Money market fund operators are warning of the end of the world as we know it if the Securities and Exchange Commission imposes new regulations on the $2.7 trillion industry.
The SEC is considering three measures it believes would make money market funds less susceptible to the runs experienced in the fall of 2008, when funds were forced to sell securities into a falling market in order to meet redemption requests from investors.
At the height of the crisis, one fund folded after word of its exposure to bankrupt Lehman Bros. debt prompted investors to ask for their money back. The value of securities in the fund's portfolio fell below the $1 per share that investors expected to receive for their shares -- what's known in the industry as "breaking the buck."
The SEC believes investor runs are still possible despite regulations implemented in 2010. The agency is considering: allowing the value of money market fund shares to float above or below $1 per share based on the value of the securities; imposing tougher capital requirements; or putting curbs on redemptions.
The industry opposes all three ideas. Federated Investors president and CEO J. Christopher Donahue called them "three different forms of poison" and said they would "severely hurt if not destroy money market funds."
Money market funds accounted for 75 percent of the $363.6 billion Federated had under management at the end of the first quarter and generated 46 percent of its first-quarter revenue of $230.3 million.
Mr. Donahue's competitors feel the same way.
"We strongly believe that additional regulation of money market funds is neither necessary nor desirable," Fidelity Investments general counsel Scott C. Goebel wrote in a letter to SEC officials last month.
Industry officials say measures taken after the 2008 crisis are enough. One temporary measure the U.S. Treasury Department took was putting a guarantee on the funds similar to what the Federal Deposit Insurance Corp. provides for bank accounts. That guarantee expired in September 2009.
Reforms enacted in 2010 were designed to help funds withstand large, sudden redemptions. They also limited the percentage of lower-quality securities funds could own.
"The 2010 regulations were, in my opinion, more than enough," said Scott Sullivan, a senior analyst for Celent, a Boston research firm that advises financial institutions.
The money market fund industry "may not be perfect, but it's in a lot better place than it was in 2008," Mr. Sullivan said.
Industry officials say allowing the value of money market shares to vary from $1 and putting restrictions on redemptions would thwart two of the purposes that investors use the funds for: stability and ready access to cash.
The Investment Company Institute recently surveyed large institutional users of money funds and found that 80 to 90 percent of U.S. treasurers would curb or discontinue using the funds if either of those proposals were adopted. The industry group said 36 percent would do the same if the SEC orders funds to maintain a large capital cushion than the 2010 regulations imposed.
Meanwhile, low interest rates mean money fund investors continue to receive paltry returns. The average money market fund pays 0.49 percent to investors, according to Bankrate.com.
Fund operators have also taken a hit, although not as big as the one taken by their investors, Mr. Sullivan said. Interest rates are normally high enough for funds to charge investors fees to manage and administer their accounts and still deliver returns. But the protracted period of low interest rates has forced funds to forgo the fees so that their investors break even or earn nominal returns.
Money market funds waived an estimated $5.2 billion in fees last year, according to the Investment Company Institute. Federated said fee waivers reduced its pretax income by $54 million in 2010, $81.9 million last year and $22.3 million in the first quarter.
Despite low interest rates and the regulatory climate, Federated keeps investing in its money market business. That's staying true to the strategy it pursued at the height of the 2008 crisis, when Federated took over a $12.3 billion money market fund Putnam Investments closed after investors began cashing out.
This month, Federated completed its acquisition of London-based Prime Rate Capital Management, which has $4.3 billion in assets, more than $4 billion of it in money market funds. Terms were not disclosed.
Federated also announced plans to acquire about $5 billion in money market assets from Fifth Third Bank of Cincinnati. Terms of that transaction, expected to be completed in the third quarter, were also undisclosed.
"We think this business is still good and sound," Mr. Donahue said.
He said regulation has caused consolidation in the industry to the point where 75 percent of money market assets are held by the 10 largest fund families. More regulation would promote even more concentration, he said.
Mr. Sullivan said that could pose a problem.
"One of the worries I have is that if the SEC keeps putting on these restrictions ... you're basically creating too-big-to-fail money market funds," he said.bizopinion
Len Boselovic: email@example.com or 412-263-1941. First Published April 29, 2012 12:00 AM