Market reforms under scrutiny; Federated CEO critical of proposals

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Federated Investors president and CEO J. Christopher Donahue Wednesday accused regulators of demonizing the $2.6-trillion money market fund industry, saying additional rules being considered by the federal government would kill a critical element of financial markets.

Mr. Donahue made the comments at an industry conference at the Westin Convention Center hotel. He is scheduled to testify this morning at a U.S. Senate Banking Committee hearing on money market reforms.

The Securities and Exchange Commission is considering proposals that would allow the value of money market shares to float instead of remaining steady at $1 per share. The agency also is considering putting curbs on redemptions to prevent a run on money market funds and imposing tougher capital requirements.

Mr. Donahue described the three ideas as "death by bullet, death by poison and death by hanging."

Peter Crane, head of the Westboro, Mass., research firm sponsoring the three-day conference, introduced Mr. Donahue as "the James Harrison of the money market business," a reference to the Steelers' defensive star.

"I enjoy defending the eighth wonder of the world," Mr. Donahue said.

He said regulations the SEC enacted in 2010 have strengthened the industry enough. Smooth operations of money funds last summer, when financial markets were roiled by the downgrade of the U.S. credit rating and Greece's financial crisis, are proof the two-year-old rules are effective, he said.

"The new regulations, in our view, are working well and they were very much road tested in the summer of 2011," Mr. Donahue told an audience of about 400.

Mr. Donahue said regulators who say money market funds are susceptible to runs or are "shadow" banks are spreading myths. He said over the four decades money funds have operated, the failure of one fund during the 2008 financial crisis hardly indicates the funds are susceptible to runs.

He described a teleconference with a U.S. Treasury official during the crisis at which industry officials were asked whether they were in favor of the government temporarily insuring money funds the way bank deposits are insured by the Federal Deposit Insurance Corporation. After industry officials said they were opposed to the plan, the Treasury official told them Treasury Secretary Tim Geithner had already decided he was going to implement the insurance, which expired in September 2009.

Money fund operators paid the government $1.2 billion in premiums for insurance they didn't want and never used, Mr. Donahue said.

The money fund industry has put on a full-court press to oppose further regulation. It says allowing money market shares to vary from $1 and putting restrictions on redemptions would thwart two of the purposes investors use the funds for: stability and ready access to cash.

Other groups have joined them.

The American Benefits Council, which advises Fortune 500 companies on benefit plans, told SEC Chairman Mary Schapiro in a letter this week that the proposals "could have a significant and adverse impact on retirement plans." Investors in 401(k) retirement plans and similar programs hold about $375 billion in money market funds, the industry group said. Money fund stable pricing at $1 per share is a benefit to investors nearing retirement who want to preserve their nest eggs, the letter stated.


Len Boselovic: or 412-263-1941. First Published June 21, 2012 5:15 AM


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