Last Monday was the deadline for the SEC's "Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report" and, as expected, it brought an onslaught of comment letters. We reviewed several last week, but today we review submissions from retail giants Charles Schwab and Vanguard. Schwab's Rick Wurster writes, "Charles Schwab & Co, Inc. and Charles Schwab Investment Management appreciate the opportunity to provide comments to the Securities and Exchange Commission on the potential money market fund reform measures outlined by the President's Working Group on Financial Markets in its December 2020 report, 'Overview of Recent Events and Potential Reform Options for Money Market Funds'. Schwab is one of the largest managers of money market fund assets in the United States, with 21 money market funds and $164 billion in assets ... as of March 31, 2021. Approximately $90 billion of those assets are in prime funds (including a retail fund with two share classes and an institutional fund with a floating net asset value); $16 billion are in eight tax-exempt municipal money market funds; and $58 billion are in 10 government money market funds. Money market funds provide investors with stability, convenience, liquidity and yield. Schwab's money market fund offerings predominantly appeal to, and are used by, individual retail investors and investment advisers who service individual investors to help manage their cash." (Reminder: Register for our free "ESG & Social Money Fund Update," which takes place Thursday, April 22 from 2-3pm EDT.)

The "Overview" tells us, "Schwab has been an active participant in the debate over money market fund regulation for well over a decade. We were supportive of the Commission's 2010 reforms to Rule 2a-7, which strengthened money market funds by increasing transparency and reducing the risk of runs. In 2012, an op-ed piece in The Wall Street Journal by Schwab CEO Walter Bettinger proposed that prime money market funds for institutional investors be required to have a floating net asset value. A version of this proposal was ultimately adopted by the Commission in 2014. At the time, Schwab advocated for separate rules for institutional prime money market funds and retail prime money market funds, arguing that 'imposing a floating net asset value solution across all money market funds would be a fundamental change to a product upon which individual investors have come to rely for four decades.'"

It explains, "Schwab believes that the 2010 and 2014 reforms to Rule 2a-7 enhanced the stability of money funds and the funds' ability to continue to function in illiquid markets. However, with the benefit of our experiences in this most recent crisis, we believe additional reforms could further strengthen the resiliency of money funds, particularly in more volatile markets. To that end, Schwab now believes that serious consideration should be given by the Commission to requiring all prime and municipal money market funds to have a floating NAV. While we by no means believe that the current money fund model is unsustainable or requires immediate reform, we nonetheless recognize that there are always ways to enhance products to increase their transparency and viability. In that spirit, we now believe that a floating NAV may reinforce to investors the fluctuating value of their investments and diminish any belief that the $1 constant net asset value is the equivalent of a guarantee of their investment. We also argue that government money market funds, which have far fewer vulnerabilities, should continue to be permitted to operate as constant NAV products with a stable price of $1 per share."

Schwab comments, "It has been our general experience that many retail investors understand how money market funds work today; specifically, they understand that there is no implicit or explicit guarantee attached to their investment in a money market fund. Nevertheless, we acknowledge that not all retail investors have that same depth of understanding and that policymakers, regulators and the media alike continue to suggest that there is a risk of investor confusion about these products. Therefore, as we outline below, Schwab believes that the time has come to consider whether the stable $1 per share price of prime and municipal money market funds is based on an accounting convention whose time has passed."

They state, "We recognize that requiring prime and municipal money market funds to operate with a floating NAV does not specifically address the liquidity concerns that triggered market volatility in March 2020 -- a key goal of the PWG. Therefore, we believe additional reforms are critical. To that end, we also recommend adopting the PWG's recommendation to remove the link between a money fund's weekly and daily liquidity levels and the imposition of fees and gates. Schwab also supports structural reforms that will increase transparency and liquidity in the short-term markets. These reforms will benefit retail investors and improve the resiliency of these important short-term cash management solutions."

Schwab's letter says, "The Commission will also need to resolve whether floating NAV funds should continue to be permitted to call themselves 'money market funds,' as well as whether floating NAV money market funds should continue to be governed by Rule 2a-7.... We also considered the possibility that a category of prime and/or municipal money market funds could retain a constant NAV, provided that those funds have a capital buffer."

It adds, "Finally, Schwab believes strongly that the events of March 2020 were not specific to money market funds and, therefore, is also supportive of any structural reforms that bring greater liquidity and transparency to the short-term markets. Improving the liquidity of short-term securities is the best way to address frozen markets across all investment types, not just money market funds. The emergence of a global pandemic caused an unprecedented liquidity crisis across a wide variety of markets in March 2020. We believe that our recommendations -- indeed, any of the PWG's reform recommendations -- will not be effective unless paired with structural reforms to these markets. Improving underlying market liquidity, particularly in the repo and commercial paper markets, would minimize price dislocation and reduce volatility. We support the perspective of other commenters, including the Investment Company Institute, on this issue."

Wurster tells Crane Data, "Importantly, we think money market funds are not in need of immediate reform. We view this more as an opportunity to come together, to strengthen our industry and [to] strengthen the resiliency of money market funds and to increase transparency for investors. We have three recommendations. One ... which is to consider a floating NAV for all prime and muni money funds. The second was to remove the tie between money market fund liquidity levels and the impositions of fees and gates. We think that would improve liquidity in the short-term money markets.... And then the third was that we support any reform that brings greater liquidity and transparency to the underlying markets. Those were the three things we commented on."

The comment from Vanguard's Gregory Davis states, "Vanguard has managed money market mutual funds since 1981. On behalf of our shareholders, who currently invest approximately $375 billion in our MMFs, we are deeply committed to working with the Commission and other financial regulatory authorities to strengthen the money market industry for the benefit and further protection of investors. Vanguard believes MMFs are an important choice for retail investors' cash management and principal preservation needs. For more than a decade, we have been actively involved in researching and evaluating MMF reform proposals including SEC amendments to Rule 2a-7 that were implemented in 2010 and 2014. Those changes enhanced MMFs' credit quality, liquidity self-provisioning, and disclosure, thereby reducing the likelihood that a future systemic market disruption would threaten these funds."

He explains, "In March 2020, the economic shock of the COVID-19 pandemic led to an unprecedented flight to liquidity and safety by investors and other market participants.... As a result of this volatility, Vanguard looked closely at its MMF offerings and in August 2020 announced that Vanguard Prime Money Market Fund would be reorganized into a government MMF. We recognized that retail investors prioritize stability when selecting money market investments and the change in investment strategy would enable the fund to continue to meet investors' expectations while providing a competitive yield over the long term. Our decision to exit prime also took into account changing market dynamics that warrant review by financial market regulators so that the short-term markets are more resilient in the case of another similar event."

The 3rd largest money fund manager writes, "Vanguard supports a floating NAV for all prime MMFs, including retail prime. Prime MMFs have concentrated exposure to commercial paper and other short-term debt issued by banks and other financial firms that are essential for the availability of credit and liquidity in the financial markets. We support further consideration of whether retail tax-exempt MMFs should preserve a stable $1.00 NAV or adopt a floating NAV structure. The short-term municipal securities markets are a unique category of securities that may warrant different regulatory treatment when compared to prime MMFs. We also support elimination of fees and gates for all types of MMFs, as these tools triggered -- rather than reduced -- fund outflows in March 2020. As the Commission turns its attention to potential additional MMF reforms, we encourage reform solutions that are tailored to the funds most likely to experience destabilizing redemptions."

Vanguard summarizes, "We support a floating NAV for all prime MMFs. As we have seen, the structure of the CP market puts stress on both CP issuers and prime MMFs whether institutional or retail. Given market structure constraints and the potential volatility in underlying prime assets, a floating NAV can help ensure that fund values fluctuate with these markets providing more flexibility and resilience than a stable NAV fund. A floating NAV also helps set investor expectations that NAVs may fluctuate during periods of market stress. We support further consideration of whether retail tax-exempt MMFs, with additional protections, can continue to sell and redeem shares at a stable $1.00 NAV.... [O]n balance we think these funds could continue to support a stable NAV if additional liquidity protections are put in place. To that end, we recommend that the Commission consider requiring shorter weekly average maturities ('WAMs') in tax-exempt MMFs as an additional measure."

It adds, "We support elimination of fees and gates for all types of MMFs.... A simple floating NAV product structure, more consistent with traditional mutual funds, would avoid that dynamic. In addition, we support enhanced liquid asset requirements in both prime and tax-exempt MMFs. Policymakers should consider what additional steps should be taken to ensure sufficient liquidity exists in the short-term markets during times of stress. Though the product reforms outlined above would eliminate any knock-on run risk exacerbated by the MMF structure, we firmly believe that MMF reform alone does not -- and cannot -- eliminate liquidity risk in the underlying short-term wholesale funding markets. `Policymakers should look closely at these markets, their tools and the various events surrounding March 2020 volatility, to improve resiliency in this critical segment of our markets."

Lastly, Vanguard tells us, "In summary, we support a simple approach to MMF reforms -- a floating NAV for retail prime MMFs, a stable NAV and shorter WAMs for tax-exempt MMFs, and eliminating fees and gates for all types of MMFs. We believe this approach is far superior to the other reform options in the PWG Report. While the other reform options may have some benefits, the Commission should carefully consider unintended negative consequences for investors and significant regulatory, disclosure, and operational challenges associated with them."

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