Fidelity Investments, one of the leading asset managers worldwide, confirmed its support for the implementation of a one percent redemption fee on large institutional money funds when the market is under extreme crisis, according to a report from Tim McLaughlin of Reuters. Reuters cited a speech by Nancy Prior, Fidelity’s president of money market funds. Prior had some other shocking words (emphasis ours), “We believe that halting redemptions or charging a fee when liquidity is scarce is the only effective means of stopping large, sudden outflows.“
Money market funds have been opposing regulatory reforms proposed by former Treasury Secretary Timothy Geitner to the Financial Stablity Oversight Council. Geithner advocated for the implementation of requiring asset managers to have capital cushions. The mutual fund industry, which holds approximately $2.7 trillion in assets, argued that further regulations would make it unattractive for investment and would drive investors away.
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Fidelity Investments acknowledged that institutional prime money market funds are susceptible to abrupt and large redemption during financial crisis, Nancy Prior, president of the money market group of Fidelity Investments explained the company’s position regarding the impending regulation in a prepared speech on Tuesday afternoon at the iMoneyNet Investor Conference in Orlando, Florida.
Prior said, “We believe that halting redemptions or charging a fee when liquidity is scarce is the only effective means of stopping large, sudden outflows. This would be a far more effective means of addressing a clearly defined issue within one specific segment of the (money market fund) product.”
“If the SEC concludes that institutional prime MMFs need further reform, a better approach would be requiring liquidity gates and/or fees that would be triggered only during times of market stress,” added Prior.
She explained that under the proposed approach, the mutual funds would set up a temporary restriction that would suspend redemptions automatically for a certain period, if its liquid assets fall below a certain threshold. This would allow the fund to restore the stability of its liquidity.
Prior further stated that shareholders would have the option to redeem their assets if the weekly liquidity of the mutual fund continue to decline to a level below a predetermined threshold. However, she emphasized that redemptions will be subject to a one percent redemption fee.
According to her, “Imposing a redemption fee would compensate the fund and its remaining shareholders for the costs of withdrawing liquidity from the fund.”
Fidelity Investments has more than $3.8 trillion assets under management as of November 30, 2012. Last January, the fund was one of the assets managers that decided to disclose the net asset values (NAVs) of its money market mutual funds on a daily basis.
Other large asset managers including JPMorgan Chase & Co. (NYSE:JPM), BlackRock, Inc. (NYSE:BLK), and Goldman Sachs Group, Inc. (NYSE:GS) also implemented floating NAVs. Vanguard did not join the pack and maintained its existing NAVs policy citing that the fluctuation of its biggest money market fund is de minimis.