The Investment Company Institute is proposing sweeping changes to restore confidence in the $3.9 trillion money market mutual fund industry, including more transparency, tighter control over investments and prohibiting investments in second-tier securities.
Among the recommendations released yesterday by a working group of the Washington-based institute are proposals to create new daily and weekly minimum-liquidity requirements, to require regular stress testing of money fund holdings and to reduce a portfolio’s average maturity limit to 75 days, from 90 days.
The working group included such firms as
The Vanguard Group Inc.,
Fidelity Investments, Legg Mason Inc. and J.P. Morgan Asset Management of New York.
The group would also like to prohibit all investing in so-called second-tier investments, or those securities that have been given the second-highest short-term rating category by two ratings agencies. Currently, money funds can hold up to only 5% of the portfolio in second-tier investments. These securities represent 6% of the commercial-paper market, according to the ICI.
“Our belief is that the recommendations strengthen an already-strong industry,” said J. Christopher Donahue, president and chief executive of Pittsburgh-based Federated Investors Inc., which has $407 billion in assets under management, including about $355 billion in money market assets.
“There weren’t any fundamental problems with money funds. The problem was liquidity in the market,” he said.
The money-fund sector experienced a run by investors last fall after The Reserve Primary Fund, offered by Reserve Management Co. Inc. of New York, saw its net asset value dip below $1 and “broke the buck.”
The working group’s proposals to reduce the average maturity limit of money fund portfolios and to add transparency about investors are designed to avoid runs on the funds, Mr. Donahue said in an interview.
“A lot of the recommendations are what funds are already doing,” said Peter Crane, president of Crane Data LLC, a Westborough, Mass.-based research firm. “I think the recommendations overall are very positive. I suspect these Band-Aids will be enough, as the patient is up and walking anyway.”
The working group is also proposing that funds disclose the concentrations of their client bases as well as give funds’ boards the authorization to suspend redemptions and purchases temporarily if a fund is in danger of losing its $1 net asset value.
“The biggest news is what they didn’t say anything about, which is insurance,” Mr. Crane said. “Money funds are weaning themselves off of the Treasury insurance and not taking the shift toward private insurance: That is the main issue going forward.”
Most fund firms are participating in the Department of the Treasury’s guarantee program, launched Sept. 19, which offers insurance to cover investments made up to that date. The program is set to expire April 30.
The ICI has asked the Treasury to extend the program through Sept. 19.
“I think the Treasury will extend it to September of this year,” said Connie Bugbee, managing editor of iMoneyNet, a money fund research firm also based in Westborough. “I think the feeling is that if they take it away in April, there could be another run. I do think that you will see more Treasury funds opt not to have the insurance. But you’ll see it stay on prime-money funds and tax-exempt muni funds.”
The working group did not recommend a continuing federal insurance scheme after September. “It would be destabilizing to other intermediaries, including depository institutions,” Paul Schott Stevens, the ICI’s president and chief executive, said in a conference call today.
All the recommendations are necessary to restore investor confidence, Ms. Bugbee explained.
Whether they will impose additional operating costs and mean lower yields for investors is not known.
“There are no free lunches,” Mr. Donahue said. “You’re going to have some give and take here. But it’s hard to relate that to basis points at this point.”
Mr. Crane was more optimistic, saying: “There shouldn’t be noticeable changes in yield. I doubt all of these recommendations would even cost a basis point.”
The recommendations were endorsed by the ICI’s board of governors for adoption as general industry practices. Members of the working group have already agreed to adopt them voluntarily.
