Federated Most Vulnerable to SEC Money Fund Proposals

Federated Investors Inc. is the most vulnerable of the largest managers of money-market mutual funds to reforms proposed last year by the U.S. Securities and Exchange Commission, according to Moody’s Investors Service.

Money-market fund assets “generate roughly 40 percent of the firm’s annual revenue and its brand image is intertwined with the product offering,” the rating company said in a statement today referring to Federated. The impact would be minimal on BlackRock Inc., Fidelity Investments and Vanguard Group Inc., which have more diversified businesses, Moody’s said.

Federated has been among the most vocal critics of the push to increase regulation of money funds, which could culminate with an SEC vote on the proposals this year. Put forward in June, these would force money funds that cater to institutional investors and purchase corporate debt to abandon their traditional $1 share price. They would also allow funds to stabilize themselves during times of stress by suspending investors’ redemptions.

Meghan McAndrew, a Federated spokesperson, declined to comment.

Regulators have sought to make money funds safer since the 2008 collapse of the $63 billion Reserve Primary Fund. Its closure triggered a wider run on funds that helped freeze global credit markets. After an initial round of rule changes in 2010, the fund industry has fought attempts to impose tighter restrictions.

Moody’s Report

The Moody’s report outlined the estimated impact of the proposed rules on the four largest non-bank money fund managers. Federated, the third-biggest, oversaw $227.5 billion in money funds, or 62 percent of total assets, as of March 31, according to the company. About 30 percent of Pittsburgh-based Federated’s money fund assets would be forced to give up the $1 share price, or constant net-asset value, if the current proposal is enacted.

“BlackRock, Vanguard and Fidelity’s overall business would be little changed by the SEC’s proposals, as U.S. money funds constitute a more modest portion of their total” assets, Moody’s said.

BlackRock’s money funds make up only about 5 percent of assets, Moody’s estimated. Of BlackRock’s money fund assets, 65 percent would be forced into a floating NAV. Fidelity would see 26 percent of money fund assets hit by a floating NAV, and Vanguard 16 percent.

The SEC is considering whether to alter how it defines retail funds, which could lower the proportion of assets forced to give up their stable $1 share price.

Investor Runs

Regulators have pointed to the $1 NAV as a reason for why the funds are vulnerable to investor runs. The stable price, which is not strictly linked to market valuations, can allow fast-moving investors to escape a troubled fund unscathed before it drops below $1, or “breaks the buck,” saddling slower movers with all the losses.

Moody’s said it expected all the firms to see a shift in client assets from funds that invest in corporate debt to those focused solely on government-backed debt, if the measures are enacted. Those funds will be allowed to retain the $1 share price.

Moody’s added that large-bank-sponsored companies are better positioned than stand-alone money managers to adapt to the rules, if they are enacted.

“The ability to offer bank deposit products in addition to government money market funds would give these firms better flow recapture rates than their peers,” Moody’s said.

JPMorgan Chase & Co. is the largest money fund sponsor among bank-owned asset managers.

SEC Chair Mary Jo White today told the House Financial Services Committee that policymakers are discussing elements of the proposed regulation and she expects the five-member commission to vote on the final rule “in the near term.”

“We are working very hard on it,” White said. “It’s an extraordinarily important rulemaking.”

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