Obscure Rule to Fix $2.7 Trillion Market Draws Tireless Opponent

  • Federated opposes ‘floating NAV’ for money-market funds
  • Firm leads persistent lobbying campaign to reverse SEC rule

It’s an obscure rule that few people understand, but its backers hope it will correct a crucial flaw in a $2.7 trillion market whose collapse in 2008 froze financial transactions around the world.

There’s one snag: the relentless bulldogs at Federated Investors Inc.

The family-run investment manager that oversees $367.2 billion in assets has outlasted larger firms like BlackRock Inc. and Fidelity Investments in the fight to persuade Congress that the regulation should never take effect. Federated has built a sophisticated lobbying operation, bankrolling lawmakers’ political campaigns and recruiting state officials to press its case.

While the effort faces long odds, the push has produced successes. Congress is currently considering bipartisan legislation to reverse one of the most sweeping post-crisis financial reforms -- one governing money-market mutual funds. There’s some urgency, as the rule is set to go on the books in October.

“This is a bill for one company: Federated,” said Peter Crane, president of Crane Data LLC, which tracks the industry. “This fight has gone on for years, but they’re the only ones still lobbying.”


With coziness to Wall Street a political liability this election year, Federated’s campaign and the role that surrogates have played shows what’s required for a financial firm to get what it wants in Washington. The struggle also reignites debate over regulators’ efforts to address the risks posed by money-market funds, part of the shadow banking system that officials including Democratic presidential nominee Hillary Clinton have vowed to make safer.

Oversight of the industry has wide implications in the world of finance. Money-market funds are the biggest source of short-term loans to businesses and provide low but reliable returns to investors, who range from retirees to investment firms to local governments. Unlike savings accounts, they’re not insured, but like bank deposits, withdrawals are easy.

In September 2008, easy withdrawals created a big problem.

Reserve Fund

An investment in the failed Lehman Brothers Holdings Inc. sparked a run on the $62.5 billion Reserve Fund, pushing it to the brink of failure, known as “breaking the buck.” At the time, money funds maintained a constant $1 share price -- called stable net asset values, or NAV. The Reserve Fund panic spread to other markets, worsening the credit crunch.

To ensure that never happens again, the Securities and Exchange Commission adopted a measure in 2014 requiring the riskiest funds to use fluctuating share prices -- a floating NAV. Federated and other opponents say the floating NAV will destroy demand for prime institutional funds, which invest in corporate debt and make up a big part of their business. The firms favor stable NAVs in part because they’re spared the expense of calculating share values daily.

“Federated has long supported the utility of money-market funds for issuers, investors and market liquidity,” Ed Costello, a Federated spokesman, said in an e-mailed statement. Legislation to change the SEC rule is needed because funding costs for services, infrastructure and job creation have already risen over the last several months, “with further increases likely to follow,” he said.

Making Money Market Funds Safe as They Once Seemed: QuickTake

Pittsburgh-based Federated, the fourth-biggest U.S. money-market firm, spent $960,000 on lobbying this year and $1.37 million last year on lobbyists inside and outside the company, the most in at least a decade, according to public filings.

Republican Senator Patrick Toomey introduced legislation last year that would reverse the SEC rule. He’s locked in a close race in Federated’s home state of Pennsylvania and has been the firm’s top recipient of campaign cash, according to data from the Center for Responsive Politics. Federated was Toomey’s third-biggest contributor the last five years, the data show.

To help recruit a Democratic co-sponsor, Federated turned to a network of lobbyists including Hutton Strategies’ Michael Hutton, according to people with direct knowledge. Hutton, Federated’s highest-paid outside lobbyist, is former chief of staff to Senator Robert Menendez, who was indicted last year on corruption charges. Menendez has denied wrongdoing.

Hutton told congressional staffers that Federated assisted in drafting the legislation and that he spoke with Menendez about co-sponsoring it, according to people familiar with the matter. Federated is Menendez’s fourth-biggest contributor over the past five years and the New Jersey Democrat ultimately did sign on to the bill.

Toomey, Hutton and Menendez didn’t respond to requests for comment.

Lobbying Network

The unique part of Federated’s lobbying strategy is the company’s role in building a network of state officials to press its case. Many of them are members of the Coalition to Protect Investor Choice, which advocates for legislation to reverse the money-fund rules. The alliance gets funding from Federated and has spent $148,500 on federal lobbying since its inception in November.

Federated executives have routinely briefed state officials about the potential impact of the SEC’s rule, leveraging relationships the firm has established as an adviser to several government investment funds. A growing number of trade groups have also lobbied lawmakers and urged state officials to get involved.

It was at a conference sponsored by the National Association of State Treasurers about two years ago that Ron Crane, Idaho’s state treasurer, said he first learned about the issue from a Federated executive.

Floating NAV

Crane said the executive warned him that the floating NAV would increase borrowing costs for governments, lead to less demand for their debt and reduce yields on their investments. That could cut into programs that fund health care providers, affordable housing and other state services, Crane said.

So he helped persuade Idaho Senator Mike Crapo, a member of the Senate Banking Committee who’s up for re-election this year, to sign on to Toomey’s bill.

“The senator did his homework and I was very impressed,” said Crane, adding that Idaho’s borrowing costs have already skyrocketed in anticipation of the SEC rule.  

Cajoling Senators

Federated executives haven’t always been as successful. They tried several times to cajole Virginia state Treasurer Manju Ganeriwala to appeal to Democratic Senator Mark Warner, according to people familiar with the matter. While Ganeriwala hasn’t taken a position on the bill, Warner has said publicly that he has “grave concerns” about the legislation.

Senator Elizabeth Warren’s staff has also heard from the office of the Massachusetts treasurer -- whose investment pool is managed by Federated, other people said. Warren hasn’t taken a position on the legislation.

Making floating NAVs a public-interest issue for states was a savvy strategy, according to Andy Green, a former SEC official and Senate Banking staffer now at the Center for American Progress. “Many lawmakers don’t know this is a bill for Wall Street,” Green said.

Impact Unclear

Still, it’s not yet clear what impact tougher rules for money market funds will actually have on local economies. The Government Accounting Standards Board, a state regulator, issued guidance in December that would exempt some funds from the SEC regulations. And much of the industry has already adopted business models in anticipation of the new requirements, potentially making a change back a costly pain in the neck.

“It’s kind of hard to unring the bell at this point,” said Robert Plaze, a former SEC attorney who helps represent funds at law firm Stroock & Stroock & Lavan. “Why would you want to poke a stick in a hornet’s nest?”

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