* Tighter capital requirements could favor banks over mutual
* BlackRock strikes conciliatory stance with regulators
* SEC still struggling to advance tougher rules
By Tim McLaughlin and Ross Kerber
Nov 14 BNY Mellon Corp's investment management
chief on Wednesday said he saw "some merit" to stiffer capital
requirements and other rules for money funds proposed by U.S.
regulators, in comments that exposed a schism in the $2.5
BNY Mellon investment chief Curtis Arledge's positive
remarks contrasted sharply with fund industry comments on
Tuesday blasting new reforms proposed by the U.S. Financial
Stability Oversight Council, a board of top regulators chaired
by Treasury Secretary Timothy Geithner. Fidelity Investments and
other major fund managers said the reforms were unnecessary and
could drive away investors.
Shares in Federated Investors Inc, heavily involved
in money funds, fell 5 percent to close at $18.43 in Wednesday
trading as the industry schism became more apparent.
Arledge, who oversees BNY's $322 billion cash management
business, said he supports requiring bigger capital buffers for
riskier, less diversified funds.
"I'm not saying I would do it exactly the way it was in the
(FSOC) proposal, although I think there is some merit to it,"
Arledge said at the Bank of America Merrill Lynch Banking and
Financial Services investor conference in New York, which was
"We do actually hold economic capital against our money
funds," Arledge said. "So we are actually very well positioned
for the world to shift to where sponsors need to recognize they
have exposures. Not everybody does, so we think we're well
positioned if that changed."
HARDER TO MAKE A DEAL
The industry split may make it harder for companies to agree
on a deal with regulators, said Stephen Keen, a Reed Smith
attorney in Pittsburgh who has represented fund firms.
The idea that fund firms should build up capital is "the
insurmountable roadblock to a compromise-most sponsors won't
accept it and FSOC won't drop it," Keen said.
Funds may also have difficulty raising capital to meet new
rules because of low interest rates, Keen said. "The irony is
that there is currently no money for capital," he said.
Regulators are trying to settle whether money funds need
more oversight after the financial crisis. In 2008 one of the
industry's best-known funds "broke the buck" and reported a net
asset value below $1 per share, dragged down by heavy holdings
in the collapsed Lehman Brothers. Federal agencies eventually
provided industry-wide backstops. In 2010, new rules required
funds to become more transparent and liquid.
In August, Securities and Exchange Commission Chairman Mary
Schapiro failed to win a majority of support from the SEC's
five-member commission to move forward with additional changes.
That sent the matter to the FSOC.
Many fund firms maintain that the 2010 reforms are
sufficient. They say new rules, like a proposed shift away from
the traditional $1-per-share value, would drive away investors.
Fidelity Investments reaction was typical. The proposals "do
not strike the proper balance of minimizing risk to the
financial system while preserving the benefits that these funds
provide investors, issuers and our economy," Fidelity president
of money funds, Nancy Prior, said in a statement on Tuesday.
David Scharfstein, a Harvard Business School professor who
has backed some money fund reforms, said free-standing fund
companies such as Fidelity, Vanguard Group and Federated
Investors, might have a harder time with capital requirements
than banks, which already have capital.
OTHER PRODUCTS FOR CASH
Lance Pan, director of investment research for Capital
Advisors Group, which works with institutional investors, said
firms such as Fidelity and Federated also have few other
products to hold the cash of investors exiting money funds.
Banks such as BNY Mellon and JPMorgan Chase & Co,
meanwhile, can offer more products for customers who might leave
money funds if they don't like new rules, Pan said.
BNY Mellon and its subsidiaries managed $155 billion in
money funds, No. 5 in the industry, as of Oct. 31, according to
Lipper, a unit of Thomson Reuters. Fidelity was No. 1 with
$418.9 billion, followed by JPMorgan with $229.6 billion and
Federated Investors with $215.9 billion, Lipper data shows.
Arledge put a finer point on the differences.
"If you personally had a choice, would you rather have your
sponsor be the safest bank in the largest economy in the world,
or an independent investment firm?" he said. "We're a winner in
the scenario where risk is actually factored in to making money
funds more resilient."
In addition, BlackRock Inc, among the most vocal
proponents of finding a compromise, is again engaged with
regulators over the latest ideas, president Rob Kapito said on
Wednesday. The New York-based firm will comment on the pros and
cons of all three proposals issued by the FSOC, Kapito said
while speaking later at the same investor conference as Arledge.
Though Kapito did not give any specific views on the FSOC's
preliminary plan, he said it was a "good starting place."
"I'm an optimist in this regard," he said, but added "this
is going to be a tough process."