Federated Hermes filed its latest "10-K Annual Report" with the SEC last week, and the 109-page document contains a wealth of information on money market mutual funds, including discussions on "Distribution Channels and Product Markets," "Regulatory Matters" and "Risk Factors." The report tells us, "Federated Hermes ... is a global leader in active, responsible investing with $668.9 billion in assets under management (AUM or managed assets) at December 31, 2022. Federated Hermes has been in the investment management business since 1955 and is one of the largest investment managers in the United States.... Federated Hermes provides investment advisory services to 174 Federated Hermes Funds as of December 31, 2022.... Of the 174 Federated Hermes Funds, Federated Hermes' investment advisory subsidiaries managed 23 money market funds with $335.9 billion in AUM, 45 equity funds with $43.3 billion in AUM, 55 fixed-income funds with $43.2 billion in AUM, 46 alternative/private markets funds with $13.1 billion in AUM and five multi-asset funds with $2.9 billion in AUM. As of Dec. 31, 2022, Federated Hermes provided investment advisory services to $230.5 billion in Separate Account assets. These Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit plans, corporations, trusts, foundations, endowments, sub-advised funds and other accounts or products owned or sponsored by third parties."
It explains, "Federated Hermes, which began selling money market fund products to institutions in 1974, is one of the largest U.S. managers of money market assets, with $476.8 billion in AUM at December 31, 2022. Federated Hermes has developed expertise in managing cash for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and competitive yields. Federated Hermes also manages retail money market products that are typically distributed through broker/dealers. At Dec. 31, 2022, Federated Hermes managed money market assets across a wide range of categories: government ($322.3 billion); prime ($145.6 billion); and municipal (or tax-exempt) ($8.9 billion)."
Discussing "Distribution Channels and Product Markets," the 10-K says, "Federated Hermes' distribution strategy is to provide investment management products and services to more than 11,000 institutions and intermediaries, including, among others, banks, broker/dealers, registered investment advisors, government entities, corporations, insurance companies, foundations and endowments. Federated Hermes uses its trained sales force of more than 200 representatives and managers, backed by an experienced support staff, to offer its products and strategies, add new customer relationships and strengthen and expand existing relationships. Federated Hermes' investment products and strategies are offered and distributed in three markets. These markets, and the relative percentage of managed assets at Dec. 31, 2022 attributable to such markets, are as follows: U.S. financial intermediary (63%); U.S. institutional (28%); and international (9%)."
They write on "Financial Intermediaries," "Federated Hermes offers and distributes its products and strategies in this market through a large, diversified group of over 6,500 national, regional and independent broker/dealers, banks and registered investment advisors. Financial intermediaries use Federated Hermes' products to meet the needs of their customers, who are often retail investors. Federated Hermes offers a full range of products to these customers, including Federated Hermes Funds and Separate Accounts (including private funds). As of Dec. 31, 2022, managed assets in the U.S. financial intermediary market included $317.9 billion in money market assets, $55.1 billion in equity assets, $39.8 billion in fixed-income assets, $2.6 billion in multi-asset and $0.8 billion in alternative/private markets assets."
Under "U.S. Institutional," they tell us, "Federated Hermes offers and distributes its products and strategies to a wide variety of domestic institutional customers including, among others, government entities, not-for-profit entities, corporations, corporate and public pension funds, foundations, endowments and non-Federated Hermes investment companies or other funds. As of Dec. 31, 2022, managed assets in the U.S. institutional market included $144.0 billion in money market assets, $42.5 billion in fixed-income assets, $2.9 billion in equity assets, $0.6 billion in alternative/private markets assets and $0.4 billion in multi-asset."
For "International" channels, "Federated Hermes manages assets from non-U.S. institutional and financial intermediary customers through subsidiaries focused on gathering assets in Europe, the Middle East, Canada, Latin America and the Asia Pacific region. As of Dec. 31, 2022, managed assets in the international market included $23.5 billion in equity assets, $19.4 billion in alternative/private markets assets, $15.0 billion in money market assets and $4.5 billion in fixed-income assets."
On "Regulatory Matters," they comment, "Examples of final rules that are expected to be issued in 2023 include money market fund reform, climate change disclosure, cybersecurity risk governance, investment company names, and loan or borrowing of securities, among other topics.... After nearly three years of analysis and debate, regulators maintain their focus on the market conditions that existed in March 2020, and their impact on open-end funds, including institutional prime and municipal (or tax-exempt) money market funds. For example, like other regulatory or government bodies, in its November 2022 'Financial Stability Report,' the Board of Governors of the Federal Reserve System (Governors) reported that certain money market funds have structural vulnerabilities that make them prone to 'runs,' an apparent reference to the withdrawal of assets and redemption risks. The Financial Stability Oversight Council (FSOC) also discussed money market and other open-end funds at its November 4, 2022 meeting. Chairperson Yellen, in discussing vulnerabilities in money market funds, open-end funds, and hedge funds, stated that these funds continue to pose risks to financial stability and can amplify shocks, transmitting stress to important counterparties and markets. She further stated that member agencies should act to address these concerns. The comment period for the SEC's proposed money market fund reforms ended on November 1, 2022, and as noted above, the SEC indicated in the SEC Fall Reg Flex Agenda that it intended to finalize its proposed money market fund reforms by April 2023."
The 10-K states, "Federated Hermes has continued, and will continue, to actively participate in the debate surrounding money market fund reforms. Consistent with prior comment letters and meetings with SEC Commissioners and SEC staff, Federated Hermes maintains its position that: (1) swing pricing will regulate institutional prime money market funds out of existence; (2) discretionary fees and gates administered by fund boards through the exercise of their fiduciary duty are the best alternatives for money market funds; (3) eliminating the link between mandatory fees and gates and a 30% liquid asset requirement is most appropriate; and (4) a four-digit Net Asset Value (NAV) for government money market funds to deal with the possibility of negative interest rates is not a better solution than allowing the use of a reverse distribution mechanism (RDM). Federated Hermes expressed these views in its letters to the SEC and to SEC Commissioners, including those letters dated June 9, 2022, June 14, 2022, August 10, 2022, and September 22, 2022, which were submitted to SEC Commissioners Peirce, Crenshaw, Uyeda, and Lizárraga after meetings with them on June 3, 2022, June 7, 2022, August 2, 2022, and September 20, 2022, respectively. In a November 1, 2022 comment letter, among other comments, Federated Hermes reiterated its concerns that: (1) the SEC's proposed amendments to Form N-MFP, stress testing requirements, and four-digit NAV will further harm money market funds and their investors and intermediaries without corresponding benefits; (2) the SEC has not developed and put forward data to support the more radical aspects of its proposal, in particular swing pricing; and (3) swing pricing tied to a specific metric could itself trigger mass redemptions or serve as an opening for market timers to game the rule."
It continues, "Federated Hermes believes that, once unencumbered from the perils of an inappropriate linkage between liquidity levels and liquidity fees and redemption gates, money market funds have sufficient liquidity levels currently to protect investors from dilution. Federated Hermes supports the use of a RDM in a negative rate environment. Federated Hermes has opposed the SEC's prohibition on the use of a RDM to maintain the stable NAVs of government money market funds because, among other reasons, the SEC's prohibition on the use of a RDM: (1) does not reflect any formal investment management industry feedback; and (2) will eliminate the use of government money market funds as sweep investments. Federated Hermes also has asserted that, due to the significant technology investments that would be necessary for market participants to modify transaction systems to process transactions in a hypothetical negative yield scenario without using a RDM, the absence of a RDM could lead to material outflows in U.S. government money market funds to bank deposits or non-regulated investment products, consistent with the notion of regulating government money market funds out of existence. Federated Hermes has argued that the use of a RDM is the clear investor preference and would preserve money market funds as an investment product for all stakeholders, and that the SEC's concerns over investor confusion regarding the operation of a RDM can be adequately addressed through disclosure. In a letter dated November 4, 2022, Federated Hermes commented that providing fund boards with the option to utilize either a RDM or a four-digit NAV is the right solution. In a letter to SEC Commissioner Crenshaw dated Dec. 16, 2022, Federated Hermes also expressed its concern that the SEC's proposal to mandate U.S. government money market funds move to a four-digit NAV in a negative rate environment did not properly consider the use of a RDM and could lead to a loss of at least $1 trillion in U.S. government money market assets that are invested via traditional sweep accounts and up to an additional $1 trillion in assets invested into U.S. government money market funds which are made as position trades entered into the cash sweep system manually at the end of the day."
They write, "Management believes money market funds provide a more attractive investment opportunity compared to other competing products, such as insured deposit account alternatives. Management also believes that money market funds are resilient investment products that have proven their resiliency. While Federated Hermes agrees that certain regulations could be improved such improvements should be measured and appropriate, preserving investors' ability to invest in all types of money market funds. Federated Hermes also supports efforts to permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements imposed under the money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations on July 23, 2014, and related guidance, for institutional and municipal (or tax-exempt) money market funds. Legislation is being re-introduced in both the Senate and the House of Representatives in a continuing effort to get these money market fund reform revisions regarding the use of amortized cost passed and signed into law."
Federated also states, "The SEC's aggressive rulemaking, particularly regarding money market fund reform and climate/ESG disclosure, could be challenged by legislators and in the courts by investment management industry participants and other industry groups. Particularly in the context of climate/ESG disclosures, the likely success of any challenge could be bolstered in light of the U.S. Supreme Court's recent decision in West Virginia vs. Environmental Protection Agency, in which the Supreme Court weakened the deference given to an administrative agency's regulatory authority by applying the 'Major Questions Doctrine,' which the Supreme Court has used to require courts to defer to Congress rather than administrative agencies regarding matters that it concludes have significant economic and/or political impact if it believes that Congress did not specifically grant such powers to an agency." (Watch for more coverage of Federated's 10-K in coming days.)
