The OCC approved a final rule that revises the requirements imposed on short-term investment funds (STIFs) managed by U.S. banks and federal branches of foreign banks. The final rule published on October 9 will require STIFs to operate with a primary objective to maintain a stable net asset value (NAV) of $1.00 per participating interest, have a dollar-weighted average portfolio maturity of 60 days (revised down from 90 days), and have a dollar-weighted average portfolio life maturity of 120 days. The final rule will also require banks managing STIFs to adopt portfolio and issuer qualitative standards, concentration restrictions, and standards to address contingency funding needs, adopt pricing procedures that reflect the value of the STIF’s assets at amortized cost and the market value of the STIF’s assets, and adopt procedures for stress testing the STIF’s ability to maintain a stable NAV. Banks managing STIFs will be required to implement procedures to report adverse stress testing results to the bank’s senior risk management, provide monthly disclosures to STIF plan participants and the OCC, and notify the OCC before or within one business day after the occurrence of certain adverse events related to a STIF. The final rule applies to national banks, federal savings associations, and federal branches of foreign banks that act in a fiduciary capacity and manage a STIF. The final rule will become effective on July 1, 2013.
Nutter Notes: A STIF is a type of collective investment fund (CIF) that operates pursuant to a plan that governs a bank’s fiduciary management and administration of the fund. A CIF is a bank-managed fund that holds pooled fiduciary assets that meet specific criteria established by the OCC’s fiduciary activities rules at 12 CFR Part 9. For admissions to and withdrawals from a STIF, a bank may value STIF assets on an amortized cost basis, provided that the STIF plan includes certain requirements, rather than marking the assets to market, which is the valuation method required for other CIFs. In order to qualify for this exception under the OCC’s current fiduciary activities rules, a STIF’s plan must require the bank to maintain a dollar-weighted average portfolio maturity of 90 days or less, accrue on a straight-line or amortized basis the difference between the cost and anticipated principal receipt on maturity, and hold the fund’s assets until maturity under usual circumstances. Because a STIF’s investments are limited to shorter-term assets and those assets generally are required to be held to maturity, differences between the amortized cost and mark-to-market value of the assets are relatively rare, absent atypical market conditions or an impaired asset. According to the OCC, the changes to the STIF rules add safeguards designed to address the risk of loss to a STIF’s principal and procedures to protect fiduciary accounts from undue dilution of their participating interests in the event that the STIF loses the ability to maintain a stable NAV.