Fund Directions - What Boards Should Know About Negative Yield on Money Funds

What Boards Should Know About Negative Yield on Money Funds

Timothy Levin Money market funds have recently been battling negative yields and breaking the buck as they adopted more defensive investment strategies with higher credit quality and correspondingly lower credit risk. Three lawyers at Morgan, Lewis & Bockius partners Timothy Levin and Jennifer Klass and associate John O'Brien -- have put together a number of options that funds have for dealing with negative yield including two seemingly radical approaches.

For funds that are looking to address the negative yield flat out, the lawyers provide a handful of simple methods to minimize or prevent the negative return. But the three bring up a couple new approaches, originally suggested by Peter Crane of Crane Data, of preventing a fund from breaking the buck by either assessing negative dividends or calculating a daily reserve share split. While the Securities and Exchange Commission has not issued guidance on either strategy, nor have any funds implemented them, the options offer a way of maintaining an equilibrium between real per share net asset value and a fund's $1 NAV.

Jennifer Klass "We are not aware of any fund groups that have yet implemented negative dividends or reverse share splits due in part to the financial implications for fund shareholders and also the operational difficulties associated with implementation," said Klass. "However, they are theoretical options and my guess is that an increasing number of funds may have to consider them if the current negative yield environment continues over the long term."

Here is what the three Morgan Lewis professionals suggest for fund directors:

John O'Brien Directors of money funds may wish to engage fund management in a discussion of the extent to which their funds have the potential to experience a negative yield especially money funds with significant exposure to U.S. Government and U.S. Treasury securities, as well as funds that have tightened their investment restrictions in the current market. Directors of money funds that are at risk for experiencing a negative yield should consider the various benefits and detriments of the options described below, among others, in light of the specific circumstances of each particular fund.

Negative Yield

A money fund ...

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What Boards Should Know About Negative Yield on Money Funds