Articles Posted in Money Market Funds

While regulators continue pondering whether to impose more regulations on money market mutual funds, a number of financial institutions, including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Fidelity Investments, BlackRock Inc. (BLK), Bank of New York Mellon Corp. (BK), Federated Investors Inc. (FII), and Charles Schwab Corp.,(SCHW), started disclosing the market-based net asset values of these funds last month. Reasons given for these disclosures included offering greater transparency and giving investors more information about the market. However, some believe there are firms are issuing these disclosures because that is what their competitors are doing.

Currently, money market funds have a $1/share stable net asset value for all investor transactions. The underlying assets of the funds, which are debt securities with high ratings, however, can undergo periodic, small value changes that may slightly affect a fund’s per share market value. This is also called the shadow price, which are reasonable estimates/fair valuations of the price that an instrument could be sold at in a current trade.

A few years ago, the Securities and Exchange Commission approved modifications to its Rule 2a-7 and other rules about money market funds mandating that managers of the funds reveal changes to portfolio holdings and give the regulator the market-based net asset values of the funds. Fund information for each month has to be given to the SEC at a succeeding month. The Commission then makes the information available to the public 60 days after the month to which the data pertains has concluded. These Daily disclosures would make the data more immediate (and relevant) for investors.

According to the California Court of Appeal, Metropolitan West Asset Management LLC indeed does not have to pay a solicitor it hired to bring in clients for its business. The ruling affirms the trial court’s summary judgment that favored the advisory firm on the grounds that the plaintiff Bruce Lloyd had failed to comply with the Cash Solicitation rule, which would make paying him unlawful.

Metropolitan West Asset Management is registered under the 1940 Investment Advisers Act and Securities and Exchange Commission rules, which mandate that those that solicit clients for investment advisers who are subject to the Act must make certain disclosures. The Cash Solicitation Rule generally requires for solicitors to give prospective clients two disclosure forms: Part 2 of SEC Form ADV and a second one that asks for information about the solicitor, his/her relationship to the investment advisory form, the compensation amount, and any extra charges that the client has to pay.

The agreement, which was signed between Metro and Lloyd was signed in March 2005, generally did not prove successful. The solicitor later proceeded to sue the investment advisory firm for not continuing to pay him a monthly retainer after 2006 and refusing to pay him a referral fee for bringing in business from Pictet & Cie to Metro, which is a Swiss financial firm.

Per a study released by the U.S. Chamber of Commerce, it is “ill-advised” to regulate money market mutual funds further due to the effective reforms that the SEC already implemented two yeas ago, including revisions that made the funds more transparent and liquid and not as high risk. The study comes in the wake of debate between lawmakers, market participants, and regulators about more regulations to the industry. For example, SEC Chairman Mary Schapiro has been pushing for the additional reforms because she believes the money market mutual fund industry continues to be a threat to the financial system.

The authors of the study derived their findings from money fund investment data that had been filed with the Commission, as well as from information on commercial paper from the Federal Reserve. Among its conclusions is that the reforms in 2010 made the funds more liquid and better equipped to deal with significant redemption changes. Also, in the last two years, the funds have begun to shift “more dynamically” through geographies and asset classes in reaction to “evolving risks.”

Another area that has been up for debate is whether the Dodd-Frank Wall Street Reform and Consumer Protection Act has, in fact, ended “too big to fail” and outlawed bailouts. Rep. Barney Frank (D-Mass) issued an analysis earlier this month that said that the law does. However, another report, by House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala), disagrees.

At the Security Traders Association’s yearly market conference in DC, Richard Ketchum, Financial Industry Regulatory Authority’s chief executive officer and chairman, said that due to growing problems the SRO is heightening its surveillance and exam focus on the options industry. He noted that there has been an increase in complaints about the use of algorithmic activities to perform possible manipulations to “move underlying equity” and that this could cause a financial firm to “take advantage” of options positions that were pre-established.

Per BNA, Ketchum said that FINRA has set up surveillance alerts to catch too much messaging traffic from algorithms that update quotes at vicious rates when options are involved. It is also looking at firms to make sure they have adequate controls related to algorithms and it will keep checking for options orders that may have possibly inaccurate coding.

The week before, Ketchum reported that the FINRA Board of Governors had given the SRO’s staff the authority to propose to the SEC rule changes to promote greater investors use of BrokerCheck. This free tool allows investors to look up former and current firms and brokers that are registered with the SRO, and representatives and investment advisers, to decide whether the should work with them. (This information would also have to be available on websites that were maintained by/for an individual associated with these firms.) Per amendments that have been proposed to the FINRA Rule 2267, which covers the education and protection of investors, member firms would have to make sure that their company sites provide a direct link to BrokerCheck. Meantime, a change has also been proposed to FINRA Rule 8312 that would give the public permanent access to information available through BrokerCheck about foreign and state cases against associated persons who were let go after a settlement was reached. It would also per the board’s approval, make downloads of BrokerCheck information available.

According to Securities and Exchange Commission Division of Investment Management deputy director Robert Plaze, the division is ready to recommend new reforms for mutual market funds as soon as Chairman Mary Schapiro gives the go ahead. Plaze spoke to reporters following at panel at the Mutual Fund Directors Forum’s yearly policy conference in DC on June 19. He was clear to note that the opinions he expressed are his own. On June 21, Schapiro said that she plans to wait until later in July to decide whether to push the division’s recommendations to a commission vote.

While lawmakers and industry members disagree, Schapiro has stayed firm in her belief that money market funds are risky and require more reforms beyond the changes to MMF requirements that the Commission signed off on in 2010. Among the options to increase money market fund resiliency that staff has been considering are mandating capital buffers accompanied by redemption limits or fees or transferring the funds from their fixed $1 net value asset to a floating one.

However these reform measures, even without their formal proposal, are already being heavily criticized. Some are worried that the potential measures might cause investors to abandon the products and sponsors to leave the industry. These critics generally believe that the changes that were made to SEC regulations in 2010 have been sufficient to strengthen the funds’ framework. For example, the Commission amendment to the 1940 Investment Company Act’s Rule 2a-7 improved fund disclosures while limiting fund risks.

The Securities and Exchange Commission says that investors can now access detailed data about money market funds, including their portfolio’s market-based price, called its “shadow NAV” (net asset value). The public can now access this information, which will be updated regularly, on the SEC’s website through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

It was just last year that the SEC adopted a rule that requires money market funds to submit information about their portfolio valuations and holdings. SEC Chairman Mary L. Schapiro says that the Commission believes that the public disclosure of this data will help market analysts and investors in evaluating mutual funds.

Per the new rule, the SEC will make available within 60 days the information that the funds file on new Form N-MFP. Money market funds also must now post current portfolio data on their on Web sites within five business days after the month has ended.

According to a study released last month by the Investment Company Institute, money funds’ market value usually adhere to the stable $1 net asset value unless there are unusual market conditions. ICI is the national association for mutual funds.

ICI report says that per securities laws, money funds can offer shares at a stable $1 NAV as long as per-share values remain within one-half cent of $1. Also, between 2000 and 2010, money funds’ average shadow price shifted between $0.998 and $1.002. During this time, the market underwent significant valuations in asset prices and interest rates. For the money fund’s market value to fluctuate beyond one-half cent of the $1 NAV, certain market condition changes would have to occur, such as investor net redemptions hitting 80% of a fund’s assets, short-term interest rates going up by over 300 basis points in a day, and a 100 basis point rise in interest rates added to investor redemptions of 70% of a fund’s assets.

Related Web Resources:
SEC Releases Money Market Fund Portfolio and “Shadow NAV” Information to the Public, SEC, January 31, 2011
The ICI Report (PDF)

More Blog Posts on Money Market Funds:
SEC is working on issues related to asset-backed securities, credit ratings, and money market mutual funds, says Schapiro, Stockbroker Fraud Blog, January 31, 2011
US Treasury Department Extends Money Market Fund Guarantee Program Through April 2009, Stockbroker Fraud Blog, December 10, 2008 Continue reading

According to Securities and Exchange Commission Chairman Mary Schapiro, the agency is dealing with a number of credit crisis-related issues associated with money market mutual funds, asset-backed securities, and credit ratings. She also said that the SEC is working on ABS rule proposals that would allow the interests of investors and sellers to align.

The proposals, and other measures, would seek to give investors easier access to loan level data, allow them more time to review products before they invest, create a mechanism to allow for continuous disclosure, and modify “shelf” offerings eligibility standards. Schapiro says that the proposals are meant to be preemptive and would tackle certain areas where issues similar to the ones that surfaced during the current financial crisis might arise in the future.

American and European regulators have been closely examining collateralized debt obligations, mortgage-backed securities, and other ABS because of the large parts they played during the financial collapse. The SEC is reviewing ABS regulations and ABS-related disclosures and reporting. The agency is also seeking to impose more stringent credit quality and maturity requirements for market mutual funds, as well as put into place substantial liquidity standards. Members will be voting on proposed rule amendments meant to strengthen the money market mutual funds’ framework. The SEC is in the process of taking out credit rating references in a number of its regulations and rules.

The US Treasury Department has announced that it will keep guaranteeing money market funds until the end of April 2009. The Temporary Guarantee Program for Money Market Funds was created because of worries that the funds’ net asset values would fall under $1 (a value drop known as “breaking the buck”).

The money market fund program guarantees a $1 minimum share price and insures the holdings of any publicly offered eligible funds that pay to take part in this temporary plan. The program, which covers over $3 million in assets, covers the participating funds’ shareholders up to the amounts that they held when business closed on September 19, 2008.

Only mutual funds that are currently taking part in the plan and meet the extension requirements can continue to participate in the program. To avail of the extended coverage, funds must submit a payment based on their net asset value since September 19. The extension notice must be sent by December 5.

The Temporary Money Market Fund Guarantee Program offers four kinds of Guarantee Agreements:

• Guarantee Agreement • Guarantee Agreement (Single Fund)
• Guarantee Agreement (Stable Value)
• The Guarantee Agreement (Stable Value Single Fund)

It is important to investors hat the standard $1 net value asset for money market mutual funds remain. Worries that money market funds would “break the buck” increased global market turmoil and resulted in serious liquidity strains. These repercussions resulted in greater volatility in exchange markets and caused certain short term interest and funding rates to spike.

Related Web Resources:
Treasury’s Temporary Guarantee Program for Money Market Funds

Read the Extension Notice (PDF)
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