Today, we excerpt from our latest Money Fund Intelligence newsletter. Our October issue contains a "Fund Profile" entitled, "Fidelity's Prior Discusses Comment Letter, Future." It says: This month, we again interview Fidelity Investment Money Market Group President Nancy Prior, and ask about Fidelity's recent comment letter on the SEC's Money Market Fund Reform Proposal, as well as several other topics. (See our previous June 2012 MFI interview, "New Queen of Cash: Fidelity's Nancy Prior.") Fidelity manages over $432 billion in money fund assets, over 17.0% of the total $2.6 trillion. Our Q&A follows.
MFI: What was the main thrust of your comment letter? Prior: Overall, we think that the SEC has taken the right approach, which was to narrowly tailor the reform proposals at those funds that have shown that they may be susceptible to large redemptions. But we think in the execution of that approach, there were some areas where the SEC nailed it but also some missteps. With respect to Treasury and government money market funds, we think they got it right. Those funds have shown that they are not susceptible to runs. So we think the SEC was right to exclude those funds from reform. But where we think they really missed the mark is with respect to the municipal funds. We firmly believe that the municipal funds should not be subject to either the floating NAV or the fees and gates proposal.
[M]unicipal funds are not susceptible to sudden redemptions, and that was proven out both in the market volatility of 2008 as well as in the summer 2011. Those funds have shown themselves to be very stable in terms of their investor base. When we look at the portfolio composition of the municipal funds -- their high level of liquidity, their very low interest rate risk, and their high credit quality -- we again believe that that portfolio construction supports excluding muni funds from the reforms. Finally, there are real costs associated with potentially regulating muni funds where they are less attractive to investors. [M]uni funds are by far the dominant buyer of municipal money market securities. So, in the event those funds are less attractive, that would translate into a real direct cost for those issuers that rely on muni funds, like states and cities and nonprofits.
MFI: What about Prime Institutional? Prior: The data does show that institutional prime funds have been susceptible to large redemptions, so targeting institutional prime funds seems right.... [But] if what the SEC is attempting to do is to address run risk, then a more effective way of doing that is by imposing the fees and gates. We've seen no evidence that suggests that a floating NAV would achieve the SEC's policy objectives. In fact we think that more disclosure of market value NAVs, something that Fidelity and others in the industry have been doing for several months now, is a very effective means of highlighting to shareholders that there are very small fluctuations in the market value of underlying portfolios. So we think the SEC's goal with respect to highlighting movements in the NAV could be achieved through disclosure.
We believe that excluding Treasury, government and muni funds is supported by the data. So it's difficult to argue that the data supports a statement that institutional prime funds have not shown to be susceptible to large redemptions. You've got to be pure in your analysis and examine all of the data equally, and let the data drive the regulatory reform.
MFI: How about your retail definition? Prior: We looked at the definition that the SEC put out, and believe it is an arbitrary cap on shareholder access to cash every single day and would be overly burdensome.... The cost and the complexity associated with imposing a daily cap didn't feel like the right balance to us. It also potentially leads to disparate treatment of shareholders in the same fund.... We really think that a fund should treat all shareholders in it the same, and therefore, allowing one shareholder to redeem more than a cap because they give advance notice or allowing a shareholder to take out more than a cap because it happens to be held it in a 401k plan, really leads to disparate treatment within a fund.
We again agree with the SEC's policy objective, which is to recognize that individuals behave differently than institutions as investors in money funds. Retail funds have shown that they are not subject to sudden, large redemptions. The SEC's policy goal is to preserve stable NAV products for individuals who invest, that is, for people. So we focused on proposing a definition that doesn't try to track money on the way out of a fund.... People have social security numbers, so we thought it would be more prudent to rely on our current regulatory scheme.... We believe that it is better to rely on that infrastructure and determine that a retail fund is one that only allows accounts for which the account holder or the beneficial owner has a social security number. It's a very simple solution, it's very transparent, very easy to implement, very easy to enforce, and every shareholder in a fund will treated the same way.
MFI: What about the additional disclosure requirements? Prior: Generally, we are supportive of more disclosure. As I said, we have been disclosing fund market value NAVs on the web since January 2013. We are supportive of website disclosure of 1- and 7-day liquidity on a historical basis. Where we think there may be potential ways to improve the disclosure proposal is in connection with lot-level information. We support disclosure that will help shareholders and regulators understand the funds, but which is not overly burdensome.
Look for more excerpts from the interview with Fidelity's Nancy Prior in coming days, or contact us to request our October issue of Money Fund Intelligence.
