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Comment letters are flooding into the Securities and Exchange Commission regarding the agency’s money-market fund proposal, as the comment period expires next week.
Charles Schwab filed its comment letter Thursday, saying that while it “generally supports” the SEC’s two-pronged reform plan, it has a “significant number of concerns about the proposed rule,” and recommended seven changes “that would make the rule less burdensome to implement.”
The SEC’s two-pronged plan, announced by SEC Chairwoman Mary Joe White in early June, would require institutional prime funds to have a floating net asset value, and impose a “fees-and-gates” approach by allowing a fund’s board to impose a 2% liquidity fee if the fund’s weekly liquid assets fell below 15% of its total assets.
White said in June that the two reforms could be adopted separately or combined into a single reform package.
Marie Chandoha, president of Charles Schwab Investment Management, said on a call with reporters Thursday that Schwab agreed that a “final rule should combine the two alternatives.”
While a floating NAV and fees and gates will help eliminate the risk of a fund breaking the buck, Chandoha said, “the reality is that nothing short of eliminating the product will prevent a run on the fund.”
However, she said the value Schwab clients’ see in money-market funds is undeniable: while the funds have “been yielding zero for many years, clients continue to use them.” Schwab is one of the largest managers of money-market fund assets in the United States, with 3 million money fund accounts and $168 billion in assets under management as of June 30.
Jeff Brown, senior vice president of government and regulatory affairs at Schwab, who was also on the call, said that while Schwab believes that the “SEC has done a thorough job on a complicated issue,” including conducting “extensive research,” Schwab does have suggestions to make.
While there is consensus, Brown says, on making sure that “municipal funds can maintain their NAV,” many divergent views will likely be expressed in the comment letters (the comment period expires Tuesday), and at the Sept. 18 hearing to be held by the House Financial Services Capital Markets Subcomittee regarding the SEC’s proposal, in which Schwab will testify.
Schwab recommended the following seven changes to the SEC’s money fund proposal:
1. The daily redemption limit for retail investors, which serves as the dividing line between “institutional investors” and “retail investors,” should be increased from $1 million to $5 million per business day. The $1 million redemption limit could significantly impact retail investors by triggering unexpected violations of the threshold and presenting a host of operational challenges. Those challenges, as well as the likelihood of inadvertent violations of the threshold, decrease markedly at the $5 million level.
2. The daily redemption limit should be applied on a per-account basis, rather than on a per-shareholder basis. Schwab said it doesn’t believe there is any realistic way to track a particular shareholder in real time to a total of $1 million (or, as the firm recommends, $5 million) in redemptions across multiple accounts, particularly if those accounts are of different types (e.g., a retail brokerage account, a 529 college savings account and a 401(k) employer-sponsored retirement account).
3. Municipal (tax-exempt) money-market funds should be exempted from the floating NAV proposal. Schwab data illustrates that owners of municipal money-market funds are overwhelmingly retail investors and their past behavior in times of market stress indicates there is less risk of a run in these funds. Municipal money-market funds are also much more liquid than prime funds, and data shows that even at the height of the 2008 financial crisis, these funds were exceptionally resilient.
4. The rule should confirm the treatment of registered investment advisors in the context of the definition of “retail” and “institutional” investor. Schwab does not believe that the proposed rule would or should require that the redemption limit apply to registered investment advisors, provided the financial intermediary applies the redemption limit to the advisors’ underlying clients, or the advisor otherwise commits to the fund to do so itself. However, because the proposed rule does not expressly address the treatment of RIAs, Schwab requests that the commission confirm this reading and application of the proposed rule.
5. Retirement accounts (Individual Retirement Accounts and employer-sponsored 401(k) and similar plans) and educational accounts such as 529 plans should be exempted from the rule. These types of investment vehicles are used exclusively by individuals and serve no purpose for institutional investors. The operational complexity that would result from attempting to apply the proposed rules to retirement accounts would be so great that the effect would be to make it nearly impossible to use money-market funds in these types of accounts.
6. The tax issues identified by the commission in its proposal should be resolved by the appropriate regulator prior to the rule taking effect. Schwab supports exempting shareholders of a floating NAV money-market fund from being required to report gains and losses unless the gains or losses exceed 50 basis points.
7. While generally supporting the commission’s proposed reforms to money-market fund diversification requirements and the proposed enhancements to disclosure, Schwab has a number of recommendations for changes to these areas of the proposal. Schwab opposes the proposed enhanced stress-testing requirements, because the firm believe they will be difficult to comply with and provide little added benefit for understanding the risks in a money-market fund.
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