Comments on the SEC's latest Proposed Money Market Fund Reform poured in ahead of Tuesday's deadline. (See the latest postings here.) The SEC will likely take a couple of days to catch up to the last-minute letters, and interested parties will no doubt be reading for weeks to come. (We'll continue excerpting from the best of the letters when we can, but we'll be slowed down by the approach of our Crane's European Money Fund Symposium next Tuesday and Wednesday in Dublin.) Today, we excerpt from Fidelity Investments' comment letter (which is not available online yet). Fidelity's statement to media sums up the letter's contents, saying, "1. Fidelity firmly believes that the SEC should treat municipal/tax-exempt money market funds the same way it treats Treasury and government money market funds by excluding these funds from any structural reforms. Municipal/tax-exempt money market funds are not susceptible to destabilizing runs, do not pose systemic risk, and have a resilient portfolio construction. In addition, these funds serve as a critical source of funding to state and local governments, as well as non-profit organizations."
They add, "2. Fidelity proposes an alternative definition of a "retail" money market fund. The SEC's proposed definition does not work because of the high operational costs and shareholder dissatisfaction with limiting access to funds. We propose a definition that is based on Social Security Number account registration. This definition represents more accurately the broader universe of people that the SEC intended to capture under its definition. In addition, this definition is simple, easy to understand, easy to implement and treats all shareholders and transactions in a single fund identically."
Fidelity's statement continues, "3. Fidelity believes that the floating NAV proposal is not an effective means to achieve the SEC's stated goal of stemming rapid and significant redemptions. This proposal would eliminate a fundamental feature of money market funds that investors have come to rely upon -- the stable NAV. In addition, this proposal involves significant costs and burdens, including new, complex tax and accounting implications for shareholders. 4. Fidelity believes that the SEC's liquidity fees and redemption gates proposal is a more effective means to achieve the SEC's goals than the floating NAV proposal. We recommend that that SEC adopt a fees and gates approach only for institutional prime money market funds. However, we recommend that the SEC reduce the redemption fee rate from 2% to 1%."
It adds, "5. Fidelity does not support a combination of, or choice between, the liquidity fees and redemption gates proposal and the floating NAV proposal. A combined structure would impose excessive costs and burdens on the money market fund industry, shareholders, and the financial markets generally, and result in an extremely complex and confusing product. 6. Fidelity recommends that the SEC extend the compliance period for any structural reforms to three years following the effective date of a final rule. This will allow money market funds and intermediaries sufficient time to implement any structural reform."
Fidelity, by far the largest manager of money funds with over $425 billion (17.2% of all assets), writes in its 56-page submission, "Fidelity has been engaged actively in discussions regarding potential MMF reform for several years, and we believe that the SEC, the primary regulator for MMFs, is the appropriate agency to proceed with additional reform for MMFs. We support the SEC's efforts in drafting a thoughtful proposal, which recognizes that not all types of MMFs are the same, and we appreciate the SEC's attempt to craft narrowly tailored reforms targeted at the limited set of MMFs proven to be susceptible to runs."
They explain, "Appropriately, the SEC has excluded both Treasury and government MMFs from the proposed fundamental structural changes, recognizing that there is no evidence to support such reform. However, we firmly believe that the SEC also should exclude tax-exempt MMFs from the floating net asset value ("NAV") and fees and gates proposals. The SEC provides no basis in the Proposed Rules release for including tax-exempt MMFs. In fact, the SEC's 2012 study on MMFs demonstrates that tax-exempt MMFs have strong liquidity positions and are not vulnerable to or likely to experience significant shareholder redemptions. Moreover, tax exempt MMFs provide a critical source of low cost financing for state and local governments that will be significantly more expensive if these funds shrink dramatically following SEC reforms that make MMFs an investment vehicle that is no longer useful and attractive."
Fidelity tells the SEC, "As part of its targeted approach, the SEC's stated policy objective for a floating NAV proposal is to limit its application to "institutional" MMFs. We support the SEC's attempt to preserve the stable NAV for retail MMF shareholders who "historically have behaved differently from institutional investors in a crisis, being much less likely to make large redemptions quickly in response to the first sign of market stress." `However, the SEC's proposed retail MMF definition, which would limit a shareholder's daily redemptions to $1 million, does not achieve the Commission's policy goal."
They write, "Unfortunately, the proposed definition would exclude a significant portion of what the MMF industry defines as retail assets. In response to a question from Chair White at the SEC's open meeting on the Proposed Rules release, the Staff indicated that the floating NAV proposal would apply only to institutional prime MMFs and, therefore, the Staff estimated that only 30 percent of all MMF assets would be subject to a floating NAV if adopted by the SEC. The SEC grossly underestimated the industry assets that would be impacted, which we estimate to be closer to 65% of all MMF assets. Therefore, we offer an alternative definition that will permit the SEC to achieve its intended policy objective of targeting institutional MMFs under the floating NAV proposal."
Fidelity continues, "As discussed in greater detail in the remainder of this letter, we have organized our comments on the Proposed Rules release as follows: I. Types of MMFs to be Excluded from Structural Reform. A. The SEC should treat tax-exempt MMFs the same as Treasury and government MMFs and exclude all tax-exempt MMFs from the floating NAV and fees and gates proposals. B. The proposed definition of a retail fund will not work as intended and we propose an alternative definition based on Social Security number account registrations."
They say, "II. Structural Reforms. A. The liquidity fees and redemption gates proposal is a more effective means to achieve the SEC's goals than the floating NAV proposal. The SEC should adopt a fees and gates approach for institutional prime funds, with certain modifications. B. The floating NAV proposal is not an effective means to achieve the SEC's stated goal of stemming rapid and significant redemptions, which could be achieved through disclosure. The SEC should not adopt a floating NAV for MMFs. C. The SEC should not combine, or offer a choice between, the liquidity fees and redemption gates proposal and floating NAV proposal."
Fidelity adds, "III. Diversification, Stress Testing, and Disclosure Changes. A. We support the SEC's efforts to enhance MMF portfolio construction and recommend some alternative options with respect to the proposed diversification changes. B. We offer some changes to the proposed MMF stress testing requirements that would meet the objective of creating a uniform standard across the industry. C. We recommend some modifications to the SEC's proposed disclosure changes. IV. The costs for Fidelity to implement the floating NAV proposal, the fees and gates proposal, the definition of a "retail" MMF, and disclosure changes are estimated to be $37 million."
The letter also explains, "MMFs are subject already 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 include portfolio construction constraints, investor protections, extensive disclosure requirements, and broad financial reporting and recordkeeping requirements. In 2010, the SEC significantly strengthened Rule 2a-7, which governs MMFs, by imposing more stringent constraints on fund maturity, liquidity, and quality, as well as new requirements on fund disclosure, operations, and oversight. 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."
Finally, they add, "For decades, MMFs have been attractive investment vehicles for shareholder capital, due to their convenience, high credit quality, and liquidity. MMFs seek to provide a stable, constant NAV and daily access to money, with a competitive yield versus bank deposits and direct investments. MMFs are utilized by a broad spectrum of investors, from small, individual investors, to large, institutional investors. As the SEC recognizes, "[t]he combination of principal stability, liquidity, and short-term yields offered by money market funds ... has made money market funds popular cash management vehicles for both retail and institutional investors".... The SEC must identify clearly and evaluate robustly the costs and benefits of additional reforms. The SEC's goal of targeting reform at institutional prime MMFs strikes the proper balance."
