The following Letter Type D, or variations thereof, was submitted by individuals or entities.
Letter Type D:
Elizabeth M. Murphy, Secretary
Re: Money Market Fund Reform
Dear Ms. Murphy:
I am writing on behalf of [name of entity], an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940, in response to the Commissions request for public comments on its proposal concerning money market funds. As an investment advisor, we are concerned that the proposal would increase our cost of providing advisory services and/or potentially eliminate an important short-term investment option for our clients.
We have used money market funds as a liquidity option for our individual and institutional clients for many years. We use institutional prime funds because they provide greater diversification with a higher rate of return and degree of safety than other alternatives and also are available to our clients with reduced fees. We are able to invest both individual and institutional accounts in these funds on an omnibus basis, thus resulting in cost efficiencies that benefit of our clients.
The proposal under consideration would force a distinction between prime funds that are offered to retail customers and those offered to institutional customers. It would prohibit institutional funds from offering their shares at $1.00 per share and instead require them to compute their net asset values to the fourth decimal point on a daily basis. This approach does not make sense to us for a number of reasons.
First, the floating NAV would destroy the utility of institutional prime funds, which are the funds we use for both our individual and institutional customers on an omnibus basis. It would result in the needless computation of infinitesimally small capital gains and losses on a daily basis, an undertaking that would pose monumental operational and omnibus accounting difficulties. Our accounting system is not functionally designed or equipped to perform this task. Moreover, many of our accounts require or instruct us to invest only in cash or cash equivalents, for the express purpose of avoiding capital gains and losses with resulting tax effects. Prime funds with a variable price per share $1.00 NAV would no longer be permissible investments for a large number of our customers, who would lose the convenience, utility, and relative safety of these instruments. Our management of the liquidity needs of such accounts would become more costly.
A customers need for same-day liquidity can arise for many reasons, such as the settlement of securities transactions, a scheduled quarterly payment of a stipulated amount to a client, or a major purchase by an accountholder. We have no means of controlling the size or frequency of such transactions or distributions. The SECs proposal would require us to monitor each such transaction to determine whether it is retail or institutional and thereby impose significant operating inefficiencies and costs that will diminish the utility of what has been for the last 25 years a simple product with same-day liquidity at par.
We are concerned that the SEC may not sufficiently appreciate the extent to which investment advisors such as ourselves rely on institutional prime money market mutual funds and the inefficiencies and costs that would result from the current proposal. As fiduciaries, we are subject to standards of prudence that require us to apply a risk-reward analysis to our fiduciary investments. Prime funds provide a superior return for our accounts with a record of safety that we consider superior to other alternatives. There are no comparable alternatives providing the same level of risk and return with the convenience and diversification of prime money market funds. We cannot feasibly return to the days when we invested individual accounts in commercial paper with varying maturities to achieve a return on short-term assets. Nor can we economically manage a portfolio of short-term investments for each account.
We understand that the SEC is responding to concerns about the potential for a run on prime money market funds during a financial crisis of the type we had in 2008. Apart from the fact that we do not believe a floating NAV would prevent investors from prudently moving their assets to preserve liquidity during a crisis, there appear to be other, more effective ways to achieve the SECs objective. It would seem reasonable in a crisis, for example, for a fund to have the ability to temporarily suspend redemptions if doing so is necessary to prevent the fund from breaking the buck or losing its liquidity. Such action would serve as a type of circuit breaker in an extreme crisis, giving the markets time to calm. It would give funds time to stabilize or, in the event a fund cannot resume redemptions without breaking the buck, ensure that the funds shareholders are treated equally in a distribution of the funds assets upon dissolution. It is our understanding that a fund at present may suspend redemptions if it is about the break the buck, but only if the fund thereafter liquidates. Fund shareholders would be less likely to panic if they know they will have access to their assets when the fund reopens after a short suspension of redemptions.
Accordingly, we believe this second alternative, which we understand also is being considered by the SEC, is a more straightforward way to address the potential for a run on money market funds rather than the floating NAV proposal, which would not solve the problem but would impose needless costs with loss of efficiency, convenience, and return for our customers.
We appreciated this opportunity to comment and thank you for your attention to our concerns.