Since the April 12 deadline passed, we've been highlighting a number of comment letters submitted in response to the SEC's "Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report." Today, we quote from several more of the largest money fund managers -- Dreyfus, Wells Fargo and Northern (who rank 8, 9 and 10 in money fund market share). The first of these says, "Dreyfus Cash Investment Strategies, a division of BNY Mellon Investment Adviser, Inc., welcomes the opportunity to comment on the money market fund reform options discussed in the 'Report of the President's Working Group on Financial Markets: Overview of Recent Events and Potential Reform Options for Money Market Funds'.... As of March 31, 2021, BNYM Investment Adviser ... managed approximately $215.3 billion invested in 25 domestic money market mutual funds structured within the confines of Rule 2a-7 under the Investment Company Act of 1940." (Note: Please join us for our next webinar, "Handicapping Money Fund Reforms," which will take place Thursday, May 20 from 2-3pm (EDT).)
It continues, "BNYM Investment Adviser supports the Report's overarching goals for money market fund reform: effectively addressing the structural vulnerabilities in money market funds that have been impacted by stress in short-term funding markets, improvement of the resilience and functioning of short-term funding markets, and reducing the likelihood that interventions and taxpayer support would be needed to prevent future money market fund runs or address stresses in short-term funding markets. The 2008 financial crisis and the 2020 financial crisis had similar market impacts, including investor runs on institutional prime money market funds and a freezing of the short-term credit market. However, it is important to note that these two crises diverge in a key respect -- their causes."
Dreyfus Cash Investment Strategies' CIO John Tobin explains, "The 2008 financial crisis was caused by several factors, including failed counterparty credit risk. The 2020 financial crisis was triggered by a global pandemic which highlighted structural deficiencies in the short-term funding market and severely reduced and hampered liquidity in these markets. Money market funds did not cause the market stress that the industry experienced in March 2020, but were adversely impacted by it. Therefore, we support the effort underway to review such vulnerabilities and to further enhance the resiliency of money market funds to meet investor expectations and redemptions in various market conditions."
He comments, "BNYM Investment Adviser has assessed the ten reform options offered by PWG in its Report. Due to the breadth of suggestions offered, we are focusing on specific suggestions that we believe would have the greatest potential to support the continued smooth functioning of the money market fund industry in various market environments. The three reform options that we believe would be most impactful are (i) the decoupling money market fund weekly liquidity and liquidity fee and redemption gate thresholds, (ii) reform of conditions for imposing redemption gates and (iii) money market fund weekly liquidity management changes. With regard to this third reform option, we have included an additional suggestion which is not included in the Report, but which we believe further supports the goals of the Report. This suggestion is to require prime money market funds to hold a minimum investment in securities issued by the U.S. government."
Dreyfus adds, "BNYM Investment Adviser has considered the remaining seven reform options proposed in the Report. We are not inclined to support these options for the various reasons outlined in more detail in Section D of this letter and in the comment letter from the Investment Company Institute, dated April 12, 2021. However, we appreciate the opportunity to address the Commission directly with our own comments at a future date, if desired.... We believe that a WLA Portfolio Minimum of 35%, instead of 30%, would be a simple and straightforward adaption for the industry.... We propose a minimum investment of 10% in Treasury securities for prime money market funds."
Wells Fargo Funds Management's letter, written by President Andrew Owen, states, "On behalf of Wells Fargo & Company and its subsidiaries, Wells Fargo Funds Management, LLC appreciates the opportunity to respond to the request by the U.S. Securities and Exchange Commission for comments on potential money market fund reform measures.... Funds Management serves as the investment manager to the Wells Fargo Funds. Our fund family offers a diverse set of government, prime and tax-exempt MMFs across multiple distribution platforms that include retail and institutional investors.... Assets under management in the Wells Fargo Money Market Funds totaled approximately $194 billion as of March 31, 2021. In managing the Wells Fargo Money Market Funds, we emphasize conservative investment choices and make preservation of capital and liquidity our highest priority."
The letter points out, "We think it important to note that prime and tax-exempt MMFs functioned largely as intended following the reforms of 2010 and 2014; specifically, the floating net asset value ('FNAV') requirement for institutional MMFs provided the price discovery that reforms intended to produce, while ensuring shareholders bore the cost of their liquidity needs. However, the events of March 2020 demonstrated that, despite the FNAV, such funds may still be susceptible to 'runs.' While the runs experienced during the 2008 global financial crisis were precipitated by credit events, March 2020 demonstrated that runs may also be caused by liquidity events, as investors, particularly institutional investors, became concerned that redemption gates would be imposed.... These investor concerns likely were fueled by the perception that permitting funds the option of imposing liquidity fees and redemption gates if their WLAs fell below the minimum 30% threshold was a requirement that they do so. In this sense, the 2014 reforms, which were in large part enacted in order to reduce the risk of runs, may have simply swapped one kind of trigger event for another, as a fund's WLA level replaced a fund's shadow NAV as the trigger which causes institutional investors to redeem."
Wells tells us, "We believe that this phenomenon illustrates that it may be more challenging, if not impossible, to solve for or eliminate run risks entirely. Rather, regulators and the industry should focus on solutions which mitigate redemption risk as much as possible, while ensuring that any additional reforms that are introduced do not threaten the viability of prime and tax-exempt MMFs in the future or impose unnecessary operating costs on MMF sponsors. Properly functioning short-term markets are important for economic growth; they provide a means for companies, municipalities, and the Federal government to finance short term needs. Prime and tax-exempt MMFs are an important tool in providing that financing, and any goal of regulatory reform should be undertaken with a view to ensuring such MMFs can continue to operate in an effective manner."
They add, "In our comments, we do not intend to address all potential policy measures highlighted in the PWG report. In our view, some measures do not address either the functioning of short-term markets or enhance the operation of FNAV MMFs; examples of such measures would be liquidity buffers, the minimum balance at risk, FNAVs for all prime and tax-exempt MMFs, and capital buffers. Other measures, such as swing pricing, a liquidity exchange bank, and new guidelines regarding sponsor support, in our view, present financial, operational, or regulatory challenges that would make them unworkable. With respect to the potential policy measures noted above, we participated in the development of and largely support the comments and recommendations made by the Investment Company Institute ('ICI') in its comment letter. We intend to focus our comments on three potential policy measures highlighted in the PWG report, namely (1) the removal of the tie between MMF liquidity and fee and gate thresholds, which we would support, (2) MMF liquidity management changes, which we would not support, and (3) countercyclical weekly liquid asset requirements, which we would not support."
Finally, a comment letter from Northern Trust Asset Management says, "In 2020, NTAM initiated a thoughtful progression of modifications to its MMF lineup to exit the prime and tax-exempt MMF sectors, a process that began with the closure in May 2020 of our institutional prime MMF, the Northern Institutional Funds - Prime Obligations Portfolio. These MMF product lineup changes were grounded in (1) NTAM's long-term views on interest rates, (2) shifting investor preferences and (3) the potential for future MMF regulatory changes.... For the foreseeable future, NTAM views government MMFs as the optimal solution for investors' immediate operational cash needs. The Commission has correctly acknowledged that during times of stress, government MMFs have served as an important source of liquidity for investors seeking stability.... We believe it is important that government MMFs be allowed to continue to operate under their current regulatory framework. Any regulatory changes that are designed to address the challenges or limitations associated with prime or tax-exempt MMFs should be targeted specifically to those types of MMFs that experienced such challenges or limitations in March 2020 rather than applied indiscriminately to all MMFs."
It continues, "To that end, to be effective we believe any additional regulation of prime and tax-exempt MMFs should be reasonably designed to meet two fundamental objectives: (1) Address prime and tax-exempt MMFs' structural vulnerabilities, but in a manner that does not unnecessarily increase the cost or complexity of operating these categories of MMFs for investors and sponsors; and Reduce the likelihood of official sector interventions relating to prime and tax-exempt MMFs and increase transparency for investors in these types of MMFs. We think it important to note that there is no failsafe regulatory solution -- no 'silver bullet' -- that can address definitively the challenges presented by investors' understandable inclination to respond to market disruption or uncertainty by seeking to reduce their exposures to riskier or less liquid assets. [W]e believe the Commission should avoid adopting a series of new additional requirements generally for MMFs, with potentially duplicative or redundant effects, when a more targeted response would more appropriately and effectively address the issues faced by only certain types of MMFs in March 2020."
In a section entitled, "PWG Report Proposal That May Advance the Goals of Reform," Northern explains, "Of the ten potential policy measures outlined in the PWG Report, we believe that transitioning to a floating NAV structure for retail prime and tax-exempt MMFs is the most constructive and appropriate. Such a change would enhance transparency and investor recognition of the credit risks associated with prime and tax-exempt MMFs and require market dynamics, as reflected in changes in the market value of a MMF's portfolio holdings, to be priced into the NAV at which investors in these MMFs purchase and redeem shares. A floating NAV structure would also align the structure of retail prime and tax-exempt MMFs with that of comparable institutional MMFs, which were required to transition to floating NAVs as a result of regulatory changes adopted by the Commission in 2014."
They state, "Retail prime and tax-exempt MMFs experienced notable asset outflows in March 2020, which likely would have continued or accelerated without official sector intervention. During March 2020, retail prime and tax-exempt MMFs continued to issue and redeem shares at $1.00 even though their market-based NAVs declined. Market-based NAVs had generally recovered by the end of the month. If these retail prime and tax-exempt MMFs had processed redemption transactions during the period of market disruption at their underlying NAVs rather than at a stable $1.00 per share, redeeming investors would have borne the effects of the short-term decline in portfolio value. This could have served to deter some redemptions and decrease retail prime and tax-exempt MMFs' vulnerabilities to runs by mitigating the first mover advantage for redeeming investors, thus enhancing the stability of the sector and therefore the overall short-term funding markets."
Northern's Head of Fixed Income Colin Robertson writes, "In a 2013 letter to the Commission on proposed MMF reforms, Northern Trust expressed the view that a floating NAV structure for prime institutional MMFs was the most appropriate structural change among various alternatives that were then under consideration by the Commission. We now believe that a similar change for retail prime and tax-exempt MMFs would be appropriate. The adoption of a floating NAV structure for institutional prime MMF investors was readily understood in the marketplace at the time, insofar as it conformed the share valuation rubric for those MMFs to that of most other mutual funds. Anecdotally, we understand that institutional investors adapted to the concept of a floating NAV much more readily than to the liquidity fee and redemption gate provisions adopted in 2014. We believe that retail investors would similarly easily understand the floating NAV construct."
He adds, "In our September 2013 comments, we expressed the view that a combination of both a floating NAV requirement and liquidity fees and redemption gates was the least satisfactory alternative. It remains our view that a floating NAV is the most appropriate policy option for prime and tax-exempt MMFs, and we continue to question whether, if a MMF has a floating NAV, liquidity fees and redemption gates are necessary or appropriate. As the PWG Report itself notes, liquidity fees and redemption gates may 'have the unintended effect of triggering preemptive investor redemptions' by MMF shareholders whose redemptions are motivated by the desire to avoid the imposition of a liquidity fee or redemption gate. We believe it is possible that many investors in institutional prime MMFs were motivated to redeem their shares in March 2020 less out of concern regarding possible declines in those MMFs' NAVs than out of concern that, if they delayed redeeming, their investment might later be adversely affected by the imposition of liquidity fees or redemption gates. We therefore urge the Commission to consider the possibility that liquidity fees and redemption gates detract from rather than enhance the resiliency of MMFs and therefore the short-term funding markets."
