Measuring money... faster, cheaper, cleaner

Fidelity Investments, the largest manager of money market funds in the U.S. and worldwide, filed its Comment Letter with the Financial Stability Oversight Council yesterday, saying, "Fidelity has been engaged actively in discussions regarding potential MMF reform for several years, and we do not believe that additional reform is necessary for MMFs. Furthermore, we believe that the FSOC has failed to meet the procedural and substantive requirements as well as the policy justifications that are necessary to exercise its authority under Section 120 of the Dodd-Frank Act ("Section 120") and make the Proposed Recommendations. However, should regulators nonetheless elect to proceed with additional regulatory reform, we strongly urge a narrowly tailored approach to address a clearly defined problem. In particular, we believe that neither the FSOC nor any other regulator has provided any reasonable justification for additional regulation of Treasury, government, tax-exempt, or retail prime MMFs. Any further reforms should be limited to institutional prime MMFs."

Fidelity Senior VP & General Counsel Scott Goebel writes, "All MMFs are subject already to extensive oversight and regulation in the United States under the Investment Company Act of 1940, together with the rules promulgated thereunder. These comprehensive regulations and rules include portfolio construction constraints, investor protections, extensive disclosure requirements, and broad financial reporting and recordkeeping requirements. In addition, mutual fund investors are afforded protections under state law and other federal statutes, such as the Investment Advisers Act of 1940, the Securities Act of 1933 and the Securities Exchange Act of 1934."

He explains, "For decades, MMFs have been attractive destinations for shareholder capital, due to their convenience, high credit quality, and liquidity. MMFs seek to provide a stable, constant net asset value ("NAV") and daily access to money, with a competitive yield versus bank deposits and direct investments. MMFs are utilized by a broad spectrum of investors, from small, individual investors, to large, institutional investors. As the FSOC recognizes, "MMFs are a convenient and cost-effective way for investors to achieve a diversified investment in various money market instruments, such as commercial paper (CP), short-term state and local government debt, Treasury bills, and repurchase agreements (repos)." MMFs provide retail individual investors, including retirees, a safe way to earn income on cash awaiting further investment with low risk and low volatility. Many of the instruments in MMFs generally are not available for direct purchase by individual investors. In addition, some MMFs offer checkwriting privileges, allowing an investor to make payments directly out of a MMF rather than requiring the investor to redeem, transfer the proceeds to another account and then make the payments. These convenience features have made MMFs an attractive complement to bank accounts."

Fidelity's letter continues, "We also believe that MMFs are a success story for the capital markets, allowing issuers to access low-cost funding under a well-defined financial regulatory framework. By investing in short-term debt instruments, MMFs serve as important providers of short-term funding to financial institutions, businesses and governments. Issuers of short-term debt instruments include the federal government and its agencies, corporations, hospitals, universities, banks, and state and local governments. Regulators recognized the importance of MMFs to the short-term funding markets in the Report of the President's Working Group on Money Market Fund Reform Options ("PWG Report"), stating that "MMFs are the dominant providers of some types of credit, such as commercial paper and short-term municipal debt, so a significant contraction of MMFs might cause particular difficulties for borrowers who rely on these instruments for financing.""

It adds, "MMFs also provide investors a convenient, cost-effective cash investment option. In addition to millions of individual investors, institutional investors in MMFs include "corporations, bank trust departments, pension plans, securities lending operations, and state and local governments." MMFs also assist broker-dealers, trustees, pension funds, and charitable foundations in managing customer assets. Today, while many MMFs offer a yield return of only one or two basis points in the current near-zero interest rate environment, investors have maintained MMF investments due to the safety, flexibility, and liquidity that MMFs provide."

Fidelity writes, "Respectfully, Fidelity's message to the FSOC is simple: take no further action on MMFs at this time. As described in more detail in this letter, the SEC is the regulator with the authority and expertise to consider whether and how to adopt additional reforms on MMFs. Furthermore, the alternatives the FSOC has proposed are not workable; and the FSOC has failed to meet the procedural and substantive requirements as well as the policy justifications that are necessary to exercise its authority under Section 120 and make the Proposed Recommendations."

Finally, they say, "Fidelity believes that regulators should proceed cautiously when considering further structural changes to a well-functioning investment vehicle that serves the needs of short-term investors and borrowers. The costs and benefits of additional reforms should be identified clearly and evaluated robustly before moving forward. Any changes to MMFs should be considered carefully prior to implementation to ensure that they are consistent with creating a stronger, more resilient product, without imposing harmful, unintended consequences on financial markets or on the global economy. Fidelity does not believe that the Proposed Recommendations or the accompanying discussion meet those standards."

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