Today, we include more coverage from our recent Bond Fund Symposium conference, which took place in Boston March 23-24. We review the session on Regulations below, which discusses pending liquidity and portfolio disclosure mandates for ultra-short bond funds and also mentions money market funds. Watch for more BFS coverage in the upcoming issues of our Bond Fund Intelligence and Money Fund Intelligence newsletters. (Mark your calendars too for next year's event, which will be March 22-23, 2018, in Newport Beach, Calif. The session recordings, Powerpoints and full conference binder are available to attendees and Crane Data subscribers here.)
Bond Fund Symposium's "Regulatory Update" segment featured Stephen Cohen, a Partner at Dechert LLP, and John Hunt, a Partner at Sullivan & Worcester LLP. Cohen's intro explained, "[We'll] cover recent regulation issues facing the bond fund industry, cover new rules and proposals from the SEC, SEC orders, and [provide an] update on ... litigation as it affects bonds and other money funds." The biggest changes are the "new rules adopted by the SEC relating to liquidity risk management and swing pricing."
He commented on the SEC's "new liquidity risk management program," "In late 2014, early 2015, SEC Chair White announced a new rulemaking initiative impacting the investment management industry. It covered a lot of ground including liquidity risk management, rules on derivatives and form modernization." The "SEC did push this for other funds and it is in fact formed to some extent by their experience with money market funds" and it "will impact the way bond funds in particular are managed with a lot more regulatory scrutiny on the liquidity they have in portfolios."
Cohen explained, "The new rule is Rule 22e-4 under the Investment Company Act of 1940. The purpose of the rule overall is to improve and formalize liquidity risk management programs and reduce the risk associated with large shareholder redemptions, that could impact a fund ability to meet redemptions.... There are several components of a liquidity risk management program under the rule. First is just an overall assessment of a funds liquidity looking at the strategy of the fund ... assessing the need for liquidity in a portfolio."
He added, "The most controversial part is funds will have to classify each and every investment that they make. Bucketed into 1 of 4 categories, highly liquid (securities that can be converted to cash in 3 days), moderately liquid, less liquid and illiquid ... a tremendous undertaking at least initially to get an operational system in place to classify each and every investment that a fund holds into one of these four categories and monitor it at least on a monthly basis.... Another key component of the liquidity risk management rule is the idea funds will have to set a highly liquid investment minimum.... The SEC finally codified a limit that has always been in place at least informally through guidance, a 15% limit on illiquid investments, they defined the term illiquid investments."
On Reporting Modernization, Cohen stated that it "will impact bond funds" and that, "Reporting modernization covers 4 key areas: one is the new adoption of a Form N-PORT. This is a form that all funds, all investment companies except for money market funds. Money market funds of course have Form N-MFP that they file monthly. N-PORT is a form that all funds including bond funds will have to report to the SEC on a monthly basis. It's going to require funds to provide portfolio wide and portfolio level holdings information ... including very detailed information about maturity, yield, etc." They must "file within 30 days of month end and reported quarterly publically on a 60 day lag."
On the "Third Avenue Focused Credit Fund," Hunt told us, "[They] went back to SEC and get an exceptive order essentially to stop the process of liquidation and to be able to do an orderly liquidation of the fund.... This is a very important situation or case especially in light of the liquidity rule.... The liquidity rule is looking at something more long term and the question is whether or not the liquidity rule had been in place would the fund still not have gotten in to the same situation?"
The pair was asked to comment on Ultra Short Bond Funds in particular, and Cohen responded, "Ultra Short-Term Bond Funds have been the focus of SEC staff scrutiny in light of money market fund reforms. In essence, the SEC disclosure staff responsible for reviewing new products has been carefully reviewing short-term bond fund disclosures to ensure that these funds are not trying to market themselves as money market funds, without the need to value with a floating NAV out to four decimal places and without fees and gates. The message from the staff is that if you offer a short-term bond fund that tries to say we do everything in Rule 2a-7, but without the basis point pricing and fees and gates, that is a problem."
Finally, Cohen commented about a panel he did recently with the SEC's Sarah ten Siethoff, "They've actually stopped some funds from launching funds that look too much like money market funds, or at least made them change their disclosures or strategies. She [said] the SEC is beginning the process [of] MMF exam priorities [in] 2017 ... implementation of 2a-7 [to] focus on things they can't see in filings, including stress testing and making sure funds are compliant with ... procedures around fees and gates, [and] more education." Crane asked Cohen, "Is it true we shouldn't count on the anti-regulatory trend in Washington to slow the SEC down?" He answered, "That's right the SEC is still going, working and enforcing rules."
The compliance dates for the Liquidity Risk Management Program are: Fund groups over $1 billion, December 1, 2018; Fund groups less than $1 billion, June 1, 2019. The disclosure requirement begin June 1, 2017 for liquidity and managing redemptions. The compliance dates for Form N-Port include: Fund groups over $1 billion, June 1, 2018, and fund groups less than $1 billion, June 1, 2019.
Once again, Crane Data is also making preparations for our "big show," `Money Fund Symposium, which will be held June 21-23, 2017, at the Atlanta Hyatt Regency. The agenda is now set and registrations are being taken, and we encourage attendees to make hotel reservations soon. We're also now taking registrations for our next European Money Fund Symposium, which will be Sept. 25-26, 2017, in Paris, France. Finally, watch for more details on our next Money Fund University, which will be in Boston, Jan. 19-20, 2018, in coming months. We hope to see you at one of our events in 2017 or 2018!
