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Investment Management

New Bill Looks to Bring Back Prime of Yore

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December 19, 2017

Bill to revive struggling prime money market funds picks up steam

BenjaminsMore than a year after money market mutual fund reform went into effect, the volume of prime funds has increased marginally but remains in the dumps. But a bill seeking to address problematic components of the reform is starting to pick up steam.

The National Association of Corporate Treasurers (NACT) recently sent a letter to Chairman Jeb Hensarling and Ranking Member Maxine Waters of the US House Committee on Financial Services to express support for H.R. 2319, which replaced H.R. 4216 at the start of a new Congress in January and seeks to revive demand for prime MMFs.

“We believe H.R. 2319 will help Main Street companies by restoring a stable net asset value ("NAV") for all MMMFs [money market mutual funds]and codifying the ability of any MMMF to operate without imposing a mandatory liquidity fee on a redeeming shareholder,” said Tom Deas, chairman of NACT, in the letter.

As of late December, the bill, sponsored by Rep. Keith Rothfus (R-Pa.), had picked a 60-long list of bipartisan co-sponsors. Hearings were held on the bill by the Subcommittee on Capital Markets in early November.

Investment in prime MMFs plummeted in the year before the new rules went into effect, falling from nearly $1.8 trillion at the end of October 205 to $562 billion a year later, according to the SEC. Meanwhile, investment in government funds and treasuries more than doubled, to $2.2 trillion from just over $1 trillion. Since then investment in government funds and treasuries have remained close to $2.2 trillion, and prime funds have inched up to $665 billion.

Corporate treasurers historically have used prime MMFs as short-term investments for excess cash. In addition, MMFs purchase commercial paper, which companies issue to cover day-to-day funding needs. In fact, that all-important liquidity—especially for cyclical businesses—can when necessary fund production and inventories, and ensure bills are paid on time. As a result, since the SEC changes were adopted in July 2014 and implemented by October 2016, Mr. Deas said, companies have seen fewer choices to invest their cash, and for many an uptick in CP borrowing costs.

When the issue of MMFs came up at NeuGroup meetings over the last few months, typically one or two members acknowledged returning to prime funds, compared to the previous fall when treasury executives almost universally said they were exiting the short-term investment. Nevertheless, as the SEC numbers show, only a small minority of companies that have returned to prime funds.

“Going to a floating NAV (net asset value) is just too much to expect treasurers to do,” said Mr. Deas in an interview, adding that many treasurers have been unable to justify or implement quickly enough the changes to treasury and financial reporting systems to track the gains and losses required by a floating NAV for federal and state tax purposes.

Requiring prime funds’ NAV to float and to be reported to the nearest hundredth of a cent, according to the NACT letter, significantly complicates corporates’ investments in prime funds. Corporate treasury and financial reporting systems before reform had treated fixed NAV funds as cash equivalents, but now their floating NAV per share must essentially be tracked in real-time.

“For federal and state income tax purposes, a floating NAV requires treasurers to keep track of gains and losses when they inevitably buy MMMF shares at one price and sell them at another in the routine redemption of their investment,” the letter says. It adds that because treasury systems compete with other departments for internal IT resources, corporate treasurers are often unable to justify the required IT systems changes and so must use sub-optimal alternatives.

The bill would exempt MMFs from having to impose liquidity fees on corporate and other redeeming shareholders.

“H.R. 2319 would restore the indispensable features of MMMFs that allow Main Street companies to manage their cash flows securely, fund their businesses in the most cost-effective way, and more readily contribute to economic growth,” the letter concludes.

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