Fidelity: Money fund reform will "destroy" industry

BOSTON Thu Mar 1, 2012 12:03pm EST

BOSTON (Reuters) - Fidelity Investments ratcheted up its rhetoric against money-market fund reform, warning U.S. regulators on Thursday that proposed changes would "ultimately destroy" the $2.7 trillion industry and disrupt financing for American businesses.

The Securities and Exchange Commission's tough proposals are meant to reduce the chances that problems in a large money fund could spread to the rest of the financial system as happened during the credit crisis that peaked in 2008.

But in a comment letter to the SEC, the largest U.S. money fund sponsor said proposals that include requiring more capital and placing restrictions on investor redemptions would be disruptive to the industry and put even greater strain on the federal guarantees that back bank deposits. Boston-based Fidelity's money market mutual funds have about $432 billion in assets.

"In particular, we continue to believe that proposals such as floating (net asset value), imposing onerous capital requirements or adding burdensome redemption restrictions will ultimately destroy the money market fund industry," Fidelity said.

"The demise of money-market funds would remove important short-term financing capacity from the markets, inevitably resulting in less credit extension that would impact businesses large and small," Fidelity said.

Fidelity and other money-market fund sponsors fear that tighter regulations under review by the SEC would drive investors to other investment vehicles, particularly banks.

Another big money fund sponsor, Federated Investors Inc, has threatened to file a lawsuit to block reforms.

Fidelity's letter to the SEC stressed that reforms the SEC put in place in 2010 after the credit crisis have made money-market funds stronger and more liquid than ever.

Both companies say the funds' ability to survive investor withdrawals last summer during the European sovereign debt crisis shows their new resilience.

But during the height of the credit crisis, the safety of money market funds was in serious question.

After Lehman Brothers declared bankruptcy in September 2008, a $65 billion money fund's net asset value dropped below $1 per share, sparking a run on the entire industry. Moody's Investors Service reported that fund companies had to put up more than $12 billion of their own money to prevent another 62 funds from "breaking the buck" and the U.S. government had to step in with backing.

SEC Commissioner Mary Schapiro, in a recent speech, said the reforms would address remaining "gaps in the regulatory system that threaten investors."

She said money-market funds still are susceptible to investor runs and to a sudden deterioration in the quality of holdings.

"It's hard to miss the hue and cry being raised by the industry against either of these approaches," Schapiro said in her February 24 speech. "But the fact is investors have been given a false sense of security by money market fund sponsor support and the one-time Treasury guarantee."

(Reporting By Tim McLaughlin; Editing by Mark Porter and Maureen Bavdek)

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