New Rules For Money Market Funds

In the United States and Europe, new rules are being imposed on the money market fund industry.

In the United States, the Securities and Exchange Commission (SEC) adopted several new regulations, all aimed at making money market funds more resilient to economic stresses and runs on the funds. In addition to proposals on portfolio composition, new rules include:

• Periodic stress testing to gauge a fund’s ability to maintain a stable asset value.
• Monthly reporting to the SEC of detailed portfolio schedules, with public disclosure following 60 days later.
• A required ability to process trades at variable share prices.

“Monthly reporting will give the public more current information, even with the lag, and could shine a light on the marked-to-market net asset value,” says Brad Adams, senior product manager, Northern Trust. “Using a variable net asset value would remove the need for strict rules to control risk, but could create some operational challenges.”

The U.S. regulations take effect in May 2010, with staggered compliance dates.

In Europe, the Institutional Money Market Funds Association (IMMFA) adopted changes to its Code of Practice that took effect in January 2010 and are aimed at improving standards for maturity, credit quality, liquidity and disclosure. The changes include:

• Funds must respect the AAA-rating credit criteria established by the credit rating agencies.
• Funds must disclose their WAM, WAFM, liquidity ladder and performance data monthly.
• Funds must make available the percentage held by the top ten shareholders upon request.

European Action Sends Ripples Worldwide

Two sets of proposed regulations in Europe could have far-ranging implications for investment managers beyond the continent’s borders. First, Undertakings for Collective Investments in Transferable Securities (UCITS) funds — which have been a global success story, with assets under management of almost 5.3 trillion euros at the end of 2009¹ — have new proposals that are due to become effective in mid 2011. Second, the original draft of the Alternative Investment Fund Managers (AIFM) directive, published in April 2009, has led to intense lobbying from across the industry, both in the European Union and globally. The final version is due for approval in July 2010. Key changes to UCITS funds, and the objectives for the AIFM directive, are below:

UCITS

• Introduction of the UCITS Management Company, which will allow UCITS to be managed by a management company authorized in another member state
• Introduction of rules to permit master-feeder UCITS structures
• Clarification of the rules for cross-border UCITS mergers
• Streamlining the UCITS notification procedure to improve the cross-border funds distribution process
• Replacing the Simplified Prospectus with a Key Investor Information document
• Improved cooperation procedures between national supervisors

“UCITS IV will potentially allow fund promoters to streamline their operations, generating cost savings for the industry,” says Judith Scattergood, senior product manager at Northern Trust, London. “It should also facilitate product development and improve marketing opportunities.”

AIFM

• To provide regulators with the ability to monitor, identify and, if necessary, address potential systemic issues arising from the activities of AIFMs, in accordance with the G20 agreement
• To create a universal passporting regime for alternative investment funds

The directive covers not only hedge funds and private equity funds, but also traditional long-only investment funds, which are not UCITS compliant.

¹ “Trends in the European Investment Fund Industry in the Fourth Quarter of 2009 and Results for the Full Year 2009,” European Fund and Asset Management Association, March 2010.

U.S. Addresses 401(k) Fees

Defined contribution (DC) plan sponsors have been demanding lower – and unbundled – investment management and administrative fees. Now, the U.S. Department of Labor (DOL) has proposed new regulations governing fees charged for investment advice offered to plan participants.

The DOL proposal, released in February, stipulates that advice must be provided on a “level fee” basis or through a computer model that has been certified as unbiased.

Under the level fee provision, an adviser’s compensation can’t be based on a participant’s selection of a particular investment option. The advice also must be based on generally accepted investment theories and consider the historical risks and returns of asset classes over time and the fees of any recommended investment. The adviser also should consider, if known, the participant’s age, risk tolerance, retirement age, life expectancy, other investments and other sources of income.

The DOL proposal also requires an annual independent audit confirming the adviser’s relationship with the plan is in compliance. In addition, before any advice is given, the adviser must provide written notice of certain information free of charge, including:

• Any material relationship between the adviser and another party in developing the advice program
• All fees and compensation the adviser or affiliates receive for providing investment advice or for a participant acting on the advice
• Any relationship the adviser or affiliates have in recommended securities
• The services provided in connection with the investment advice

“Downward pressure on fees charged to participants remains a top priority for DC plan sponsors,” says James Danaher, senior investment product manager in the DC solutions group at Northern Trust. “They want participants to be able to track what they are paying without having to watch assets under management.”

Comments on the proposals are due by May 5, 2010.

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