Are you one of the millions of investors who own a money market mutual fund? If so, you probably use it to pay bills, or as a parking spot for money you may want to invest later—and you don’t worry much about it.
For good reason, too. Money market mutual funds are among the safest, most convenient and popular short-term investments. They invest in money market securities of the highest quality and provide you with ready access to your money. In the wake of the 2008 financial crisis, the U.S. Securities and Exchange Commission (SEC) tightened relevant regulations to make money market mutual funds even more resilient than before.
With the economy still recovering, interest rates still near historic lows, and additional regulatory change in store, you may be wondering what’s ahead for money market mutual funds. For decades, they have provided a safe and effective way for investors to manage their cash holdings, and an important source of short-term funding to financial institutions, businesses, and governments. But the future of this hugely popular and important investment vehicle could be in jeopardy if additional regulations under consideration by the SEC are enacted. We believe there could be significant negative consequences for investors and the economy.
To learn more about what the regulatory debate may mean to investors and the economy, Viewpoints checked in with Nancy Prior, president of Fidelity’s Money Market group.
What additional changes for money market mutual funds are regulators proposing?
About the expert
Prior: Money market mutual funds have been highly regulated by the SEC since they first became available to investors more than 40 years ago. These funds enable individual and institutional investors to have access to professional money management for their short-term investments, and are a complement to bank accounts.
The strict rules under which these funds are managed are designed with three key shareholder objectives in mind: to preserve capital with a stable $1 net asset value (NAV) per share, to have ready access to cash investments, and to provide current income. The 2008 financial crisis led regulators to consider dramatic changes to money market mutual fund regulations, and, in 2010, significant changes were implemented to make all types of money market funds more liquid, more transparent, and more resilient during any future crisis in the short-term markets that might drive a sudden increase in redemptions.
The SEC is not considering any further structural changes for the types of money market mutual funds that invest only in securities issued or guaranteed by the U.S. government and its agencies. Treasury and government money market funds would continue to offer a stable $1 NAV to all shareholders, with no restrictions on investors’ access to their money.
However, for other types of money market mutual funds, the SEC is proposing dramatic structural changes that we believe could have a significant impact on shareholders. Two alternatives that could be adopted alone or in combination could have the most impact:
- A floating NAV for institutional general purpose (prime) and municipal funds
The first alternative is to eliminate the stable $1 NAV for the types of money market mutual funds whose investments include debt issued by corporations or municipalities, and whose investors are large institutions. The SEC’s own analysis of the 2008 market crisis has identified institutional investors—not individual retail investors—as being prone to flee general purpose money market mutual funds (commonly known as prime) during times of market stress. These types of funds—institutional general purpose taxable funds and municipal, or tax-exempt, funds—would be required to price their shares out to four decimal places (e.g., $1.0000), and the NAV would float instead of remaining stable.
This change is intended to affect only institutional investors who may use these funds to manage significant amounts of money. The SEC’s proposal attempts to exclude retail general purpose and municipal money market mutual funds from the floating NAV by proposing that a fund that caps a shareholder’s redemptions at $1 million per day could continue to maintain a stable $1 NAV. This measure is intended to prevent institutions from investing in retail funds.
- Temporary redemption restrictions for general purpose and municipal funds in distress
The other proposal would limit both institutional and retail investors’ daily access to their cash held in general purpose and municipal money market mutual funds by requiring a fund that holds only 15% of its assets in weekly liquid assets to impose a fee for redemptions—or even to temporarily suspend redemptions. Funds are required to hold 30% of their assets in weekly liquid assets. This proposal is intended to allow the investment manager of a fund, whose weekly liquid assets have dropped to half the required level during a sudden market crisis, to liquidate securities in an orderly fashion to meet redemption requests, and to protect the interest of shareholders who remain invested in the fund.
What is Fidelity's point of view on the proposed regulatory changes?
Prior: Here is Fidelity's perspective on key elements of the SEC's proposal:
- Exclusion of municipal funds from floating NAV and redemption restrictions
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 municipal/tax-exempt money market 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 nonprofit organizations.
- Preservation of stable $1 NAV for retail money market mutual funds
Fidelity proposes an alternative definition of a “retail” money market fund. The SEC’s proposed definition based on a daily redemption cap for each shareholder does not work because of the high operational costs and shareholder dissatisfaction with limiting access to funds. We propose a definition of a retail money market mutual fund that is based on having a Social Security number account registration rather than a daily redemption cap. This definition represents more accurately the broader universe of people that the SEC intended to capture under its definition. In addition, this definition is simple, easy to understand, and easy to implement, and it treats all shareholders and transactions in a single fund identically.
- Floating NAV for institutional general purpose (prime) money market mutual funds
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 on—the stable NAV. In addition, this proposal involves significant costs and burdens, including new, complex tax and accounting implications for shareholders.
- Temporary liquidity fees and suspension of redemptions for funds in distress
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 the SEC adopt a fees and gates approach only for institutional general purpose/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.
- Timeline for implementation of structural changes
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.
What do you think will happen next on the regulatory front?
Prior: The SEC has received many comments on its proposal. The SEC commissioners and staff will take several months to study these comments, and potentially modify their approach. At the end of that period, the commissioners will vote on whether to make further changes to money market mutual fund regulations. It is important to understand that no change is imminent for your current money market mutual fund investments. There are several additional steps to come, and it will be a year or more after the SEC’s vote before significant changes, if any, take effect. Fidelity is actively engaged with regulators in this process, and we will continue to work to advance reform measures that strengthen the stability of money market funds in a way that does not create risk, and that would not eliminate the core features that investors value in money market mutual funds. Striking the right balance is key.
Are my money market investments safe?
Prior: 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 any time they wish. Most importantly, we continue to be vigilant in seeking to keep our money market mutual funds safe and in protecting the $1 NAV, which has always been our No. 1 objective in managing these funds.
- Read about Fidelity's approach to managing money market mutual funds and different types of Fidelity funds.