The SEC's little-read, "Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher," publication finally got a response Friday when the largest manager of money funds, Fidelity Investments, sent a comment letter and survey to reporters. (The letter and survey are not available online at either the PWG comment area of the FSOC comment letter page yet.) The company's "Re: Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher" letter says, "Fidelity Investments ("Fidelity") would like to take the opportunity to provide the Commission with comments in response to the recent study issued by the staff of the SEC's Division of Risk, Strategy, and Financial Innovation, entitled "Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher" (the "SEC Study". The SEC Study addresses the Commissioners' questions regarding money market fund activity during the 2008 financial crisis, the efficacy of the 2010 money market fund reforms, and how money market funds would have performed in 2008 had the 2010 reforms been in place at the time. The materials we submit today address some of the analysis and data provided in the SEC Study.

The letter continues, "Fidelity continues to believe that the 2010 reforms have made money market mutual funds more resilient and that additional reform is not necessary. However, to the extent that regulators continue to explore additional reforms, it is critical that any new proposals be based on data and facts that are accurate and complete and that any reforms apply only to the appropriate universe of funds. As the SEC Study recognizes, not all money market mutual funds have performed similarly during times of financial stress. Accordingly, we believe the data supports excluding Treasury, government, and tax-exempt money market mutual funds from any further reform. Moreover, within the category of "prime" money market mutual funds, we believe that differences in redemption patterns between "retail" and "institutional" funds warrant further examination and definition before determining which, if any, of these funds should be subject to additional reforms."

Fidelity adds, "We urge the Commission to give full consideration to these materials as it evaluates the appropriateness of any additional regulation for money market mutual funds. Fidelity would be pleased to provide any further information or respond to any questions that the commissioners or staff may have."

The letter's attached survey, "An Analysis of the SEC Study on Money Market Mutual Funds: Considering the Scope and Impact of Possible Further Regulation," explains, "On November 30, 2012, the Division of Risk, Strategy, and Financial Innovation ("RSFI") within the Securities and Exchange Commission ("SEC") released the results of a study ("SEC Study") in response to certain questions regarding money market mutual funds ("MMFs") that had been posed by SEC Commissioners Aguilar, Gallagher, and Paredes. These Commissioners had jointly requested in September 2012 that RSFI undertake a focused research and data-gathering effort so that they could gain a better understanding of (1) MMF shareholder flows during the 2008 financial crisis; (2) the effectiveness of the most recent MMF reforms adopted by the SEC in 2010 ("2010 Reforms"); and (3) the potential impact that any additional MMF reform may have on short-term debt markets."

Fidelity explains, "The SEC Study is a thoughtful and independent analysis. As the SEC evaluates whether to move forward with a proposal for additional MMF reform, Fidelity encourages the SEC to continue to engage in a rigorous assessment of the costs and benefits of possible future regulation by applying careful, thorough economic analyses of the likely consequences of new rules using all relevant data. Only by employing a process of this kind can the SEC advance its mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation."

They write, "The SEC Study sets a solid foundation for deliberation on possible further MMF reform. The SEC's work is particularly helpful as a counterpoint to the recent proposed recommendations from the Financial Stability Oversight Council, which seeks to impose structural reform on all MMFs without appropriately considering whether such broad reforms are supported by empirical data. The SEC's analysis helps make clear that certain types of MMFs do not need any further reform."

Fidelity continues, "We have analyzed the SEC Study and augmented its findings with our own data and experience to develop a set of informed conclusions about the study, which we present in the following pages. We have organized our observations into the following four interrelated themes: 1. The SEC Study demonstrates that the 2010 Reforms significantly reduced risk across all types of MMFs. 2. The SEC Study shows that most types of MMFs were not subject to large, abrupt redemptions during the financial crisis. 3. The SEC Study highlights that certain "institutional" funds have performed differently than "retail" funds; yet there is no regulatory classification of funds based on shareholder type or composition. 4. If, based on findings from its study, the SEC determines that further reform is necessary, then such reform should be narrowly tailored, so as to minimize disruption to short-term markets and lessen adverse impacts on long-term economic activity. The remainder of this document consists of four sections designed to address these themes and to provide detailed analysis, support, and, in some cases, rebuttal, of the most significant findings of the SEC Study."

Fidelity tells us, "As the largest U.S. MMF provider, we have seen increased resiliency in MMFs after the 2010 Reforms. The SEC Study provides an independent verification of our experience. MMFs are generally classified into four major categories ... based on the types of assets they hold: Treasury, government, municipal, and prime (also referred to as "general purpose"). Clearly, the risk profiles associated with MMFs in these four categories can vary significantly based solely on fund holdings."

They add, "The SEC Study appropriately recognizes that not all MMFs have performed similarly during times of financial stress. These behavioral discrepancies among MMFs arise simply because different MMFs are exposed to different risks. A major source of the disparity in risk levels among MMFs is that they hold different types of assets, as summarized in Exhibit 1. However, the risk levels can become even more disparate when the MMFs are held by different types of investors, since share subscription and redemption patterns are strongly dependent on shareholder composition. Within each of the four major MMF categories shown in Exhibit 1, industry participants and observers routinely distinguish between two important sub-categories of funds, namely "institutional" funds (those funds with shareholders which are primarily corporations, governments, and intermediaries) and "retail" funds (those funds with shareholders who are primarily individuals). This distinction has been made not only to acknowledge structural differences in business models required to service retail and institutional investors, but also to facilitate performance comparisons among funds having similar assets and shareholder composition."

Finally, Fidelity writes, "As mentioned above, data in the SEC Study suggest that institutional and retail MMFs exhibit different redemption patterns in times of market stress. Now that the SEC has analyzed and identified these inherent differences in shareholder behavior, it has created an opportunity to tailor any future reform appropriately. Currently, however, there is no regulatory classification of funds as institutional or retail. Today, MMF advisors self-classify funds -- i.e., MMF managers voluntarily report to an industry vendor whether a particular fund is retail or institutional. Therefore, an important step toward creating properly tailored reform is to put forth formal criteria that distinguish between these two fund types. We encourage the SEC to analyze this issue further and to work toward a distinction between retail and institutional MMFs, as it will be helpful in considering appropriately tailored reform based on the available empirical evidence."

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