Survey data shared with PLANADVISER by SimCorp, a global provider of investment management solutions and services, reveals “a large amount of uncertainty and lack of preparedness for the pending money market fund reform, due for compliance by Q3 2016.”
Some qualified retirement plan sponsors and service providers have misinterpreted the likely impact of the Securities and Exchange Commission’s (SEC) money market fund reforms, opining the rulemaking will necessarily drive defined contribution (DC) plans away from retail money market funds. But others, it seems, have failed to pick up on the wide-ranging impacts anticipated from the reforms.
As explained by Marc Mallett, vice president of product and managed services at SimCorp North America, the rule amendments require providers to establish a floating net asset value (NAV) for institutional prime money market funds, which will allow the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. The rule updates also provide non-government retail money market funds with new tools, known as liquidity fees and redemption gates, to address potential runs on fund assets.
These are the headline-grabbing elements of the money market reform, Mallet explains, but there are other technical implications that have not yet broken into the public consciousness. “The amendments of key rule 2a-7 will mostly affect floating NAV, liquidity fees and redemption gates, diversification, stress testing, and disclosure and reporting, all of which will have technological and strategic impact on money market funds,” Mallet explains.
The SimCorp survey was conducted during a recent webinar hosted in collaboration with KPMG, which gathered together nearly 60 investment and advisory firms working in the U.S. and elsewhere in North America. Together the survey respondents manage some $10 trillion in assets, yet fully 85% of the survey respondents claimed to have “limited or no understanding of the SEC’s final ruling 2a-7.
NEXT: Review of important implications and deadlines
The lack of understanding around 2a-7 is significant and potentially highly problematic, Mallet observes, as only 23% of investment providers surveyed are currently able to strike multiple NAVs during the day. Further, only 19% receive online alerts when daily liquidity is reduced to 10% or less and 75% state that their organizations “are not completely prepared for money market reform to go into effect.”
“The need for NAV validation has always existed, but the stakes are higher than ever before,” Mallet says. “In recent news, a global vendor of asset management software suffered an outage that prevented its clients from striking NAVs for days at a time, critical for any fund manager.”
Aside from being in breach of contract, firms rely on these numbers to conduct ongoing business.
“The inability to strike a real-time NAV completely throws off the numbers, incurs fees, and creates an overall snowball effect of inaccuracy,” Mallet tells PLANADVISER. “Stakeholders rely on their firm to make wise investment decisions on their behalf based on accurate numbers. Without them, the entire process becomes compromised.”
Complying with the reforms will not necessarily require changes to every plan’s investment menu, but given plan sponsors’ fiduciary duty and the widespread use of money market funds as retirement savings vehicles, plan officials will certainly want to carefully consider what the reforms mean for them.
In terms of deadlines, changes to stress testing and diversification will take effect April 14, 2016, along with changes to Form N-PF, Form N-MFP and clarifying amendments. Then, on October 14, 2016, floating NAVs will need to be in place for generally all institutional prime money market funds, along with liquidity fees and redemption gates.
“These changes have even more meaning for the investment providers,” Mallet says. “The impact goes beyond client service and portfolio management and touches both the middle and back office, including areas such as compliance and technology platforms. The money market reforms will have an impact all along the investment value chain.”
NEXT: A second, similar opinion
Bruce Ashton is a Los Angeles-based partner in the employee benefits and executive compensation practice group of Drinker Biddle and Reath LLP. He agrees that plan officials and service providers should already be considering how they will adapt to money market fund reforms.
For plan sponsors and advisers, “almost certainly, they’ll need to make changes in their plan’s investments, and they should also be talking to their service providers about how to deal with the changes,” Ashton says in an advisory opinion issued in collaboration with Reliance Trust. “As a reminder, the SEC modifications will mandate a floating NAV for money market funds, and permissive or mandatory redemption fees and gates, except in the case of government funds basically limited to U.S. Treasury securities and retail funds.”
Both will be exempted from the floating NAV requirement, Ashton explains, but only government funds will also be freed from the redemption fee and gate requirements—though they can impose them if their boards chose to do so. Some have opined these changes mean plan sponsors will feel compelled to move to government money market funds.
“As others have pointed out, these modifications either mean trading return for stability, since U.S. Treasury securities generally have a lower return than other debt instruments, or running liquidity risk, since retail funds with a potentially higher return will be subject to the fees and gates,” he explains.
This sounds like a set of bad choices, Ashton says, but fiduciaries should take heart, because “there are other capital preservation vehicles that avoid most of the unpleasant aspects of the ‘new’ money market funds while offering virtually the same level of stability and often a higher rate of return.”
Ashton says among the alternatives available in the market are “cash separate accounts, private money market funds (which are not subject to the SEC rules), short term bond funds and stable value funds.”