You need to review your money market fund(s) prior to October 14th.

We have some changes coming, many of you may have already noticed. Your money market fund may now have a fluctuating price instead of the set $1.00 value that we have been used to.

What has caused this change?

The Securities and Exchange Commission has required a floating net asset value (NAV) for institutional prime money market (MM) funds. The changes are a result to the 2008 financial crisis, the Eurozone sovereign debt crisis of 2011 and the impasse over the U.S. government’s debt ceiling in 2011 and 2013. Its intent is to reduce the chance of unfair investor dilution and make it more transparent to certain of the impacted investors that they bear the risk of loss and not the fund sponsors nor the Federal government. This will allow institutional MM funds to temporarily prevent investors form making withdrawals and / or allow the funds to impose fees for investor who redeem shares. the rule may also be interpreted and used by retail MM funds if previously disclosed to the investor.

What does this mean?

In simple terms, the $1.00 NAV of our money market mutual funds we have been accustomed to can how “break the buck” or drop below a value of $1.00.

The rule allows the daily share prices of the MM funds to fluctuate along with changes in the market value of the fund’s assets. The rule also will provide non-government MM fund board of director’s new tools such as liquidity fees and redemption gates (gates that can be closed) to control runs on the MM funds.

What are MM mutual funds invested in?

Government securities, tax-exempt municipal securities, or corporate debt securities have been the underlying investment of MM funds. These securities though short term in nature do fluctuate in value from day to day due to changes in interest rates.

How does this affect me?

It probably will not affect you the retail investor. Bank money market accounts will not be affected since they are not mutual fund accounts. Most retail mutual fund families that have MM mutual funds have already adjusted their portfolios to hold 99.5% US government securities. Thus qualifying the MM mutual fund to continue to maintain the $1.00 value. Other mutual fund families have changed their MM mutual funds to short term bond funds. These funds will not be able to maintain the $1.00 valuation.

Also, some 401k plans have made the same changes as the mutual fund companies. They have in other cases eliminated the MM sub-accounts offered and have a short term bond sub-account made available to take the money market fund’s place. (Sorry for the change in terminology but we are not allowed to call the investment choices in 401k plans mutual funds.)

Then why are you writing this?

Some customer investment accounts are not cut and dried as to whether they are a retail account. The following is an excerpt from Vanguard Funds website:

“In order to be considered a retail fund, the fund must have policies and procedures reasonably designed to limit beneficial ownership to natural persons (for example, accounts associated with social security numbers), including individual beneficiaries of certain trusts and participants in certain tax-deferred accounts, such as defined contribution plans. Businesses, defined benefit plans, endowments, and other accounts that are not beneficially owned by natural persons will have access only to institutional money market funds. There are many instances where retail eligibility is currently unclear, including, but not limited to, certain pooled investments holding money market funds, nonqualified investment plans, collective trust investments and money market components of company stock funds or other custom plan funds, retirement plans with forfeiture accounts and short-term investment funds, and donor advised funds.”

Therefore, it would be beneficial for you to inquire about any MM mutual fund accounts you may own.

For those who are clients of Callaway, and accounts are held at Hilltop Securities, Inc. we have a bank insured money market. We have relationships with many different banks. Therefore, we are able to retain the net asset value of one-dollar. In fact, we are able to handle about three million dollars among twelve different banks to keep the total account FDIC insured. Our customers who have accounts held a American Funds have MM mutual funds that are considered “retail”.

What should I do with this information?

Contact your broker to verify where your cash is held. And if necessary move your funds where the NAV cannot “bust a buck”.

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