In 2014, the SEC approved new rules under the Investment Company Act of 1940, amending the operation of money market mutual funds.  The SEC is requiring Institutional money market funds to sell and redeem shares based on the current market-based valuation of the portfolio, rounded to the fourth decimal place.  The rule also allows fund boards new flexibility to control heavy redemption demands to protect remaining shareholders.  The goal of these new regulations is to preserve the integrity of money markets as instruments of liquidity and to ensure that the valuation of each fund is transparent to investors.

Effective on or before October 14, 2016, each money market fund will be required to classify itself as one of the following: Government, Retail, or Institutional.  The classifications are tied to the underlying portfolio.

Government funds must hold 99.5% or more of their assets in cash or government based securities.  Retail money markets will be restricted only to beneficial owners who are natural persons.  Institutional funds are funds that do not qualify as retail or government.

The rules go into effect on October 14, 2016, however many funds will be making the necessary changes prior to the October effective date.  Some funds have recently announced that they will begin compliance with the new rules in July or August.

Each fund’s classification has impact on shareholders, custodians, dealers, and recordkeepers.  First and foremost, the classification dictates the requirements for stable versus floating NAV (referred to as “FNAV”), as well as the imposition of liquidity fees and gates.

		Money Market Funds
	Retail	Institutional	Government
Floating NAV (FNAV)	No	Yes	No
Liquidity Fee	Yes	Yes	No
Redemption Gate	Yes	Yes	No

Secondly, the classification impacts the types of entities that can hold a position within the fund.  Account eligibility is based on social code (account type), as compared to the money fund classification.  In the case of retirement plans, the SEC has ruled that participants are the beneficial owners and natural persons; therefore, retirement plans are eligible to hold Retail funds.  However, Retail funds are subject to fees and gates, making them potentially complex investments for daily valued defined contribution plans.

Mid Atlantic is being notified separately by each issuer as the issuer’s board and portfolio managers evaluate accounts under management, portfolio composition, and future strategy.  Mid Atlantic is evaluating these notices and working with the fund companies to identify accounts that might require liquidation or mapping to alternative investments.  Your relationship manager will then be in touch to provide support.

Mid Atlantic has modified the TNS investment screener to validate prospective account setups against money market category and account social code to identify eligibility.  Mid Atlantic has also rolled out new reports to identify holdings that will require liquidation or transfer into alternate securities or products.

The NSCC security master files are being modified to contain the following fields: money market category, number of NAV strikes, and strike times.  To facilitate your need to have this information as soon as possible to triage problems with your advisor and broker networks and plan sponsors, Mid Atlantic will be manually entering values as provided via email or other fund notification, as soon as received.  Note that some funds will not be declaring a category as they intend to close and liquidate before 10/14/16.  If a specific close date has been provided to MATC, the date has been added to TNS and will appear on all money market reports.

Since account eligibility is based on a comparison of social code and fund category, some existing accounts will become immediately ineligible to hold positions they have already funded.  In those scenarios, we see a variety of potential outcomes:

• Some funds will make advance notice of force liquidations and then close the ineligible accounts on a set date.

• Some funds will map ineligible accounts into a “like fund” that supports the social code.

• Some funds will leave the account open but delist from NSCC, thereby creating a pseudo-close where no electronic trading, pricing, reconciliation, or dividend processing can occur, requiring voluntary liquidation of the account.  As Mid Atlantic is notified of funds taking this approach, we will get in touch quickly to allow you as much time as possible to wind down the position.  As of today, six issuers have delisted Institutional funds: Wells Fargo, Fidelity, Federated, JP Morgan, BlackRock, and Goldman Sachs.  Those notices have been distributed as Service Announcements and are also posted on the MATC homepage under the Announcement section.

With a floating NAV, each fund can set the number of strikes that will occur and these will be done at pre-defined times.  Each “strike” is the issuance of an execution price.  The NSCC files are being modified to allow up to 10 NAV strikes/execution prices per day, although many funds with floating NAVs have indicated they will likely set three to four strikes/execution prices per day.  The fund’s procedure for purchase and redemption pricing must be disclosed in the prospectus.  Mid Atlantic will provide a report of all strike times on TNS.

The Mid Atlantic file layouts will not be changed to accommodate multiple NAVs for a single trade date.  If you elect to pull prices intraday, you would receive the intraday prices as Mid Atlantic receives them from NSCC.  If you pull prices only after market close, then you will receive the last NAV for the trade date.   All intraday NAVs will be viewable on TNS for reporting and audit purposes.

Each institutional money market trade with a floating NAV fund will receive the strike price of the next NAV computation after receipt of the trade.  For intraday trades, a strike price of 9:00 a.m. might be transmitted to NSCC at 10:30 a.m., and a strike price of 11:00 a.m. might be transmitted to NSCC at 12:30 p.m.  A trade received by the fund at 10 a.m. would receive the 11:00 a.m. strike price.

Institutional fund trades sent during the evening hours may receive either the end of day NAV strike or the first NAV strike of the next business day, subject to the rules of each individual fund per its prospectus filing.  That is why institutional fund strike times are also referred to as trade cutoff times.  For this reason, we highly urge you to NOT perform price-dependent processing for any institutional money market positions.

Government and retail funds will continue to price based on end of day NAV.

Under the new SEC rules, non-government money markets must maintain 90% liquidity based on weekly valuation reporting.  If the liquid value falls below 90%, a 1% liquidity fee will apply to sells only (not buys) unless the fund’s board determines that doing so is not in the best interest of the fund.   The fund’s board also has discretion to determine whether imposition of a lower or higher fee (not to exceed 2%) is warranted.  If the liquid value falls below 70%, a 2% liquidity fee will apply to sells only (not buys) as well as a redemption gate (up to 10 days in each 90 day period) unless the fund’s board determines that doing so is not in the best interest of the fund.   Gates may also be imposed on purchases, at each fund’s discretion.

At this time, there is no automated mechanism for a fund to notify the industry of a fee or gate.  Notification to Mid Atlantic will occur via call or email from the fund.  Mid Atlantic will in turn send notifications and alerts as soon as the details of the fee or gate are confirmed with the fund.

The notice from the fund will usually be retroactive to prevent a run on the fund (i.e. an 11 a.m. gate could be announced at 11:30 a.m.), although funds can optionally announce an end of day effective time.

When trading in funds that have fees or gates, the platform sets a flag on each sell order indicating to the fund whether the fund should impose the fee or gate or whether the intermediary will be calculating the fee and imposing the gate at the beneficial owner level.  Funds also retain the right to “hard gate” a fund and ignore the intermediary’s request, thereby rejecting all sell trades to prevent a run on a fund.

The imposition of a fee or gate is determined relative to the timestamp when the trade is “in good order”.  The definition of “in good order” is discretionary and determined based on who is assessing the fee or gate.

Mid Atlantic is taking the position that all time stamps will be set by Mid Atlantic upon receipt of the trade from the underlying intermediary.  The timestamp of Mid Atlantic’s receipt of the trade will be passed through to NSCC and will be used by the fund to determine the appropriate FNAV to be used for trade execution as well as the imposition of a fee or gate.  All Mid Atlantic trades will be marked as “fund assessed”.

Since all money market sell trades will be sent as “fund imposed”, if a fee is assessed, MATC would receive back the net settlement.  The liquidity fee will be disclosed in the confirmation and the net shares and dollars of the confirmation are net of the fee, similar to any fund assessment of a CDSC.

The new rules impose considerable compliance oversight if a contracted dealer such as Mid Atlantic allows underlying firms to timestamp orders and to independently compute liquidity fees or assess gates.  Liquidity fees must be estimated on trade date, before the next NAV strike, with proceeds to be delivered to the funds via wire (outside NSCC settlement) on the next business day.  Due to the extremely manual processes of liquidity fee management, and the extensive oversight by the funds of any fees not computed by the fund, Mid Atlantic is standardizing all trades as fund-assessed.

Each underlying Mid Atlantic client performs recordkeeping on many different software systems and many versions/releases of those systems.  Given the potential variances across underlying firms based on software systems and internal controls, allowing an underlying firm to monitor fees and gates is not feasible since Mid Atlantic will be subject to very stringent audit controls and oversight by the funds specific to money market trading.

If a client does a same day exchange and the sell side is a money fund subject to a fee or gate, the potential exists for the settlement to be less than projected due to a fee, or for the trade to be fully rejected due to a gate.  Please keep in mind that you must make Mid Atlantic whole for any settlement shortfalls if you support same day exchanges for your underlying plans.   While the frequency of any liquidity fees or gates should be minimal, allowing money market funds to be treated as same day exchange eligible increases your risk of a settlement shortfall.

Mid Atlantic will leave all retail and institutional money market funds fully disclosed on the books of the transfer agent.  Due to the specific rules regarding social code eligibility, as well as the timeliness of trading within NAV strike windows, Mid Atlantic will not aggregate money fund positions.

Expect increased 22c-2 requests or other transparency inquiries from the funds as they review beneficial owner eligibility within each fund position.  Some funds are requiring Mid Atlantic to perform attestations that buys and sells will not be netted for any institutional money fund accounts.   Additionally, funds will be auditing for compliance with the updated prospectus provisions of money funds, as well as the non-prospectus provisions of Rule 2a-7.  Funds may request 2a-7 certifications from any underlying firm that maintains an omnibus position that does not clearly indicate eligibility of underlying beneficial owners.

Additional language will be needed in fact sheets and fee disclosures to indicate that retail or institutional funds may entail fees or might not be redeemed in the event of a liquidity issue.  Participant 404(a)(5) disclosures must clearly indicate to participants that while money markets provide liquidity within a portfolio, there is the risk of a liquidity fee being assessed or that a position might not be redeemable in the event of a liquidity shortfall at the fund.

Note that money market NAVs can now run to four decimal places, thereby impacting calculations throughout all trading, transfer agency, and sub systems for confirmations, dividends, transfers, and other activity.  Reports will also require updating to accommodate the longer price precision.

All account valuations will be performed at end of day NAVs, but accounts with FNAVs may have specific trades performed at values not reflective of the end of day NAV.

Mid Atlantic will not edit any inbound or outbound client file layouts.  Some systems already read the “fee” field in a confirmation record and others do not.  If you remain in funds subject to fees and gates, please consult with your system vendor to determine if your confirm import will recognize a liquidity redemption fee in a confirmation or settlement record.

Mid Atlantic will continue to roll out additional reporting and notifications to help you scrub your holdings and facilitate transition of positions as needed.  Please understand that there is little standardization across funds.  Some funds will be filing updated prospectuses as late as September for final declaration of position.  We will work as quickly and diligently as possible to assist you during this very challenging time.