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Mutual Funds, Bank Trusts and Money Market Reform

Mutual Funds, Bank Trusts and Money Market Reform

The Money Market reforms promulgated by the SEC became effective October 14, 2016. The implications of the reforms go deep and wide, both with the mutual funds that offer money market funds, but also for the firms that offer money market funds on their platforms. One segment of firms particularly hard hit by the reforms is banks. Bank trust accounts receive untold cash items every day, from everything from dividends to rental income. There are just too many of these small transactions to invest individually in mid or long term investments. Banks have used money market funds as sweep vehicles for many years to park this constant flow of cash receipts until ready to invest in longer term investments. Money market funds have been a convenient vehicle to park cash and earn interest while still being considered similar to cash, as the funds always maintained a one dollar per share value.

Now with Money Market Reform, money market funds have become more complicated and have attracted the attention of the Office of the Comptroller of the Currency (OCC). The OCC regulates and supervises all national banks and thrift organizations. On May 19, 2016, the OCC issued OCC Bulletin 2016-17 “Compliance with SEC Money Market Fund Rules by Bank Fiduciaries, Deposit Sweep Arrangements, and Bank Investments.” The bulletin focuses on three main areas:

  1. Describes how the rules are likely to affect banks
  2. Addresses the product and process changes that banks should consider
  3. Highlights potential compliance, liquidity, operational, and strategic risks

We have mentioned the importance of money market funds for sweep accounts, but banks use money market funds in discretionary and directed fiduciary accounts, retirement accounts, custody accounts as well as holding these funds on their own balance sheet. So there are lots of areas within a bank where MM funds are utilized.

Monitoring of Prospectus and SAIs for MMFs

One of the challenges with a firm offering money market funds is keeping up with any changes that funds may make to their MM funds. The bulletin makes several references advising banks to review prospectus and SAI filings of money market funds. Two examples are below.

  1. The OCC Bulletin states that banks should monitor the changes initiated by MM complexes, as they make changes regarding which funds will be characterized as government, retail or prime. The bulletin states the following in regards to bank fiduciaries with Investment discretion: “When establishing processes for the initial and ongoing due diligence for MMFs approved for use as sweep vehicles or as part of the cash equivalent allocation in fiduciary accounts, banks should continue to review the prospectuses and Statements of Additional Information for the MMFs, as well as Form N-MFP.”
  2. The bulletin further addresses banks that hold shares of money market funds on their balance sheet: “Banks should monitor changes to any MMFs they hold on their balance sheets to ascertain that these MMFs remain eligible for purchase under 12 CFR 1.3(h),” and also “As part of their initial and ongoing due diligence, banks should review the prospectuses and Statements of Additional Information for MMFs.”

Accessing prospectus and SAI filings is a challenge in itself. Looking out for changes in these filings is even more difficult. In working with banks trying to solve this compliance issue, we are suggesting the utilization of two different “Software as a Service” products that we offer.

  • The first one is AperioLite. This product allows individuals to create email alerts when various mutual fund data points are changed by a fund. Fields such as Money market fund indicator, MM liquidity fee/eligibility redemption gate indicator and NAV strike times are critical data points to track. The email notifications would indicate the fund/CUSIP as well as the data point changing. The inquiry tool in AperioLite allows you to view the changes as well as any historical values.
  • The other application that we make available to banks is called FUNDDox. This is a document repository of all 40 Act mutual funds prospectus and SAI filings, going back to 2009. Access is one click away as long as you have a ticker or cusip number. This allows you to actually see the changes in the filings.

 

We think the combination of AperioLite and FUNDDox gives banks the tools they need to monitor changes in Money Market funds as well as non-money market funds and puts the user one click away from the regulatory filings. Contact us for more information or to request a demo.

 

Burton Keller
L. Burton Keller was a principal founder of the company in 1985 and currently focuses on strategic initiatives for the company. Mr. Keller also serves as company representative to the DTCC and is an active member of the Bank, Trust and Retirement Advisory Committee of the Investment Company Institute.
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