By Yali N’Diaye

WASHINGTON (MNI) – The Investment Company Institute, the voice of
mutual fund managers, said Tuesday that reforms of money market funds
that would force funds to float their net asset value, introduce capital
requirements and impose new redemption limits would drive “hundreds of
billions of dollars” away from those funds.

The Securities and Exchange Commission is still working on sweeping
reform proposals that could reshape the MMF industry landscape.

SEC Chairman Mary Schapiro made clear last year that the agency was
contemplating just two options: capital buffers and floating net asset
values.

“Floating NAVs and capital buffers, possibly combined with
redemption restrictions, seem to be the options with the greatest
viability,” she said in a speech on November 7.

An industry source Tuesday told Market News International that the
reform proposals so far include both options.

The Wall Street Journal reported earlier that SEC’s plan includes
the creation of capital reserves “by injecting more cash from corporate
coffers; issuing stock or debt securities; or collecting more money from
shareholders.”

The plan would also limit investors’ redemptions to 95% of their
money when they want to sell their assets all at once. The remainder 5%
would be returned after 30 days.

And last but not least, the plan would introduce a floating NAV
regime.

Federated Investors is said to be ready to sue the SEC should the
new rules affect its ability to do business.

“Nothing has been proposed,” an SEC spokesman told MNI Tuesday. The
SEC has not announced yet when the proposals would be issued and no open
meeting on the topic is scheduled so far.

Charles Schwab and Federated investors shares fell on the reports
of possible reforms.

“The reported changes are not necessary, particularly in light of
the SEC’s own success in reforming money market funds,” ICI President
and CEO Paul Schott Stevens wrote in a blog in reaction to the media
reports.

He especially expressed concerns over combining all three options.

“Forcing money market funds to float their value, imposing
bank-like capital requirements, and freezing investors’ funds when they
try to redeem … present the worst of all worlds,” he said.

“These proposals will both drive fund sponsors out the industry,
reducing competition and choice for investors, and leave the remaining
sponsors with a product that few investors or their financial advisers
will use,” he continued.

As a result, “The harm to investors and the economy of such changes
could be enormous.”

He stressed that “The combination of capital requirements and
redemption restrictions may well be the one idea that’s worse than
forcing funds to float.”

While a broad group of investors and users of MMFs oppose such
reforms, Fitch ratings said in November, following Schapiro’s speech,
that such reforms would be credit positive.

“Fitch views the potential U.S. money market fund (MMF) regulations
expected to be put forth by the Securities and Exchange Commission (SEC)
as positive from a ratings perspective,” the rating agency said.
“Still, the changes could have secondary effects on the industry, which
require further consideration.”

Schapiro herself has acknowledged the challenges of ensuring an
“orderly transition” from a stable to a floating NAV.

Industry experts expect the proposals to be issued by the end of
March.

Once the staff submits its proposal during an open meeting, the SEC
commissioners will vote on whether to submit them for comments.

Sometimes SEC commissioners, even when opposed to a rule, vote in
the favor of submitting a proposal for comments for the sake of getting
input.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MAUDS$]