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Regulations would kill money-market funds, Federated CEO says

| Wednesday, Jan. 23, 2013, 12:01 a.m.
Federated Investors Inc. CEO J. Christopher Donahue in his office at the company's downtown headquarters.
James Knox | Pittsburgh Tribune-Review
Federated Investors Inc. CEO J. Christopher Donahue in his office at the company's downtown headquarters. James Knox | Pittsburgh Tribune-Review

A long-simmering government effort to more tightly regulate money-market mutual funds is back on the front burner — and Pittsburgh's Federated Investors Inc. is pretty hot over it.

The Securities and Exchange Commission could have proposals drafted by the end of March, SEC Commissioner Daniel Gallagher said last week. While details are being worked out, the SEC might require fund managers to set up capital buffers against losses. Money managers and institutional investors alike fear that if rules are too stringent, investors would be deprived of a convenient and highly liquid option that can be critical to cash flow.

For about 35 million investors, new regulations could restrict how many fund shares investors can redeem at one time, or require fund managers to account more precisely for share values every day.

Regulators want to impose rules that would prevent another money-market fund collapse like the failure of the $62.5 billion Reserve Primary Fund in September 2008. The nation's first money-market fund, its failure contributed to the credit crisis in fall 2008. Afterward, the Federal Reserve temporarily guaranteed assets in money market funds through 2009, but it legally can no longer do so.

“The government has been standing over money-market funds with a club since the 1970s trying to kill them,” Federated CEO J. Christopher Donahue said in an interview.

An outspoken critic of money-market regulation, Donahue frequently has equated the three types of rules floated by regulators as a choice of “ways to die.”

“Any one of the (possible rules) would cause enormous amounts of money to move from money market funds into other instruments,” Donahue said.

Federated, based in Downtown's Liberty Center, is the nation's third-largest manager of money-market mutual funds. The company managed $242.8 billion in such funds at year's end, behind Fidelity Investments and JPMorgan Chase.

The money-market mutual fund universe is huge. Fund assets totaled $2.7 trillion as of Jan. 16, according to the Investment Company Institute.

A key player in the industry is Dreyfus, owned by Bank of New York Mellon Corp. Dreyfus manages the seventh-largest money-market fund, with nearly $157 billion in assets at year's end.

Close to two of every three American households own money-market fund shares, according to the institute. People own them either in a sweep account tied to an investment portfolio or more directly, by parking proceeds of a home sale, for instance.

Much like a bank deposit account, the most attractive feature of a money-market fund is that it's highly liquid. That means investors have ready, convenient access to their money. Fund assets traditionally earn slightly more than bank deposits but are not insured by the Federal Deposit Insurance Corp.

Money-market mutual funds are widely used by municipalities, bank trust departments, individual households, securities broker dealers and corporations. Fund assets typically are invested in short-term corporate debt, Treasuries and other government securities.

Because many money-market funds invest in very short (usually 60-day) corporate debt, they are a critical source of liquidity for corporate America.

“This is how a lot of companies pay their bills. It's how they make payroll and pay suppliers to build inventory,” said Greg McBride, senior financial analyst at, North Palm Beach, Fla.

In their 40-year history, money-market funds have earned more than $1 trillion in interest, “and that's hundreds of billions of dollars above what they would have earned in bank accounts,” said Peter Crane, president of financial research firm Crane Data LLC, Westborough, Mass. Many municipalities and nonprofits are legally required to use money-market funds to stash their extra cash.

“Stability, convenience, and liquidity — including the stable share price and ability to access 100 percent of their money — are what draw investors,” Allegheny Conference on Community Development CEO Dennis Yablonsky and Greater Pittsburgh Chamber of Commerce President Barbara McNees wrote in a joint letter dated Jan. 4 to Treasury Secretary Timothy Geithner. He heads a special council that has focused on money-market regulation, much as the SEC has.

“Removing these features would drive investors away and impair a critical source of financing for both the private and public sectors,” the letter said. Yablonsky and McNees could not be reached.

“None of these proposals would have helped Reserve Primary,” Crane said. “They would likely have caused more harm than good.”

Traditionally, money market mutual funds are valued at a stable $1 per share. But regulators might require that fluctuations in the net asset value be determined and disclosed daily to share owners.

Several fund management companies have begun daily disclosures of share values. Federated will do the same this week, spokeswoman Meghan McAndrew said.

If the SEC imposes stringent reforms on the money-market industry, most institutional investors would decrease or even discontinue their investing, according to an Investment Company Institute survey of more than 200 treasurers of corporations, state and local governments and other money-market fund investors in early 2012.

For instance, if the commission required fund managers to hold back 3 percent of all redemptions for 30 days, 90 percent of investors said they would reduce or drop their use of money market funds, the institute reported. Investors don't buy and hold money-market funds long-term, experts say. They redeem their holdings after weeks, for instance, to make regular bill payments.

If the SEC required money fund net asset values to float — rather than be valued at $1 a share, as they are currently — 79 percent of those surveyed said they would cut or drop their money fund investing.

“If it's reported that a fund share is worth 99 cents, investors would flee,” McBride said.

Thomas Olson is a staff writer for Trib Total Media. He can be reached a 412-320-7854.

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