In June 2013, the Securities and Exchange Commission (SEC) issued a proposal for further regulation of money market mutual funds. It is important to bear in mind that this is just a proposal and it will be many months, if not years, before new rules come into effect. If you are a Fidelity money market mutual fund shareholder, you should know that there is no change to your fund or to money market mutual fund regulation at this time.
Fidelity thoroughly and thoughtfully reviewed the proposal and in mid-September 2013, we submitted a comment letter to the SEC with our perspective and response. In late October 2013, we and several other asset management firms jointly submitted a comment letter to the SEC proposing an alternative approach to the definition of a retail money market fund. In mid-April 2014, we submitted a supplemental comment letter providing our perspective on the analysis in four reports published by the SEC’s Division of Economic Risk and Analysis (DERA) in March 2014.
Here is a summary of the SEC’s June 2013 proposal, followed by our perspective and recommendations, which we included in our comment letters and in the letter we submitted jointly with several other asset management firms.
SEC proposal summary
The proposal includes two principal alternative reforms that could be adopted alone or in combination. It also includes additional diversification and disclosure measures that would apply under either alternative.
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Alternative one: floating net asset value (NAV) (applicable to institutional prime & institutional municipal/tax-exempt money market mutual funds)
Under the first alternative, institutional "prime" (or general purpose) money market mutual funds and institutional municipal money market mutual funds would be required to transact at a floating NAV.
- Floating the NAV – Funds would no longer be able to use amortized cost to value their portfolio securities except to the limited extent all mutual funds are able to do so. Daily share prices of these money market mutual funds would fluctuate along with changes, if any, in the market-based value of their portfolio securities.
- Showing fluctuations in price – Funds would be required to "basis point round" their share price to the nearest 1/100th of one percent (the fourth decimal place in the case of a fund with a $1.0000 share price).
- Exempting government and retail money market funds (MMFs) – All Treasury and government money market mutual funds and retail prime and municipal money market mutual funds would be allowed to maintain a stable share price. A retail money market mutual fund would be defined as a money market mutual fund that limits each shareholder's redemptions to no more than $1 million per business day.
A retail money market mutual fund would be defined as a money market mutual fund that limits each shareholder's redemptions to no more than $1 million per business day.
Alternative two: Liquidity fees and redemption gates (applicable only to institutional and retail prime & municipal/tax-exempt money market mutual funds)
Under the second alternative, money market mutual funds would continue to transact at a stable share price, but impose liquidity fees and redemption gates in times of stress.
- Liquidity fees – If a money market mutual fund's level of "weekly liquid assets" were to fall below 15 percent of its total assets (half the required amount), the money market mutual fund would have to impose a 2 percent liquidity fee on all redemptions. However, such a fee would not be imposed if the fund's board of directors determines that such a fee is not in the best interest of the fund or that a lesser liquidity fee is in the best interest of the fund.
- Board imposed redemption gates – Once a money market mutual funds level of "weekly liquid assets" were to fall below 15 percent of its total assets (half the required amount), its board of directors also would be able to impose a temporary suspension of redemptions (or "gate"). A money market mutual fund that imposes a gate would need to lift that gate within 30 days, although the board of directors could determine to lift the gate earlier. Money market mutual funds would not be able to impose a gate for more than 30 days in any 90-day period.
- Prompt public disclosure – Money market mutual funds would be required to disclose promptly and publicly the weekly liquidity threshold dropped below 15%, any imposition or removal of any liquidity fee or gate, and a discussion of the board's analysis in determining whether or not to impose a fee or gate.
- Exemption for government money market funds –Treasury and government money market mutual funds would be exempt from the fees and gates requirement. However, these funds could voluntarily opt into this new requirement.
Additional disclosure and reporting requirements (applicable to all MMFs)
The SEC also proposed additional reforms, including enhanced reporting requirements, more timely reporting of fund portfolio holdings, comparable reporting requirements for private liquidity funds under Form PF, stronger diversification requirements, and enhanced stress testing.
Fidelity's perspective on the SEC proposal
- Fidelity firmly believes that the SEC should treat municipal/tax-exempt money market funds the same way it treats Treasury and government money market funds by excluding these funds from any structural reforms. Municipal/tax-exempt money market funds are not susceptible to destabilizing runs, do not pose systemic risk, and have a resilient portfolio construction. In addition, these funds serve as a critical source of funding to state and local governments, as well as non-profit organizations.
- The SEC's proposed definition of a "retail fund" does not work because of the high operational costs and shareholder dissatisfaction with limiting access to funds through a daily redemption limit. In late October 2013, Fidelity and several other asset management firms submitted a joint comment letter to the SEC, proposing a simpler and more cost effective definition for a retail money market mutual fund that would be allowed to maintain a stable share price, which more accurately captures the intended population of retail investors: one that limits beneficial ownership interest to natural persons. This would include individuals investing in money market funds through individual accounts, retirement accounts, college savings plans, health savings plans and ordinary trusts. Under this definition, a retail fund would not permit investments by accounts established for businesses, including small businesses, defined benefit plans, endowments or similar accounts where natural persons do not represent the beneficial ownership of those accounts. This definition represents more accurately the broader universe of people that the SEC intended to capture under its definition and achieves the goal of preserving the money market mutual fund product for individual investors, whose redemption activity patterns are quite stable. Fidelity firmly believes that the SEC should treat retail money market funds the same way it treats Treasury and government money market funds by excluding these funds from any structural reforms.
- Fidelity believes that the floating NAV proposal is not an effective means to achieve the SEC’s stated goal of stemming rapid and significant redemptions. This proposal would eliminate a fundamental feature of money market funds that investors have come to rely upon – the stable NAV. In addition, this proposal involves significant costs and burdens, including new, complex tax and accounting implications for shareholders.
- Fidelity believes that the SEC's liquidity fees and redemption gates proposal is a more effective means to achieve the SEC's goals than the floating NAV proposal. We recommend that that SEC adopt a fees and gates approach only for institutional prime money market funds. However, we recommend that the SEC reduce the redemption fee rate from 2% to 1%.
- Fidelity does not support a combination of, or choice between, the liquidity fees and redemption gates proposal and the floating NAV proposal. A combined structure would impose excessive costs and burdens on the money market fund industry, shareholders, and the financial markets generally, and result in an extremely complex and confusing product.
- Fidelity recommends that the SEC extend the compliance period for any structural reforms to three years following the effective date of a final rule. This will allow money market funds and intermediaries sufficient time to implement any structural reform.
Fidelity also offers recommendations in its letter regarding the SEC's proposed changes to diversification, stress testing, and disclosure.
SEC studies and supplemental comment letter
In March 2014, the SEC's Division of Economic Risk and Analysis (DERA) published and sought public comment on the results of four money market mutual fund reform-related studies that it had completed, specifically the DERA's:
- Analysis of Demand and Supply of Safe Assets in the Economy, including academic literature reviewing recent evidence on the availability of "safe assets" in the U.S. and global economies.
- Analysis of Government Money Market Fund Exposure to Non-Government Securities.
- Analysis of Liquidity Cost During Crisis Periods, including the spread between same-day buy and sell transaction prices for certain corporate bonds from Jan. 2, 2008, to Jan. 31, 2009.
- Analysis of Municipal Money Market Funds Exposure to Parents of Guarantors, including the extent to which various types of money market funds are holding in their portfolios guarantees and demand features from a single institution.
In mid-April 2014, we submitted a supplemental comment letter, offering our perspective on the DERA studies above, as well as additional information and analysis intended to assist the SEC as it considers final rules on money market mutual fund reform. In that letter, we encourage the SEC to consider the following:
- The data supports an exemption from structural reform for government MMFs. The SEC appropriately exempted both Treasury and government MMFs from proposed fundamental structural changes because these MMFs are not susceptible to the risks of mass redemptions during periods of market stress. Both the Safe Asset Supply Study and the Government MMF Study provide further data to support this conclusion.
- The SEC should limit any government MMF exemption from structural changes to those government MMFs that hold exclusively government securities. This approach aligns with investors’ expectations that government MMFs are comprised of only government securities. The Government MMF Study shows that only a few government MMFs make investments in non-government securities.
- If the SEC proceeds with the liquidity fee and redemption gates alternative for institutional prime MMFs, the SEC should set the redemption fee rate at one percent. Both the Liquidity Cost Study and our analysis comparing DERA’s work to the market conditions Fidelity observed during the 2008 financial crisis support this recommendation.
- The SEC should not eliminate the "25 percent basket" and, instead, reduce the 25 percent basket to a 15 percent basket for MMFs. DERA's analysis in the Muni MMF Guarantor Study supports this position and demonstrates that there are real costs to MMFs if the SEC either eliminates the 25 percent basket or reduces it by too much.
The SEC is expected to spend several more months reviewing comments received and determining whether the proposed regulation should be adopted, revised, or rejected. At the end of the review period, the proposal may be voted upon by the SEC Commissioners. To be approved, the proposal would need a majority of Commissioners’ votes. Should the vote result in the adoption of the regulation, it is typically another – often extended – period of time before new rules become effective.
Fidelity ultimately shares the same goal as regulators and policymakers: to ensure the strength and stability of money market mutual funds and our financial system, while preserving the benefits that these funds provide investors, issuers and our economy. We will continue to advocate on behalf of all of our money market mutual fund shareholders and work with the SEC as these important regulatory discussions continue.
We can state unequivocally that Fidelity’s money market mutual funds and accounts continue to provide security and safety for our customers’ cash investments. Our funds invest in money market securities of high quality, and our customers have full access to their investments anytime they wish. Most importantly, we continue to be vigilant in keeping our money market mutual funds safe and in protecting the $1.00 net asset value (NAV), which has always been our #1 objective in managing these funds.