Fidelity Management & Research Company Senior Vice President & General Counsel Scott Goebel is the latest to submit a Comment Letter to the SEC on the President's Working Group Report on Money Market Fund Reform. The letter says, "Fidelity Investments would like to provide the Commission with the results of some of our recent research into the views of money market mutual fund investors. Currently, money market mutual funds are subject to a comprehensive regulatory framework overseen by the Commission. This existing structure includes the recent enhancements to Rule 2a-7, which were designed to strengthen further money market mutual funds. Fidelity has been working with regulators, including Commission staff, to evaluate the need for additional money market fund reforms. To inforn our view, we have conducted extensive research with retail and institutional investors to gain insight into which money market mutual fund features are most important to investors and how investors might react to potential reforms. We urge the Commission to consider these materials as it evaluates whether any additional regulation for money market mutual funds is appropriate."
Fidelity's research study, entitled, "The Investor's Perspective: How individual and institutional investors view money market mutual funds and current regulatory proposals designed to change money funds," explains, "In 2010, regulations governing money market mutual funds (Rule 2a-7) were strengthened by requiring funds to hold more liquid and shorter duration investments in their portfolios. Since then, Fidelity Investments, along with other money market mutual fund managers, has been working with regulators to evaluate whether additional money market reform proposals are needed. To inform our viewpoint on these proposals, Fidelity, the largest money market mutual fund manager with $433 billion in assets under management and 10.9 million money market mutual fund accounts as of December 31, 2011, has conducted extensive research with both individual investors, often called "retail" investors, and "institutional" investors, including corporate treasurers, bank and broker/dealer intermediaries. Among other things, we hope this research will provide further insights into which money market mutual fund features are most important to investors and feedback about how investors might react to certain reform proposals now being considered by regulators."
It continues, "While Fidelity has serious questions about the need for more regulation, especially since there is compelling evidence to suggest that the 2010 reforms have significantly improved the overall soundness of money market mutual funds and made them more resilient to market stress, we continue to keep an open mind to new ideas that might further improve money market mutual funds. We believe that the costs and benefits of any new rule proposal should be carefully weighed to understand the potential impact on the millions of retail and institutional investors who have come to rely upon money market mutual funds to manage their cash balances. The following research results suggest that adopting rules requiring money market mutual funds to float their net asset values (NAV) or impose liquidity restrictions on shareholders -- two ideas that are currently under consideration -- could spark retail and institutional investors to pull significant amounts of assets out of money market mutual funds, leading to unintended consequences for the financial markets and the U.S. economy."
The Fidelity Research Survey's "Key Takeaways" include: "Retail and institutional investors overwhelmingly indicate that they first and foremost invest in money market mutual funds for safety of principal and liquidity, while yield is a secondary consideration; Retail investors use money market mutual funds as a complement to bank products, such as checking and savings accounts, not as a replacement for these FDIC-insured vehicles; A vast majority of retail money market mutual fund investors understand that these funds are not FDIC-insured and the prices of securities held by these funds fluctuate up and down daily; and, Money market mutual fund reform measures that would reduce liquidity or require the NAV to float could cause a significant number of retail and institutional investors to shift assets out of money market funds into banks and other short-term investment vehicles."
The survey says, "Safety of Principal and Liquidity are What Investors Value Most in Money Market Mutual Funds. Fidelity retail and institutional investors overwhelmingly viewed protecting the principal of, and maintaining ready access to, their investments as the most important characteristics of money market mutual funds. A Large Percentage of Fidelity Customers Have a Good Understanding of Money Market Mutual Fund Risks.... [T]hree out of four (75%) Fidelity retail money market mutual fund investors understand that there is not any sort of government guarantee standing behind money market mutual funds. When we probed further on the topic of risks associated with money market mutual funds, 81% of those surveyed understood that the securities held by money market mutual funds had some small daily price fluctuations (11% thought money market mutual fund securities didn't fluctuate while 8% were unsure). Further, only 10% of Fidelity retail money market mutual fund investors believe the government will step in if a money market mutual fund is in danger of breaking $1."
It adds under [the] "Vast Majority of Institutional and Retail Investors Favor Keeping a Stable $1 NAV" that "89% of institutional investors indicated a preference for keeping the stable $1 NAV and only 4% of those surveyed indicated a preference to change to a fluctuating NAV. A large percentage of retail money market mutual fund investors (74%) also favor keeping the stable $1 NAV and just 3% indicated a preference to change to a fluctuating NAV."
The comment letter explains that "Changing to a Fluctuating NAV Could Prompt Institutional and Retail Investors to Flee from Money Market Mutual Funds," saying that "57% of institutional investors we surveyed said they would move all or some of their assets out of money market mutual funds if the NAV of these funds were allowed to fluctuate." It adds, "Likewise, 47% of retail investors said they would move all, or some of their assets, out of money market mutual funds. It also appears that banks would capture the lion's share of the assets moving out of money market mutual funds. For instance, when we asked institutional investors to indicate the primary investment vehicle into which they would move, 42% said they would move to money market deposit accounts at banks and 14% said they would move to CDs/Time Deposits. 19% said they would transfer assets primarily into Treasury securities and 13% said into commercial paper. Separately managed cash accounts, offshore funds, non-2a-7 funds with maturities under 1 year, and cash were mentioned by only 1%. (Note: 8% did not indicate a primary vehicle.)"
Finally, Fidelity says, "Instituting Liquidity Restrictions on Money Market Mutual Funds Could Be Received as Negatively as a Floating NAV." It explains, "Regulators are also considering whether to institute liquidity restrictions on money market mutual funds as a way to make them less susceptible to runs during periods of market stress. One approach that has been talked about is holding back a portion of redemption proceeds for a period of time to provide a safety cushion should a money market fund run into trouble. Fidelity has tested two versions of a holdback feature. In the first version, a portion of proceeds (either 1% or 3%) was held back for 30 days on all redemptions. In the second version, a portion of proceeds (either 1% or 3%) was held back for 30 days only during periods of severe market stress that resulted in the NAV of a money market mutual fund to falling below a certain "trigger level" ($.9975 was used as the example) and was in danger of breaking the $1 stable share price.... [W]e learned that this potential reform could be as destabilizing as a floating NAV.... Given the importance retail investors place on the liquidity feature of money market mutual funds, it is not surprising that investors reacted so negatively to a potential rule that would restrict access to principal."
