With the deadline for Comments on the SEC's Money Market Fund Reform Proposal now passed, we continue to read through the mountain of feedback. Today, we quote from the Wells Fargo Advantage Funds' comment, which, though there have been many diverse views, represents the mainstream of comment letters to date. It also addresses some of the technical disclosure issues that are causing concerns among portfolio managers. (See the latest list of comment letters here.) The comment, "Karla Rabusch, President, Wells Fargo Funds Management, LLC says, "On behalf of Wells Fargo & Company and its subsidiaries, Wells Fargo Funds Management, LLC appreciates the opportunity to comment on the proposed amendments to rules governing money market mutual funds issued by the Securities and Exchange Commission ("Commission") on June 5, 2013 ("Proposals"). Subsidiaries of Wells Fargo & Company advise and distribute the Wells Fargo Advantage Funds. As of August 31, 2013, the Wells Fargo Advantage Funds had a total of approximately $252 billion in assets under management across a broad spectrum of investments. Our fund family offers a diverse set of money market funds across multiple distribution platforms that include retail and institutional investors. Assets under management in our advised money market funds totaled approximately $119 billion as of August 31, 2013, making Wells Fargo the ninth largest U.S. money market mutual fund provider in the industry. In managing the Wells Fargo Advantage Money Market Funds, we emphasize conservative investment choices and make preservation of capital and liquidity our highest priority."
She continues, "While we believe the 2010 Amendments adequately reduced the risk that money market funds pose to financial stability, we do not oppose in principle additional measures to further strengthen money market funds and further reduce the risk of rapid and substantial redemptions, or "runs," during periods of market distress. We believe, however, that any further regulatory measures must strike an appropriate balance between the costs to investors and others, including businesses, states, municipalities and other local governments that rely on money market funds as a source of short-term credit, and any benefits in the form of a marginal reduction in run risk. We largely opposed the set of proposed recommendations issued by the Financial Stability Oversight Council ("FSOC") in November 2012 because we believed they lacked such balance."
Wells writes, "We view the Proposals as a significant step forward from the FSOC's proposed recommendations. As described further in this letter, we are pleased to support a number of measures, including standalone liquidity fees and gates, further diversification requirements, and many of the proposed new disclosure requirements. We still oppose, however, a variable net asset value ("NAV") requirement for any money market funds, whether as a standalone measure or in combination with liquidity fees and gates. Though we appreciate that the Proposals would mostly limit the variable NAV to those money market funds that have shown any susceptibility to runs -- prime institutional money market funds -- the Release does not provide a sound rationale as to why this measure will address or prevent such runs. This lack of demonstrable benefits is particularly troubling given the substantial costs to prime institutional money market fund investors, sponsors, and financial intermediaries, as well as to the businesses that rely on these funds for short-term credit."
They add, "Finally, notwithstanding our view that liquidity fees and gates are more appropriately tailored to curtail the risk of runs than a variable NAV requirement, we strongly oppose a combination of a variable NAV requirement with liquidity fees and gates. Such a combination will exacerbate, rather than cure, the problems associated with a variable NAV requirement. It is true that liquidity fees and gates represent a much more effective solution to the problem of runs with lower costs than a variable NAV requirement; but adding an effective lower cost measure to an ineffective high cost measure will only magnify overall costs without providing any greater benefit than simply adopting the effective measure alone. In fact, we believe that the proposed combination would lead nearly all investors to abandon prime institutional money market funds for alternatives such as government money market funds -- which may not have the capacity to absorb the additional assets -- and other alternatives that may pose their own risks to the financial system."
Rabusch's letter continues, "We are generally and conditionally supportive of the Commission's proposed new disclosure rules and amendments that are designed to enhance risk transparency to investors. Money market fund shares are investments and investors are better positioned to recognize the risks of money market funds through transparency into a fund's key risk characteristics and disclosure of relevant information. For example, the proposed daily website disclosure of a stable NAV fund's market-based NAVs would provide investors with transparency into a significant risk metric that will inform their investment decisions. Since April 1, 2013, the Wells Fargo Advantage Money Market Funds have been voluntarily publishing their mark-to-market NAVs on a daily basis on their website. Recognizing the benefits to investors of clearer and more prominent disclosure of the risks associated with money market funds, we offer comments on certain aspects of the disclosure proposals. i. The proposed requirements to file Form N-MFP on a weekly basis would be unduly onerous."
It adds, "ii. The Commission should not adopt proposed requirements to disclose detailed information regarding repurchase agreement collateral under amended Form N-MFP because doing so would result in harm to money market funds and their shareholders. The Commission proposes to require additional disclosure with respect to the collateral underlying repurchase agreements in Form N-MFP. We strongly oppose this requirement because we believe the information specified in the proposal may be misused in a manner that will ultimately and seriously disadvantage money market fund shareholders and increase systemic risk, while providing information that will carry little to no utility to investors."
Wells also writes, "The proposal would require that money market funds disclose certain security specific information regarding securities collateralizing repurchase agreements, including CUSIP-level information. Based on discussions of this proposal with six broker-dealers who we view as among the leading participants in the repurchase agreement market ("repo broker-dealers"), we believe that this proposal would effectively result in public disclosure of proprietary trading information about repo broker-dealer inventories of securities and trading positions, and that, in turn, the disclosure of this information could allow competing broker-dealers and other trading counterparties to use this information against repo broker-dealers in trading activities. In anticipation of these potential disadvantages, repo broker-dealers would have the incentive to, and, in our view, likely would, seek to protect themselves by allocating repurchase agreement collateral in priority to counterparties who are not required to publicly disclose proprietary information before allocating collateral, if at all, to money market funds."
They comment, "The proposed CUSIP-level disclosure of repurchase agreement collateral would, in our estimation, prove to be of limited worth to money market fund shareholders, who may be ill equipped to use this granular information to gain meaningful insight into the nature of the securities, or to aggregate this information in a way that would allow them to assess the potential risks to a fund posed by these securities in relation to the repurchase agreement that they collateralize. Instead we propose that money market funds report statistics, including average margin levels, on their repurchase agreements in substantially the same form and with the same frequency as the current reporting of tri-party repurchase agreements by the Federal Reserve Bank of New York on its website."
Wells also says, "The categories of information on repurchase agreements that we propose money market funds report would be much more useful to money market fund investors and regulators than CUSIP-level data on collateral because our proposed categories would allow for regular and efficient comparison of important current and historical risk factors regarding repurchase agreements between different funds and to the market as a whole on a standardized basis. At the same time, it would protect the counterparties' proprietary trading information and further ensure that money market funds retain access to the repurchase agreement market. iii. Money market funds should not be required to disclose acquisition dates or costs to the public because doing so would result in harm to funds and their shareholders."
They continue, "Under the Proposals, money market funds would be required to disclose on Form N-MFP "... the purchase date (and), the yield at purchase ... and the purchase price" for each portfolio security. We believe that such disclosure provides no meaningful information to shareholders and prospective shareholders regarding the risks of a money market fund. Instead, these proposed amendments would require disclosure of proprietary trade information that can and would be used to disadvantage money market funds and their shareholders. For example, based on our observations of actual market behavior, issuers of commercial paper would use this type of information to determine the price at which money market funds purchase their commercial paper from dealers. Upon learning that money market funds purchased the issuer's commercial paper from the dealer at a discount to posted issuance levels (as is customary), an issuer can, and we believe would, compel the dealer to discontinue the practice of discounting the issuer's commercial paper to funds. As a result, money market funds would then be required to pay a higher price for their commercial paper than they otherwise would have if this proprietary trade information had not been required to be disclosed on amended Form N-MFP. We support efforts to increase transparency and aid in price discovery in the money markets, but oppose disclosures that would enable money market fund competitors and counterparties to link this trade information to funds to the detriment of fund shareholders. Instead, we would suggest that price discovery might be enhanced through other methods, such as increasing the categories of securities reported through the Financial Industry Regulatory Authority's Trade Reporting and Compliance Engine (TRACE) system. Trades could be reported in broad maturity categories, such as those used by the Board of Governors of the Federal Reserve System in its commercial paper market statistics. Such broad price reporting would aid in price discovery and transparency while, at the same time, protecting shareholders from the potential harm resulting from the release of money market funds' proprietary trade information."
Wells adds, "We generally support the Commission's proposals to further tighten money market fund portfolio diversification requirements; though we believe that to limit increasing risk of a common shock across money market funds, the Commission must end Rule 2a-7's reliance on Nationally Recognized Statistical Rating Organization ("NRSRO") ratings for purposes of defining securities eligible for money market fund investment. Defining eligible securities in terms of NRSRO ratings not only perpetuates reliance on a discredited and demonstrably unreliable means of determining credit quality, but it unnecessarily limits the diversity of issuers and guarantors of potential money market fund portfolio securities."
Finally, the letter concludes, "We appreciate the opportunity to comment on the Proposals. We view them as a substantial step forward from the FSOC's proposed recommendations issued in 2012. As such, we are pleased to support certain of the Proposals that we believe constitute sensible and cost effective means to further strengthen money market funds and ensure that they do not pose systemic risk. These measures include standalone Fees and Gates, enhanced diversification requirements, and certain additional disclosure requirements. We continue to oppose a variable NAV requirement for any money market funds because we do not believe that it will help to prevent runs, but will make money markets much less useful to shareholders and lead to a migration of assets to alternatives, presenting its own set of problems. We also strongly oppose the potential combination of a variable NAV with liquidity Fees and Gates because we think it will render institutional prime money funds unusable for nearly all investors. Ultimately, however, we appreciate the work that the Commission has done in formulating the Proposals, and we look forward to continuing a constructive dialogue with the Commission to help reduce any risks of destabilizing runs on money market funds without removing key features that have made them such a popular investment options and critical source of credit to businesses, states, municipalities and other local governments."
