New rules governing money market mutual funds were issued by the U.S. Securities and Exchange Commission (SEC) in July 2014, with a compliance deadline of October 14, 2016.
As the SEC deadline approaches, Viewpoints checked in with Nancy Prior, president of Fidelity’s fixed income division, to get her perspective on how the regulations have changed the industry and Fidelity’s updated money market fund lineup.
What caused the SEC to change its rules for money market mutual funds?
Prior: The financial markets, including the money markets, were disrupted by the global credit crisis of 2007-2008. The SEC sought to make money market mutual funds even more safe and transparent for shareholders by publishing more daily and historical data about fund liquidity, market value, and shareholder flows. Additionally, the SEC made several structural changes in how money market mutual funds operate.
What are the key elements of the SEC rule changes?
Prior: The rule changes affect different types of funds differently. Investors in government money market mutual funds, which invest primarily in U.S. Treasury and government securities, have seen few changes to those types of funds.
For prime funds, which invest primarily in securities issued by corporations including banks and other types of financial service companies, and municipal funds, which invest primarily in tax-exempt securities, the SEC rule changes for the first time made a distinction between retail funds and institutional funds.
- Individuals (or “natural persons,” to use the regulatory term) are able to invest in retail prime or retail municipal money market funds, which will continue to seek to offer a stable $1.00 NAV (net asset value).
- Institutional prime and institutional municipal money market funds have a floating NAV calculated out to four decimals, and are available to both individual and institutional investors.
In remote cases, when any retail or institutional prime or municipal money market fund has insufficient weekly liquidity (a measure of a fund’s ability to meet shareholder redemptions), the fund may impose a fee for redemptions, payable to the fund, or even temporarily halt, or “gate,” redemptions as a way to help restore fund liquidity.
Government money market funds are able to continue to seek to offer the traditional stable $1.00 NAV to both retail and institutional investors. Fidelity’s government money market funds (including U.S. Treasury and Treasury only funds) won’t be subject to the remote potential for redemption fees or gates.
How did Fidelity respond to the rule changes?
Prior: After several years of work, Fidelity completed its implementation of the new SEC rule changes on October 1, 2016. Our priority throughout has been 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 wanted to make sure that the SEC changes were implemented simply and transparently— in plenty of time to meet the requirements. We are always listening to our customers, but to prepare for these regulatory changes, we put particular focus on reaching out to our customers to understand which features of money market funds are important, and what Fidelity could 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 $1.00 NAV and is not subject to the remote possibility that liquidity fees could be placed on redemptions in certain circumstances, or to gates, which prohibit redemptions in specific situations. For that reason, Fidelity sought and gained shareholder approval to convert and rename a number of funds to operate as government funds. Government money market funds continue to serve as a core option for brokerage accounts through which customers settle securities trades. That way, shareholders do not need to be concerned about a redemption fee or gate restricting full daily access to their cash or affecting their ability to buy or sell securities or to complete other types of transactions.
Also, because we have a wide range of customers with varying needs, Fidelity is continuing to offer a full suite of money market products, including Treasury, government, prime, and municipal funds, for use by retail and institutional investors.
What additional changes have been made?
Prior: During the first months of 2015, Fidelity implemented the policy requiring all U.S. Treasury and government money market funds to hold 99.5% of their assets in government securities, which is the standard for government funds under the SEC’s new rules. Additionally, all Fidelity government funds added prospectus disclosure to notify investors that fees or gates will not be imposed on Fidelity government and U.S. Treasury money market mutual funds.
Later in 2015, we announced which of Fidelity’s non-government money market mutual funds would be designated as retail, and which would be designated as institutional funds. Our updated money market mutual fund lineup for direct investors is detailed on Fidelity.com.
Current and future portfolio holdings are subject to risk.
Past performance is no guarantee of future results.
The municipal market can be affected by adverse tax, legislative, or political changes, and by the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a money market security to decrease.
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