SEC seen unlikely to rein in money fund business

May 29, 2007 @ 12:01 am

By Aaron Siegel

NEW YORK — The Securities and Exchange Commission has more pressing matters then regulating the burgeoning cash business, in spite of the record growth experienced by money market funds, according to Richard Heitman, vice president and regional consultant at The Reserve in New York.

According to numbers released by Crane Data LLC, a Westborough, Mass.-based supplier of money market fund information, assets in money funds have increased 20% since April 2006, to $2.5 trillion.

The Federal Deposit Insurance Corp.-insured sweep account sector now accounts for $500 billion in assets, taking into account the growing popularity of cash overall.

However, growth in any financial sector means that the regulators are watching.

Comment period extended

As The Reserve’s Cash Summit was taking place here this month, the SEC announced that it had extended the comment period on proposed new financial responsibility rules for brokerage firms, which contain several changes covering the handling of customer assets and credits, cash sweeps, net capital rules and the use of banks for reserve deposits.

The period for comment, which previously was set to expire May 18, was pushed back to June 18.

“My opinion is that the SEC will leave things alone,” Mr. Heitman said at the conference.

“Since this kind of product is half bank and half brokerage, the Federal Reserve also does not appear to be very energetic about regulating the way that insured deposits are used,” he added.

“My opinion is that you have more to fear from customers and brokers,” said Peter G. Crane, president and chief executive of Crane Data. “The SEC is hesitant, and they don’t want to piss off the Federal Reserve.”

The eight-year-old trend of “bankerage” — brokerage firms moving into banking — and the growing popularity of “cash” as an overall investment are signs that there is a convergence between the investment and banking worlds and the battle for wallet share, Joseph Martin, senior vice president of sales for The Reserve, said at the summit.

Consolidation is key

“You’re not going to want to have your accounts at a place that doesn’t have checks, cards and cash,” he said. “The key to gathering assets is to create a consolidation account.”

Mr. Martin added that people see cash as a viable alternative to mitigate risk for asset allocation.

The trend is a function of low interest rates and low online trading commissions, which give brokerage firms other avenues to bring in revenue, Mr. Crane said.

Returns and rates are both on the rise.

As of April 30, the average return in the institutional market was 5.13%, and the average individual yield was 4.70% — up from 4.65% and 4.25%, respectively, a year earlier, according Crane Data.

A.G. Edwards & Sons Inc. of St. Louis now offers brokerage sweep accounts with a 4.64% rate, Mr. Crane noted, while Raymond James Financial Inc. of St. Petersburg, Fla., pays 4.63%.

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