Major financial firms are calling on the Securities and Exchange Commission to narrow its money market fund reform plan, asking it to exclude tax-exempt money funds and revise the definition of “retail investor,” among other changes.
In comment letters filed with the SEC, Fidelity Investments, The Charles Schwab Corp. and BlackRock Inc. all said that the commission's plan to restructure money funds shouldn't extend to those that invest in municipal debt. The comment period on the SEC's money fund reform proposal, floated in June, closed last Tuesday.
In a Sept. 16 letter, Fidelity said that many of its shareholders with high account balances use tax-exempt money funds for their core brokerage accounts. The redemption limit that the SEC uses to define retail funds — $1 million daily — would force Fidelity customers to switch to money funds that would be subject to a floating net asset value or to redemption restrictions under the commission's reform plan.
Fidelity said that if left unchanged, the reform plan would lead the firm, one of the biggest money market mutual fund companies, to pull tax-exempt money markets from its lineup.
“After evaluating the significant costs associated with making existing tax-exempt [money market funds] compliant with the SEC's proposed "retail' definition, Fidelity has reluctantly concluded that we are unlikely to offer tax-exempt [money market funds] with a daily redemption limit as currently proposed,” wrote Scott Goebel, Fidelity's senior vice president and general counsel.
NO FLOATING NAV
Fidelity argues that money funds that invest in muni securities are more like government and retail money funds, which wouldn't be subject to a floating NAV under the SEC proposal, than they are like prime institutional money funds that would have to let their share value fluctuate daily.
In its Sept. 12 comment letter, Schwab said that muni money funds shouldn't have a floating NAV.
“Our data illustrates that owners of municipal money market funds are overwhelmingly retail investors, and their past behavior in times of market stress indicates there is less risk of a run in these funds. We do not believe that municipal funds pose a systemic risk,” wrote Marie Chandoha, president of Charles Schwab Investment Management.
Fidelity, Schwab and BlackRock want the SEC to change the definition of “retail money funds.”
Instead of the $1 million daily withdrawal limit, Fidelity and BlackRock favor using Social Security number registration to ensure that the investors are retail. Schwab favors increasing the daily redemption ceiling to $5 million.
“Many individuals use [money market funds] as a brokerage core account, and the proposed redemption limit is fundamentally incompatible with such use as a transaction account,” Mr. Goebel wrote. “These individuals will not stay in funds with a daily redemption limit, and investment advisers may choose not to offer such [money market funds].”
On June 5, the SEC released a proposal that offered two reform approaches for money funds.
One would institute a floating NAV for prime institutional funds, which invest mostly in corporate debt and are seen as the riskiest in the approximately $2.6 trillion money fund market. Money fund shares traditionally are priced at $1.
The other SEC reform option would allow all money funds to maintain a stable NAV, but would establish “liquidity fees” for redemptions from funds that fell below a certain liquid- asset level. It also would allow a fund's board — at its discretion — to lower a temporary redemption “gate” for up to 30 days.
SEC Chairman Mary Jo White said that the proposals, which could be combined, are designed to reduce the risk of investor stampedes out of money market funds during times of economic stress. Such an event occurred after the Reserve Primary Fund fell below a $1 NAV in 2008.
BlackRock urged the SEC to choose one proposal or the other, but not pair them.
“The combined structural proposal, requiring [floating NAV] and standby liquidity fees and gates, is not workable for investors,” Barbara Novick, BlackRock's vice chairman, and Richard Hoerner, managing director and head of global cash management, wrote in a Sept. 12 comment letter. “The focus of any final rule should be only on prime [money market funds].”
Federated Inc., one of the biggest money fund companies, told the SEC that reform isn't necessary, but if it proceeds, the fee-and-gate option would be the most effective at stopping runs.
A floating NAV “would not stabilize [money market funds] but would instead be enormously harmful and result in departures of institutional investors, including state and local investors, from [money market funds] and a significant shrinkage in [money market funds],” John D. Hawke Jr., a partner at Arnold & Porter LLP, wrote on behalf of the company in a Sept. 11 letter.
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