As the Securities and Exchange Commission considerstightening its regulations for money market funds, separatelymanaged accounts have been touted as a possible alternative ifcompanies decide to shift assets in response to the new rules. Suchaccounts are essentially customized money funds; they allow acompany to set guidelines for how the money in its account isinvested.

“It appeals to people, the idea that they can pull together aportfolio that's specific to their needs,” said Michael Gallanis, apartner at consultancy Treasury Strategies inChicago. “If you do not wish to actively manage accounts on yourown, this seems to be the next best choice.”

Gallanis said, though, that few of Treasury Strategies' clientsuse separately managed accounts.

The Association for Financial Professionals' 2013 Liquidity Survey, released last month, shows that 22% ofthe 885 companies surveyed say their short-term investment policiesallow them to use separately managed accounts (SMAs), unchangedfrom the 2012 survey. But according to the AFP survey, thecompanies surveyed hold just 3% of their short-term assets in SMAs,also unchanged from the level reported in last year's AFPsurvey.

Separate accounts showed up a little more distinctly when AFPasked companies where they invested funds they moved out of bankswhen unlimited FDIC insurance expired at the end of last year: 8%of the assets that exited bank accounts were invested in SMAs,while 22% went to Treasury money market funds, 21% to prime moneyfunds, and 15% to Treasury or agency securities.

Thomas Hunt, AFP's director of treasury services, noted that AFPasked specifically about short-term assets and suggested companiesmight use separate accounts more for assets with longermaturities.

Tyler Haws, director of business development at Clearwater Analytics,which provides investment accounting and reporting, said the prosand cons of using separate accounts for short-term assets varydepending on each company's circumstances. “If I'm a company thatneeds all of my cash within a week or two weeks, I'm going to lookat the world much differently than someone who knows they don'tneed 50% of their cash for the next year,” he said.

In general, money market funds “are convenient, simple and offersame-day liquidity for all my assets,” Haws said, while a separateaccount “is going to be completely customized to the maturity andliquidity needs I would have to meet for my business.”

Hugh Lamle, president of M.D.Sass Investors Services, a New York-based investment managementfirm, noted that the company controls the securities in theseparately managed account. In fact, if the company has a seasonalneed for cash, it could borrow against the securities in itsaccount, Lamle said.

At a panel at the New York Cash Exchange conference in May,Bruce Guiot, the chief investment officer at Miami University ofOhio, said that investing in SMAs provides organizations with “muchgreater transparency and control.” Using a separate account entailssetting up custodial arrangements for the securities involved,which means an extra layer of fees, Guiot said. But he argued thatthat setup provides additional fraud control, because it means theinvestor gets two separate statements each month on the account,one from the investment manager and one from the custodian

Lamle said he expects to see some money leavemutual funds for separate accounts: “Not a flood, but a trickle.”But he sees the shift having more to do with companies' interest inmoving out the yield curve.

With short-term interest rates so low, many companies withexcess cash have extended the maturity of their investments,venturing out to hold securities maturing in a year, or two orthree years. “Often those are in separate accounts,” Lamle said, inpart because few ultra-short bond funds are of sufficiently highquality to satisfy corporate investors.

The SEC is considering two changes to money fund regulations,one of which would require prime funds, which invest in short-termcorporate debt, to switch from using a stable, $1-a-share net assetvalue (NAV) to a variable NAV. It also proposed a 2% liquidity feeon money fund redemptions if a fund's liquidity falls below acertain level.

Companies that use money funds are concerned a floating NAVwould mean more work because they would have to mark theirinvestments to market and recognize the changes in value in theirfinancial statements. Companies are also concerned about anyrestrictions on redeeming the cash they invest in money funds.

But separately managed accounts don't offer a stable NAV, sousing them still entails dealing with a variable NAV and markinginvestments to market. Observers argue, though, that theadministrative burden involved is not that great.

“If you're in very, very high-grade, short-term securities, thedegree of fluctuation can be controlled to a very minimal amount,”Lamle said. “The custodian is going to give [companies] a daily,weekly or monthly report marking the securities to market. Or ifthey're in a money market fund, they will get a report [from themoney fund].”

Clearwater Analytics'Haws, pictured at left, noted that companies considering using aseparate account needn't worry about the burden of markinginvestments to market or tracking other accounting elements such asimpairment or amortization, since reporting solutions likeClearwater's handle that work for companies.

In fact, Haws said, “separate account managers have over thelast few years really put together full-service offerings to makeit as easy as possible—management of the assets, custody of theassets, reporting of the assets, and accounting and SEC disclosuresfor the assets, all in a single integrated solution.”

When it comes to liquidity, Lamle said the ability to pull moneyout of separate accounts depends on the type of securities theaccount holds. And in a separately managed account, companiesneedn't worry about getting caught up in a panic in which the fearsof other investors in a money fund cause a rush to the exits, asituation that can disadvantage investors who are late to move,Lamle said.

Haws said treasurers considering investing in separate accountsshould start by educating themselves. “Talk to managers of funds aswell as separate accounts,” he said. “Learn about the pros andcons.”

Companies should determine their investment objectives and howfar out the yield curve they're willing to go, and they should have“a reasonably conservative cash-flow forecast,” Lamle said.

“Then look at the tradeoff between quality and yield,” he said.“We would always advise clients to stick with the very highestquality. Even if you have a perfectly valid cash-flow forecast,things can come up to change it.”

To read about the money fund market in Europe, seeWho's Afraid of Floating NAV?