The Office of the Comptroller of the Currency issued a Bulletin entitled, "Compliance With SEC Money Market Fund Rules by Bank Fiduciaries, Deposit Sweep Arrangements, and Bank Investments," which "describes how the SEC's MMF rules are likely to affect banks, addresses the product and process changes that affected banks should consider, and highlights potential compliance, liquidity, operational, and strategic risks." Also, we review a report from Financial Advisor magazine on a Senate Subcommittee hearing on long-shot legislation to change money fund rules. (See our May 18 News, "Stable NAV Money Fund Legislation Has Subcommittee Hearing Says BB.")
The release, which we learned about from the ABA Banking Journal, says, "The Office of the Comptroller of the Currency (OCC) is issuing this bulletin to highlight actions that national banks and federal savings associations (collectively, banks) should take and factors that banks should consider based on the U.S. Securities and Exchange Commission's (SEC) revised money market fund (MMF) rules in effect now and going into effect. Although these rules directly apply only to MMFs, the rules indirectly affect banks that make MMFs available to their customers through their fiduciary and custody activities, bank programs that automatically sweep funds between deposit accounts and MMFs, banks that invest in MMFs, and banks involved in any of these activities will likely be affected by compliance, liquidity, operational, and strategic risks related to the SEC’s revised rules."
The OCC explains, "Banks that make MMFs available to customers through their fiduciary and custody activities or through bank programs that automatically sweep funds between deposit accounts and MMFs, or that own MMF shares, should assess the compliance, operational, and investor liquidity implications of the 2014 MMF rules. These regulatory changes affect a broad range of bank activities, including discretionary and directed fiduciary accounts, retirement accounts, corporate trust relationships, custody accounts, deposit sweep arrangements, and MMF investments held on a bank's balance sheet. Banks should monitor the changes initiated by MMF complexes as these complexes announce which specific funds will be characterized as government, retail, or prime. Banks should determine how these changes might affect the funds that banks make available to their customers or hold on their own balance sheets. Banks should develop plans for any resulting bank product changes that include tracking and reporting while the changes are being implemented."
On Retail MMFs, they state, "The SEC ... notes that although it is a fund's obligation to satisfy the retail fund definition, an intermediary could nonetheless be held liable for violations of other federal securities laws, including the antifraud provisions, when funds of institutional investors are improperly funneled into retail MMFs. As a result, banks that make MMFs available to customers through omnibus accounts should have processes and systems to accurately determine and report which underlying accounts are eligible to purchase specific types of MMFs. Banks also should ensure that accounts that do not have beneficial owners who are natural persons are not allowed to purchase retail MMF shares whether through an omnibus account maintained by the bank or otherwise."
The Bulletin continues, "When developing policies and related procedures, banks should seek advice of counsel to determine which specific types of accounts are eligible to purchase retail MMFs. Banks should have effective processes to determine whether each MMF that they make available qualifies as government, retail, or prime, and they should code their systems accordingly."
On "Redemption Gates and Liquidity Fees," it says, "Banks that make retail and prime funds available to their customers should establish effective processes and system capabilities to implement redemption gates and impose liquidity fees at the account level if and when an MMF implements these tools. Banks also should consider the potential effect on bank liquidity if the banks make funds available to clients' accounts before those funds are actually received from the MMFs, and the MMFs subsequently impose redemption gates that temporarily restrict payment of those customer funds."
The OCC adds, "The SEC has stated its belief that prime MMFs should be able to provide intraday liquidity, meaning that these MMFs would establish a process to strike a NAV at multiple, predetermined times each day. These characteristics, which would likely pose numerous operational challenges, make it unclear whether banks will be able to continue to offer prime MMFs as sweep vehicles for deposit sweep arrangements or for a bank’s fiduciary and custody accounts. Banks that make prime MMFs available to their fiduciary and custody clients will need the system capabilities to report and process transactions to four decimal places. They will also need to establish processes to submit and settle trade orders in the modified time frames established by the funds."
The guidance also says, "When establishing processes for the initial and ongoing due diligence for MMFs approved for use as sweep vehicles or as part of the cash equivalent allocation in fiduciary accounts, banks should continue to review the prospectuses and Statements of Additional Information for the MMFs, as well as Form N-MFP. Banks should regularly monitor MMF websites for disclosures related to the funds' liquidity, market-based NAV rounded to the fourth decimal place, and support from a sponsor or fund affiliate to ensure that the MMFs selected by the bank meet the banks' ongoing standards for fiduciary account sweep vehicles or cash equivalent assets."
It continues, "Banks that offer sweep arrangements between deposit accounts and MMFs should assess the respective processing characteristics, system requirements, compliance requirements, and liquidity characteristics of government, retail, and prime MMFs. Based on operational and liquidity considerations, most banks will likely conclude that once the SEC's MMF reforms are fully implemented, government funds are the only practical option for bank deposit to MMF sweep arrangements.... Banks that make changes to the deposit sweep vehicles and arrangements they offer should determine whether updated disclosures are required under the Federal Deposit Insurance Corporation's disclosure rules pertaining to sweep accounts."
Finally, the Bulletin summarizes, "The OCC expects banks that make MMFs available to customers through their fiduciary and custody activities or through deposit to MMF sweep programs, and banks that own MMF shares, to actively monitor rule changes and SEC guidance in this area. The OCC also expects banks offering this product to bank customers to track specific changes initiated by MMF complexes as these complexes determine whether each of the funds they offer will be government, retail, or prime. Banks should assess how these rule changes and the resulting changes made by the fund complexes affect bank fiduciary and custody activities, deposit sweep programs, and bank investments. Banks should determine what changes are needed and develop and implement comprehensive plans for incorporating these product changes into their policies and systems."
In other news, an article in Financial Advisor, entitled, "Senators Spar Over Floating NAV For Money Market," explains, "Senate Banking Committee members sparred Thursday over a proposal to bar the Securities and Exchange Commission from imposing a variable price (called a floating net asset value) on any money market mutual fund.... A co-sponsor of a bill to create a ban, New Jersey Democratic Senator Robert Menendez said local government officials are complaining the floating NAV will increase their borrowing costs while investors and fund managers worry it will significantly reduce the viability of money market funds as tools to invest money short term."
It continues, "Noting that upheaval in the money fund market helped precipitate the financial crisis, Virginia Democratic Senator Mark Warner said removing the SEC's ability to require floating NAVs on the industry would restore a false sense of security the investments are risk-free. He said the bill has little chance of passage.... In defense of the legislation, Pennsylvania Republican Senator Pat Toomey noted after the Reserve Primary Fund "broke the buck" when its underlying shares fell below $1 in value, investors received 99 cents on the dollar."
