Wells Fargo Asset Management, the 7th largest MMF manager with $210 billion, will merge its two "Prime" money market funds, we learned from a new Prospectus Supplement for the $1.5 billion Wells Fargo Cash Investment Money Market Fund. The filing tells us, "In November 2020, the Board of Trustees of Wells Fargo Funds Trust approved the merger of Wells Fargo Cash Investment Money Market Fund into [the $10.8 billion] Wells Fargo Heritage Money Market Fund, two funds within the same fund family.... The Board of the Target Fund believes that this merger will benefit current Target Fund shareholders. In the merger, the Target Fund will transfer all of its assets and liabilities to the Acquiring Fund in exchange for the same class of shares of the Acquiring Fund. The merger is expected to be a tax-free reorganization for U.S. federal income tax purposes. Immediately following the merger of your fund into the Acquiring Fund, you will hold shares of the Acquiring Fund with a dollar value equal to the dollar value of the Target Fund shares you previously held."
It continues, "What do we believe are some key benefits of the fund merger? Among the factors that Wells Fargo Funds Management, LLC considered in recommending the merger were the following: Acquiring fund has a larger asset base and the combined fund will have greater long-term product viability. Factoring in the waivers to which Wells Fargo Funds Management, LLC has contractually committed through May 31, 2022, the annual fund operating expenses after fee waivers of the Acquiring Fund are the same or lower compared to the Target Fund. Wells Fargo Funds Management, LLC serves as the investment manager of the Target Fund and the Acquiring Fund. Wells Capital Management Incorporated is the investment sub-advisor for the Target Fund and the Acquiring Fund."
Wells also asks, "Why has the Board of Trustees approved the merger? In addition to the key benefits described above, among the factors the Board considered in approving the merger were the following: The investment objective and principal investment strategy of the Target Fund is comparable to that of the Acquiring Fund. Shareholders will not bear the Merger-related expenses (other than brokerage and transaction costs associated with the sale or purchase of portfolio securities in connection with the Merger). The merger is expected to be a tax-free reorganization for U.S. federal income tax purposes."
In related news, a new filing for Dreyfus Liquid Assets also involves the merger of Prime MMFs. (See our Nov. 19 News, "Dreyfus Consolidates Money Funds, Sticks w/Prime; OFR Annual Report.") It explains, "As a shareholder of Dreyfus Liquid Assets, Inc., you are being asked to vote on an Agreement and Plan of Reorganization to allow the Fund to transfer all of its assets in a tax-free reorganization to General Money Market Fund, Inc. (to be restructured and named, on or about February 1, 2021, Dreyfus Money Market Fund), in exchange solely for Class A shares and Dreyfus Class shares (to be renamed, on or about February 1, 2021, Wealth shares and Premier shares, respectively) of the Acquiring Fund and the assumption by the Acquiring Fund of the Fund's stated liabilities. The Acquiring Fund, like the Fund, is a money market fund that seeks to maintain a stable share price of $1.00. The Fund and the Acquiring Fund are managed by Dreyfus Cash Investment Strategies, a division of BNY Mellon Investment Adviser, Inc., the investment adviser to the Fund and the Acquiring Fund."
It adds, "Management of BNYM Investment Adviser has reviewed the lineup of Dreyfus money market funds and has concluded that it would be appropriate to consolidate certain funds having similar investment objectives and strategies and that would otherwise benefit fund shareholders. As a result of the review, management recommended to the Fund's Board of Directors that the Fund be consolidated with the Acquiring Fund. The reorganization of the Fund would occur on or about May 13, 2021 if approved by shareholders."
For more, see our previous Crane Data News stories: "Northern Drops Other Prime Shoe, Exits Muni Too; MFI Intl Holdings" (12/15/20), "BMO Liquidating Inst Prime MMF" (11/17/20), "SEC's Blass on Push for More MMF Reforms; Vanguard Liquidating PA, NJ" (9/28/20), "Fidelity to Liquidate Prime Instit Money Funds; Cites Investor Behavior" (6/22/20) and "Northern Liquidating Prime Obligs; NY Fed on PDCF; Weekly Port Holds" (5/20/20).
In other news, LGIP (local government investment pool) manager PFM published a white paper entitled, "Understanding Bank Deposits The Rate You See versus the Rate You Earn." It says, "Public and nonprofit officials are expected to seek the best available returns while maintaining the safety and liquidity of funds when investing stakeholder dollars. However, that task can be challenging when comparing returns on cash on deposit with a bank against investment alternatives for those balances."
It continues, "Many banks offer compensation to their institutional depositors through an earnings credit rate (ECR). This rate is typically set by the bank and determines the dollar value of credits earned on available or 'compensating' balances. In most cases, earnings credits can only be used to pay the bank for services utilized. When evaluating options for cash balances, it is important to understand the mechanics of the ECR offered. Due to bank fees and adjustments to the way ECRs are calculated, the actual return on deposits may not match the rate published on statements."
The PFM piece explains, "In order to accurately compare the ECR relative to other alternatives, it is important to look not only at the stated rate but also at associated fees on deposit balances. Most banks assess a monthly fee on the value of deposits maintained. This deposit-based fee is identified on the monthly invoice or account analysis statement provided by the bank, with each bank using a unique name for the charge. Examples of deposit-based fees include: Deposit Administration Fee; Recoupment Monthly Fee; Deposit Bank Assessment."
It states, "Banks may also impose a reserve requirement, which can effectively reduce the balance available to generate earnings credits by as much as 10%. Deposit-based fees and reserve requirements should be considered because each can considerably decrease the effective earnings on bank deposits. In a low-interest-rate environment, fees on deposited balances may exceed the bank's compensation, resulting in a negative effective rate on balances despite the stated rate being positive. Consequently, it is important to compute the 'net' ECR and compare the 'net' rate to alternative investment options."
On the "potential risks of an exceptionally high ECR," PFM comments, "Some banks will offer above-market ECRs to incentivize customers to maintain large balances. This has the appearance of providing depositors a return that cannot be matched by alternative investments with similar safety and liquidity characteristics. However, in many cases, these exceptional rates are not fully realized by the depositor."
Finally, they write, "One notable risk related to an above-market ECR relates to the way banks set the rate in conjunction with pricing for cash management and treasury services. Because earnings credits can only be used to pay back the bank for services used, the bank can recover the 'cost' of offering an exceptionally high ECR by raising the price charged for cash management and treasury services – effectively devaluing the earnings credit."
PFM's paper adds, "A second risk related to above-market ECRs is that the credits earned by depositors typically expire. While a depositor may accrue a large nominal value in credits, if the credits cannot be used to pay the bank for service charges before they expire, some portion will be lost – again devaluing the exceptional earnings credit. Depositors should monitor their monthly earnings credits against the cost of services utilized and be aware of how quickly any excess credits will expire."
