Money fund firms, clients sour on SEC proposals

BOSTON Tue Feb 7, 2012 4:43pm EST

BOSTON (Reuters) - Fund management firms voiced sharp objections Tuesday to proposals that would tighten regulations on money market funds in an effort to make them more safe.

That outcry comes in response to several proposals the U.S. Securities and Exchange Commission is considering that would significantly alter the $2.6 trillion money-market fund industry.

One proposal would allow the value of the funds to float, rather than being fixed at $1 per share as it is now. Another would require investors to stagger withdrawals. They could get 97 percent out at once and the remainder after 30 days.

A formal SEC proposal could come within a month, according to mutual fund industry executives.

"It definitely has the potential to completely change the economics of the money market fund industry," said Tom Bradley, president of TD Ameritrade Institutional. He added companies would fight rules changes. "This will not happen without a battle," he said.

Shares of some major fund companies fell Tuesday in response to news of the potential changes, including Federated Investors Inc and Charles Schwab Corp

Fidelity Investments, the nation's largest money-market fund manager, has warned regulators that more than half of its money-fund clients would move some or all of their assets out of the investments if the net asset value of the funds were allowed to fluctuate.

Fidelity said a poll of customers found 52 percent of retail investors surveyed would invest less, or stop investing altogether, in money market funds if there were a waiting period on part of their redemptions. Results did not change significantly when the holdback scenario was dropped to 1 percent of redemptions, Fidelity said.

Fidelity General Counsel Scott Goebel shared the Boston-based company's research on how investors might react to potential reforms in a February 3 letter to the SEC. Fidelity had $433 billion in money-market fund assets under management at the end of 2011, representing 10.9 million accounts among retail and institutional investors.

Peter Crane, president of Crane Data LLC, a company that tracks the money-market industry, said he doubted there will be a permanent holdback on money fund redemptions.

"I think the SEC will propose something like the HSBC letter - an emergency holdback that the board can declare if they think the NAV is in danger," Crane said Tuesday.

Even though the discussions about the rules are preliminary, investors already have moved money out of some money-market funds after one of them, Reserve Primary, failed to maintain its $1 per share net asset value in 2008.

Bradley said many clients are now using Insured Deposit Accounts, or IDAs, some of which are backed by the Federal Deposit Insurance Corp.

"We still do have our money market fund," Bradley said. "But for the most part, most of the cash on our platform was moved into the IDA accounts by our clients, and it was done for a reason - you are in a near-zero interest rate environment, nothing is really paying that much and so the cash that is held with us is generally cash that is held on the sidelines in between investments and you don't want to put that at risk . (IDAs) can pay a competitive yield and you get the FDIC insurance, you get that government guarantee."

Jason Weyeneth, an analyst at Sterne Agee Asset Management, said in a recent research note that the likelihood of new rules being implemented is reasonably low, given the industry's outcry and the prospect of legal challenges.

Nevertheless, money fund managers are on high alert to beat back any more regulation. Reforms being considered by the SEC "could spark retail and institutional investors to pull significant amounts of assets out of money-market mutual funds, leading to unintended consequences for the financial markets and U.S. economy," Fidelity said in its letter to the SEC.

Nearly 60 percent of institutional investors surveyed by Fidelity said they would move all or some of their assets out of money funds if the net asset value were allowed to fluctuate. And 47 percent of retail investors said they would do the same.

Fidelity and other money market managers oppose more regulations, especially since reforms in 2010 required the industry to hold more-liquid and shorter-duration investments.

Fidelity also said it tested the idea of a 1 percent non-refundable redemption fee to be triggered if a fund's share price dipped below $0.9975. Of the retail money-market fund clients surveyed, 70 percent said they would invest less, or stop investing altogether, if they were subjected to that sort of redemption fee.

"Given the importance retail investors place on the liquidity feature of money-market mutual funds, it is not surprising that investors reacted so negatively to a potential rule that would restrict access to principal," Fidelity said in its report.

(Reporting By Tim McLaughlin, Ross Kerber and John McCrank; Editing by Maureen Bavdek, Alwyn Scott, Gerald E. McCormick and Gunna Dickson)

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