There’s a good chance regulators will get their floating-NAV wishes for MMFs in 2013.
With the Financial Stability Oversight Council and the Securities and Exchange Commission at loggerheads over final MMF rules and neither certain about what will pass, for investors it’s hard to know what to expect in 2013. Of the three main MMF regulations suggested to gain control of the $2.7 trillion industry – a floating net asset value (vNAV), buffers and holdbacks – the most likely is vNAV. Regulators say vNAV will help prevent “runs” but the MMF industry disagrees and strongly opposes the measure.
But recent developments suggest that vNAV is on the way. For one, a growing list of fund managers, including Goldman Sachs, JPMorgan Chase, BlackRock, Fidelity Investments, Federated Investors and Charles Schwab, has decided to publish daily fund asset values. While the intent isn’t entirely clear (beyond the desire to be more transparent), publishing the values will show investors that if there is a move to vNAV the fluctuations won’t be as large as feared; in fact they move in minute increments daily – virtually staying at the dollar level – even in times of great stress. So they conceivably could remain the “set it and forget it” short-term cash vehicle treasurers love.
Another is that despite the indecision at the FSOC and SEC, it’s likely something will get done. While the FSOC doesn’t have the authority to make the rules – it needs the SEC to set and implement – it does have the authority to designate a financial entity as systemically important, something it could do to MMFs. If that were the case MMFs would have to play by a different set of rules, i.e., they would fall under Federal Reserve supervision.
And then there is the Republican commissioner at the SEC who is softening his stance on floating NAV. On Wednesday following an address at the US Chamber of Commerce, Commissioner Daniel Gallagher reportedly told the audience that there was “a new spirit at the commission,” and that it was “working with the staff, working with industry, working amongst the commissioners and a consensus that we need to take some actions.” In August, he was part of the group of skeptical commissioners that helped put the kibosh on then-SEC Chairman Mary Schapiro’s plans at reform.
So how can investors prepare for a vNAV world? Kevin Bannerton from DB Advisors had these words of advice for 2013:
- Become familiar with the differences that exist between stable NAV and variable NAV funds, not only in terms of the accounting issues, but also the operational, risk management and investment implications. This way you can assess the suitability of vNAV funds for your investments as the issue becomes more relevant.
- Engage your auditors in the accounting treatment and reporting requirements for both internal monitoring and tax issues.
- Evaluate investment objectives and available opportunities. A changing environment that includes variable NAV money market funds will likely force corporate investors to clearly divide cash between operational and strategic (investment) uses and evaluate options to best address the risk tolerance and liquidity needs of each. This division will likely include a greater emphasis on accounting treatment of specific investments.
DB Advisors, it should be noted, launched a floating NAV fund in 2011. The firm for some time has advocated giving investors a choice, suggesting that both vNAV and stable NAV products be available. As Mr. Bannerton said in an interview in 2012: “We think there is room for both products. The market has to evolve to address a changing risk landscape and allow clients to adjust their risk objectives.” That risk landscape holds a heavy dose of regulatory risk.
And so we start 2013 with an intrepid agenda to…wait and see. The departure of Treasury Secretary Timothy Geithner, a big advocate of MMF reform and, as Treasury Secretary, the head of the FSOC, could put the march toward vNAV on hold. That’s because current Treasury Secretary Nominee Jack Lew, if confirmed, will be charged with more critical issues – namely US budget negotiations. So while investors wait, it’s best to get educated and, more importantly, keep Boards educated, primed and ready for action.