March 8, 2012 / 6:00 PM / 8 years ago

UPDATE 1-Federated mulls structural change amid reform talk

* Donahue reiterates objections to money fund proposals

* Says new rules would drive cash to banks, raising risk

* Cites Federated stock and bond assets

By Ross Kerber

March 8 (Reuters) - Federated Investors Inc is prepared to change its corporate structure if new money fund rules make it hard to offer cash-management services to clients, Chief Executive Officer Chris Donahue said on Thursday.

Speaking at a financial conference sponsored by Citigroup Inc, Donahue reviewed the Pittsburgh asset manager’s longstanding concerns about new rules for the $2.7 trillion money fund industry being considered by the U.S. Securities and Exchange Commission and other regulators.

If rule changes are adopted that make it hard to offer its current cash management services, a contingency plan for Federated could be to change its structure, Donahue said at the conference, which was webcast. He noted that the company had been privately held in the past.

“If we have to change our corporate structure in order to do the business we have done before,” he said, “OK, that’s the way the world goes.”

As one of the largest money fund providers, with about $285 billion in such assets under management, Federated has been among the most outspoken opponents of new rules. Donahue and executives at other fund managers fear the proposed changes could wreck their industry by making the funds less useful to clients.

U.S. officials have been reviewing money funds since the financial crisis when one of the industry’s best-known funds “broke the buck” and reported a net asset value below the $1 per share level that most investors expect.

In 2010 the SEC put new liquidity and transparency requirements on the funds. Donahue and other executives say the changes have done plenty to shore up the sector and helped it survive tests like outflows during the U.S. debt ceiling debate last summer.

Regulators have said the tests were not complete, but it is unclear if SEC Chairman Mary Schapiro has enough votes among the five SEC commissioners to move forward with some of the changes that the agency’s staff is studying. These include allowing net asset values to “float” away from $1 per share or restricting redemptions from the funds.


Speaking at the Citi conference, Donahue reiterated the industry’s concerns and said rule changes could have major consequences such as driving money to major banks. Such a move he said would create “an increase in systemic risk” - precisely the opposite of what other reforms intended.

Donahue said it appears regulators could take until May or later to propose new rules, and even then a comment period could stretch another four months and it is possible new rules could simply linger after that without action. “I don’t know if there will ever be a line in the sand to say these issues go away forever,” he said.

While he criticized the proposed regulations, Donahue also emphasized in his presentation that Federated also manages equity and bond funds - about $88 billion in all - which would sustain its market capitalization no matter what happens on the regulatory front.

“Federated does have investment considerations beyond regulation,” he said.

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