* Review based on filings from 341 prime money funds
* Most support predates 2010 rule changes
* Adds fuel to debate over new regulations
By Ross Kerber
BOSTON, Aug 13 Sponsor support likely kept at
least 21 money market funds from "breaking the buck" during the
financial crisis, the Federal Reserve Bank of Boston found in a
study issued on Monday, adding fuel to a debate over the need
for additional regulations.
The study's authors reviewed filings from 341 prime money
market funds from 2007 to 2011 and found at least 21 that
received support worth more than 0.5 percent of their assets.
That amount was large enough to suggest that, without it, the
funds would not have been able to maintain the $1 per share net
asset value investors expect, they wrote.
The study authors said that "Such support, which has served
to obscure the credit risk taken by these funds, has been a
common occurrence over the history" of money funds.
The study comes as regulators, including Boston Fed
President Eric Rosengren push for new rules to make the funds
more resilient. Industry executives have pushed back, saying new
rules adopted in 2010 by the U.S. Securities and Exchange
Commission have done plenty to shore up the funds and that
additional changes would have unintended consequences.
With $2.7 trillion under management at July 31, money funds
play a key role in the financial system. Past studies have shown
dozens of funds received support during the crisis, but not in
as much detail.
A spokeswoman for the fund industry's main trade group, the
Investment Company Institute, said leaders were not immediately
available to comment on the Fed study on Monday afternoon. Some
executives have said the support given to the funds before the
2010 reforms is not central to the current debate.
The Fed's study offered some evidence for that argument.
Much of the cash and securities purchases made by sponsors to
shore up their funds was needed to cover defaulted structured
investment vehicles in the funds and obligations to the
collapsed investment bank Lehman Brothers, prior to the 2010
Lehman obligations led to one of the biggest fund missteps
during the crisis, when the well-known Reserve Primary Fund
failed to maintain $1 per share. Government backstops shored up
other funds afterward, but those have since expired.
In an interview, study co-author Steffanie Brady
acknowledged much support described in the paper stemmed from
problems in 2007 and 2008. But she said the weaknesses remain
and that the 2010 reforms "have not been fully tested." None of
the SEC's changes would have precluded funds from buying Lehman
securities, she added.
In all the study found at least 78 money funds received some
type of direct support in the form of cash contributions or
purchases of distressed securities at above-market prices. In
all, the support totaled $4.4 billion.
Sponsors that provided support included well-known fund
companies such as Northern Trust Corp, T. Rowe Price
Group Inc, Bank of New York Mellon Corp and the
Western Asset Management unit of Legg Mason Inc.