The Investment Company Institute sent a letter to the IRS seeking an update on MMF reform related issues, we learned from mutual fund news source Fund Action. FA's brief, entitled, "IRS Urged to Hasten MMF Guidance," says, "As the Oct. 16 deadline for prime money market funds to float net asset values or convert to government funds is getting closer, the industry is getting a bit restless with the Internal Revenue Service. So far, the IRS hasn't come up with regulatory actions firms say are needed to cope with the tax consequences of money fund reform." We review the letter below. Also, we have updates on the launch of a new Goldman Sachs Institutional Tax-Exempt fund, on the designation of several USAA Muni money funds as Retail, and on the surprising jump in Tax-Exempt MMF yields.
ICI's March 9 letter, authored by Associate General Counsel Karen Lau Gibian, and addressed to IRS Associate Chief Counsel (Financial Institutions and Products) Helen Hubbard, states, "The Investment Company Institute wishes to withdraw its prior request for guidance permitting money market funds to treat certain reorganizations as tax-free under section 368. We understand that none of our members currently plan to utilize such a strategy in preparation for compliance with the Securities and Exchange Commission money market fund rule adopted in 2014. Given the number of guidance requests pending before the Internal Revenue Service and the Treasury Department, we hope that withdrawing this request will allow the government to focus on more important issues."
It adds, "With respect to the remaining money market fund guidance requests, we wish to reiterate the industry's priorities. First, the issue for which most immediate guidance is necessary is the diversification of variable insurance product money market funds under section 817(h). Given the quickly approaching compliance deadline for money market fund rule, mutual fund complexes need guidance on this issue before they can determine whether and how to continue using money market funds in their variable insurance products. In the absence of such guidance, it is unclear whether the use of money market funds in such a way will remain a viable strategy." (Note: In Crane Data's "Prime to Government" spreadsheet, we count, among the 74 funds "going Government" to date, almost 20 that are variable annuity or insurance company related MMFs.)
The ICI letter continues, "The second issue for which immediate guidance is necessary is the issue of adviser contributions. Again, fund complexes currently are deciding how to manage their existing money market funds in anticipation of the compliance date of the money market fund rule. The use of adviser contributions may be an important tool necessary to ease the transition for investors from stable net asset value to floating NAV money market funds."
It concludes, "Finally, we note that it remains vitally important to the success of the new SEC rule that the proposed regulations under sections 446 and 6045 be finalized. If the proposed NAV method and the exemption from information reporting are not formally adopted, it is unclear how the new floating NAV rules will work. Although the proposed regulations permit shareholders and funds to rely upon the guidance therein prior to the publication of final regulations, the industry clearly would prefer the certainty that final regulations would provide." (See our July 30, 2014 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal.")
In December, Goldman Sachs Asset Management issued a press release stating their plans to designate the Goldman Sachs Financial Square Tax-Free MMF as Retail and change its name to the Goldman Sachs Investor Tax-Exempt MMF around March 31, 2016. (See our Dec. 21, 2015 News, "Goldman Sachs AM Details More MMF Changes, Portal Enhancements.") These changes occurred last week. Our April MFI XLS will show the fund as the Goldman Sachs Investor Tax-Exempt MMF.
In that same December story and press release, GSAM announced that it was planning to launch a new Tax-Exempt Institutional fund, the Goldman Sachs FS Tax-Exempt MMF. An April 4 SEC filing explains, "Goldman Sachs Financial Square Tax-Exempt Money Market Fund (the "Fund"). Supplement dated April 1, 2016 to the Prospectus, Summary Prospectuses, and Statement of Additional Information. The Board of Trustees of the Goldman Sachs Trust has approved the designation of the Fund as an "institutional" money market fund under Rule 2a-7 under the Investment Company Act of 1940, effective on the earlier of October 14, 2016 or upon 30 days' prior written notice to investors."
It adds, "As an institutional money market fund, the Fund will be required to price and transact in its shares at a net asset value reflecting market-based values of its portfolio holdings. The floating NAV will need to be rounded to four decimal places (e.g., $1.0000). In addition, on or after the Effective Date, the Board will be permitted to impose a liquidity fee on redemptions from the Fund (up to 2%) or temporarily restrict redemptions from the Fund up to 10 business days during any 90-day period, in the event that the Fund's weekly liquid assets fall below the required regulatory thresholds."
Also, USAA filed a Prospectus Supplement designating the USAA California, USAA New York, USAA Virginia, and USAA Tax-Exempt MMFs as Retail. The filings say, "In July 2014, the Securities and Exchange Commission (SEC) adopted amendments to money market fund regulations that will affect the manner in which the Fund and other money market funds are structured and operated. Under the 2014 Amendments, money market funds that qualify as "retail" (Retail MMFs) or "government" (Government MMFs) will be permitted to continue to utilize amortized cost to value their portfolio securities and to transact at a stable $1 net asset value (NAV) per share as they do today. The Fund currently intends to qualify as a Retail MMF no later than October 14, 2016."
Finally, we are seeing signs of life in the Tax-Exempt money fund market. Our April MFI XLS shows that the average 7-Day Yield for our Crane Tax Exempt Index is 0.03%, triple (up 2 basis points from) the previous month. On the rise in Tax-Exempt yields and the SIFMA Index, JP Morgan Securities' Alex Roever, "[I]n the municipal markets, this week's setting of 40bp for the SIFMA index marked its cheapest level of the post-crisis era and highest ratio of 3m Libor (64%) since mid-2013. We continue to believe that SIFMA's rise is due in large part to effects stemming from MMF reform and tax season cyclicals. While there may be room for SIFMA to drift modestly higher, our derivative strategists believe the worst of the sell off is likely behind us as cross-over demand from prime funds should help to stabilize the VRDN complex."
