We go back to the well again today and cite yet another major comment letter on the SEC's recent Money Market Fund Reform Proposal. Our latest excerpts are from J. Charles Cardona, President, The Dreyfus Corporation, New York, New York. Cardona writes, "The Dreyfus Corporation ("Dreyfus") appreciates the opportunity to respond to the "Money Market Fund Reform" proposals (the "Proposals") recently issued for public comment by the U.S. Securities and Exchange Commission (the "Commission") on June 19, 2013 (the "Release"). Established in 1951 and registered with the Commission as an investment adviser under the Investment Advisers Act of 1940, Dreyfus manages approximately $260 billion in assets, including approximately $167 billion in 41 domestic money market mutual fund ("MMF") portfolios that are structured within the confines of Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act") and approximately $24 billion in two offshore, dollar-denominated liquidity funds (Irish-domiciled UCITS funds). Dreyfus is a subsidiary of The Bank of New York Mellon Corporation, a global financial services company operating in 36 countries and serving more than 100 markets, and a leader in providing financial services for institutions, corporations, and high net-worth individuals, offering investment management and investment services worldwide."
He explains, "Dreyfus supports the policy goals that the Commission set forth in the Release and at the Commission's Open Meeting held on June 5, 2013 (the "Policy Goals"), which we understand are: Lessening MMFs' sensitivity to excess redemption activity; Increasing MMFs' ability to manage through and mitigate potential contagion from high levels of redemptions; Imposing transparency and risk management overlays; and Preserving, as much as possible, the utility of MMFs."
The Dreyfus letter continues, "Though Dreyfus supports these directionally sensible policy aims, we believe a number of the Proposals are not appropriately designed to achieve the Policy Goals and are more likely to diminish, rather than preserve, the overall utility of MMFs for all MMF investors. In particular, we are concerned with: The variable net asset value ("VNAV") alternatives (particularly, without appropriate "tax relief" as we discuss in Section Ill below), despite the proposed Government and retail exclusions; The Commission's decision not to exclude tax-exempt MMFs ("Municipal MMFs") from the Structural Proposals, as the Commission chose to exclude Government MMFs; and The elimination of amortized cost as a means for valuing the portfolio securities (with remaining maturities of> 60 days) of constant net asset value ("CNAV") MMFs."
It adds, "Dreyfus welcomes the Commission's intent to preserve the intrinsic value of MMFs in its proposals to exclude Government MMFs from the proposed mandates of VNAV and Standby Liquidity Fees and Gates ("Fees and Gates") structures (hereafter, the VNAV and Fees and Gates proposals collectively are referred to as the "Structural Proposals") and to provide a "retail" exception from the VNAV alternative that would allow for certain funds to maintain a CNAV. We can see how these Proposals, to some degree, can preserve the utility of MMFs for certain investors, but we believe they are not sufficient to offset the damage that will be done to the industry if the three Proposals cited above are adopted."
Cardona also writes, "Dreyfus also continues to believe that too much emphasis has been placed on stopping MMF redemptions to the exclusion of considering how a MMF's structure reveals how it can be expected to perform in a time of crisis. Our comments in this regard derive from our view that MMFs were not the cause of the 2008 financial crisis, but rather faced the same flight to quality from financial institutions that others faced during this period. We believe there is room within Rule 2a-7 to enhance the credit, interest rate, and liquidity risk profile of MMFs, and increase the frequency of disclosure of MMF holdings, without harming the utility of MMFs for investors. We believe our approach can successfully mitigate systemic risk by broadly enhancing MMFs resiliency. Importantly, we do not think that improving resiliency fails to address the perceived "structural vulnerabilities" of MMFs. Instead, we think these are complementary and not discrete objectives."
He comments, "Dreyfus further welcomes the Commission's consideration of Fees and Gates as a stand-alone alternative. We believe Fees and Gates directly answer the perceived structural vulnerabilities of MMFs and the Policy Goals and should be given due consideration in that regard. We also think that Fees and Gates appropriately complement the Rule 2a-7 enhancements we outline later in this letter, as each incentivizes more conservative and resilient MMF portfolio construction within a VNAV framework."
Cardona adds, "Lastly, Dreyfus agrees with the Commission that among the proposals "not one size fits all" and that a requisite balance must be achieved between preserving the unique value of MMFs for all investors both as investments offering capital preservation, daily liquidity, and cash management transactional utility and as instruments that contribute to the capital formation process, with systemic concerns. Thus, we believe that if the Commission remains inclined to pursue a VNAV alternative, providing fund sponsors and MMF boards choice in implementation, as contemplated in the Release, offers the best chance for the Commission to achieve its Policy Goal of preserving the utility of MMFs in a VNAV environment."
He says, "The VNAV structure will diminish MMF utility substantially, without solving for redemption sensitivity in times of market crisis or improving the ability of investors to understand the risks associated with their MMF investment. The VNAV structure fails to adequately address the perceived "first mover advantage" and should not be expected to reduce portfolio or systemic stress during times market crisis. The VNAV structure also cannot be a meaningful option for the cash management marketplace because it carries major tax and record keeping burdens and will not be supported by intermediaries provides of MMFs if adopted by the Commission. Also, and contrary to assertions made in the Release, a VNAV structure eliminates the fund's ability to serve investors' same-day liquidity needs. Further, we do not believe that "transparency of risk" is achieved through "causing investors to experience price changes," as the Commission asserts. Transparency is achieved by making the MMF's overall risk profile readily available for investors to assess how a fund can be expected to perform in various market conditions. These are threshold issues for market acceptance for any sort of VNAV MMF and the record established by the Commission is insufficient to support imposing this level of disruption on MMF investors."
Finally, Dreyfus comments, "We greatly appreciate the Commission's intent to take a moderate approach with these Proposals and we thank the Commission for the opportunity to present our views on the issues raised by them, particularly those that, in our view, risk diminishing the utility of MMFs to a much greater extent than the Commission may estimate."
