By Richard A. Roth, J.D.
Securities and Exchange Commission rules on money market funds that were adopted in 2014 and that take full effect this year will affect national banks and federal savings associations in a number of ways, the Office of the Comptroller of the Currency is warning. The rules will affect how banks and thrifts (referred to as banks) manage their own MMF holdings and how they offer customers access to MMFs, the OCC says. Some of the amendments already are in effect, and the remainder will take effect Oct. 14, 2016 (OCC 2016-17).
Banks may hold MMF shares on their balance sheets as permitted investments. Also, they may sweep funds over which they have fiduciary investment discretion or that are in customer deposit accounts into MMFs. In any case, they now must be certain that the funds are invested only in permissible MMFs and that they make any necessary disclosures.
SEC rules. According to the OCC, the SEC rules divide MMFs into three types: retail, government, and other. MMFs in the "other" category might be referred to as prime, institutional, or institutional prime MMFs.
The rules establish net asset value (NAV) determination requirements, liquidity fees, and redemption gates that vary based on the type of MMF. They also impose new disclosure duties and diversification requirements that could affect banks and bank customers.
MMFs in the "other" category will no longer be allowed to trade at the traditional fixed $1-per-share NAV. Instead, they will be required to use a floating NAV that is based on the market value of the MMF’s assets, and they will need to be able to calculate that NAV at multiple specified times each day.
Prime MMFs and retail MMFs—funds "reasonably designed to limit all beneficial owners of the fund to natural persons"—will be subject to liquidity fees and redemption gate requirements that are intended to provide tools to handle runs. If a fund’s weekly liquid assets fall to less than 10 percent, the MMF will be required to impose a 1-percent redemption fee unless doing so would not be in the fund’s best interests. If weekly liquid assets fall to less than 30 percent, the fund can impose a liquidity fee of up to 2 percent or suspend redemptions for up to 10 days (the redemption gate).
MMF access for bank customers. The specific eligibility requirements for retail MMFs will require banks to exercise care about which MMFs are selected for sweeps, the OCC points out. If the MMF is unable to identify the individual investors, the bank likely will need to be able to certify to the MMF that all of them are natural persons. Sweeping or depositing the funds of other investors into a retail MMF could subject a bank to liability under SEC rules, the agency warns.
Moreover, changes in the ownership of an account can change its eligibility to invest in a retail MMF, the OCC notes. For example, if a trust becomes irrevocable on the grantor’s death, the trust funds might lose their eligibility for retail MMF investments.
If a bank makes available to customers investments in MMFs that are subject to liquidity fees or redemption gates, the bank must have the ability to implement those requirements at the account level. In fact, the SEC’s rules might make it inappropriate to offer prime MMFs as sweep vehicles for deposit or fiduciary accounts. Even retail MMFs might be inappropriate for fiduciary funds, the OCC is warning.
Worse still, "most banks will likely conclude that once the SEC’s MMF reforms are fully implemented, government funds are the only practical option for bank deposit to MMF sweep arrangements," the agency says.
MMFs on bank balance sheets. Banks may not invest in retail MMFs, and they should monitor all of their MMF holdings for changes that would make them impermissible, unsafe, or unsound. This should include reviewing each MMF’s SEC monthly filings, other disclosures, and websites.
General expectations. Banks that hold MMFs or enable customers to do so must actively monitor relevant SEC guidance and rule changes, as well as how each MMF is classified, according to the OCC. They must know which types of accounts are eligible to purchase which types of MMFs, and they must have effective processes to prevent improper investments and track any changes in either a fund or an account.
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