SEC Money Market Rule Changes Still Playing Out

The SEC made fundamental changes to the rules governing money market funds back in 2014; according to John Faustino at Fi360, the rule changes have created a big opportunity for advisers with stable value fund expertise.

Fi360 announced earlier in February that it has acquired the stable value fund quantitative research program and associated databases from Blue Prairie Group.

John Faustino, Fi360 chief product and strategy officer, described his firm’s vision for the deal during a wide-ranging interview with PLANADVISER. Apart from describing the stable value database acquisition, Faustino also shared his outlook on the broader regulatory environment impacting retirement plan advisers and their clients in 2019.

Winning New Plans on Stable Value Expertise

Faustino said the agreement with Blue Prairie Group to acquire its stable value fund quantitative research program and databases brings a new capability to the adviser-support marketplace—one that has been demanded by advisers for some time. According to Faustino, other firms such as Morningstar have offered more limited capabilities in the stable value fund review/monitoring area, but he argues that combining the analytical skills of Fi360 with the Blue Prairie Group dataset is a significant step forward, both in terms of ease of use and in terms of the breadth and quality of potential stable value market analysis.

Faustino said the acquired data is derived from a consortium of more than 35 fund managers and represents more than $450 billion in assets. He further noted that Fi360 will maintain the collection, management and analysis of all new data, making the reports available to advisers and broker/dealers through its existing Stable Value Navigator solution.

“The data and associated analysis provides a comprehensive overview of stable value as an asset class and facilitates proper due diligence among financial professionals,” Faustino said. “We feel the expansion of Stable Value Navigator will offer a powerful strategy for retirement plan advisers to target new business. Plan sponsors are hungry for expertise in this area and are looking for knowledgeable advisers to help them with their money market fund and stable value fund choices.”

According to Faustino, the effects of money market fund-focused regulatory changes made back in 2014—with compliance deadlines in 2016—are still being felt by defined contribution (DC) retirement plans today. Under the rule changes driven by the Securities and Exchange Commission (SEC), retirement plans did not necessarily have to entirely divest from retail or institutional money market funds, but many plan sponsors and advisers have decided this is the best course of action.

In a nutshell, the SEC rule amendments established that investment managers had to start identifying and publishing a “floating net asset value” for institutional prime money market funds, which caused the daily share prices of these funds to begin to fluctuate along with changes in the market-based value of fund assets. The rule updates also provided non-government retail money market funds with new tools, known as liquidity fees and redemption gates, to address potential runs on fund assets. 

These changes caused some Employee Retirement Income Security Act (ERISA) fiduciaries to doubt that they could still offer certain money market funds and remain in compliance. In fact this is not the case, as the rules provide important exceptions for investing in retail money market funds that ease plan sponsors’ fiduciary concerns. However, more cautiously minded plan sponsors and advisers have still moved away from the offering of money market funds, instead favoring stable value as the most appropriate capital preservation approach for ERISA-governed retirement plans.

Faustino said that this debate is continuing to play out among DC plan sponsors, representing a fantastic opportunity for advisers with stable value expertise to be of service. He said Fi360 is recognized for its objective, quantitative and analytical products, and that this approach will be applied to the stable value analysis, “ensuring advisers have the resources they need to make informed, fiduciary-minded decisions for their clients.”

To underscore the action ongoing in this part of the DC plan marketplace, Faustino cited an study from January 2019, “401(k) Portfolio Study of Investment Categories,” in which there are presented some “very interesting numbers” in terms of money market funds still active in DC plans. Notably, exhibit 5.5 on page 17 shows more than 13,000 plans hold a taxable money market fund and 3,653 hold a prime money market fund.

“With $1.76 million and $2.85 million held on average in each of the vehicles per plan, the exposure remains significant,” Faustino said. “This all represents a great opportunity for fiduciary-minded advisers to target these plans.”

Broader Regulatory Issues Facing Advisers

Turning away from the topic of capital preservation options in ERISA plans, Faustino said he expects the SEC to be ready to publish a final version of its Regulation Best Interest proposal during the third quarter of 2019.

For retirement industry fiduciary advisers, the SEC’s introduction in April 2018 of a proposed Regulation Best Interest was one of the seminal moments of the year. Coming fairly soon after the defeat of the Department of Labor’s fiduciary rulemaking process in appellate court, the SEC’s Regulation Best Interest quickly took center stage in many advisers’ minds when it comes to important regulatory changes on the horizon.

As Faustino observed, the SEC Regulation Best Interest and associated proposals are designed to enhance investor protections by elevating the broker/dealer standard of conduct and reaffirming—and in some cases clarifying—the fiduciary standard for investment advisers, as well as by requiring more candid and plain language disclosures. Faustino said the SEC appears to be making steady progress as it seeks to respond to industry comments on the proposed version of its Regulation Best Interest.

Faustino went on to observe that the U.S. Department of Labor (DOL) also seems to be working towards publishing new rules of its own in the third quarter of 2019, having to do with some of the same conflict of interest topics that the SEC is working on. He agreed that it is interesting and a little perplexing to see the DOL working towards another conflict of interest rule change, given the recent defeat the regulator suffered in the Fifth United States Circuit Court of Appeals.

“I believe the DOL is acting again in this area at the behest of the SEC, which has said it wants to coordinate its Regulation Best Interest implementation with the DOL’s many rules and requirements for ERISA fiduciaries,” Faustino said. “It remains to be seen exactly what DOL is doing and how big of a role it may play in supporting the SEC’s final Regulation Best Interest. Plan fiduciaries should stay tuned.”

Faustino concluded that the U.S. states have also taken on a key role in driving the conflict of interest discussion forward in 2019. He said there is no sign that regulators in more progressive states will stop their efforts to create their own strict conflict of interest rules applying to advisers, broker/dealers and even agents selling annuities and life insurance.

“There is a real patchwork of regulations that is forming across the U.S., and this is clearly a concern to the advisers and firms we support,” Faustino said. “It is becoming increasingly difficult as a national or even a regional business to remain in compliance with all the rules and regulations coming online. This will remain a challenge for some time, we believe.”