Eight large investment companies that manage nearly $1.2 trillion in U.S. money market mutual funds have asked the U.S. Securities and Exchange Commission to reconsider how the exemption for retail money market mutual funds is worded in the commission's proposed industry reforms.
The reforms, which could impact the defined contribution retirement plans that offer money-market funds, were introduced in June as a reaction to how the industry dealt with the 2008 financial crisis. The SEC wants to make investments in mutual funds safer for individuals who rely on them for future retirement income.
The commission proposed to define a retail fund as a fund that does not permit any shareholder of record to redeem more than $1 million of redeemable securities on any one business day.
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In their letter to the SEC, the companies – including Fidelity Investments, BlackRock Inc., Invesco Ltd., Northern Trust Corp., Vanguard, Wells Fargo Funds Management LLC, Legg Mason & Co. LLC and Western Asset Management Co. and T.Rowe Price Associates Inc. – said the proposed daily redemption limit would be "burdensome to implement for both funds and third-party intermediaries, resulting in significant costs and operational complexity. More importantly, investors do not want a continuous limitation on their ability to redeem shares."
They proposed an alternative definition: "Retail fund" should mean a fund that limits beneficial ownership interest to natural persons.
This definition would include individuals investing in money-market mutual funds through individual accounts, retirement accounts, college savings plans, health savings plans and ordinary trusts, the letter said.
The companies believe their definition would prohibit investments by accounts established by businesses, including small businesses, defined benefit plans, endowments or similar accounts where natural persons do not represent the beneficial ownership interest of those accounts.
"As a means of ensuring compliance with this rule, each retail fund would be required to disclose in its prospectus that it limits investments to accounts where natural persons have the beneficial ownership interest," the letter said.
With respect to third-party intermediaries, fund advisers could rely upon contractual arrangements that require such intermediaries to abide by all fund policies. Other advisors may choose to require periodic certifications from intermediaries that have policies in place that are reasonably designed to ensure that only natural persons invest in a retail fund, the companies said.
There are advantages to changing the definition so that it reads this way. It achieves the goal of preserving the money-market mutual fund product for those individuals whose redemption activity does not threaten a fund's liquidity or stability and it encompasses the large majority of individual investors who use retail accounts today, the letter said.
"Our experience has shown that in times of crisis, these individuals are less likely to redeem en masse. Additionally, shares of such a retail fund would be more widely dispersed among a greater number of shareholders than the institutional funds that experienced large outflows during the financial crisis in 2008," the companies said.
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