We're keeping the "Comments on Money Market Fund Reform" to the SEC coming with letters from Allspring (formerly Wells Fargo Funds), State Street Global Advisors and Capital Group, the 10th, 11th and 12th largest managers of money market funds. Allspring's submission, written by President Andrew Owen, tells us, "Allspring is the sponsor of the Allspring Funds, a fund family that offers a diverse set of government, prime and tax-exempt money market funds across multiple distribution platforms that include both retail and institutional investors. Assets under management in the Allspring Money Market Funds totaled approximately $177 billion as of March 31, 2022. As the 10th largest sponsor of money market funds in the United States, Allspring welcomes this opportunity to provide the Commission with its thoughts on the Proposing Release." (Reminder: Please register and make hotel reservations soon for our big Money Fund Symposium conference, which will take place June 20-22, 2022 in Minneapolis, Minn. We look forward to seeing you in June!)
The letter states, "For reasons more fully explained below, we oppose the Commission's proposed swing pricing requirement for institutional prime and institutional tax-exempt money market funds. We do not believe that the imposition of such a mechanism is necessary to prevent runs on money market funds, nor do we think that such a mechanism is capable of doing so. While we acknowledge that the imposition of swing pricing may pass some costs of redemption onto redeeming investors during periods of market stress, we note that redeeming investors already experience these costs at least in part due to the fluctuating NAV of the institutional prime and institutional tax-exempt money market funds that would be required to adopt swing pricing. And during normal periods, we believe that swing pricing would have no impact on redeeming investors at all. Given the costs and operational difficulties associated with implementing and continuously imposing swing pricing, even during normal periods when it would have no effect, as well as the potential unintended consequences we discuss below, we think the downsides of swing pricing far exceed the limited benefits."
Allspring continues, "In addition, for the reasons discussed more fully below, we oppose the Commission's proposed amendments to Rule 2a-7 to prohibit a stable NAV money market fund from reducing 'the number of its shares outstanding to seek to maintain a stable net asset value per share or stable price per share'. While we acknowledge that the concept of share cancellation may be somewhat new to certain types of investors, this obstacle can be overcome with clear disclosure, and we believe that such concerns are not a sufficient reason for prohibiting what, in our view, is the most efficient method for stable NAV money market funds to deal with the unlikely scenario of negative interest rates. In addition, we oppose the Commission's proposed requirement that government and retail funds confirm that intermediaries transacting in fund shares have the capacity to process transactions at prices that do not correspond to a stable NAV if the funds were to convert to a floating NAV."
They add, "In conclusion, we strongly object to amending Rule 2a-7 to include a swing pricing requirement or to prohibit the use of share cancellation methods such as RDM. We believe that such amendments would result in negative consequences for shareholders, fund sponsors, the short-term funding markets, and the industry as a whole, while not achieving the objectives the Commission seeks and unduly hampering flexibility for money market funds and the boards that oversee them. We understand and support the Commission's need to undertake further money market reform in light of the events of March 2020. However, we believe that removing the threat of fees and gates from Rule 2a-7 while also increasing the daily and weekly liquid asset requirements for money market funds are adequate steps on their own to strengthen funds and prevent the sort of investor behavior we saw in March 2020. Indeed, had the SEC not adopted the fees and gates provisions in 2014, additional reform might not be necessary now at all. We say that not as a criticism, rather, simply as an acknowledgement that predicting investor behavior is challenging, and as a reminder that reforms adopted under the best of intentions may lead to unintended consequences. We urge restraint."
State Street Global Advisors' comment letter, written by CIO Matthew Steinaway, says, "State Street Global Advisors strongly opposes the Proposed Rule. While some aspects of the proposal could, if properly calibrated, benefit investors and improve market stability in times of stress, we expect the swing pricing mandate for prime institutional funds to significantly inhibit the viability of such funds as investment or cash management products, most likely effectively eliminating such funds from the marketplace, and unnecessarily and unwisely reducing investment options for our clients."
It explains, "First, implementing swing pricing for MMFs is operationally challenging, or perhaps impossible, without making substantial changes to the MMF investment offering. Capturing (or estimating) the data needed to calculate a swing factor takes hours, not minutes, and would require funds to impose much earlier investor cut-off times, eliminate or reduce the ability of MMFs to calculate multiple NAVs per day and reduce MMFs' ability to offer T+0 settlement. For investors, institutional prime MMFs would become much less useful investment options, most notably through loss of intra-day liquidity."
SSGA writes, "Second, the concept that all MMF redemptions should carry the full cost of liquidating a vertical slice of the MMF's portfolio is severely flawed, and inconsistent with how MMFs operate. MMFs are designed specifically for short-term investing, and regularly handle large subscriptions and redemptions. MMFs hold liquidity to meet these large redemptions, usually funded through maturing assets rather than secondary market activity. When a MMF does sell assets, it is done strategically, considering multiple factors, including available market liquidity, market pricing, the overall composition of the portfolio, rating agency rules and forecasts of future liquidity needs. The liquidation of a vertical slice of MMF assets is simply not how such funds manage liquidity, and imposing a swing factor based on such an assumption is simply not consistent with how MMFs operate, and would result in inaccurate, model-based NAVs disconnected from the actual liquidity and redemption practices of the fund."
They tell us, "As a result, the Commission may want to consider requiring funds, under relatively extreme circumstances, to assess set redemption fees under predetermined fund level triggers.... Should the Commission determine such a measure is necessary, we suggest a fixed redemption fee, perhaps of 1%, which is meaningful enough to protect the fund and remaining investors and to provide a disincentive to redemptions during periods the fee is applied."
SSGA's comment adds, "We are concerned that the Commission significantly underestimates the burden and market disruption that will result from its proposed certification requirement. Fixed NAV MMFs are predominantly used as cash management and 'sweep' vehicles, with very frequent and large transaction volumes facilitated by platforms and intermediaries. While a fixed MMF may itself be able to switch to a floating NAV, the system of intermediaries serving investors in the MMF, in many cases, cannot or will not. Certifying the ability to switch to a floating NAV would require MMFs to ensure that this entire ecosystem can support the change, a near impossible task, particularly in the current environment, when negative yields are not imminent or likely in the foreseeable future for US MMFs.... As the Commission describes in its Proposed Rule, there are other tools available which would allow funds to address a negative rate environment, particularly a Reverse Distribution Mechanism ('RDM'). The Commission takes a negative view on the use of RDMs. We disagree, and suggest the Commission reconsider, and allow use of RDMs as an option for fixed NAV MMFs to pass on negative yields to investors."
Finally, The Capital Group, manager of the American Funds, writes "Money market funds play a critical and essential cash management function within the market and to investors of funds managed by the Capital Group. Capital Group manages two money market funds. The first is American Funds U.S. Government Money Market Fund, which as its name implies is a government money market fund that as of March 31, 2022 has approximately $24 billion.... The second is the Capital Group Central Cash Fund ('CCF'), an institutional prime money market fund that is used as a central cash management vehicle primarily for other funds managed by Capital Group and is not offered to the public. As of March 31, 2022, this fund has approximately $147 billion.... We estimate that assets under management of Capital Group's internal institutional prime money market fund represent approximately 18% of overall institutional prime assets. During March 2020 and as discussed further below, both our U.S. government money market fund and CCF realized significant inflows."
They state, "Capital Group generally supports removing the links between fund liquidity requirements and the imposition of redemption gates and liquidity fees, as well as increasing funds' daily and weekly liquidity requirements. We are also supportive of clarifications to rule 2a-7 that will provide better and more consistent data.... At the same time, we are concerned that the swing pricing component of the Proposal will (1) not meet the Proposal's intended objective of preventing fund dilution or runs on funds, (2) reduce the overall availability of money market funds and (3) simultaneously impose substantial and unduly burdensome operational complexity and costs to money market funds. Additionally, although we are supportive of the Proposal's amendments to certain reporting requirements on Form N-MFP to improve the availability of information about money market funds, for the reasons described below, we are concerned that the Proposal does not provide adequate time for filers to submit such additional reporting."
The Capital Group also says, "Privately offered money market funds organized, for example, by a fund adviser for the purpose of centrally managing the cash of the investment companies within a fund complex are inherently different in nature. Capital Group's own non-public, central money market fund focuses on liquidity and capital preservation over yield, and we structure CCF's portfolio accordingly. In our experience, the fund also has greater visibility into upcoming and/or larger redemptions, in particular, and can build shorter term liquidity in anticipation."
They add, "Lastly, consistent with the data driven and supported approach we are advocating for, as illustrated by the lower redemption rates realized by internal money market funds noted in the Proposal's release and as substantiated by Capital Group's own data, we strongly believe that nonpublic internal money market funds should be exempt from the swing pricing requirement if adopted. Because nonpublic internal money market funds have greater visibility into upcoming and/or larger redemptions, in particular, and can build shorter term liquidity in anticipation, the Commission's policy concerns of significant unforeseen shareholder redemptions and first-mover advantage are not typically applicable to nonpublic internal money market funds."
