Among the latest Comment Letters on the Financial Stability Oversight Council's Proposals for Money Fund Reform, Wells Fargo Funds Management President Karla Rabusch writes, "Wells Fargo Funds Management, LLC appreciates the opportunity to comment on the proposed recommendations for further changes to the regulation of money market funds issued by the Financial Stability Oversight Council ("FSOC") on November 19, 2012 ("Proposed Recommendations"). Subsidiaries of Wells Fargo & Company ("Wells Fargo") advise and distribute the Wells Fargo Advantage Funds. As of December 31, 2012, Wells Fargo Advantage Funds had a total of approximately $240.4 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."
The letter explains, "Money market funds have long played an important role in our nation's economy, providing both retail and institutional investors with a liquid, stable, and diversified investment option, while at the same time providing a vital source of funding to businesses, states, municipalities and other local governments. We are supportive of the amendments to Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act") adopted by the U.S. Securities and Exchange Commission ("SEC") in January 2010 ("2010 Amendments"). Following adoption of the 2010 Amendments, money market funds have successfully demonstrated their resiliency in the face of market distress, including the U.S. debt ceiling and European sovereign debt crises that occurred during 2011. We wish to continue a constructive dialogue about ways to maintain the effective regulation of money market funds for the benefit of our customers and the United States economy."
It continues, "While we believe the 2010 Amendments adequately reduced the risk that money market funds pose to financial stability, any further changes to the regulation of money market funds 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. As discussed in this letter, the Proposed Recommendations fail to strike this balance. We believe, however, that an alternative measure -- imposing a combination of redemption gates and liquidity fees in the rare event that a money market fund's liquidity becomes materially impaired -- would more directly address the risk of destabilizing runs and yet at the same time impose fewer costs on investors, borrowers, and the financial system."
Wells adds, "We believe it is critical to preserve the availability of stable value money market funds. A stable net asset value ("NAV") has long been a key element in the appeal of money market funds to investors by providing stability of principal and daily access to funds, while offering a competitive yield. While the FSOC has expressed its concern that a stable NAV makes money market funds more susceptible to runs than variable-NAV Funds, we do not believe that the FSOC has demonstrated that a variable NAV would substantially reduce any perceived risk of runs. Given the significant costs for investors in eliminating this feature of money market funds, we do not believe that it is appropriate for the FSOC to recommend this option, or for the SEC to propose and adopt it, based on conjecture and speculation about its benefits."
They write, "The FSOC has posited that a variable NAV will condition investors to become accustomed to, and more tolerant of, fluctuations in money market fund NAVs, the implication being that investors will thus not run from a distressed variable-NAV money market fund. However, the FSOC does not cite to any historical evidence that a floating NAV would have such an impact. In fact, the best evidence available points to the opposite conclusion. As the FSOC recognized in its release, ultra-short bond funds ... experienced substantial outflows in 2008 as NAVs declined. The French equivalent of floating-NAV money market funds provide yet another example, having lost roughly 40 percent of their assets over a three month time span from July 2007 to September 2007. While the FSOC cited these examples in its release, we believe that the FSOC and other regulators must do more than that before imposing sweeping changes on a popular investment alternative -- i.e., provide similarly concrete countervailing evidence demonstrating that that the proposed changes will remedy the perceived problem."
Wells also says, "A floating NAV requirement may spell the end of financial intermediaries' use of money market funds as cash sweep options for their clients. Cash sweep programs permit investors to keep their cash invested and yet still retain ready access to their funds throughout the trading day. These programs rely on the predictability of sweep balances to facilitate same-day investment of newly available cash into designated money market fund sweep shares and to permit the same-day availability of the proceeds from redeemed money market fund shares either for reinvestment or withdrawal. Without a stable NAV, purchases and redemptions of money market fund shares would likely have to be settled after the end of the trading day, which would not comport with the needs of financial intermediaries and their clients."
It continues, "Of course, the effects of requiring a floating NAV will not be felt by money market fund investors alone. As the FSOC has recognized, businesses, states, municipalities and other local governments rely on money market funds as an efficient source of short-term credit. To the extent that investors pull their assets from floating-NAV money market funds, these businesses and governments will likely have to look for credit elsewhere. Neither the FSOC nor any other regulator has been able to adequately describe where these businesses and governments could turn for funding and the costs associated with seeking alternative sources of credit.... Ultimately, we believe that regulators must understand and explain these and other potential impacts for borrowers -- as well as on the financial system and economy at large -- before pursuing a sweeping change like requiring money market funds to maintain a floating NAV."
Wells explains, "The FSOC raised the question of whether money market fund shares should be re-priced initially at $100.00 if a floating NAV requirement is adopted. We do not believe that the FSOC or other regulators should require floating-NAV money market fund shares to be re-priced at any price over $10.00, which is the customary industry initial pricing for other mutual funds. At present, no legal mandate exists for variable-NAV mutual funds to establish any particular initial offering price. Any mandate to initially re-price money market fund shares at the market-based NAV nearest to $100.00 would require the calculation of a fund's market-based NAV to the nearest basis point (i.e., one hundredth of a percentage point) in order to produce a re-priced market-based NAV corresponding to the prescribed level. A commenter has observed that this action would require a higher degree of precision in calculating a fund's NAV than is required by applicable existing accounting pronouncements, which require a fund to calculate its NAV to an accuracy of the nearest one-tenth of a cent (equivalent to one tenth of a percentage point for a fund using a $1.00 share price).... Finally, we do not see any rationale for applying a floating NAV universally to all money market funds."
They tell the FSOC, "One of the core functions of money market funds is to provide shareholders immediate access to their investments, often at multiple times during a business day. The MBR requirement would severely undermine the utility and function of money market funds as a cash management tool because investors would not be entitled to access the full amount of their invested funds for a period of 30 days. Money market fund investments are frequently drawn down to meet payments that become immediately due, such as employee payroll obligations and trade payables. The MBR requirement would irreparably impair the liquidity function money market funds provide and effectively render them unusable by businesses and public entities that currently rely on money market funds to meet short-term cash operating needs.... In addition, due to delays in full payments of redemptions, the MBR requirement would effectively preclude the use of money market funds as sweep vehicles in which monies are automatically invested and redeemed, for example, to deploy excess cash."
Wells Fargo also writes, "Money market funds are investments. As such, we agree with the proposition that investors must recognize that they entail risk of loss. We acknowledge that the addition of modest NAV buffers to money market funds could help them absorb small losses and meet greater liquidity demands in distressed markets. However, we do not believe that the goal of any buffer requirement should be to entirely insulate investors from loss. We are concerned that the FSOC, in proposing its two alternative NAV buffers -- up to 1% of assets when coupled with the MBR and up to 3% of assets when combined with other measures -- is attempting to effectively eradicate such risk, at a cost that will cause investors and fund sponsors to abandon money market mutual funds."
They explain, "In its Proposed Recommendations, the FSOC stated that a NAV buffer could be funded by money market fund investors, through retained earnings or subsidization of higher-yielding subordinated shares, or by fund sponsors. However, given the current low interest rate environment in which fund investors are earning historically low yields and fund sponsors are waiving significant portions of management fees just to preserve modest returns or avoid negative yields for investors, buffers of up to 1% or 3% of assets are simply unworkable for either investors or sponsors."
Wells writes, "Though we have misgivings about the Proposed Recommendations, we believe that regulators could adopt lower cost alternative measures that would better address the risk of runs on prime funds, without removing those attributes of money market funds that investors most value. These alternatives include imposing so-called "redemption gates" and "standby liquidity fees" if a prime money market fund's liquidity becomes materially impaired. In particular, certain industry participants have put forward a sensible proposal in which liquidity fees would be "triggered" when a money market fund's one week liquidity falls to 15%. At that point, the fund would suspend additional investor redemptions for a short period, and then re-open, imposing a fee on all redemptions; a fee of 1% of redeemed amounts would be applied. The liquidity fees collected would be used to shore up a fund and help slow or stop the decline in its mark-to-market NAV by enabling the fund to avoid liquidating holdings into a distressed market."
They add, "Any excess fees left after the fund returns to its normal function could be distributed to fund investors pro rata or retained as a buffer against future losses. The redemption gate and liquidity fee proposal would present two significant benefits that strike to the heart of the problem regulators have attempted to address. First, liquidity fees would actually provide an affirmative reason for investors to avoid redeeming from a distressed fund. That is, investors redeeming from a distressed fund will pay to exercise their right of redemption. Those investors who do not need their money immediately, but who otherwise might redeem in reaction to market dislocation, will have an affirmative disincentive from doing so. The actions of those who choose to redeem in spite of the liquidity fee will help to support the fund's market-based NAV and thus reduce or eliminate the potential harm associated with the timing of their redemptions to other remaining investors."
Wells continues, "We do not intend to suggest that redemption gates and liquidity fees represent the only effective and palatable regulatory measures. We believe that regulators should consider other measures -- particularly rules mandating greater transparency and disclosure -- that could further benefit investors, funds, and the financial system without undermining the essential features of money market funds. The SEC in particular in recent years has focused on rulemaking aimed at making disclosure more accessible and comprehensible to investors. Adoption of the summary prospectus, XBRL tagging, and the proposal of new disclosure requirements for advertisements and marketing materials for target date funds provide salient examples. Though we believe that current money market fund disclosure requirements are entirely adequate, we would welcome the opportunity to review and comment on creative proposals that would, for example, require even clearer and more prominent disclosure of the necessary risk of loss associated with money market funds. We also note that a number of money market fund sponsors have voluntarily begun publishing their funds' mark-to-market NAVs on a daily basis. We believe that regulators should consider and seek public comment as to whether mandating such disclosure from all money market funds would benefit investors and the financial system at large."
Finally, the letter says, "We appreciate the opportunity to comment on the FSOC's Proposed Recommendations. While we do not believe that the Proposed Recommendations strike an appropriate balance between costs to investors and the financial system and any benefits in terms of a marginal reduction in run risk, we appreciate the work that regulators have done to further strengthen money market funds and the financial system over the last several years. We intend to continue to engage in a constructive dialogue with the FSOC and the SEC to help reduce any risks of destabilizing runs on prime money market funds without removing the key features of money market funds that have made them such a popular investment alternative and critical source of credit to businesses, states, municipalities and other local governments."
