Changes in the rules governing money market mutual funds were under consideration for more than five years, as regulators sought to reduce the likelihood of a repeat of the market challenges that occurred during the financial crisis. The U.S. Securities and Exchange Commission (SEC) issued new liquidity and other requirements for money market mutual funds in 2010, and in July 2014 announced additional revisions. (For specific changes, read the key money market mutual fund regulations.)
The SEC gave money market fund providers until late 2016 to comply with the new regulations. Viewpoints checked in with Nancy Prior, president of Fidelity’s fixed income division, to ask what money market fund investors should expect as Fidelity adjusts its money fund lineup to comply with SEC regulations.
What are the key elements of the SEC rules?
Prior: The rule changes affect different types of funds differently. Government money market mutual funds, which invest in U.S. government securities, are exempt from the key structural changes in the new rules. Investors will see few changes to those types of funds. For prime funds (sometimes called “general purpose”), which can invest in non-government debt, and municipal funds, which invest in tax-exempt securities, the SEC rule changes for the first time make a distinction between retail funds and institutional funds.
Once implementation of the rule is complete, individuals will be able to invest in retail prime or retail municipal funds, which will offer a stable $1 NAV (net asset value). Institutional prime and institutional municipal funds will have a floating NAV (expected to vary slightly around a four-decimal value of $1.0000) and will be open to both individual and institutional investors. Any prime or municipal money market fund with insufficient weekly liquidity—a measure of a fund’s ability to meet shareholder redemptions—may impose a fee for redemptions. It may even temporarily halt, or “gate,” redemptions as a way to help restore fund liquidity. Government money market funds will continue to offer a stable $1 NAV to both retail and institutional investors, and won’t be subject to gates or fees.
We are required to adopt these changes and to make sure that our funds in these categories comply with the SEC rules. Although the new rules don’t have to be fully implemented until late 2016, we have already begun making the first phase of changes to our product lineup. That way we can help customers learn well in advance about the rule changes, and confidently invest in funds that will meet their future needs.
How is Fidelity responding to the rule changes?
Prior: Our priority is to ensure that our product line meets the needs of our many different types of customers, and that we offer them a broad range of choices. We want to make sure that the SEC changes are implemented simply and transparently, in good time to meet the requirements. We are always listening to our customers, but to prepare for regulatory changes, we have put a particular focus on reaching out to them to understand which features of money market funds are important, and what Fidelity can do to ease the transition into the new rules.
We clearly heard that many customers want continued access to a money market fund that offers a stable $1 NAV and is not subject to liquidity fees that could be placed on redemptions in certain circumstances, or to gates, which prohibit redemptions in specific situations.
Let’s look at an example. At Fidelity, money market funds serve as a core option for brokerage accounts through which customers settle securities trades. One of the core options is a prime fund, Cash Reserves, which would be subject to gates and fees under the new rules. To provide the fund’s shareholders with a core option not subject to gates and fees, we sought and gained their approval to convert Fidelity Cash Reserves to a government fund, and rename it Fidelity Government Cash Reserves. These changes will be implemented toward the end of 2015. That way, shareholders need not be concerned about the possibility that a gate or a fee could restrict full daily access to their funds. And customers can continue to transact freely in their core brokerage account without worrying whether the potential imposition of a fee or gate could affect their ability to buy or sell securities.
Also, because we have a wide range of customers with varying needs, we will continue to offer a full suite of money market products, including Treasury, government, prime, and municipal funds, for both retail and institutional investors.
What additional changes are customers hearing about and experiencing?
Prior: We began to communicate with money market fund investors in January of this year, when the Board of Trustees of each fund approved this first phase of planned changes.
We have implemented the policy requiring all U.S. Treasury and government money funds to hold 99.5% of their assets in government securities, which is the standard for government funds under the SEC’s new rules. The purpose of this change is to indicate to shareholders that Fidelity’s government money market funds already meet the SEC’s new requirement.
We have also communicated with customers about fund mergers and conversions of prime to government funds (which we call a change to their “investment mandate”). Some mergers were approved by shareholders earlier this year and will be implemented in late 2015.
Is there anything customers should do now?
Prior: No, nothing immediately. Our next set of changes to align to the SEC’s new rule will be to determine which prime and municipal funds will be retail funds, and only available in the future to individual investors. Many shareholders will experience no impact from those decisions. If you are impacted, we will be sending you information that will clearly explain the plan for the fund—and if any further step is needed, the timeline and process you should follow.
Current and future portfolio holdings are subject to risk.
Past performance is no guarantee of future results.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
The municipal market can be affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a money market security to decrease.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917