Nancy Prior, President, Money Markets, of Fidelity, gave a speech Tuesday afternoon at iMoneyNet's Money Market Expo conference in Orlando, entitled, "Proceed With Caution: Striking the Right Regulatory Balance for Money Market Mutual Funds." (Note that Crane Data is unaffiliated with this event; we run the competing Money Fund Symposium.) Prior's talk says, "As the largest provider of money market mutual funds, Fidelity is very much committed to ensuring the safety, stability and viability of this product. Our money market fund portfolio management team is focused each and every day on researching and analyzing the short-term markets to help ensure that our funds can deliver – today and tomorrow, in stable and volatile markets -- principal stability, ready liquidity and a market-based return that our shareholders count on. We take our fiduciary responsibility to our shareholders very seriously. Our highest priority in managing MMFs is maintaining the safety and liquidity of our clients' principal, and we are proud of our track record over the past 30+ years."
She explains, "Ever since the SEC adopted a robust and comprehensive set of amendments to money market funds in 2010, Fidelity and the entire MMF industry have been actively engaged in deliberations about whether there is a need for further regulatory reform. Over this three-year period, we have heard a range of viewpoints and recommendations from MMF investors, issuers, providers, academics and policymakers. The debate has been open and transparent, with hundreds of hours of public meetings, voluminous comment letters online for all to see, and countless headlines and articles in the press. I want to thank everyone who has been actively involved in this debate. It has certainly been a thorough process, some would say exhaustive!
Prior continues, "But while differences remain as to whether additional reform is necessary and, if so, what the best approach might be ... we all share the same goals: to ensure the strength and stability of MMFs and our financial system ... and to preserve the benefits that these funds provide investors, issuers and our economy. I believe we are beginning to see a consensus emerge that could lead to a path forward ... a consensus across the various constituencies that have been actively involved in this debate -- including, most importantly, the regulators. I will elaborate on that later in my remarks."
She tells the audience, "We at Fidelity support reform that could serve to strengthen the resiliency of MMFs. But, as with any potential regulation, the expected benefits need to be carefully weighed against any potential harm or unintended consequences that might result from a change. We believe that some of the structural changes being considered by regulators would greatly diminish the attractiveness of these highly effective and low-cost cash management vehicles, with potentially severe consequences. On behalf of our shareholders, we have been -- and will continue to be -- vocal in our opposition to proposals that would undermine the core features that customers value in MMFs while providing no benefit to the overall stability of the financial system."
Prior adds, "We firmly believe that the 2010 amendments to Rule 2a-7 have made MMFs more resilient ... and that further action is simply not warranted. That's why our message to the Financial Stability Oversight Council (FSOC) is simple: take no further action on MMFs at this time. The SEC is the regulator with the authority and expertise to consider whether and how to adopt additional reforms on MMFs. Furthermore, the alternatives the FSOC has proposed are not workable; and the FSOC has failed to meet the procedural and substantive requirements as well as the policy justifications that are necessary to exercise its authority to make such recommendations."
She comments, "Our recent stress tests have demonstrated that our prime funds can now handle in a single day outflows twice the size of the largest redemptions we saw over the course of an entire week at the height of the crisis.... The results of these stress tests raise the question of how much protection is enough. We do not think removal of all risk from these funds is a desirable or realistic goal.... Based on the facts, data and empirical evidence, there simply is no justification, or benefit, for further reforms to Treasury, Government, Municipal or Retail Prime MMFs."
Prior says, "Unfortunately, no regulatory classification of funds as institutional or retail exists today. MMF advisers self-classify funds.... Therefore, an important step toward creating properly tailored reform is to establish formal criteria that distinguish between these two fund types.... But, more importantly, any regulatory changes should be narrowly tailored to address actual, identified risks. We urge regulators to focus on the problems they are trying to solve -- the ability of MMFs to sustain large, abrupt redemptions in times of severe market stress. Because Treasury, Government, Municipal, and Retail Prime MMFs do not pose the liquidity, credit, and redemption risks that the FSOC and SEC have identified as a concern, these types of funds should be excluded from any additional reform measures."
She continues, "Indeed, the comment letters filed in response to the FSOC's proposed recommendations on MMF reform show strong support for limiting further reform to Prime funds. Of the comment letters that addressed the issue of distinctions across types of MMFs, more than 95% agreed that Treasury MMFs should be excluded from further regulatory changes; 86% said that government funds require no changes; and 83% held the same view for Muni funds. The SEC should continue to review the results of its study prior to considering structural changes to MMFs. And the Commission should clearly identify and thoroughly evaluate the costs and benefits of any additional regulations."
Prior adds, "The fact is ... MMFs are already among the safest, most transparent -- and most heavily regulated -- investment products available anywhere.... Recently, Fidelity and other fund sponsors have begun providing even greater transparency by disclosing their portfolios' per-share market values on a daily basis. MMFs are subject to strict liquidity, maturity and credit restrictions. They can invest only in issuers that represent minimal credit risk. They don't engage in leverage or risky financial activity. They are not permitted to have foreign currency risk, invest in long-dated, lower-quality securities, or engage in credit default swap transactions."
She continues, "No one cares more about the strength and stability of the MMF industry than we do. We remain open to new ideas and creative thinking about the best way to improve the resiliency of MMFs. Yet, in support of our shareholders' best interests, we remain steadfastly opposed to changes that would eliminate the core features that investors value in MMFs. That said, we recognize that some policymakers strongly believe that further regulation is needed, and we appear headed down that path. In that case, we respectfully call on the SEC to ensure that any further reforms of MMFs be consistent with the goal of creating a stronger, more resilient product ... and do not impose harmful, unintended consequences on financial markets or the economy. We should not regulate for the sake of regulating. If additional regulation is necessary, it should be narrowly tailored to address a clearly identified problem."
She says, "The SEC should consider a prudent and balanced regulatory response to this narrow issue. A floating NAV is not the answer. It would impose burdensome tax, accounting and recordkeeping requirements for investors. Moreover, there is no evidence to suggest that it would prevent outflows in a crisis. It won't reduce risk in the system. Always-on redemption restrictions (like the MBR), those that prevent shareholders from redeeming all of their cash, also are not the right answer. Our customers have told us -- loudly and clearly -- that they have little or no interest in a product with a floating NAV or one that continually limits access to their funds. Why would such drastic changes to the core features that investors value in the MMF product be necessary or helpful?"
Finally, Prior adds, "In closing, neither the SEC nor the FSOC has demonstrated the need for any additional regulation of Treasury, Government, Muni or Retail Prime funds. These funds are not susceptible to runs, they present negligible credit risk, and they have massive liquidity. Fundamentally changing the core characteristics of MMFs would jeopardize the viability of this crucial cash management product and drive investors to products that may be less-regulated, less transparent or less stable, with adverse consequences for the stability of the financial system. The result, we are convinced, would be restricted access to credit, increased borrowing costs, and significant harm to the overall economy. We urge the SEC to carefully tailor any further reforms. Taking a broad-brush approach by imposing further regulations on all types of MMFs, regardless of their risk profile, would be contrary to the SEC's mandate ... to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. If more reform is needed, it should be limited to Institutional Prime Funds and be narrowly tailored to address the risk in this specific segment of the industry as highlighted by the SEC study."
