We mentioned this past weekend in a "Link of the Day" that the Vanguard Group had posted the first serious comment letter on the SEC's Money Market Reform Proposals. Now, industry leader and heavyweight Fidelity Investments has added an extensive comment letter on the potential changes to money fund regulations. Fidelity supports the new liquidity provisions, though it argues that fixed-rate government securities, repo and other money funds be included and that retail and institutional funds be defined by an objective standard (same day liquidity), supports the spread WAM, supports the continued use of amortized cost accounting, and supports monthly portfolio disclosure proposals. But it opposes a shorter WAM, opposes a ban on second-tier securities, opposes a floating NAV, and opposes the disclosure of market prices.
The letter says, "Fidelity Investments, the largest manager of money market mutual funds with over $500 billion in assets, appreciates the opportunity to comment on the Securities and Exchange Commission's proposed amendments to certain rules that govern money market mutual funds under the Investment Company Act, issued in Release No. IC-28807. Fidelity recognizes the thoughtful approach and significant work undertaken by the staff at the SEC in preparing the Release, and supports the Commission's goal of increasing the resilience of money market mutual funds to market disruptions such as those that occurred in 2008. In responding to the Commission's proposals, Fidelity is committed to strengthening market integrity and confidence, mitigating systemic risk, ensuring robust market discipline and promoting appropriate regulatory oversight."
It continues, "Fidelity believes that financial markets, including money markets, function most effectively with a combination of market discipline and prudent government oversight. Both need to improve, but we urge the Commission to strike the right balance in adopting final rules relating to money market mutual funds. Money market mutual funds represent a success story of financial innovation and regulatory oversight. Individual and institutional investors have expressed their confidence in the management and regulation of money market funds by investing over $3.6 trillion in these products."
Fidelity says, "Money market mutual funds provide critical funding for federal, state and local governments in the United States as well as corporations around the world. Rule 2a-7 has been an effective regulation benefiting investors and issuers alike. Our goal in this letter is to recommend enhancements to Rule 2a-7 that further strengthen the money market industry and broader financial markets. Fidelity generally supports the Commission's proposals. In certain areas, we make some alternative suggestions to strengthen money market mutual funds and reduce the risk of unintended consequences for issuers and investors. In others, we believe that the current rule adequately mitigates potential risk and recommend that the Commission make no changes."
It continues, "Fidelity manages money market mutual funds with a focus on stability, liquidity and shareholder return, in that order. We believe that the Commission's proposal as amended by our proposed changes will promote stability and enhance liquidity while also limiting the potential negative impact on shareholder returns. The Commission estimates that its proposed changes to Rule 2a-7 'would decrease the yield that a money market fund is able to achieve in the range of 2 to 4 basis points'. However, we estimate that the potential yield reduction could be as high as 25 to 43 basis points for an institutional non-rated fund, 19 to 32 basis points for a rated institutional fund and 14 to 31 basis points for a retail fund.... Based on a survey recently commissioned by Fidelity, money market mutual fund investors view these potential yield impacts as significant. However, if the Commission adopts the suggestions in this letter, we estimate that the potential yield impact would be reduced to 13 to 20 basis points for an institutional fund, whether or not rated, and three to seven basis points for a retail fund."
Fidelity's summary of recommendations says, "Fidelity supports the new liquidity proposals, including different requirements for retail and institutional funds, with a suggestion to include Government Securities as Liquid Assets. Fidelity also supports the inclusion of a five percent Daily Liquid Assets requirement for all tax-exempt money market mutual funds. Fidelity believes that Rule 2a-7's current weighted average maturity requirement of 90 days appropriately limits interest rate risk" "supports the introduction of a weighted average life test," "believes that it is appropriate to continue to permit a money market mutual fund to invest up to 10% of its assets in securities that represent minimal credit risk but do not meet the Commission's definition of 'liquid'," and "believes that second tier securities that represent minimal credit risk continue to be an appropriate investment for money market mutual funds" They add, "Fidelity is also concerned that elimination of the ability of money market mutual funds to purchase second tier securities will have a negative impact on first tier securities that may be at risk of downgrade."
The letter adds, "Fidelity favors monthly money market mutual fund holdings disclosure on a fund sponsor's website with a five business day lag." And, "Fidelity opposes moving money market mutual funds to a floating NAV and believes that a floating NAV will cause significant shareholder outflows, destabilizing money market mutual funds and the overall money markets." Finally, the fund company "supports the continued use of amortized cost accounting for money market mutual funds and believes that public disclosure of market value pricing will only serve to confuse shareholders and undermine the integrity of money market mutual funds."
