Fidelity to SEC: You've done enough money market reform

Fidelity Investments is the latest financial firm to fire a shot across the Securities and Exchange Commission's bow regarding money market funds. In a March 1 comment letter, the giant investment company told the agency that the 2010 revisions to money-fund rules have made the vehicles more liquid and transparent and less risky – and obviate the need for further reform that the SEC is considering. The 2010 changes were instituted after an investor stampede for the exits in 2008 forced Reserve Primary Fund shares to fall below the traditional $1 net asset value. Thanks to the 2010 revisions, money funds now must hold 10% of their portfolio in instruments that are liquid on a daily basis and 30% that are liquid on a weekly basis. The rules also shortened fund maturities and required funds, which typically invest in short-term debt, to use safer assets. Fidelity said that after the SEC's 2010 actions “money market funds now hold investment portfolios with lower risk and greater transparency, characteristics that reduce the incentive of shareholders to redeem. Contrary to recent comments by some that mutual funds are living on borrowed time, we strongly believe that additional regulation of money market funds is neither necessary nor desirable.” The SEC has indicated that it is not finished with the money market overhaul. It will propose rules within the next couple months that would allow a floating NAV or establish new capital requirements and withdrawal restrictions. Those ideas make Fidelity wince. “We continue to believe that proposals such as the floating NAV, imposing onerous capital requirements or adding burdensome redemption restrictions will ultimately destroy the money market fund industry,” Fidelity said. SEC Chairman Mary Schapiro is becoming inured to the industry's plaintive objections. In a Feb. 24 speech to a Practicing Law Institute conference in Washington, she said that money markets remain susceptible to runs and a sudden collapse of the value of their assets. She reiterated that the SEC would consider the floating NAV and new capital requirements. “It's hard to miss the hue and cry being raised by the industry against either of these approaches,” Ms. Schapiro said. “But the fact is investors have been given a false sense of security by money market fund sponsor support and the one-time Treasury [Dept.] guarantee [following the Reserve Primary Fund collapse]. Funds remain vulnerable to the reality that a single money market fund break of the buck could trigger a broad and destabilizing run.” It sounds as if the industry and Ms. Schapiro are girding for a long battle.