In our previous post, we reviewed how the financial markets’ reaction to the COVID-19 pandemic requires mutual funds to review, and possibly reclassify, the liquidity of their investments. As liquidity and valuation are often two sides of the same coin, factors that may lead to reclassifying a security’s liquidity may also raise questions concerning how to value the security for purposes of calculating a mutual fund’s net asset value (“NAV”). This post discusses when this may be the case.
Continue Reading Navigating Mutual Funds in Rough Markets—Valuation

During a recent webinar, Steve explained that the market and trading conditions caused by the COVID-19 pandemic might be “reasonably expected to materially affect one or more of [a mutual fund’s] investments’ classifications” for purposes of the fund’s liquidity risk management program (its “LRM Program”). In this circumstance, Rule 22e-4 under the Investment Company Act of 1940 requires more frequent review of these classifications. This post describes how a rough market may require a mutual fund (other than a money market fund or in-kind exchange traded fund) to reclassify an investment’s liquidity classification.
Continue Reading Navigating Mutual Funds in Rough Markets—Liquidity

Yesterday I posted a summary of the Federal Reserve Bank of Boston’s Money Market Mutual Fund Liquidity Facility (the “Facility”). Today it expanded the Facility to include tax exempt money market funds and municipal securities. Rather than write a separate post, I updated my original post so all the information is in one place and up to date. The blog editor does not have search functions, so forgive me if I haven’t removed every reference to “Prime” or inserted “Muni” in every appropriate spot.

A favorite client has also furnished me with a companion no-action letter obtained by the Investment Company Institute (“ICI”). I cannot link to the letter because I have not found it on either the SEC’s or ICI’s website. The letter is summarized below.
Continue Reading Update on Money Market Mutual Fund Liquidity Facility & Related No-Action Letter

The Federal Reserve Bank of Boston (“FRBB”) has established a new Money Market Mutual Fund Liquidity Facility. (I’m not sure what acronym to use here; “mmm … Fund Liquidity” would work. Let’s just call it the “Facility.”) The Facility opened on March 23, 2020. This post summarizes the significant terms of the Facility and suggests an idea for fund boards to consider.
Continue Reading Information on the Prime and Tax Exempt Money Market Fund Liquidity Facility (Updated 3/23)

I. DERIVATIVES ISSUES

1. Inventory “relationship level” considerations in legal documentation that governs your derivatives trading relationships (ISDA Master Agreements, Futures Customer Agreements, Master Securities Forward Transaction Agreements, etc.)

a. Example: Decline in Net Asset Value Provisions (Common in ISDAs)

i. Identify the trigger decline levels and time frames at which transactions under the agreement can be terminated (25% over a 1-month period – is that measured on a rolling basis or by reference to the prior month’s end?)

ii. Confirm whether all or only some transactions can be terminated (typically, it is all transactions)

iii. Identify the notice requirements that apply when a threshold is crossed

iv. Identify whether the agreement includes a “fish or cut bait clause” that restricts the ability of the other party to designate the termination of the transactions under the trading agreement


Continue Reading Market Volatility Regulatory Outline for Asset Managers

As we touched upon briefly in our previous post on the SEC’s recent Fund-of-Fund (“FOF”) rule proposal, proposed Rule 12d1-4 includes a provision that would limit an acquiring fund’s ability to redeem shares of an acquired fund. Specifically, proposed Rule 12d1-4(b)(2) would prohibit a fund that acquires more than 3% of an acquired fund’s outstanding shares from attempting to redeem more than 3% of the acquired fund’s shares in any 30-day period. Unlike most current exemptions from Section 12(d)(1), this limitation would apply to acquiring and acquired funds that are part of the same group of investment companies. However, the release asked for comments on whether to exempt funds within a group of investment companies from the limitation on redemptions.

Continue Reading SEC Fund-of-Fund Rule Proposal: Potentially Disruptive Impact of Redemption Limitation