Money-market fund companies obtained permission to support 155 of their funds during the financial turmoil of 2007 and 2008, and six more funds got the same go-ahead since the crisis, according to a list provided to Congress by the U.S. Securities and Exchange Commission.
Bank of New York Mellon Corp., Morgan Stanley and Charles Schwab Corp. are among companies that lined up the ability to bail out funds to guard against credit defaults or market illiquidity, according to the SEC’s list, a copy of which was obtained by Bloomberg News. Northern Trust Corp., American International Group Inc. and Pioneer Investments bought troubled securities out of their funds in 2010 and 2011 after the SEC passed new rules to make funds more stable.
The report stems from testimony Chairman Mary Schapiro gave to the Senate Banking Committee on June 22 aimed at bolstering regulators’ arguments that money funds remain a threat to global financial market stability despite the 2010 rule changes. Fund companies had sought permission from the agency to provide support for funds more than 300 times since the 1970s, she told lawmakers. Senator Patrick Toomey, a Pennsylvania Republican who has criticized Schapiro’s quest for additional reform that could face an agency vote as early as this month, asked her to back up the claim with data.
“It was not the staff’s practice to grant such no-action relief if the applicant represented to the staff that the relief was being sought merely as a precautionary measure,” Florence Harmon, an SEC spokeswoman, said today in an e-mailed statement. The agency believed “the relief was needed either to assist the fund in maintaining a stable net asset value or to meet extraordinary redemptions in the fall of 2008.”
The list doesn’t show how many funds were actually bailed out.
Companies that secured permission to rescue funds included five of the 10 largest U.S. providers. The two biggest, Fidelity Investments and JPMorgan Chase & Co., didn’t appear on the list in connection to actions during or since the crisis.
Industry executives and representatives called the list misleading and an exaggeration of how many funds required support to prevent them from “breaking the buck,” or falling below their stable $1 share value.
“What’s troubling about this list is that the reason for the support is completely obscured, and so it gives a false and misleading impression,” Brian Reid, chief economist at the Washington-based Investment Company Institute, said in a telephone interview.
Reid said the SEC historically had encouraged companies to offer support to funds rather than expose shareholders to potential losses. “Now they are trying to use sponsor support as some sort of inference that there’s a problem.”
J. Charles Cardona, president of New York-based BNY Mellon’s Dreyfus unit, said the SEC was overstating its case by including funds that obtained approval for a bailout from their parent but never used it.
“The chairman’s testimony, at a minimum, demonstrates a lack of appreciation for the circumstances surrounding” the actions taken by fund sponsors, Cardona said.
Dreyfus’s parent BNY Mellon said in September 2008 it would spend $433 million to absorb losses for investors in six institutional funds and four mutual funds that held debt issued by Lehman Brothers Holdings Inc., the bankrupt securities firm.
Dreyfus got permission to support 53 funds in 2007 and 2008, the list shows. Investors pulled $36.6 billion from Dreyfus funds, excluding those that focus on government-backed securities, in the week after Lehman declared bankruptcy in September 2008, according to data from research firm iMoneyNet in Westborough, Massachusetts.
The SEC’s list includes “a number of significant inaccuracies,” Marie Chandoha, president of Charles Schwab Investment Management, said in an e-mailed statement.
It incorrectly includes San Francisco-based Schwab’s Value Advantage Funds and cites a $1.35 billion capital infusion into another fund when the actual amount was $1.35 million, she said.
“Ultimately, less than half the funds that we applied for took advantage of the no-action relief, and all the securities purchased out of the funds matured at par,” Kevin Klingert, head of global liquidity for New York-based Morgan Stanley Investment Management, said in an e-mailed statement.
John O’Connell, a spokesman for Chicago-based Northern Trust, and Geoff Smith, a spokesman for Boston-based Pioneer Investments, declined to comment.
Money funds have attracted scrutiny since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which held debt issued by Lehman. Its closing a day after Lehman’s bankruptcy triggered an industrywide run on funds eligible to buy corporate debt, helping to freeze global credit markets.
The run abated only after the U.S. Treasury guaranteed money-fund shareholders against losses on more than $3 trillion in securities for a year and the Federal Reserve began financing the purchase of fund holdings at face value to help them make redemptions. Congress has since prohibited the Treasury from acting in the same way again.
The 2010 rule changes required funds to meet liquidity minimums, reduce average maturities and disclose holdings more frequently, and allowed them to close more quickly in an emergency. Schapiro has said more action is needed to prevent another run.
Schapiro sent to fellow commissioners on June 25 a proposal that would force funds to abandon their fixed $1 share price or introduce withdrawal limits and capital buffers. Industry executives have lobbied against the plan, saying it would destroy the product’s appeal to investors and rob short-term borrowers of an important funding source. Commissioners could kill the proposal or invite public comment on it in a vote as early as this month.
Northern Trust acted in 2011 to buy about $85 million of holdings in Eksportfinans ASA from two of its funds after Moody’s Investors Service downgraded the Norwegian bank, a move that threatened the funds’ own ratings with the agency. AIG bought $100 million in Eksportfinans debt from one fund.
In 2010, Pioneer bought $20 million in debt issued by British Petroleum Plc, whose ratings were downgraded after the Deepwater Horizon oil spill. Pioneer is a unit of Milan-based Unicredit SpA.