Three new comment letters opposing additional radical regulatory reforms have been added to the SEC's "President's Working Group Report on Money Market Fund Reform" Comment Page in the past few days. These include submissions from: Scott Goebel, Senior Vice President and General Counsel, Fidelity Management & Research Company; Joseph L. (Jay) Hooley, Chairman, President and Chief Executive Officer, State Street Corporation; and, John D. Hawke, Jr., Arnold & Porter LLP, on behalf of Federated Investors. The Fidelity letter features a white paper entitled, "A Look at Regulatory Reform for Money Market Mutual Funds: Studying the Impact of the 2010 Changes," while the `Federated submission takes aim at a possible new "holdback" and capital requirements.
The latest addition to the SEC's PWG Comment letters says, "Fidelity Investments would like to take the opportunity to provide the Commission with data and commentary regarding the effectiveness of the Commission's 2010 amendments to Rule 2a-7 on money market mutual funds. Currently, money market mutual funds are subject to a comprehensive regulatory framework and to oversight by the Commission. This existing structure includes the recent enhancements to Rule 2a-7, which were designed to strengthen further money market mutual funds. Fidelity has been working with regulators, including Commission staff, to evaluate the need for additional money market reforms. To inform our viewpoint, we have gathered data that illustrate the impact that the 2010 amendments have had on money market mutual funds, particularly during the turbulent market conditions of the past year."
It continues, "The materials we submit today demonstrate that the amended version of Rule 2a-7 reduced risk in money market funds by imposing more stringent constraints on portfolio liquidity, maturity, and quality, and through new requirements relating to disclosure, operations, and oversight. In the wake of these SEC actions in 2010, money market funds now hold investment portfolios with lower risk and greater transparency, characteristics that reduce the incentive of shareholders to redeem. Contrary to recent comments by some that mutual funds are living on borrowed time, we strongly believe that additional regulation of money market funds is neither necessary nor desirable.
State Street's letter comments, "On behalf of State Street Corporation, I am writing to convey our strong concern with the direction the Securities and Exchange Commission (SEC) is reportedly heading in connection to money market mutual fund reform. State Street is a major global provider of asset management and servicing to money market mutual funds and similar collective investment vehicles. We believe these funds play an important role in today's financial markets, and that the SEC should proceed very cautiously in adopting reform proposals which may unnecessarily limit investors' access to these types of investment products."
They explain, "We understand the systemic risk-related concerns that have prompted both the Commission's current review of money market mutual fund regulation and the higher level reviews of such products at the FSOC and FSB level. However, we are concerned that the proposals under consideration --- including the "floating NAV", "redemption holdback" and "capital buffer" proposals -- will greatly reduce the usefulness of money market mutual funds to investors. By driving investors to less well-regulated products, these proposals could increase, rather than decrease, systemic risk."
State Street continues, "We are aware of the liquidity challenges faced by some money market mutual funds during the recent financial crisis. We believe, however, that the 2010 changes the Commission adopted to Rule 2a-7 significantly reduced the risks such funds present to the financial system and that any additional changes should be very carefully considered, with full consideration given to the needs of investors, and their likely alternative options for investing the $2.7 trillion currently held in money market mutual funds."
They add, "The proposals apparently under consideration at the Commission -- including the "floating NAV", "redemption holdback" and "capital buffer" proposals --- appear likely to severely reduce the usefulness of money market mutual funds for investors, who use such funds primarily for cash management, and who rely on having full, liquid, and predictable access to their investments on a daily basis. Adoption of these proposals by the Commission would fundamentally change the characteristics of money market mutual funds, essentially eliminating a substantial portion of the market. We do not believe such a fundamental restructuring of global financial markets will reduce systemic risk, or benefit investors."
Finally, Federated's latest comment by John Hawke states, "We understand that the Commission continues to evaluate additional structural reforms to its regulation ofmoney market mutual funds, including a capital requirement and a 30-day holdback of a portion of an investor's redemption proceeds.... We believe that such requirements would seriously undermine the utility ofMMFs to businesses, governments, investors, and other private and public sector participants in a range of industries. As explained in greater detail below, a holdback requirement (or minimum balance requirement variant of the same) would eliminate the very liquidity of MMFs that has been central to their widespread use in a variety ofapplications, including corporate payroll processing, storing corporate and institutional operating cash balances, 401(k) and 403(b) employee benefit plan processing, and holding broker-dealer customer cash balances. A capital requirement, which we understand is also being contemplated, would depress already low yields on MMFs, reducing their attractiveness to corporate and retail investors. Finally, we understand that moving MMFs to a floating net asset value is also being considered by the Commission. Please refer to our previous submission dated December 15, 2011 on that subject, which discusses the impact of a floating NAV on a range of business systems."
Hawke adds, "We strongly caution the Commission to appreciate the far-reaching consequences of these changes before proposing fundamental reforms that would threaten the ability of countless economic participants to use MMFs in conducting basic, everyday business transactions. This dramatic reduction in the size of MMFs would also have a potentially devastating impact on the short-term markets and raise the cost of capital for countless corporate and municipal issuers. Respectfully, we urge the Commission to refrain from implementing fundamental changes to the regulation of MMFs at this time and to instead conduct a careful analysis of the effectiveness of the 2010 amendments to Rule 2a-7 and recent enhancements to its oversight of MMFs in order to determine whether any further changes to MMF regulation are warranted. We urge the Commission to also consider the serious potential market ramifications that even the proposal of a rule could have, particularly when coupled with improvident statements intended to justify the adoption of the proposal."
