A host of new comment letters on the SEC's Proposed Money Market Fund Reforms appeared ahead of the long weekend and ahead of the looming September 8 deadline. The SEC's change proposals for its regulations governing money market funds would, "Tighten the risk-limiting conditions of rule 2a-7 by ... requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the weighted average maturity of portfolio holdings, and limiting funds to investing in the highest quality portfolio securities; require money market funds to report their portfolio holdings monthly to the Commission; and permit a money market fund that has 'broken the buck' ... to suspend redemptions to allow for the orderly liquidation of fund assets." The SEC is expected to receive an unprecedented number of comment letters (55 have already been posted through Friday), and is expected to digest the comments then release the final 2a-7 amendments late this year.
While it hasn't been surprising to see the vehement and almost unanimous opposition to the possibility of a floating NAV, we've been surprised by the number and breadth of commenters speaking out in opposition to the proposed ban of "Second Tier" securities. Some of the largest money fund managers, including No. 1-ranked Fidelity Investments, have already written opposing the change. But a recent comment letter was posted by the U.S. Chamber of Commerce and signed by representatives of Aetna, Alcoa, Avon Products, Clorox, Comcast, Consolidated Edison, CVS Caremark, Devon Energy, Dominion Resources, Duke Energy, Hubbell, Marriott International, Nissan Motor Acceptance, PG&E, ServiceMaster, Walt Disney, Time Warner, and XTO Energy also argues strongly against the change. (Another letter from the American Securitization Forum, or ASF, is pending.)
The Chamber of Commerce letter says, "The undersigned companies and organizations represent a diverse range of industries that rely on a well-functioning and liquid money market to support their financing needs.... While we support the majority of changes set forth in the Proposal, we oppose the proposed amendments to prohibit money market funds from investing in securities that carry the second highest credit rating. As set forth below, we believe this action would have a negative and unintended impact on capital formation that far outweighs any speculative increase in investor protection."
It explains, "We urge the SEC to preserve the ability of 2a-7 funds to invest up to 5% of total assets in A2-P2 Securities for several reasons: I. Issuers of A2-P2 Securities represent a major part of our capital markets and are significant contributors to our nation's economy. II. A2-P2 Issuers are high quality credits with investment-grade long-term debt ratings. The historic default risk of A2-P2 Securities is very similar to that of A1-P1 Securities. A2-P2 Issuers are required to hold 100% backstop facilities to offset this risk. III. The Proposed Prohibition would not have prevented the recent strains on money market funds.... IV. The Proposed Prohibition could indirectly discourage non-2a-7 investment in A2-P2 Securities which would severely constrict the market for A2-P2 commercial paper.... V. The Proposed Prohibition could decrease borrowing flexibility and elevate borrowing costs for A2-P2 Issuers, thereby restricting their ability to meet their short-term cash needs, increasing their cost of capital, and driving up consumer costs."
Other recent comments include letters from: J.P. Morgan Investor Services Co., who argues that the second business day filing deadline [for portfolio holdings] may pose a significant logistical challenge; Fannie Mae, who worries that "preserving the interest rate reset maturity shortening provisions for government securities that have a maturity of 731 days or less will both minimize market disruption and enable issuers of government securities to continue to meet critical internal funding needs"; the Independent Community Bankers of America, who say they are "concerned that these amendments to Rule 2a-7 may unnecessarily restrict MMF investments in FDIC-insured certificates of deposit (CDs) (CDARS and similar programs are considered "illiquid," ICBA explains); and, Nuveen Investments, who objects that the, "requirement that the underlying bond be rated in the highest short-term or long-term rating category represents a change from the current rule, which requires a rating 'within the NRSROs' two highest short-term or long-term rating categories.'" (Nuveen says, "Such a change would greatly reduce the amount of tender option bonds that could be acquired by tax-exempt money market funds.")
Look for more comment letters to be posted throughout next week, and look for a more-detailed analysis and discussion in the September issue of our Money Fund Intelligence newsletter ($500 a year), which will be e-mailed to subscribers on Tuesday morning.
