US Bancorp Comments on MF Reforms
Yet another of the posted "Comments on Money Market Fund Reform" to the SEC comes from U.S. Bancorp Asset Management, manager of the First American Funds, the 14th largest money market fund complex. Chief Investment Officer James Palmer writes, "U.S. Bancorp Asset Management, Inc. (USBAM) appreciates the opportunity to comment on the proposed amendments to money market fund (MMF) rules that were issued by the U.S. Securities and Exchange Commission (SEC) on December 15, 2021. USBAM is a registered investment adviser with more than $192 billion in assets under management as of Dec. 31, 2021. We are primarily focused on short-term fixed income strategies for institutional investors. As the adviser to the First American Funds family of MMFs, established in 1982, both fund shareholders and our business have been impacted by the 2010 and 2014 MMF reforms. We would like to share our viewpoint on the meaningful potential changes our industry and MMF shareholders may face should the SEC's proposed amendments be implemented as proposed." Palmer explains, "USBAM's summarized views on the proposed amendments are below: The SEC should delink redemption gates and liquidity fees from weekly liquid asset percentages which will effectively address first mover advantage. The SEC should impose increased daily and weekly liquidity metrics that will allow MMFs to meet redemption requests throughout various market cycles; although we feel a smaller increase in weekly liquid assets – to 40% rather than 50% – will accomplish the same goal. The SEC should not implement swing pricing as proposed because it will reduce investor interest in institutional prime and institutional tax free MMFs and increase investor confusion. The SEC should not implement the proposed negative rate amendments prohibiting reverse distribution mechanisms and requiring stable net asset value (NAV) funds to float because this will limit the optionality currently afforded each MMF's board to manage future negative rate environments; funding market disruption would potentially occur as stable NAV government fund investors engage in large-scale withdrawals upon the threat of negative rate policies; and numerous intermediaries may choose not to undertake the required complex systems conversions reducing the availability of government MMF offerings to investors." The letter tells us, "MMFs were not the cause of the short-term market stress in March 2020, an idea supported by the research published by the Investment Company Institute in November of that year. The First American Fund complex – including First American Institutional Prime Obligations Fund – experienced inflows during the period. It is our view investors see MMFs as a less volatile investment during times of market stress and preserving that benefit remains a paramount consideration for these investors." It comments, "[T]he lack of certainty over the application and scale of swing pricing, funding delays for same-day settlement, and NAV adjustments add unnecessary complexity to institutional prime and institutional tax-free MMFs. Additionally, the concept would likely prove confusing for shareholders. Rather than providing the perceived benefit of reducing or eliminating first-mover advantage, USBAM believes that there would be a significant reduction or elimination in demand for funds subject to swing pricing. Ultimately, fewer institutional prime MMFs would also have a negative effect on demand and functioning in the short-term markets, thereby increasing volatility for those few prime MMFs choosing to remain and the short-term market at large. It is USBAM's view swing pricing does not achieve the goals of increased transparency nor resilience." US Bancorp A.M. says, "MMF sponsors are uniquely positioned to understand the needs of short-term issuers, MMF shareholders, and liquidity markets. USBAM believes investors want to be able to rely on the principal preservation and NAV stability of their MMFs. We are concerned that the proposals intended to address a negative rate environment – requiring intermediaries to attest they can support a floating NAV in stable NAV MMFs and the prohibition of RDM – have potential to meaningfully disrupt the financial markets. Post-2014 reforms, stable NAV MMFs have gathered scale primarily because they offer a stable NAV along with daily liquidity. We believe this change would push MMF investors into other regulated and unregulated cash vehicles that would have a hard time accommodating the nearly $5 trillion in assets that could flow out of these stable investments." Finally, they add, "USBAM's other major concern is the swing pricing proposal. If adopted, it will likely further shrink the size of the institutional prime and institutional tax-exempt MMF sectors at a time adding scale back to the sectors would have a net positive impact. Smaller, less diverse prime and tax-exempt MMF sectors would be less resilient, thereby making the MMF industry a less robust funding source for short-term issuance, which runs counter to efforts to strengthen short-term markets. MMFs carry certain risks, as does every other investment vehicle. We believe MMF shareholders understand these risks and choose to invest in our funds because they have historically offered – and continue to offer – an acceptable risk/return tradeoff."
