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Mutual fund throw down drags on

By Sheyna Steiner ·
Friday, April 27, 2012
Posted: 1 am ET

The scuffle over money market mutual funds is rolling along. This week, the Wall Street Journal reported on lobbying efforts by fund companies to get lawmakers to influence decision makers at the Securities and Exchange Commission who are considering new regulations for money market funds.

From the Wall Street Journal story, "Money funds' battle royal":

In an effort to win the battle, executives from Fidelity Investments, J.P. Morgan Chase & Co., Vanguard Group Inc., T. Rowe Price Group Inc. and Federated Investors Inc. spent a total of 10 hours one day in March meeting with 15 different members of Congress from both political parties, according to people familiar with the meetings.

The lawmakers who attended included the top two members of the House Committee on Financial Services, Rep. Spencer Bachus (R., Ala.) and Rep. Jeb Hensarling (R., Texas). On April 17, Messrs. Bachus and Hensarling sent a sharply worded letter to Ms. Schapiro, urging her to conduct a thorough analysis of money funds before proposing further regulation.

"As you proceed in this area, we would also like to remind you that the SEC's mandate is to ensure that investors have all the material information about an investment, not to engineer investments so that they are free of risk," they wrote.

Mutual fund companies contend that the money market mutual funds are safe enough, but SEC regulators still aren't sure. Some changes have already been made to money funds following the financial crisis. They went into effect in 2010.

Possible changes to money market funds

In late January, the Securities and Exchange Commission announced they were thinking about restricting the way money market funds are priced. Rather than hewing strictly to a $1 per share net asset value, funds could be required to float their net asset value, or price per share.

Money market funds would also be required to maintain a cushion of extra funds to prevent investor losses in case of a panic, and there may be some redemption restrictions imposed as well. One idea under consideration is that investors would get the majority of their funds at withdrawal, about 95 percent, and then would receive the remainder after 30 days.

People in favor of losing the $1 share price on money market funds say that a floating NAV would increase transparency. Investors would have a much clearer picture of the true value of the fund.

The argument against a floating NAV says investors already know that investing in money funds could result in a loss to principal, but they would invest in the funds less if there was a variable price per share.

Fidelity Investments, money market fund industry heavy, sent a letter to the SEC in February citing research conducted internally. According to a 2011 Fidelity Retail Customer Survey, 42 percent of retail investors value price stability in money funds, and 42 percent value the liquidity. Only 16 percent ranked yield as the most important factor in investing in money market funds.

While 11 percent of clients surveyed expressed a belief that money funds are government-guaranteed and 14 percent were not sure, 75 percent of those surveyed said they know  the funds are not guaranteed.

In an opinion piece on the Wall Street Journal website on Thursday, Eric Rosengren, president of the Federal Reserve Bank of Boston, wrote in support of further regulation of money market funds. He cited the level of credit risk taken by some funds as contrary to investor perceptions and expectations.

Undermining assertions of a truly stable $1 share price from fund companies, Rosengren says the parent companies of money market funds have been forced to rescue their funds more than the public may know.

A forthcoming white paper from the Federal Reserve Bank of Boston "will, using public sources, document more than 50 instances from 2007 to 2010 when sponsors either purchased troubled securities from a fund or provided a direct cash infusion. The total amount of support was at least $3.2 billion," he wrote.

That was the subject of a 2010 paper from credit rating agency Moody's as well. When sponsors can't or won't step in to rescue money funds, the result is not pretty.

A floating NAV would expose the level of fluctuations that really go on in money market funds. While it would be a change, would the increased transparency be a good or bad thing?

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