August 7, 2000
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attention: Jonathan G. Katz, Secretary
Re: Proposed Regulation FD Regarding Selective Disclosure, SEC Release Nos. 33-7787,
34-42259, File no. S7-31-99
Ladies and Gentlemen:
The Vanguard Group1 appreciates the opportunity to present its concerns about the unintended effects proposed Regulation FD is likely to have on the management of money market funds. Vanguard supports the intent and purpose of Regulation FD, and believes that promoting timely dissemination of information to both retail and institutional investors is necessary to fair and efficient securities markets. Vanguard has become concerned, however, that in its current form, Regulation FD will impair the ability of portfolio managers and analysts to obtain useful information and for money market fund managers to perform their affirmative obligations under Rule 2a-7 under the Investment Company Act of 1940. We have had an opportunity to review a letter submitted by Fidelity Investments to the Commission dated July 31, 2000 on this subject and wish to communicate our support for the concerns expressed in that letter. We urge the Commission to seek a solution that will best serve the investing public, including millions of money market fund investors.
Under Rule 2a-7, prior to purchasing a security, money market fund managers are required to make an independent assessment of the creditworthiness of the issuer and determine that the instrument represents a "minimal credit risk." The Commission has made it clear on numerous occasions that fund companies have ongoing obligations to assess and monitor minimal credit risk and the creditworthiness of the issuer, obligor, or provider of a demand feature or guarantee, of a money market instrument. To perform these obligations, it is essential that credit analysts have the ability to probe the issuer's management on issues that relate to credit quality and minimal credit risk.
We believe that Regulation FD, as proposed, will impair the ability of money market fund managers and credit analysts to perform these obligations effectively. Our experience with Rule 15c2-12 under the Securities Exchange Act of 1934 is illustrative.2 Rule 15c2-12, like Regulation FD, was designed to improve the dissemination of certain financial information and material events to investors, however, it has proved to have had a contrary effect in many cases. The adoption of minimum disclosure requirements in the municipal bond market has caused us to experience a "ceiling" rather than a "floor" in disclosure practices that affects many municipal securities, including those that are not subject to the rule. This has affected investors' ability to obtain critical information from obligors and municipal issuers, who have treated Rule 15c2-12 as a means to limit the amount of information they supply to investors.3 We fear a similar effect from issuers of all money market instruments if Regulation FD is adopted as proposed.
We urge the Commission to address the potential adverse effects of Regulation FD on the ability of money market fund managers to assess the minimal credit risk and credit quality of the issuers and obligors of money market instruments. Some form of safe harbor exclusion may address these concerns, however, we suggest that to be effective, any safe harbor provision should take into account the different organizational structures of credit departments within fund companies.4
Thank you for the opportunity to raise these issues prior to the Commission's consideration of Regulation FD. If we can be of further assistance, please contact the undersigned, or Michael Praplaski, Principal, Head of Fixed Income Credit Research, at (610) 669-4049.
Very truly yours,
Ian A. MacKinnon
Vanguard Fixed Income Group
cc: Meyer Eisenberg, Deputy General Counsel
Richard A. Levine, Assistant General Counsel
|1||The Vanguard Group, headquartered in Valley Forge, Pennsylvania, is the nation's second largest mutual fund firm. Vanguard serves 14 million shareholder accounts and manages more than $560 billion in U.S. mutual fund assets. Vanguard offers 109 fund to U.S. investors and 33 additional funds in foreign markets.|
|2||Rule 15c2-12 requires the issuers of covered securities to supply nationally recognized municipal securities depositories with annual financial information, audited financial statements and notice of eleven material events, among other things.|
|3||Vanguard's experience under Rule 15c2-12 is not atypical. See, e.g., remarks of Richard Ciccarone of Van Kampen Investment Advisory Corporation at the U.S. Securities and Exchange Commission's Office of Municipal Securities' First Annual Municipal Market Roundtable at 53-54 (Oct. 14, 1999).|
|4||For example, we note that the safe harbor proposed by Fidelity Investments in its letter dated July 31, 2000, may not provide effective relief unless the fund company has separately dedicated analysts for money market securities.|