On July 23, 2014, the Securities and Exchange Commission (SEC) adopted amendments to the rules that govern money market mutual funds. The amendments strive to preserve the key benefits of money market funds while reducing the risks associated with investor runs. However, for mutual funds – and their business partners – the revised rules will likely require significant reforms to their structures and operations.
Key provisions that will challenge the current operating model include: a floating net asset value (NAV) decimalized to a basis point; the definition of ‘Retail Funds” as those with procedures to limit investors to “natural persons; and the introduction of gates and liquidity fees.
While firms and providers may have started along the development curve on some of these features in response to the 2008 liquidity downturn and subsequent market demands, considerable coordination and effort will be needed to complete, standardize and integrate these changes across the vast network of funds, service providers and intermediaries who support customer accounting for these products.
Additional provisions impact fund governance and compliance. These include “enhanced diversification, disclosure and stress testing requirements.” This will require increased diligence on the part of boards, as well as increased administrative and compliance supervision. As with any regulation, the devil will be in the details as funds work to integrate these changes into policies, procedures and governance models.
The regulators did provide some relief from the original draft amendments by providing carve-outs to rule 10b-10 which maintains continuity by allowing less frequent confirmation of money market trades even though they have fluctuating NAVs. They also worked with the Internal Revenue Service (IRS) to provide simplified cost basis and wash sales rules.
The required modifications will likely touch everything from technology platforms and call centers to client communications and websites. Also, since most mutual funds rely on third-party transfer agents and intermediary platforms for transaction handling, the impact won’t just be limited to the funds themselves – but will extend to their business partners too. This will require an additional layer of vendor oversight, as well as improved integration and coordination at the system and process level.
The market’s reaction will be the final test, and will be dependent both on the interpretation and execution of the rules as they are implemented over the next two years. Customers have remained faithful to Money Markets, even as returns during the economic recession and recovery have been minimal, demonstrating that the product maintains market demand. As the industry navigates the implementation hurdles, their ability to maintain ease of access, simplified trading and cost effective products will be key considerations for ongoing acceptance in the market, including the willingness of intermediaries to maintain them on their platforms.
To view the amended rules, visit the SEC website.
Posted by Tom Rollauer, Executive Director, Center for Regulatory Strategies, Deloitte & Touche LLP, Tim O’Sullivan, Director, Deloitte & Touche LLP