Focus on credit and regulation. Portfolio Manager Commentary Overview, strategy, and outlook: As of February 28, 2017

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1 WELLS FARGO MONEY MARKET FUNDS Portfolio Manager Commentary Overview, strategy, and outlook: As of February 28, 2017 Contributing authors Jeffrey L. Weaver, Head of Money Funds and Short Duration Strategies Laurie R. White, Managing Director and Senior Fund Manager, Taxable Money Funds John R. Kelly, Fund Manager, Taxable Money Funds Matthew A. Grimes, Managing Director, Money Market Credit Research Michael W. Shinners, Senior Analyst, Taxable Money Market Credit Research Focus on credit and regulation Viva Las Vegas! The Structured Finance Industry Group (SFIG) held its 2017 conference in Las Vegas from February 26 to March 1. The SFIG is an industry association with a large membership, drawing professionals from rating agencies, issuers, dealers, the investing and legal communities, and other participants in the structured finance marketplace. While modest relative to other industry conventions, the event with roughly 7,000 attendees remains the largest structured finance conference in the world. The tone of the conference might be characterized as one of cautious optimism. From our perspective, this was the first conference in some years that regulatory topics didn t overwhelm issues around fundamental, market, or other deal-specific considerations. In fact, the industry has adjusted to a number of rather impactful regulatory measures, and structured finance appears to remain a dependable funding component for companies and, indirectly, consumers. Using the Asset-Backed Alert rankings, issuance volume in worldwide structured finance was $619.8 billion in 2016, down more than 5% from $656.7 billion in 2015 due to a decline in issuance of collateralized loan obligations. Volume for U.S. asset-backed securities (ABS) was $220.9 billion in 2016 versus $213.4 billion in 2015, an increase of 3.5%. In the commercial paper market, as of March 1, asset-backed commercial paper (ABCP) outstanding, as tracked weekly by the Federal Reserve (Fed), currently stands at $243.6 billion versus $224.2 billion a year ago (not seasonally adjusted). Among the many discussions at the conference, conversations tended to gravitate at some point toward rates, regulatory relief, and repatriation. While participants had differing opinions on the number and timing of future Fed actions and what that may do to volumes, performance, and risk appetite, several attendees were equally interested in what an appropriate spread differential may be that would entice investors back into prime funds. Unfortunately, the answer may be more than 30 basis points (100 basis points equals 1.00%) given current levels, and the criteria to reinvest may be more involved than simply a spread differential. This may include changes to rulemaking and technology, for example. Issuers and investors have largely adapted to many of the regulatory changes, including many of the capital, liquidity, and securitization standards. It is unclear whether conference attendees viewed a repeal of laws and regulation as necessary given some of the new rules may be additive to efficient markets and much of the infrastructure has been implemented, such as the Volcker Rule and Regulation AB II. Participants, however, might welcome relief on rules that continue to balance the costs and benefits for issuers, investors, financial stability, and consumers, and many topics remain unresolved. Are there parts of the Volcker Rule that impede liquidity? Could risk weight percentages be recalibrated? Risk retention may indeed align issuer and investor interests, but is the size and method of calculation appropriate? Are the inflow and outflow assumptions appropriate in the calculation of the liquidity coverage ratio?

2 Are the exposure measures in the supplementary leverage ratio consistent and at a reasonable level? The administration seems to be receptive to regulatory change given the recent orders; however, it is challenging to handicap what may actually materialize. Issuers generally remain optimistic about their pipeline of new deals, and asset quality is expected to remain generally stable but may bounce off recent lows. The ABS market was extremely active in the first two s of the year and full-year forecasts tend to be above 2016 levels. It is unclear, however, the impact that repatriation or tax reform might have on the capital markets, and changes to the law may or may not be a 2017 event. But whatever happens, all involved in the industry are working hard to make sure that we have a stable platform that will contribute to economic activity. Regulatory update After a series of executive orders and a leaked memo from the House Financial Services Committee, there has been significant speculation about how financial regulation, primarily centered on the Dodd-Frank Act (DFA), could be modified, how implementation dates could be extended, or how rulemaking efforts and regulatory enforcement could be modified in approach. Specifically, the president issued orders on Core Principles for Regulating the United States Financial System, Reducing Regulation and Controlling Regulatory Costs, and Presidential Memorandum on Fiduciary Duty Rule. In the order regarding financial systems, the document establishes core principles to promote competition, foster growth, empower Americans, prevent taxpayer-funded bailouts, restore accountability within agencies, and rationalize the regulatory framework. To this end, the president asked the Financial Stability Oversight Council (FSOC) to prepare a report within 120 days of the effective date of the order summarizing regulations that promote the core principles, what actions are being taken to advance the principles, and what regulations inhibit the regulatory system from achieving the core principles. On one hand, the orders assist the president in achieving his stated deregulation agenda; on the other hand, the orders themselves outline only core general beliefs and don t contain much in direct actions. As a result, a substantive impact may not occur quite as quickly as many might presume. It also is important to note the bureaucracy may act in an independent fashion from the president in their decision-making process, and additionally in order to repeal an Act of Congress it would take an Act of Congress, so the DFA is the law of the land until there is new legislation. Many of the rules required by the DFA already have been written and implemented according to a progress report by the law firm Davis Polk in July 2016, there were roughly 390 rulemaking requirements of which 70% had been finalized with an additional 9% proposed. So, there is a lot to unwind, and the pace of change likely will be slowed further to the extent that proposed modifications of implemented rules require accompanying comment periods. The U.S. also has had significant input into the Basel Accords and Financial Stability Board recommendations that serve as the regulatory framework for many countries and subsequently are used by these countries as frameworks to evaluate the equivalency of the regulatory framework in other countries. Should the U.S. regulatory regime be deemed insufficient, local regulators may subject our institutions to more stringent oversight, which may eliminate any domestic benefits from regulatory change. What might we see from the orders? Generally, given the time it has taken to write rules we may see a pause on remaining rule-making or rule-making that strikes a different balance between costs and benefits as required by the orders. Regulators likely may reduce reporting requirements and there is some evidence that is taking place already. The threshold at which institutions are considered systemically important is likely to move north, going from the current $50 billion to something as high as $250 billion. In fact, regulators already have given some relief to smaller financial institutions on their annual stress-test submissions. As terms expire, the heads and personnel of the regulatory agencies, such as the Fed, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Commodity Futures Trading Commission, and other agencies, may see turnover with individuals more sympathetic to a new agenda. For example, in addition to the retirement of Federal Reserve Governor Daniel Tarullo, the Federal Reserve vice chairperson of supervision role remains vacant so the president already has several key oversight slots to fill. The new Treasury secretary, who is the leader of the FSOC, also likely will influence the regulatory agenda. While a full repeal of the DFA seems unlikely, it is possible select segments of the law might be modified through legislation, through the Financial CHOICE Act of 2016 introduced by Representative Jeb Hensarling, such as the bank resolution process, a rollback of the prohibitions on bank proprietary trading, and many other items. While the CHOICE Act faces support in the House, Senate politics may make it unlikely their approach will reconcile with the ambitious House bill, even though the chair of the Senate Committee on Banking, Senator Crapo, has expressed support for the executive order. And finally, while most of 2

3 the conversation has focused on the banking sector, there may be support for improving some of the constraining features, such as fees and gates, instituted by the recent Rule 2a-7 changes. Although it is difficult to put a probability on what actually gets done, the table below notes some of the key topics and changes currently contemplated by the CHOICE Act, as well as comments by legislators. The CHOICE Act Key topics Off-Ramp Provision Orderly Liquidation Authority (OLA) Volcker Rule & Durbin Amendment Liquidity (LCR & NSFR) & capital rules Stress tests Consumer Financial Protection Bureau (CFPB) FSOC/other Fiduciary Rule Government-sponsored enterprises (SLMA, FNMA, FHLMC, etc.) Glass-Steagall Act Risk retention Changes contemplated and legislator comments The CHOICE Act allows qualifying bank organizations (QBOs) to opt out of certain regulations to the extent the bank meets a 10% supplementary leverage ratio. The CHOICE Act repeals the OLA (Title II) and structures a new chapter in the Bankruptcy Code for large complex financial institutions, although many of the constructs would still apply, like automatic stays and single point of entry. The proposed act also would adjust the Fed s emergency lending authority; the FDIC would be prohibited from guaranteeing obligations of banks; the FSOC would no longer be able to designate nonbank financial institutions as systemically important or break up an institution it deems to pose a grave threat to financial stability. The CHOICE Act looks to repeal both. The Treasury secretary nominee seemed supportive of rolling back the Volcker Rule as it inhibits liquidity in capital markets; however, most of the ABCP conduits already have modified their structures to be compliant with the rule. This may be a rulemaking area that may see some modifications but no repeal. However, a relaxing of some of the liquidity coverage ratio, net stable funding ratio, and leverage ratio inputs or measurement of exposures may benefit the short-term market. Changing the outflow or credit conversion factor assumptions on liquidity facilities may narrow the regulatory funding gap between investors and issuers in terms of desired maturities. Changes to capital rules may cause some market disruption given adaptation has already started with new indentures and issuance. However, securitized risk weights continue to be an ongoing topic of conversation globally. It should be noted, however, that the advisor to the president, Gary Cohn, may seek more stringent capital levels to mitigate other regulatory relief. The Fed rolled back the qualitative portion for certain smaller institutions, and these likely will remain in some form. The 2017 stress-test directions and scenarios already have been rolled out. Under the CHOICE Act QBOs would be exempt from Stress Tests and Comprehensive Capital Analysis and Review (CCAR). The Act also looks to make the CCAR a bi-annual event versus annual. It is possible the CFPB is rationalized a bit, particularly the agency head in the short term. There have been discussions about giving the president the choice to remove the head of the agency at will. The act also could make the agency structure a five-person bipartisan body with additional regulatory participants (such as the OCC and Federal Housing Finance Agency) and adjust or eliminate supervisory authority thresholds and scope. Prior to the past election, a panel of the D.C. Circuit found unconstitutional the provision in the Dodd-Frank Act establishing a single Director of the CFPB who could not be removed by the president except for cause. The CHOICE Act seeks to eliminate the Office of Financial Research; scale back much of the FSOC s authority; modify the powers of the Fed somewhat; and require that all regulators budgets, except that of the Fed, should be funded via the appropriations process. Importantly, the act would subject all regulatory interpretations to judicial review. The industry seems interested in having the Securities and Exchange Commission (SEC) draft some type of rule. The Department of Labor (DOL) has requested the Office of Management and Budget review a proposal to delay the rule or the DOL may delay closing of the comment period. Unwinding of the government-sponsored enterprises is an area that will require considerable debate in Congress and is unlikely to change. The Treasury secretary did not seem supportive of reintroducing this concept in its traditional form. Many issuers already have implemented risk-retention measures, including ABCP issuers. However, reducing the size of the required retained piece or including undrawn commitments in the calculation may be welcome changes. Regulatory action most likely will focus on other asset classes. 3

4 Debt-ceiling update In anticipation of the reinstatement of the debt ceiling on March 16, the U.S. Treasury continued to make progress in bringing its cash balance down, with the very front end of the Treasury bill (T-bill) market feeling the brunt of the supply reductions. As we explained in greater detail in this space last, the cash balance needs to fall from $373 billion on January 31 to about $25 billion on March 16. By February 28, the balance was down to $189 billion, as shown in the chart below. However, since the Treasury issued a $50 billion cash management bill last, the maturity of which on March 15 will instantly drop the cash balance by that amount, it made even more progress in February than a first glance showed. Continued T-bill supply reductions combined with likely heavy tax-refund outflows are expected to shrink the cash balance to its mid target. U.S. Treasury cash balance Billions ($) Cash balance retirement plans, as well as modifying the issuance patterns to other government entities. Using these methods buys the Treasury a number of s before it really bumps into the limit. Since the amount of time is ultimately entirely dependent on the government s cash flows, and those are even more uncertain than usual given the state of fiscal flux with the transitioning government, it s pointless to speculate on a certain drop-dead date. A good starting point has come from the most recent experience, when the Treasury s efforts established an extraordinary time equivalence of just over seven s. That is, the Treasury ran out of room about that long after it began employing its measures the last time the debt ceiling was reestablished after a suspension. Bottom line is that while the deadline might be imminent and looming, doom and gloom is not. 4-week T-bill auction Billions ($) Auction size (left scale) Auction yield(right scale) Yield (%) Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Source: Bloomberg L.P. Jul-16 Jan-17 The T-bill supply cuts have focused, to date, on the sizes of the 4-week T-bill auctions, and, accordingly, the greatest impact on T-bill yields occurred in those very short maturities. As shown in the chart on this page, 4-week T-bill auctions that took place each week in 2017 with a size of $45 billion yielded, on average, 0.50%, but as the size was reduced on February 21 to $35 billion and then on February 28 to $18 billion, the auction yields fell to 0.48% and 0.40%, respectively. When the debt ceiling is reinstated on March 16, the Treasury likely will begin employing some of its famous extraordinary measures (which have been used so often in these circumstances as to become particularly ordinary) to create room under the ceiling to issue additional T-bills and rapidly rebuild a safe cushion into its cash balance. When that happens, the yields on T-bills likely should rebound. As we ve discussed before, the extraordinary measures largely consist of suspending or altering the investment actions of a number of different federal employee Source: U.S. Treasury Besides the supply relief that likely will come with expanded T-bill supply in the second half of March, the prospect of a Fed rate hike on March 15 came into focus on the last day of February, when New York Fed President Dudley commented on interest rates. Although various Fed officials had pointedly noted that a rate hike was possible in March, their comments largely had come to be treated as background noise until confirmed by one of the core Federal Open Market Committee members, generally thought to be Chair Yellen; Vice Chair Fischer; and Dudley, who, in particular, traditionally has been a voice of caution. In this case, Dudley seemed to throw caution to the wind with his remark So, put it all together, I think the case for monetary policy tightening has become a lot more compelling, signaling that an interest-rate hike in March seems more likely than not. The combination of a flipped supply picture with higher overnight rates via the Fed could change the investing environment next

5 Wells Fargo FNAV money market fund NAVs Wells Fargo FNAV money market fund weekly liquid assets Municipal Cash Management MMF Institutional Cash Investment MMF Select Heritage MMF Select Capital gains distribution Municipal Cash Management MMF Institutional Heritage MMF Select Cash Investment MMF Select 30% SEC minimum Fund NAV Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Percent of fund Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Source: Wells Fargo Funds Source: Wells Fargo Funds Rates for sample investment instruments current -end % (February 2017) Sector 1 day 1 week Wells Fargo Fund 1-day yield 7-day current yield U.S. Treasury repos Cash Investment MMF Select Fed reverse repo rate 0.50 Heritage MMF Select U.S. Treasury bills Municipal Cash Mgmt MMF Inst l Agency discount notes LIBOR Government MMF Select Asset-backed commercial paper Treasury Plus MMF Inst l Dealer commercial paper % Treasury MMF Inst l Municipals Sources: Bloomberg L.P. and Wells Capital Management, Inc. Does not include sales charges and assumes reinvestment of dividends and capital gains. Source: Wells Fargo Funds The advisor has contractually committed to certain fee waivers and/or expense reimbursements. These reductions may be discontinued at any time. If fees had not been waived, the seven-day current yield for the Cash Investment Money Market Fund, Heritage Money Market Fund, Municipal Cash Management Money Market Fund, Government Money Market Fund, Treasury Plus Money Market Fund, and 100% Treasury Money Market Fund would have been 0.74%, 0.69%, 0.42%, 0.44%, 0.36%, and 0.16%, respectively, and the total returns would have been lower. For more information, please contact: Institutional Sales Desk: Website: wellsfargofunds.com (Click Institutional Cash Management ) 5

6 For floating NAV money market funds: You could lose money by investing in the fund. Because the share price of the fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the fund s liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. For retail money market funds: You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the fund s liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. For government money market funds: You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund s sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. For the municipal money market funds, a portion of the fund s income may be subject to federal, state, and/or local income taxes or the Alternative Minimum Tax (AMT). Any capital gains distributions may be taxable. For the government money market funds, the U.S. government guarantee applies to certain underlying securities and not to shares of the fund. The views expressed and any forward-looking statements are as of February 28, 2017, and are those of the fund managers and the Money Market team at Wells Capital Management, subadvisor to the Wells Fargo Money Market Funds, and Wells Fargo Funds Management, LLC. Discussions of individual securities, the markets generally, or any Wells Fargo Funds are not intended as individual recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances in the market. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements. Carefully consider a fund s investment objectives, risks, charges, and expenses before investing. For a current prospectus and, if available, a summary prospectus, containing this and other information, visit wellsfargofunds.com. Read it carefully before investing. Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company. Neither Wells Fargo Funds Management nor Wells Fargo Funds Distributor has fund customer accounts/assets, and neither provides investment advice/recommendations or acts as an investment advice fiduciary to any investor Wells Fargo Funds Management, LLC. All rights reserved. FASS