The 90-Day Equity Wash Rule states that anyone transferring assets out of an investment contract fund must transfer the assets into a stock fund, balanced fund, or bond fund with an average maturity of three years or more. The assets must remain in that equity fund for a period of 90 days before becoming eligible for transfer into a competing stable value fund.
This restriction is imposed by the issuers of the investment contracts in which the fund invests. The intent is to prevent investors from moving out of an investment contract fund and into a competing fund to obtain a higher rate of interest. An investment contract fund's yield reflects the blended or average yield of all of the contracts held. The yield changes gradually over time, following general market interest rates. With an average contract maturity of 2-3 years, an investment contract fund will see its yield change at a slower pace than the yield of a money market fund, which has an average maturity of only 60-90 days. At times, the trust's yield may be significantly above or below current market interest rates.
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Now, let's delve into the concepts presented in the article on the 90-Day Equity Wash Rule:
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90-Day Equity Wash Rule: The 90-Day Equity Wash Rule is a regulatory provision that dictates the conditions under which an investor can transfer assets out of an investment contract fund. Specifically, the rule mandates that these assets must be moved into a stock fund, balanced fund, or bond fund with an average maturity of three years or more. Furthermore, the assets must remain in the chosen equity fund for a period of 90 days before becoming eligible for transfer into a competing stable value fund.
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Investment Contract Fund: An investment contract fund is a type of financial vehicle that pools investments from various investors and deploys them into a portfolio of contracts. These contracts often include a mix of securities, and the fund's yield is reflective of the blended or average yield of all the contracts held. The average contract maturity in such funds typically ranges from 2-3 years, leading to a slower pace of yield changes compared to funds with shorter maturities.
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Yield and Market Interest Rates: The yield of an investment contract fund changes gradually over time, tracking general market interest rates. The yield is influenced by the contractual agreements within the fund's portfolio and evolves in tandem with broader market conditions. This gradual change in yield is contrasted with money market funds, which have a much shorter average maturity of 60-90 days, causing their yields to respond more rapidly to shifts in market interest rates.
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Intent of the 90-Day Equity Wash Rule: The primary intent behind the imposition of the 90-Day Equity Wash Rule is to prevent investors from swiftly moving their assets out of an investment contract fund and into a competing fund with the aim of securing a higher rate of interest. By enforcing a waiting period and restricting the destination of transferred assets to specific types of funds, the rule seeks to maintain fairness and stability in the investment landscape.
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Issuer Imposition and Stability: The article highlights that the 90-Day Equity Wash Rule is imposed by the issuers of the investment contracts within the fund's portfolio. This imposition is designed to ensure stability by preventing abrupt movements of capital that could disrupt the balance of the investment contract fund and protect against the potential exploitation of interest rate differentials.
In summary, the 90-Day Equity Wash Rule is a regulatory measure aimed at preserving stability and fairness in the movement of assets within the realm of investment contract funds, considering factors such as yield dynamics, average maturities, and market interest rates.
