MMF gating/redemption fees removed - Oct 2

msf

When the SEC divided MMFs into "government", "retail", and "institutional", it added gating requirements to prevent or slow down possible runs on MMFs. Good thought, poor design. AFAIK, no fund ever actually imposed these restrictions, though they updated their prospectuses to allow them.

As of Oct 2, funds are no longer allowed to even suggest they might do this. They are required to:

remove the ability for a fund board to temporarily suspend redemptions if the fund's liquidity falls below a threshold. In addition, the [SEC regulation] amendments will remove the tie between liquidity thresholds and the potential imposition of liquidity fees."

Final Rule

For example, from Schwab:
"As of October 2, 2023, the prospectuses for the Schwab Money Funds were updated to remove language tied to redemption gates, thresholds, and liquidity fees."

I've sent a note to Fidelity, as it has not updated its prospectuses. Pragmatically, this doesn't make a difference. However, its legal department seems out to lunch. I'll see what response I get.

yogibearbull

But liquidity fee may be there. Of course, the entire language related to gates/fees in prime-retail m-mkt funds will have to change.

"The amendments will also require certain money market funds to implement a liquidity fee framework that will better allocate the costs of providing liquidity to redeeming investors."

msf

Those "certain money market funds" are institutional funds. This is in lieu of the earlier swing pricing proposal.

institutional prime and institutional tax-exempt money market funds will be subject to a mandatory liquidity fee when net redemptions exceed 5% of net assets. Funds will not be required to impose this fee, however, when liquidity costs are less than one basis point, which we anticipate will often be the case under normal market conditions.

https://www.federalregister.gov/d/2023-15124/p-224

Unlike the removal of the old gating/fee requirement (which must have been done by Oct 2), the "compliance date for the mandatory liquidity fee framework [] is twelve months after the effective date (Oct 2) of the final amendments."
https://www.federalregister.gov/d/2023-15124/p-840

Right now, gates are ended, the old redemption fees are ended, and any new liquidity fees are yet to be implemented.

If we're looking at the future, I'm more concerned with the increase in the liquid asset requirement from 10% to 25% (daily liquidity) and from 30% to 50% (weekly liquidity).
https://www.federalregister.gov/d/2023-15124/p-453

That could make any future redemption fees moot, but also reduce the yield of MMFs. That will take effect six months from now.
https://www.federalregister.gov/d/2023-15124/p-848

yogibearbull

From what I read, the new redemption/liquidity fees may be imposed after daily net redemptions of 5%+ of AUM. For humongous m-mkt funds (Fido, Vanguard, etc), that is unlikely to kick in.

msf

I cited the requirement above - 5% net redemptions and liquidity costs above 1 basis point.

There is another set of rules for discretionary redemption fees. These may be imposed only if the fund board deems the fee to be in the best interest of the fund. Which fund sponsor is going to be first to say that it is in the best interest of a fund to impose a redemption fee?

Once the sponsor does that, its MM fund business is shot - not just the fund in question but its whole stable. On reputation, even if the short term decision is correct.

msf

I've sent a note to Fidelity, as it has not updated its prospectuses.

Unfortunately, I was a bit too tactful in my note. I indicated that the Federal Register reports that a prospectus is change required by the SEC not later than Oct 2. I asked when I might expect to see an updated prospectus. The response was that when prospectuses are updated, clients are notified and can find them online. Also, that this should happen "soon".

So I just sent a followup: thanks, but my concern is about the prospectuses being out of compliance. All of the top ten families (by AUM of MMFs) have created supplements or issued new prospectuses except Fidelity. I offered Fidelity an out: maybe I misread, or maybe its old prospectus actually does comply (it doesn't).

I concluded: Help me understand. Or perhaps I should ask the SEC since it's their rule.
Maybe that will get some attention.

Top MMF managers
https://www.financialresearch.gov/money-market-funds/

yogibearbull

I see Edgar/SEC N-MFP2 filings dated 10/6/23 with data on liquidity etc for Fido m-mkt funds, but NO prospectus revisions/supplements.

msf

I try to avoid putting my foot in my mouth (not always successfully), so I did check the SEC filings before sending a followup to Fidelity. I'd never looked at N-MFP filings before, but they're the equivalent of N-PORT filings (monthly holdings) for non-MMFs.

N-MFP: Monthly Schedule of Portfolio Holdings of Money Market Funds (PDF)
N-PORT: Monthly Portfolio Investments Report (PDF)

As you said, nothing to do with prospectuses.

msf

Below is the complete response received from Fidelity. There's really little else Fidelity could say.

Thank you for your email that we received on October 6, 2023, regarding SEC rule 2a-7. As your concerns are important to us, your email was forwarded to the Executive Office for review. I appreciate this opportunity to address your concerns.

Fidelity has been working diligently to implement the SEC’s amendments. To ensure our investors are aware, we have incorporated the recent changes to each money market fund’s fact sheet on our website.

I can confirm that Fidelity fully complies with all laws and regulations applicable to our businesses, products, and services, including SEC Rule 2a-7. Before October 2, when Rule 2a-7 permitted fees and gates, Fidelity did not impose a fee upon the sale of shares or temporarily suspend a shareholder’s ability to sell shares in any money market fund we manage.

We appreciate your years of loyalty to Fidelity, and we look forward to assisting with your accounts in the future. If you have additional questions, please call us at 800-544-6666. For your convenience, representatives are available 24 hours a day, 7 days a week.

Sincerely,

Nathan Snyder
Executive Office

What's the point of a having prospectus that (still) says that the fund might violate the law (by suspending redemptions)? It could just as easily say that the fund might hold long term securities. That's also prohibited. Hard to trust a document that borders on fiction.

Updates to Fidelity's website do not inform all of Fidelity's investors of changes. Fidelity MMF investors also invest via third parties (e.g. WellsTrade, Merrill). They see the unamended SEC filings.