Last week, mutual fund news source ignites brought pending Money Fund Reforms back into the headlines with the piece, "Shops Step Up Pressure on SEC to Revamp Money Fund Rules." They explain, "Industry firms and their trade groups appear to be making a last-ditch effort to convince the Securities and Exchange Commission to change several key parts of its money market fund rule proposal. The agency seeks to put out the final rule in October, according to its regulatory agenda. But some large money fund sponsors have argued that if the proposed rule is adopted in its current form, it would kill institutional prime funds and hurt government money funds." We quote from the article below, and we also look at one of the most recent comments on reforms from Federated Hermes' Peter Germain, who discusses the RDM, or reverse distribution mechanism
The ignites MMF Reforms update tells us, "The proposal was first floated in December and comments on it were due in April. On Aug. 10, nearly 30 industry executives met remotely with Securities and Exchange Commission officials about the proposed rule, disclosures show. The shops represented at that meeting included the largest managers of money funds: Fidelity, BlackRock, Vanguard, JPMorgan, Federated Hermes, Schwab and T. Rowe Price. The firms are members of the asset management group of the Securities Industry and Financial Markets Association, which organized the meeting.... The SEC's disclosure about the meeting states only that the money fund rule proposal was discussed, but it does not provide any details."
It says, "There's likely still 'a lot of wiggle room in the details' of the final rule, said Peter Crane, chief executive of Crane Data. The SEC could choose to further study certain parts of the proposed rule instead of making them requirements, for example, or could soften the final rule by choosing to make certain actions voluntary instead of mandatory, he said."
The article continues, "In early August, Investment Company Institute CEO Eric Pan submitted a letter to 'supplement' the trade group's earlier comments, and to set the record straight regarding swing pricing and its use in other jurisdictions. '[W]hile some non-money market funds in Europe do use swing pricing, money market funds in Europe do not use, and have not used, swing pricing,' Pan wrote. 'This point is worth repeating: European money market funds do not use swing pricing.' The SEC's rule proposal would require institutional prime and tax-exempt money funds that are experiencing net redemptions to use the mechanism, which allows firms to adjust the fund's net asset value so that the transaction price is borne by investors redeeming their shares."
It comments, "Federated Hermes' CEO Chris Donahue stated his opinions bluntly. 'Swing pricing is a plague on money market funds,' he wrote in a May letter to SEC Chair Gary Gensler. 'It will finish off the task of regulating institutional prime funds 'out of existence.' One trillion [dollars] was taken out during the last round of changes and the remaining $300 billion will be largely taken out with swing pricing.'"
Ignites adds, "The SEC in 2014 passed reforms that required institutional prime and tax-exempt products to adopt a fluctuating net asset value, rather than the $1.00-per-share stable NAV they had always used. The rule took effect in October 2016, and in the months prior to the effective date, about $1 trillion in assets moved out of institutional prime and tax-exempt money funds and into government ones. Institutional prime funds represented nearly $230 billion in assets as of Aug. 25, ICI data shows. The data does not include the unregistered prime funds that some of the largest money fund sponsors run for internal use."
While there haven't been many Comments on Money Market Fund Reforms since the April deadline passed, there have been a trickling of entries and meeting notices. The latest is from Federated Hermes' Chief Legal Officer Peter Germain. He writes to the SEC's Sarah ten Siethoff, "As a follow-up to our conversation on July 22, and as previewed in our letter on July 28, we are writing to provide further information and examples of how a reverse distribution mechanism ('RDM') could be utilized in a negative interest rate environment in such a way as to minimize any potential investor confusion."
Germain explains, "We have set-forth as exhibits to this letter a number of examples of disclosure documents which could be utilized in a negative interest rate environment or in other circumstances in which a four-digit NAV is required. These include: (i) an initial notice upon a fund's board adoption of new prospectus disclosure on the potential use of a RDM should the Federal Funds Rate fall below zero (Exhibit A); (ii) ongoing prospectus disclosure (Exhibit B); (iii) a draft website notice to be published if and when the Federal Reserve lowers the Federal Funds Rate below zero (Exhibit C); and (iv) a mock account statement informing investors that a RDM is in place and directing them to the fund's prospectus (Exhibit D)."
He continues, "Additionally, we discussed at length how investors in money market funds would receive the appropriate explanatory disclosure documents and be given an opportunity to have any questions they might have about a RDM addressed, even though end investors may often only have direct relationships with intermediaries who offer funds on behalf of fund companies. To provide comfort to the Commission on this point, we have confirmed that all of our intermediary agreements contain forms of the following provisions: Delivery of Disclosure Documents. Intermediary shall deliver or cause to be delivered to its customers copies of the current Prospectus for any Shares (including the SAI if expressly requested), periodic reports, proxy materials and other shareholder communications."
Federated's Counsel writes, "It is also our understanding that these provisions are industry standard for situations where funds are distributed primarily through intermediaries and would be included in any similar intermediary / distribution agreement. Given that, we are confident that the agreements that we have in place with intermediaries would require distribution of any required disclosure related to a RDM that we provide. It should also be noted that some intermediaries may prefer to create their own client communications, which would be provided to their clients in addition to the distribution of any material we may provide."
He adds, "We hope that after reviewing our examples of plain English disclosure regarding the use of a RDM that the Commission will include the potential use of a RDM as an option for a Board to elect to use in a negative rate environment, thereby avoiding negative consequences to U.S. investors and markets. We agree with your goal of having contingency tools in place should we ever encounter a negative rate environment and are hopeful that the Commission will allow the use of a RDM as a permissible contingency tool in a negative rate environment."
They write, "As previously noted, we remain very concerned that the Commission's proposal to mandate U.S. Government MMFs move to a four-digit NAV in a negative rate environment could lead to a loss of at least $1 Trillion in U.S. Government MMF assets via traditional sweep accounts and up to an additional $1 Trillion in assets invested into U.S. Government MMFs which are made as position trades. These position trades are entered into the cash sweep system manually at the end of the day. The position trades include, but are not limited to, investor funds relating to special items, such as mass-tort settlements, M&A, stimulus money, securities lending and custody.... Movement out of these investments would remove a stable source of support for these vital markets, as well as a source of funding for the Federal Government. These assets would most likely shift from U.S. Government MMFs into lower yielding bank deposit accounts or other less transparent products, which would disrupt the liquidity and functioning of these important markets, and would deprive investors of a market rate of return."
Finally, Germain states, "Given the complexity and importance of this matter and the reality that the risk of a near-term shift to negative interest rates is extremely remote, we urge the Commission to consider use of a RDM with proper plain English disclosure and withhold the requirement in the proposed MMF rule relating to the four-digit NAV until a RDM has been thoroughly vetted and approved. We very much appreciate your continued consideration on the use of RDM in a negative rate environment and we will continue to make ourselves available for any further follow-up questions or discussions as you deem appropriate."
For earlier letters, see our May 6 News, "May MFI Features: Comments on SEC Reforms, Fidelity Letter, Earnings," which quotes, "MFI's 'Comments' article says, 'The big news over the past month was the release of most of the major 'Comments on Money Market Fund Reform' sent to the SEC in response to its Money Fund Reform Proposal. Following the April 11 deadline, dozens of letters were posted, including entries from 17 of the 20 largest managers of MMFs. Click on the name for comments from each of the managers here: Fidelity (see article), BlackRock, Vanguard, J.P. Morgan, Federated Hermes, Morgan Stanley, Dreyfus, Northern, Allspring, SSGA, American Funds, Schwab, First American, Invesco, T. Rowe Price, HSBC and Western. (Goldman Sachs, UBS and DWS didn't submit letters.)'"
