The largest U.S. money fund manager, Fidelity Investments, added its two cents to the European front of the regulatory debate with a comment letter to IOSCO, the International Organization of Securities Commissioners, which was also posted to the SEC's President's Working Group Report on Money Market Fund Reform (Request for Comment) page. Fidelity Senior VP and General Counsel Scott Goebel writes in his cover letter to the SEC, "Enclosed is a copy of comments that Fidelity Investments ('Fidelity') submitted to the International Organization of Securities Commissions ('IOSCO') on its consultation report on Money Market Fund Systemic Risk Analysis and Reform Options (the 'Report'). The Report sought comment on a variety of possible reforms to money market funds, much like the President's Working Group Report on Money Market Fund Reform, but on a global level. As we have outlined in the attached letter, U.S. money market mutual funds currently are subject to a comprehensive regulatory framework and to oversight by the Commission. We believe that the Commission's robust regulation and oversight of money funds has been very successful and the Commission's 2010 amendments to its rules governing money funds have made them even more liquid, transparent and stable than ever before."
He explains, "We believe that some minimum international standard must exist for consistent treatment and management of money market funds under a global regulatory framework. However, we realize that money market fund regulation has developed in different markets based on differences in relative size and maturity of national economies. It is important for regulators to recognize these differences within their jurisdictions, which may necessitate varying regulation. Accordingly, our recommendation to IOSCO, the Financial Stability Board, and other regulators globally is to consider certain key features and principles that offer the greatest protections to investors while enabling money market funds to play an important role in the capital markets."
Goebel continues, "These practices include constraints on the liquidity, maturity, diversification, and credit quality of money market funds, as well as transparency and clear governance requirements, all of which have proven effective in increasing the resilience of money market mutual funds in the U.S. In addition, we encourage regulators to expand their focus beyond money market funds to examine investment products that remain unregulated and non-transparent in the money markets. We recommend that international regulators concentrate on introducing regulation to the various pools, structured vehicles, and other funds that offer cash investment without the strict rules under which money market funds operate. We urge the Commission to give full consideration to these materials as it evaluates whether any additional regulation for money market mutual funds is appropriate."
Fidelity's letter to IOSCO states, "Fidelity Investments ('Fidelity') appreciates the opportunity to provide comments to the International Organization of Securities Commissions ('IOSCO') on its consultation report on Money Market Fund Systemic Risk Analysis and Reform Options. Fidelity is the largest money market mutual fund ('MMF') provider in the United States, with more than US$415 billion in MMF assets under management. Funds we manage represent more than 16% of MMF assets in the United States (as of March 31, 2012) and more than 9% of MMF assets worldwide (as of December 31, 2011). More than nine million customers, who include retirees, parents saving for college and active investors, use Fidelity's MMFs as a core brokerage account or cash investment vehicle. Continued viability of MMFs is important to investors, issuers and financial markets, and it is important to us."
It explains, "MMFs are subject 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 encompass portfolio construction, 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."
Goebel writes, "We note that the Report seems to presume that MMFs present risks to the financial system and that additional reform is needed. We do not agree with those presumptions, which are asserted, but unsubstantiated, in the Report. Importantly, we believe that all costs and benefits should be enumerated and evaluated before regulators seek to make further structural changes to a well-functioning investment vehicle that serves the needs of short-term investors and borrowers. Additional reforms should be carefully considered 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."
Finally, Fidelity's 21-page response urges that IOSCO and the FSB adopt a stricter, U.S.-style, definition of the term "money fund" and comment, "We think investors will benefit from having a common definition of MMFs that is well understood and clearly regulated. That said, as daily participants in the broader money markets, we remain concerned with the narrow regulatory focus on MMFs. First, the Report does not critically examine the Financial Stability Board's (FSB) assertion that MMFs are part of "shadow banking." In fact, MMFs are the antithesis of shadow banking because portfolio characteristics and holdings are transparent to investors -- certainly much more so than actual banks…. We recognize that the FSB asked IOSCO to "examine regulatory action related to MMFs", but believe that regulators would do much more to reduce the possibility of systemic risk in the money markets in particular (and capital markets more generally) by focusing first on these unregulated areas before trying to force structural changes onto MMFs. Thus, we think more focus should be placed on the FSB's third workstream that "will examine shadow banking entities other than MMFs" as those unregulated vehicles merit more attention."
