Since deadline passed last week for the Comments on the SEC's Money Market Fund Reform Proposals, there have been 205 letters of substance and over 1,100 more form letters. Today, we excerpt from the letter from John T. Donohue, Chief Investment Officer and Head of Global Liquidity, J.P. Morgan Investment Management Inc.. The 2nd largest manager of money funds writes, "J.P. Morgan Asset Management ("JPMAM") appreciates the opportunity to comment on various aspects of the Securities and Exchange Commission's (the "SEC" or the "Commission") proposal to enhance the regulatory framework of money market funds ("MMFs"). JPMAM is one of the largest MMF managers in the world with fund assets under management of approximately $471 billion. Domestically, JPMAM provides investment management services for 13 MMFs registered under the Investment Company Act of 1940 (the "1940 Act") with assets totaling approximately $248 billion, including the JPMorgan Prime Money Market Fund, the industry's largest MMF, with assets of approximately $108 billion."
The letter continues, "JPMAM strongly supports the SEC's goal to reduce potential systemic risk and increase the transparency of the risks presented by MMFs while preserving their benefits. We believe the SEC's proposal (the "Proposal") and the Release present a thoughtful and well-balanced analysis and appropriately identify significant issues that need to be considered, including the importance of the continued use and viability of MMFs to investors and the financial markets."
Its summary says, "JPMAM believes that in achieving the optimal balance of reducing systemic risk and preserving MMFs as an efficient and viable tool for investors and the financial markets, it is important to bear in mind that the reform of MMFs has been under discussion since the early days of the 2008 financial crisis. In the ensuing five years, the SEC has enacted effective reforms that have helped to reduce risk, improve liquidity and disclosure and ensure the stability of the short-term fixed income markets. In addition, the JPMAM-advised MMFs and other MMFs have taken certain elective steps to strengthen investor awareness by voluntarily providing important information to investors, most notably daily disclosure of market-based net asset values ("NAVs") calculated to four decimal places and daily and weekly liquidity thresholds, as applicable. In considering the next steps in money market reform, it is useful to take into account these recent advances and the experiences of MMFs since the implementation of the 2010 reforms."
Donohue writes, "As set out in more detail below, we have undertaken a careful assessment of the benefits and the impact on the continued utility of MMFs presented under the alternatives set forth in the Proposal. We believe that the best option for achieving the SEC's objectives is a variation of the fees and gates alternative under the Proposal ("Alternative 2") in which a board, in its discretion, may impose a gate, and potentially thereafter, a liquidity fee, among other options. We believe that a gate is the only way to effectively stop mass redemptions ("runs"). We believe that boards should determine the appropriate threshold for imposing a gate. A specific trigger that requires board action may cause investors to redeem as a MMF gets close to the trigger, which may accelerate the run that gates and liquidity fees are designed to prevent. We also believe that the proposed 30-day period for gating would be unacceptable for investors, as they could be denied liquidity during a crisis when it is most needed, and could be destabilizing to the short-term liquidity markets and during a period of market stress. We believe that authorizing a board to gate for up to ten (10) calendar days, using a similar standard to the standard under which a board is permitted to halt redemptions in connection with liquidation under Rule 22e-3, would prevent a run and provide the board with a sufficient timeframe to consider and respond to a problem. Ten (10) calendar days should also provide MMFs an opportunity to rebuild significant amounts of liquidity since the 2010 amendments to Rule 2a-7 require MMFs to invest at least 30% of their portfolios in assets that can provide weekly liquidity. Further, we believe that a MMF board should have the discretion to address a problem by imposing a liquidity fee of up to 2% following the lifting of a gate for up to thirty (30) days. Alternatively, a MMF board may elect to liquidate the MMF or re-open the MMF with a floating NAV."
He continues, "If the SEC pursues the floating NAV alternative under the Proposal ("Alternative 1"), we believe that the SEC should not distinguish between retail and institutional investors. In addition, we have identified a number of significant operational and transitional challenges that a transition to a floating NAV would pose to investors, the industry and the financial markets, as set forth in more detail in Appendix A. In particular, we do not believe that MMFs should be placed in an unfair position via the share price reporting mechanism (i.e., the ability to use a $1.000 share price transacted to three decimal places or $10.00 transacted to two decimal places) that all other funds registered under the 1940 Act enjoy through a requirement to transact at a greater level of precision. Further, we request that any discussion of a timeline to convert to a floating NAV not begin until critical tax and accounting issues have been resolved."
J.P. Morgan adds, "To the extent that the challenges to implementing a floating NAV cannot be sufficiently addressed, we note that one of the key objectives of Alternative 1, improving the accuracy of investors' perception of the risks presented by MMFs, may also be achieved through a requirement of greater transparency. We believe that frequent disclosure of key MMF information (i.e., market-based NAVs, daily and weekly liquidity levels and portfolio holdings) work to both reduce risk and aid investors' understanding of the true nature and risk of their investment. While a floating NAV also provides an incremental benefit of reducing the likelihood of inequitable treatment to shareholders by requiring MMFs to sell and redeem shares based on the current market-based value of the securities in their underlying portfolios rounded to the fourth decimal place (e.g., $1.0000), as discussed in more detail below, we believe that this benefit can be achieved by providing MMF boards with discretionary gating powers and the power to impose a liquidity fee, tools which they can use to protect against such inequities in times of stress."
They continue, "Further, we believe that tax-exempt MMFs should be excluded under both Alternative 1 and Alternative 2 in the same way that government MMFs are excluded. Additionally, we believe that the proposal to eliminate the "twenty-five percent basket" ("the basket") for guarantees and demand features from a single entity should be modified to more effectively reduce risk."
Finally, the letter's summary says, "Our views are informed by our experience in the market as well as through engagement with MMF investors and financial intermediaries who have expressed concerns about various aspects of the Proposal. Specifically, MMF investors have indicated concern about changes to the basic tenets of money funds -- stability of principal and daily liquidity. Both Alternatives 1 and 2 have the potential to significantly reduce these key benefits that MMFs provide today and the adoption of either alternative will reduce the use of MMFs. The extent of the impact appears to be dependent upon the details of the reforms adopted. The majority of these investors have stated that they would look to utilize bank deposits, direct money market securities, government MMFs and possibly look to outsource more internal investments to outside managers. Nearly all investors have expressed significant concerns with a rule that combines both alternatives."
