New rules governing money market mutual funds are on the horizon. Although the rules were issued by the U.S. Securities and Exchange Commission (SEC) in July 2014, mutual fund companies have until October 2016 to comply with the new regulations. (For specific changes, read the key money market mutual fund regulations.)
One year ahead of that deadline, Viewpoints checked in with Nancy Prior, president of Fidelity’s fixed income division, to see what Fidelity has done so far and what money market fund investors should expect as Fidelity adjusts its money market 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. Treasury and 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” funds), which can invest in nongovernment 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 changes is complete by October 2016, the following will take effect:
- Individuals (or “natural persons,” to use the regulatory term) will be able to invest in retail prime or retail municipal money market funds, which will continue to seek to offer a stable $1 NAV (net asset value).
- Institutional prime and institutional municipal money market funds will have a floating NAV calculated out to four decimals, and will be 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 or even temporarily halt, or “gate,” redemptions as a way to help restore fund liquidity. Government money market funds will be able to continue to seek to offer the traditional stable $1 NAV to both retail and institutional investors, and won’t be subject to the remote potential for redemption fees or gates.
We are required to adopt these changes and to make sure that our funds in these categories comply with the SEC rules by October 2016. None of Fidelity’s prime or municipal money market mutual funds are currently subject to liquidity fees or redemption gates. Similarly, Fidelity’s institutional money market funds are not yet subject to the floating NAV.
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 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 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 the remote possibility that liquidity fees 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, some 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. Under the new regulations, the fund would be able to continue to seek to offer a traditional stable $1 NAV, but it would be subject to the remote possibility of redemption fees, or to gates. 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 we’re renaming it Fidelity® Government Cash Reserves. Shareholders approved the same type of change for Fidelity® Money Market Trust Retirement Money Market Portfolio (which will be renamed Fidelity® Retirement Government Money Market II Portfolio) and for VIP Money Market (which will become VIP Government Money Market). These changes will be implemented toward the end of 2015. 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, we will continue 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 are in process or have been made?
Prior: During the first months of 2015, we 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. The purpose of this change is to indicate to shareholders that Fidelity’s government money market funds already meet the SEC’s new requirement. Additionally, the Board of Trustees for the funds has approved a prospectus disclosure to notify investors of its intention not to impose fees or gates on Fidelity government and U.S. Treasury money market mutual funds.
We also communicated with customers about several fund mergers and the conversions of three prime funds to government funds (which we call a change to their “investment mandate”).
In fall 2015, we announced which of Fidelity’s nongovernment money market mutual funds would be designated as retail and which would be designated as institutional funds. Investors in those funds will be notified of the designation, and institutional investors who will no longer be qualified to invest in retail prime or retail municipal money market mutual funds under the SEC’s new rules will receive additional communications to help them evaluate other investment options such as government funds and institutional money market mutual funds. These changes are detailed on Fidelity.com.
Is there anything customers should do now?
Prior: For many retail shareholders, there is nothing that needs to be done immediately. Many retail shareholders will experience no impact from the retail and institutional designation of Fidelity money market funds. If you are affected, we will be sending you information that will clearly explain the plan for the funds you own—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.
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.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917