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BlackRock Favors Withdrawal Fees for Money Market Funds

BlackRock Inc. (BLK), the world’s largest money manager, criticized draft recommendations for new rules governing money-market mutual funds offered last month by a senior panel of regulators, and reiterated its call for withdrawal restrictions for funds under stress.

Floating the share price of money funds to reflect market prices wouldn’t prevent investor runs, and requiring the funds to hold capital buffers would effectively eliminate the product by driving clients away, the New York-based firm said today in a letter to the Financial Stability Oversight Council in Washington. BlackRock said it favored a plan to impose a 1 percent fee on withdrawals when a fund’s weekly liquidity dropped below half the required level.

“This approach preserves the benefits to all investors and borrowers, while also definitively stopping a run,” Barbara G. Novick, BlackRock’s vice chairman, and Richard K. Hoerner, head of the firm’s global cash management business, wrote in the letter.

Regulators, led by outgoing SEC Chairman Mary Schapiro, have been working to overhaul rules governing the $2.6 trillion money-fund industry since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, triggered by holdings of debt issued by Lehman Brothers Holdings Inc., set off a run by money-fund investors that helped freeze global credit markets.

Schapiro’s Plan

Schapiro had planned as recently as August to propose that money funds be forced to choose between a floating share value or a combination of capital buffers and withdrawal restrictions. She shelved the proposal when three of her four fellow commissioners signaled they would reject it.

The Financial Stability Oversight Council, a panel of regulators headed by Treasury Secretary Timothy Geithner, on Nov. 13 began a process by which it will pressure SEC commissioners to reconsider the elements of Schapiro’s plan and a third option that also included a capital buffer. Other industry leaders immediately rejected the recommendations.

The council, known as FSOC, said it would be open to other proposals offered during a 60-day comment period.

The plan to make funds abandon their traditional fixed share value of $1 gained new momentum on Dec. 8 when commissioner Luis A. Aguilar said he is now open to the proposal after reviewing an SEC staff report on the effects of rule changes made in 2010. Daniel M. Gallagher, another commissioner who opposed Schapiro’s proposal, has also said he may support the concept.

Floating Price

BlackRock said that while a floating share price, or net- asset value, would shrink money funds and wouldn’t prevent investor runs, the firm isn’t wholly opposed to the idea.

“We’re open to a discussion on it,” Novick said today in a telephone interview. “It doesn’t really meet the needs, in terms of stopping a run, but if they want to go for a floating NAV we believe there are certain features that would be important to our clients.”

Investors would have to be exempted from taxes on small gains and losses incurred in a floating fund for the idea to work, Novick said, repeating concerns raised by both Aguilar and Gallagher.

Under BlackRock’s plan, a temporary closure and withdrawal fees would be triggered when a fund’s seven-day liquidity fell below 15 percent of assets. Liquidity refers to cash and securities that can be readily converted into cash.

The plan wouldn’t favor big players over smaller ones or push investors out of the product, and could be implemented without a phase-in period, Novick said.

“You could make it effective as of a certain date and then just turn it on,” she said.

FSOC considered the proposal a “preliminary idea” and have asked for more information about it, Novick said.

To contact the reporters on this story: Christopher Condon in Boston at ccondon4@bloomberg.net; Alexis Leondis in New York at aleondis@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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