The glacial process of money market fund reform is finally starting to come to a head, but the largest asset managers have been hedging against their worst-case scenario for some time.
The Securities and Exchange Commission this month is expected to vote on whether to propose additional reforms for money market funds, which industry officials claim could be the death knell of the industry.
Although the majority of the SEC's five commissioners are expected to give the proposal the green light, there will be a comment period and an additional vote before any official reforms are adopted.
Even though the action shows that the SEC is moving forward on money market reform, the end result is still very much up in the air.
But that hasn't stopped some of the biggest money market fund managers from preparing for the worst. The industry has argued that further reform could send investors fleeing from the cashlike products and has spent heavily lobbying against it.
The reforms under consideration include instituting a floating net asset value or imposing a capital buffer with redemption restrictions. Both ideas have drawn fierce resistance.
Financial industry officials argue that they undermine the features of money funds that make them attractive: a certain return and immediate access to capital. They contend that the changes would sharply increase costs for sponsors and limit fund availability for companies and state and local governments that depend on them for cash management.
To protect themselves against massive outflows from money market funds — which already had declined from their 2007 peak of more than $4 trillion in assets to $2.55 trillion as of Aug. 1 — firms have been working on contingency plans.
Fidelity Investments, the largest money fund manager, with $406 billion in assets, according to Crane Data LLC, was one of the first fund firms to launch a money-market-like mutual fund, for example. The Fidelity Conservative Income Fund (FCONX) was launched in March 2011 and already has gathered $1.6 billion in assets.
BlackRock Inc. plans to launch similar funds this year. Pacific Investment Management Co. LLC and Putnam Investments offer similar funds.
Ironically, this new breed of ultrashort-bond funds became possible after the SEC enacted tighter regulations for money funds in 2010. Those rules came in the wake of the Primary Reserve's “breaking the buck” in 2008, which led to a run on money funds.
The 2010 reform limited the average weighted duration in which the money funds could invest to 60 days, from 90 days, and put stricter requirements on the quality of the notes in which the funds could invest. The new ultrashort-bond funds invest in the securities that money funds no longer can use.
By sticking to the old money market rules, the hope is that the funds will be able to capture investors who leave money funds.
“It's one of the more attractive features,” said Peter Crane, president of Crane Data.
Meanwhile,
The Vanguard Group Inc. is considering adding banking services, such as Federal Deposit Insurance Corp.-insured accounts and certificates of deposit, according to a report by Reuters.
Christopher Donahue, chief executive of Federated Investors, has been one of the most vocal critics of additional money market reform. Like most in the industry, he contends that the 2010 changes were enough to ensure the stability of the system.
Unlike some of its rivals, Federated has continued to pick up money market assets. In the past three years, Federated has made three separate acquisitions of money fund assets totaling almost $6 billion.
“We believe the money fund business is a good business to be in,” said Federated spokeswoman Meghan McAndrew.
Mark Schoeff Jr. contributed to this story.
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