Federated vows vigorous legal action to block SEC proposals
Federated Investors Inc., the third-largest manager of money-market mutual funds, is planning legal action to block rule changes being contemplated by the Securities and Exchange Commission that the company said could destroy the $2.7 trillion cash-management industry.
Pittsburgh-based Federated will "fight it regulatory-wise and legal-wise as much as can be done," CEO Christopher Donahue said on Friday in a conference call with analysts.
Money-fund providers and regulators have been wrestling for three years over how to make the funds safer without destroying the appeal of the investment product, which is used by corporations and millions of households. The SEC is expected to make two proposals before the end of March.
"Clearly the proposals are drawing nigh," Peter Crane, president of research firm Crane Data LLC in Westborough, Mass., said. "And with anything that truly threatens their franchise, you can expect a severe reaction."
The first plan being drafted by the SEC's staff would eliminate money funds' stable $1 share price. The industry has long warned this would lead investors to abandon money funds.
The second would combine capital buffers and a 30-day holdback of a portion of all redemptions. Donahue said that Federated would fight either of the two rules.
"It's like the choice between you wanted to die by hanging or by bullet," Donahue said during the call.
Donahue said he would take legal action under the Administrative Procedures Act, claiming the SEC hadn't done sufficient analysis of the rules' impact. John Nester, a spokesman for the SEC, declined to comment.
Legal action could also delay the implementation of any new rule, Donahue said.
"It depends on whether or not you're able to get the injunction at the moment of impact and then you fight it out in court," he said.
The redemption restriction being planned by the SEC, according to Donahue, would require funds to hold back 3 percent of any client withdrawal for 30 days.
"That's a new piece of news that's going to go over like a lead zeppelin," Crane said, referring to the details of the redemption restriction.
Any proposal from the SEC staff would probably win initial approval from commissioners. After a period for public comment, a final, rulemaking vote would require approval by at least three of five commissioners for passage.
Federated managed about $285 billion in money-fund assets as of Dec. 31. Federated ranks behind Fidelity Investments and JPMorgan Chase & Co., the two biggest providers of money-market mutual funds, according to Crane Data LLC.