Yet another Tax Exempt money market mutual fund is giving up the ghost. The $2.0 billion ($3.3B as of a month ago) Federated Tax Free Money Market Fund filed to liquidate, the latest in a long line of municipal exits. (See our August 4 News, "Muni MMFs "Decimated" by Rules Says Bloomberg; More Liquidations," and our Feb. 24 "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche.") This latest T-E liquidation filing says, "On August 12, 2016, the Board of Trustees (the "Board") of Money Market Obligations Trust approved a Plan of Liquidation for Tax-Free Money Market Fund (the "Fund") pursuant to which the Fund will be liquidated on or about September 23, 2016 (the "Liquidation" or the "Liquidation Date"). In approving the Liquidation, the Board determined that the liquidation of the Fund is in the best interests of the Fund and its shareholders." Also this week, Wilmington Prime merged into Wilmington U.S. Government, and Nicholas MMF and Putnam Liquidity MMF liquidated. We review the latest money fund carnage below, and we also excerpt from a recent article on Investment Policies.
Federated's prospectus supplement continues, "Accordingly, the Fund may begin positioning the portfolio of the Fund for liquidation, which may cause the Fund to deviate from its stated investment objective and strategies. It is anticipated that the Fund's portfolio will be positioned into cash and overnight variable rate demand notes on or some time prior to the Liquidation Date. Effective as of the close of business on August 30, 2016, the Fund will be closed to new investors. Investments by existing shareholders may continue until September 22, 2016."
It adds, "Any shares outstanding at the close of business on the Liquidation Date will be automatically redeemed. Such redemption shall follow the procedures set forth in the Fund's Plan of Liquidation. Final dividends will be paid with the liquidation proceeds. Any capital gains will be distributed to shareholders, if necessary, prior to the Liquidation."
The filing explains, "Any time prior to the Liquidation Date, the shareholders of the Fund may redeem their shares of the Fund pursuant to the procedures set forth in the Fund's Prospectus. Shareholders may also exchange their shares of the Fund into shares of the same class of another Federated fund if the shareholder meets the eligibility criteria and investment minimum for the Federated fund for which the shareholder is exchanging."
Wells Fargo Securities' Garret Sloan and Vanessa Hubbard commented on the Tax Exempt space, "The weekly SIFMA index reset last week at 0.46 percent, a gain of 2 basis points over the prior reset and the highest weekly reset since May 2009. The driver of SIFMA continuing to reset at higher levels is assets pulling out of tax-exempt money market funds. Last week, tax-exempt funds lost $11.6 billion in assets, the largest outflow YTD and the largest outflow over the same timeframe (May 2009 to present) outside of a $15.8 billion outflow during the tax season in 2014. Tax-exempt funds ended last week at $173.0 billion, down from $184.6 billion the prior week and down 33.0 percent since the start of the year." (For more on the T-E outflows, see Monday's News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps.")
Finally, it says, "If you are a taxable shareholder, the Liquidation of the Fund will be a recognition event. In addition, any income or capital gains distributed to shareholders prior to the Liquidation Date or as part of the liquidation proceeds will be subject to tax. All investors should consult with their tax advisor regarding the tax consequences of this Liquidation."
In other news, "Investments and Wealth Monitor features an article entitled, "The Impact of New Money Market Fund Regulations on Investment Policies." Authors Anthony Carfang and Cathryn Gregg write, "In July 2014, the U.S. Securities and Exchange Commission (SEC) issued new regulations for U.S.–domiciled money market funds (MMFs). The new regulations primarily impact institutional prime and municipal MMFs; government and U.S. Treasury MMFs (both retail and institutional) are exempt from these structural reforms. A two-year transition period allows fund companies and investors time to adapt, with implementation scheduled for October 2016."
They explain, "More corporate investors are aware that new MMF regulations have been approved and have some understanding of the impact. However, most are not yet sure whether their investment activities will be affected and whether they need to change something to continue investing in MMFs. This article presents a four-step process to deal with the new regulations, according to the following thought sequence: Understand the new regulations, Examine your current investment policies, Have a conversation with your chief financial officer, and Develop an action plan."
In a section entitled, "Examine your current investment policies," the article tells us, "Once you understand the new money fund regulations, the next step is to examine your investment policies. Most companies and institutions maintain approved investment policies at either a board level or with the chief financial officer (CFO). Some policy statements are broad and others are more prescriptive. To help you evaluate your own policies, we examined more than 20 investment policy statements from our corporate clients representing a cross section of industries, revenue, and portfolio size."
Its conclusion says, "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 the corporate treasurer views this issue and whether the treasurer will continue investing in MMFs."
Finally, the authors write, "It makes sense to have a discussion about the MMF value proposition constancy, the parallels between post-change MMFs and other permitted investments, and the continued valuable role you see for MMFs in your firm's short-term investment strategy.... After examining a large representative sample of our clients' investment policies, we conclude that most companies will not require formal policy changes to continue investing in institutional prime or municipal MMFs."
