A money market fund manager's worst nightmare is large redemptions which can cause a money market fund to break the proverbial "buck", particularly, in a volatile market. The new rule that the SEC is considering would make shareholders much more mindful of the actual value of each share held in a money market mutual fund portfolio, generally, referred to as the net Asset Value or NAV.
If shareholders panic unnecessarily in a volatile market and make redemption requests, it could actually force the Portfolio Manager of the Money Market Fund to redeem securities whose current market value may have declined significantly or below par in order to raise the cash needed to meet redemptions.When a money market fund sells securities prior to the security's redemption date, a gain or loss is recognized which is then distributed to all shareholders. Therefore, the actions of some shareholders can result in tax consequences for all the shareholders of a money market fund.
As a Portfolio Manager of a Money Market Fund, I once had to placate a large shareholder that was irate because a family member did not receive a duplicate statement that he requested from the funds' shareholder services subsidiary. He was a Trustee of a large family trust that represented 60% of a state specific tax-exempt money market fund. Liquidating 60% of the entire portfolio in and making the funds available in three business days would cause the fund to break the buck.
I decided not to panic! First, I called the Shareholder Services people and read them the Riot Act! The amazing thing is that they still hadn't sent the shareholder the duplicate statement! They had merely entered a change in the statement so he would receive duplicate statements at the beginning of the following month. I asked them to send duplicate statements for the previous six months, an apology letter signed by a Vice President, and a small gift. Turned out they had a Starbucks coffee boxed gift that included a mug! Perfect -- who does not like Starbucks!
Next I called the shareholder, he was entertaining friends to an early dinner -- his AARP club! He was very irritated by the call -- I had interrupted his dinner! This wasn't looking good -- not going according to my plan! I told him I was the Money Market Portfolio Manager and asked him politely, if I could call back the next day -- making sure that I said, "Sir", "Please" and "Thank you" in the most perfect English accent. By the time I put the phone down, he was very calm.
The next day I called the Shareholder -- thank God for FedEx and Starbucks! FedEx had already delivered the duplicate statements, the apology letter, and the Starbucks gift. Mr. Shareholder was beaming and very proud that he was actually talking to the Money Market Portfolio Manager! After a profuse apology and assurance that duplicate statements would be delivered going forward, Mr. Shareholder decided not to withdraw the funds.
I was so relieved -- a Starbucks gift and an apology had saved the day! There was no need to sale securities to generate cash to meet the large redemption request! Phew! One of the Vice Presidents of Shareholder Services called to congratulate me for pulling it off; otherwise, we would have had a major disaster and all because of a duplicate statement!
Scroll down to read the snippet below and the full article at the link.
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Proposed money market mutual fund rules draw fire
The Securities and Exchange Commission is considering proposals they say will make money market mutual funds safer — and the mutual fund industry loathes them.
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Money market funds, unlike bank money market accounts, are uninsured mutual funds that invest in high-quality, short-term debt issued by the government, corporations and municipal entities. The funds have $2.6 trillion in assets. The two proposals, each considered an alternative to the other, will be put out for public comment in late March or early April.
•Money funds would abandon the accounting convention that lets them keep share prices at a constant $1. The change would drive home the point to investors that money funds aren't federally insured, thus discouraging panic if a fund's share price fell below $1 — breaking the buck, in fund parlance.
Money funds already have to calculate and disclose their "shadow net asset value" — what the share price would be if each security were priced each day as a stock fund's is. For example, the Fidelity Cash Reserves money fund had a shadow price of $1.0002 on Nov. 30, according to a filing with the SEC. You can find a money fund's shadow price by looking at form N-MFP via the SEC's Edgar system.
The change could make every money fund transaction into a taxable event, forcing investors to calculate miniscule gains and losses in share prices, the fund industry argues. And institutional investors don't like the risk of losing money. "One company treasurer told me, 'If I don't get a dollar in and a dollar out, you don't get my dollar,' " says Paul Stevens, CEO of the Investment Company Institute, the funds' trade group.
•Money funds would have to keep a capital reserve in case of large redemptions. They would also put a 30-day hold on 3% to 5% of an account — a move also aimed at discouraging massive redemptions.
Source -- click on the link to read more:Proposed money market mutual fund rules draw fire – USATODAY.com
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