MMFs are still on par with most other permissible short-term investments and deposits with respect to safety, liquidity, yield and convenience. Moreover, MMFs still enjoy an advantage over other instruments in terms of liquidity and transparency."
Finally, the piece adds, "The notion that fees and gates are problematic is a red herring. As we show in this report, these provisions provide a fund Board with additional investor protection tools. Further, the fees and gates provisions merely codify for money funds the actual liquidity limitations that exist for all money market instruments and bank deposits in times of market stress. After examining a large representative sample of our clients' investment policies, we conclude that most companies will not require formal policy change to continue investing in Institutional Prime or Municipal MMFs."
