Three big-name mutual fund shops, including Fidelity Management & Research Company, State Street Corporation and Federated Investors, have a few choice words for the Securities & Exchange Commission about more money- market regulations.
Among other comments, the mutual fund executives warn that eliminating the fixed $1 price of fund shares will scare away many investors who want some minimum level of value stability in their assets.
The managers made their cases in comment letters to the President’s Working Group Report on Money Market Fund Reform, input from industry participants on eight additional reforms the working group is mulling for fund risk management.
Central to the reforms is a proposal that the SEC is expected to put forth that would eliminate the fixed net $1 net-asset value of funds, and allow the value of the shares to float. Another proposal would require funds to hold back at least 3 percent of investors’ cash when they sell all of their holdings at one time with the remainder returned after 30-days. A third proposal would establish an industry-wide capital cushion to help absorb short-term market shocks.
In their comment letters, the fund executives said that the past reforms accomplished a lot in reducing risk and increasing transparency amongst mutual funds, and that these changes will greatly reduce any temptations amongst shareholders to bolt from the funds.
They warned further changes could undermine whatever gains the original amendments made in restoring shareholder trust.
“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,” wrote Scott Goebel, senior vice president and general counsel of Fidelity Management & Research Company, in a March 1st letter to the securities agency.
Mutual fund executives warn that eliminating the fixed $1 price of fund shares will scare away many investors who want some minimum level of value stability in their assets. A 30-day holdback, they say, will leave transactions dangling during that time period, creating major bookkeeping headaches and slowing down transactions. Whereas, a capital cushion will have impact mutual fund yields.
The proposals, in a February 24th letter written by Joseph Hooley, chairman, president and chief executive officer of State Street Corporation, “appear likely to severely reduce the usefulness of money market mutual funds for investors,” who use such funds primarily for cash management, and who rely on having full, liquid, and predictable access to their investments on a daily basis. Adopting the proposals, he wrote, would fundamentally change basic characteristics of money market mutual funds, essentially eliminating a substantial portion of the market.
“By driving investors to less well-regulated products, these proposals could increase, rather than decrease, systemic risk,” he wrote.
Meanwhile, attorney John Hawke, a partner in the firm Arnold & Porter, wrote a letter on behalf of Federated Investors arguing that same-day settlement of a transaction is a crucial feature of mutual funds that is crucial to their market attractiveness. The holdback will “destroy” the ability of companies and individuals to use the funds as a liquid investment that can be readily redeployed the same day.
A capital reserve, Hawke wrote further, might not impact mutual fund yields on a day-to-day basis, but its presence would inevitably decrease yield from time-to-time.
“As part of its prudence review, a plan fiduciary would be required to consider the nature of a [mutual fund’s] capital reserve and how it affects the [fund’s] yield,” he wrote.
The SEC and members of Congress continue to hold public talks related to the proposals. Members of Industry observers expect that regulatory language articulating the changes should be hashed out by the end of the second quarter. After that the five commissioners of the SEC will have to vote to adopt them.
