ICI, SIFMA petition SEC for hearing on Reserve

The firm's defunct Primary Fund still has $10.8 billion to distribute to shareholders

Jan 18, 2009 @ 12:01 am

By David Hoffman

Two trade groups that represent the investment management industry want the Securities and Exchange Commission to hold a public hearing on the liquidation plan for a money market fund that collapsed in September.

"Finding the right solution for investors in the Reserve Primary Fund is proving difficult and time-consuming," according to a Jan. 5 letter to the SEC from the Investment Company Institute of Washington and the Securities Industry and Financial Markets Association of New York and Washington.

"A public hearing with participation from the affected parties could provide valuable insight to the commission."

Reserve Management Co. Inc. of New York, adviser to the Reserve Primary Fund (RFIXX), declined to comment on the proposal.

About 20%, or $10.8 billion, of the fund's assets have yet to be distributed to investors, according to Reserve spokeswoman Ming Lee Hatch.

Reserve Management is not a member of the ICI but is a member of SIFMA.

John Heine, a spokesman for the SEC, declined to comment last week on whether such a hearing will take place.

'TRANSPARENCY IS KEY'

The ICI, however, believes that a public hearing is important.

"Transparency is key," said Ianthe Zabel, a spokeswoman for the ICI. "It's important for shareholders and the public to be given as much information as possible through a public hearing."

The Reserve Primary Fund "broke the buck" in September when its net asset value fell to 97 cents per share. The price reflected the then $64 billion fund's ownership of $785 million in debt issued by the bankrupt Lehman Brothers Holdings Inc. of New York.

The announcement marked only the second time in money market fund history that a fund's NAV has slipped below $1 per share. In 1994, Denver-based Community Bankers U.S. Government Money Market Fund liquidated as a result of bad derivatives investments, causing a loss to investors of about 4 cents on the dollar.

Reserve Management on Dec. 3 made public a plan to liquidate the Primary Fund. The plan — approved by the SEC — laid out how the fund's assets would be distributed to investors.

The plan, however, has not appeased investors who are angry at having to wait to receive only a portion of the money they placed in the fund.

COMPLAINT ALLEGATIONS

Last week, an administrative complaint filed against Reserve Management by William F. Galvin, secretary of the commonwealth of Massachusetts, alleged that immediately after Lehman's collapse, executives at the firm — to prevent a run on the fund — lied about the Primary Fund's ability to maintain a $1-per-share NAV.

The complaint also alleged that Reserve Management gave preferential treatment to larger clients by allowing them to make redemptions ahead of smaller clients.

Ms. Hatch, Reserve Management's spokeswoman, also declined to comment on the complaint.

Similar allegations were made in a lawsuit filed Jan. 6 by Colorado Securities Commissioner Fred J. Joseph.

Reserve Management also faces numerous class actions from investors and is under investigation by the SEC.

In light of so much anger toward the company, many find no surprise that the ICI and SIFMA have asked for public hearings into its liquidation plan.

"I assume they are feeling pressure from individual investors and some of the aggrieved parties," said Peter Crane, president of Crane Data LLC, a Westborough, Mass.-based money fund research firm.

But public hearings into a liquidation plan that's almost run its course seem like overkill, said W. E. Donoghue, chairman of an eponymous Norwood, Mass.-based firm with more than $100 million in assets.

"I'm trying to think what that would do other than undermine confidence in money funds," said Mr. Donoghue, who wrote a book about money market funds in 1981.

People need to take a step back and get some perspective, he said.

While the Reserve Primary Fund did break the buck, Reserve Management generally has done well by its investors over the years, Mr. Donoghue said.

In fact, once all the disbursements have been made to investors in the Primary Fund, investors may find they actually made money, Mr. Crane said.

"I can't prove it yet, but I predict investors in [the Primary Fund] will end up with positive returns in 2008," he said.

E-mail David Hoffman at dhoffman@investmentnews.com.

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