(Note: For those of you attending to first annual European Money Fund Symposium, which takes place today and tomorrow, welcome to Dublin!) Our latest featured Comment Letter on the SEC's Money Market Fund Reform Proposal comes from Lu Ann S. Katz, Head of Global Liquidity, Invesco Ltd.. Invesco's comment letter says, "We are writing to share our views on the proposal promulgated by the Securities and Exchange Commission (the "Commission") to amend certain provisions of the Investment Company Act of 1940 (the "1940 Act") relating to money market mutual funds ("MMFs").... Invesco Advisers, Inc., along with its affiliates, has managed and advised MMF and other cash investment vehicles for over 30 years. As of August 31, 2013, Invesco Advisers had $64 billion in assets under management in its 12 registered MMFs operated in compliance with Rule 2a-7 of the 1940 Act, as amended ("Rule 2a-7"). 1As a leading MMF sponsor, Invesco believes that it is important for us to share our views on the proposed reforms, which would directly affect the millions of MMF shareholders whose financial needs we serve <b:>`_."
They write, "In summary, our views on the reforms included in the Proposed Rule are as follows: The comprehensive changes to Rule 2a-7 promulgated in 2010 have significantly enhanced the stability and transparency of MMFs. The impact of these changes must be taken into account when considering further MMF reforms. Consideration of further reforms to MMFs must begin with a clear understanding of the objectives that the reforms are intended to achieve and the criteria used to evaluate them. Policymakers have enunciated the principal goals of additional MMF reforms as: addressing the vulnerability of MMFs to heavy redemptions and mitigating the related potential contagion risk; increasing the transparency of MMF risks and risk management practices; preserving the benefits that MMFs currently offer to investors to the greatest extent possible; preserving MMFs as a key source of funding for state and local governments and as an important cash management tool for investors; and promoting equitable treatment for all MMF investors by, among other things, ensuring that extraordinary liquidity costs for MMFs during periods of market stress are borne by the investors generating them and eliminating information advantages."
Invesco continues, "In evaluating potential reform options, it is critical for policymakers to apply criteria designed to ensure that any additional reforms: are effective in accomplishing the goals discussed above; are carefully tailored to address the particular risks policymakers seek to mitigate; preserve the utility and core features of the product valued by those who invest in and distribute MMFs; minimize the significant and potentially destabilizing effects of unintended consequences; and increase transparency regarding MMFs for both investors and regulators."
They explain, "We support Alternative 2 which, when coupled with the proposed new disclosure requirements, reflects the most appropriate balance of the cost/benefit elements set forth above. The ability to suspend investor redemptions by imposing redemption gates when MMF liquidity is abnormally low provides the most direct, simple and effective method to achieve the central goal of additional MMF reforms: preventing investor runs and contagion risk to other MMFs. Redemption gates have been proven to be an effective means of preventing runs and providing a "cooling off" period to mitigate the effects of short-term investor panic. Liquidity fees would provide an appropriate and effective means to ensure that the extra costs associated with raising liquidity to meet fund redemptions during times of market stress are borne by those responsible for them."
Katz tells us, "The implementation of liquidity fees also would mitigate the 'first-mover' advantage issue, which has been one of the Commission's concerns since 2008. The amount of any liquidity fee should be carefully calibrated in relation to a MMF's actual cost of liquidity. The fees should be restorative, not punitive, and designed to deter early redemptions. We generally support the enhanced disclosure requirements in the Proposed Rule but believe that the proposed dramatic expansion in stress testing requirements is unwarranted."
She also comments, "The floating NAV proposal in Alternative 1 would not achieve the stated objectives of MMF reform and is substantially inferior to Alternative 2 from a cost benefit perspective because: it would not deter MMF investor runs; it would reduce significantly the utility of the affected MMFs for the majority of their investors; investors have no appetite for floating NAV MMFs; it would trigger a wide variety of unintended and undesirable consequences; it would pose significant operational challenges; and the proposed distinction between "retail" and "institutional" funds is artificial and difficult to implement."
But Invesco adds, "If the Commission nevertheless decides to proceed with Alternative 1, the following changes are critical: retail funds should be defined with reference to shareholder social security numbers; municipal MMFs should be exempt from floating their NAVs; amortized cost pricing should be retained for stable NAV MMFs; and NAV calculations for MMFs should remain consistent with those of other mutual funds. Alternative 3 effectively would destroy MMFs by combining the undesirable features of Alternative 1 with the significant liquidity restrictions of Alternative 2, thereby to creating a uniquely undesirable product that no rational investor would select."
The comment also states, "However, while policymakers have noted that the central objective of the proposed reforms is to mitigate risks associated with MMFs, they have also recognized that eliminating these risks entirely is not feasible since the changes required to do so would be so drastic as to essentially destroy the product. The Report of the President's Working Group on Financial Markets: Money Market Fund Reform Options acknowledges that "Importantly, preventing any individual MMF from ever breaking the buck is not a practical policy objective..." The critical importance of MMFs to investors and global financial markets demands that any additional reforms be well-balanced, tailored and effective. Given regulators' stated goal of "making the funds more resilient ... while preserving, to the extent possible, the benefits of money market funds," any further MMF reforms must be crafted within the context of a holistic cost-benefit analysis that takes into account their full implications for financial system stability, investor choice, and continued access to short-term financing for governments and businesses, as well as the feasibility of implementing them."
Katz says, "The plain fact of the matter is that investors cannot be forced to purchase an investment product that does not appeal to them. The fundamental features of MMFs that investors have embraced for over 40 years -- stability of principal, liquidity, administrative ease and a competitive yield -- are critical to the product's appeal, utility and continued viability. Our MMF clients have communicated clearly that they will seek alternative products to address their needs if MMFs are altered in such a way as to impair substantially their usefulness as a cash management tool. Likewise, the distribution partners through whom many MMF sponsors offer their products to investors must be willing and able to support changes required by the proposed reforms, otherwise they will cease to make MMFs available on their platforms. Distributors have limited resources and understandably focus their efforts on those products most likely to appeal to end investors."
She explains, "Alternative 2, when coupled with the enhanced disclosure requirements proposed in the Proposed Rule, represents the best balance of the cost/benefit factors discussed in Section II above.... As the Proposed Rule recognizes, the possible imposition of liquidity fees and/or redemption restrictions on a MMF, even on a temporary basis, significantly affects one of the fundamental attributes that investors value most highly in MMFs: their liquidity. It is therefore appropriate that these drastic remedies be reserved for circumstances of significant liquidity disruption. This tailored approach is in sharp contrast to the blunt prescription offered by Alternative 1, which would radically change the nature of MMFs even when they are in no real danger of a run. Furthermore, the discretion contemplated in Alternative 2 for a MMF board to determine whether and at what level to impose liquidity fees and redemption gates is appropriate and would provide the flexibility needed for the board, which is intimately familiar with the attributes of the MMFs it oversees and prevailing market conditions, to tailor a response to the particular facts and circumstances of the fund. Finally, we believe that additional education about the purpose and operation of the proposed liquidity fees and redemptions gates and the circumstances in which they might be implemented would increase greatly MMF investors' willingness to accept them."
Invesco writes, "The concept of imposing "circuit breakers" during times of extreme volatility is not foreign to financial markets. Trading exchanges routinely impose temporary trading halts to stem potential panicked selling by investors when markets or individual security prices fall precipitously. Moreover, as noted by Commissioner Gallagher, permitting MMF boards of directors to impose temporary redemption restrictions would represent "a change that would build on the 2010 reforms" by extending a MMF board's existing power under Rule 22e-3 of the Investment Company Act to impose redemption restrictions once the board has made the irrevocable decision to wind down a MMF because it is on the verge of breaking the buck. Permitting a MMF to restrict redemptions in order to protect the fund also would complement the fund's existing ability to reject new shareholder purchases during periods when accepting additional assets could be detrimental to the fund."
Finally, they conclude, "As a leading MMF provider, Invesco strongly supports the Commission's efforts to strengthen this critically important product in a manner that enhances its stability while retaining its fundamental characteristics and continued utility for investors. Any such efforts must begin with a clear understanding of the policy goals they are intended to achieve and an appropriate set of evaluative criteria to be applied in the context of a rigorous cost-benefit analysis. We believe that the proposed combination of liquidity fees, redemption gates and enhanced disclosure is the most effective and feasible method of achieving policymakers' stated goals. On the other hand, requiring MMFs to float their NAVs would fail to achieve the Proposed Rule's aim of preventing and mitigating investor runs. Furthermore, it would generate significant costs and administrative burdens that would cause large numbers of MMF investors, sponsors and service providers to reconsider their willingness to use this product. Worse still, the proposal to require MMFs to implement floating NAVs with liquidity fees and redemption gates would wholly fail the required cost/benefit analysis and would devastate the industry by creating an essentially unmarketable product that would lead investors to abandon MMFs en masse. We respectfully request the Commission to consider carefully our views on this matter and to pursue only those reforms that advance its expressed policy goals while preserving the viability of MMFs, which have served investors’ cash management needs ably for over 40 years."
