Fidelity Sees Consensus on Limiting of Money-Fund Rules

Fidelity Investments, the biggest U.S. manager of money-market mutual funds, said there is growing agreement among company leaders and regulators to limit any new rules for the products to those eligible to buy corporate debt.

“We are beginning to see an emerging consensus developing around the realization that Treasury, government and muni funds do not need any further reform,” Nancy Prior, president of the money-market business at Boston-based Fidelity, said today during a speech at a conference in Orlando.

Fidelity, JPMorgan Chase & Co. and BlackRock Inc. are among companies that have urged regulators to exclude money-market mutual funds that invest solely in government-backed or municipal securities if they introduce new rules for the product that houses $2.6 trillion in assets. The presidents of all 12 Federal Reserve regional banks also signed a letter on Feb. 12 that, while calling for tougher rules, said changes should initially focus on so-called prime funds, or those that can buy corporate debt.

The U.S. Securities and Exchange Commission is expected to take up as early as this month a proposed overhaul being prepared by the agency’s staff. Commissioners are under pressure from the Financial Stability Oversight Council, a panel of senior regulators charged under the Dodd-Frank Act with identifying systemic financial risks, to re-examine proposals they declined to take up in August.

Regulatory Debate

Regulators have debated how to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, caused by losses on debt issued by Lehman Brothers Holdings Inc., triggered a wider run on prime funds that helped freeze global credit markets.

The SEC in 2010 introduced minimum liquidity levels, a lower cap on average maturities and more disclosure. Former SEC Chairman Mary Schapiro, saying the funds still posed a threat to financial stability, had planned a more sweeping overhaul that would have imposed a floating share value or required capital reserves and withdrawal restrictions. The biggest money-fund providers fought the proposals, claiming either option would destroy the appeal of money funds.

Schapiro shelved her plan in August after a majority of SEC commissioners said they wanted to see more study on the issue. Schapiro left her post at the SEC in December. Mary Jo White, President Barack Obama’s pick to chair the SEC, appeared at a nominations hearing today before the Senate Banking Committee.

While leading fund companies continue to argue against the proposals, some have acknowledged they are losing the battle to stop new rules and have begun urging regulators to limit their scope.

Changes Inevitable

“We recognize that some policymakers strongly believe that further regulation is needed, and we appear headed down that path,” Prior said in her speech at the Money Market Expo hosted by research firm iMoneyNet.

Prior said the run on money funds in September 2008 was narrowly focused, citing research conducted by the staff of the SEC. Prime funds lost about $370 billion to withdrawals in the week after Lehman Brothers filed for bankruptcy. Municipal funds lost $26 billion. Funds that buy only debt backed by the U.S. government took in $185 billion in deposits, she said.

“Based on the facts, data and empirical evidence, there simply is no justification, or benefit, for further reforms” to municipal and government funds, Prior said.

Prior said withdrawals from prime funds during that week were concentrated on funds that cater mainly to institutional clients. She said any new reforms should also exclude prime funds that serve only retail investors, an argument that has less agreement in the industry and hasn’t received public support from regulators.

Industry Views

Vanguard Group Inc. and Charles Schwab Corp. (SCHW) have also called for sparing prime retail funds from further reforms. JPMorgan and BlackRock have urged regulators not to create different rules for institutional and retail products. All four companies are among the industry’s top six money-fund providers.

Prime funds held $1.47 trillion, or 56 percent of money fund assets, as of March 5, according to Westborough, Massachusetts-based iMoneyNet. Funds restricted to government- backed securities held $880 billion and those that buy municipal securities managed $279 billion.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

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

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