With the April 11 deadline approaching, substantial letters have finally started appearing on the SEC's "Comments on Money Market Fund Reform" page. One of the latest comes from Northern Trust Asset Management Executive Vice President & Head of Fixed Income Colin Robertson. He writes, "Northern Trust Asset Management is pleased to submit these comments to the Securities and Exchange Commission on proposed amendments to certain rules that govern money market funds under the Investment Company Act of 1940. NTAM commends the Commission for its thoughtful consideration of proposed changes to MMF regulation after the stresses placed on short-term funding markets in March 2020." (Note: For those attending our Bond Fund Symposium today, welcome to Newport Beach, Calif.! We hope you enjoy the show today and Tuesday. Visit our "Bond Fund Symposium 2022 Download Center" for materials and recordings.)
The comment letter tells us, "Northern Trust Investments, Inc. is the primary U.S. investment adviser of NTAM and is one of the nation's largest sponsors of MMFs. As of December 31, 2021, registered MMFs sponsored by NTI and operating under Rule 2a-7 under the Act had approximately $218 billion in net assets, all of which were in 'government MMFs' (as defined in Rule 2a-7). NTAM offers a range of liquidity solutions, including tax-exempt, prime and government cash management solutions across mutual funds, CITs, UCITS and separately managed accounts. Because of the importance of the liquidity solutions that NTAM offers to our clients, NTAM welcomes this opportunity to engage constructively with the Commission regarding regulatory reform measures for MMFs."
It explains, "NTAM's views on the proposed amendments are summarized below: It is highly unlikely that NTAM will reenter the institutional prime or institutional tax-exempt MMF markets. Swing pricing, together with increased liquidity requirements, if adopted, will reduce the utility of the money market fund vehicle to such an extent that the product will no longer be viewed by investors as an attractive investment option and will no longer serve many of its intended valuable cash management functions."
Northern comments, "Converting to a floating net asset value, rather than implementing mechanisms that reduce the number of fund shares outstanding, is an appropriate solution in a negative interest rate environment. The current regulatory framework applicable to government MMFs should be preserved, and should not be altered in response to perceived challenges related to other types of MMFs. Furthermore, NTAM supports MMF reform efforts that increases transparency for investors and preserves cash management options. NTAM, however, urges the Commission to reassess and balance the need for certain investor-specific information, as proposed, with the paramount need to protect investor privacy."
They state, "In 2020, NTAM initiated a thoughtful progression of modifications to its MMF lineup by exiting the prime and tax-exempt MMF sectors, a process that began in May 2020 with the closure of NTAM's institutional prime MMF, the Northern Institutional Funds - Prime Obligations Portfolio. NTAM's MMF product lineup changes were grounded in (1) shifting investor preferences, (2) the expectation of punitive MMF regulatory changes, and (3) NTAM's views on interest rates. More specifically, our MMF lineup changes were influenced by the following NTAM views: Investors should be compensated for the risks they take, and NTAM is committed to delivering investment products and solutions that fit our investor-centric approach."
Northern adds, "Future MMF regulatory changes have the potential to make prime and tax-exempt MMFs unattractive to investors through unnecessary complexity and without compensating for the investment risk, especially in low interest rate environments. Government MMFs are the optimal solution for investors' immediate operational cash needs. The proposed amendments to Rule 2a-7 that would require swing pricing for institutional prime and tax-exempt MMFs and impose increased liquidity requirements further reinforces NTAM's decision to exit the prime and tax-exempt MMF markets and, if adopted, makes it highly unlikely that NTAM will reenter the institutional prime and tax-exempt MMF markets."
They also write, "As more fully explained below, NTAM does not view the removal of liquidity fees and redemption gates from Rule 2a-7 as offsetting the new proposed swing pricing and increased liquidity requirements in a manner that would make prime and tax-exempt MMFs appealing to investors or fund sponsors. In short, NTAM does not support the proposed amendments to Rule 2a-7 that would require swing pricing for institutional prime and tax-exempt MMFs and increased liquidity thresholds."
The letter explains, "As evidenced during March 2020, access to liquidity remains of primary importance to investors. Even though no MMF imposed a liquidity fee or redemption gate, the mere possibility of a fee or gate was a contributing factor in the level of MMF redemptions as certain MMFs' level of weekly liquid assets decreased closer to 30% of the MMF's total assets (the level at which a board of directors/trustees has discretion to impose a liquidity fee or redemption gate)."
It states, "Our clients use MMFs for a variety of purposes, ranging from overnight 'sweeps' of available cash for short-term yield, to pools of readily available cash to meet business operating expenses or investment needs, to longer-term strategic allocations of excess cash. It is vitally important that any additional regulatory requirements adequately consider the essential priorities of both retail and institutional investors to have readily available, predictable access to MMFs to meet their various cash management and liquidity needs. As further discussed below, NTAM expects that the proposed amendments will cause the prime and tax-exempt MMF sector to continue to decline, causing corporate and municipal borrowers to continue their move towards other sources of short-term funding, further reinforcing NTAM's view of government MMFs as the optimal solution for investors' immediate operational cash needs."
Northern says, "Regarding swing pricing specifically, NTAM views swing pricing as adding further complexities and operational challenges to institutional prime and tax-exempt MMFs that significantly diminish the benefits of principal preservation and liquidity access, both of which are core tenets valued by investors in cash management vehicles. As a result, the institutional prime and tax-exempt MMF product will no longer serve many of its intended cash management functions that investors seek and value and will no longer be viewed by investors as an attractive investment vehicle to help manage their important cash management needs. Instead, NTAM believes that a clear and consistent approach to any anti-dilution mechanism would benefit investors and fund sponsors."
Finally, they comment on disclosures, "Although similar information is required to be disclosed in a MMF's registration statement on an annual basis, NTAM believes monthly reporting of this information may cause investors to adjust holdings as of month end to avoid public disclosure of their MMF holdings. This investor specific disclosure item could therefore increase MMF redemption activity in a manner that does not serve the Commission's objectives of MMF reform. With respect to investors monitoring MMF liquidity levels, NTAM notes that investors will continue to have access to publicly available information about MMFs' historical net flows as well as current liquidity levels on a MMF's website. This information, which is required to be reported on a daily basis, provides a sufficient basis for investors to monitor redemption risks without the need for additional disclosure of shareholders that own more than 5% of shares as of month end. Revising the proposed reporting requirements to be reported on a confidential basis will still enable the Commission to collect and aggregate data and monitor a MMF's potential risk of redemption by an individual or small group of investors, but will protect investor privacy and confidentiality."
