Volcker's regulatory suggestions rile money market execs

The idea of regulating the money market mutual funds as if they were banks could be detrimental to the $3.6 trillion industry, observers said today after former Federal Reserve chairman Paul Volcker called for tighter reins on the funds.
AUG 25, 2009
The idea of regulating the money market mutual funds as if they were banks could be detrimental to the $3.6 trillion industry, observers said today after former Federal Reserve chairman Paul Volcker called for tighter reins on the funds. In an interview with Bloomberg, he said money market mutual funds weaken the U.S. financial system and should be regulated like banks "Banks remain the functioning heart of the financial system and they are protected and regulated," Mr. Volcker said. "To the extent they have competitors that have different ground rules, kind of free-riders in my view, weakens the financial system." Regulating money funds like bank investments would mean that funds would need reserves, said Connie Bugbee, managing editor at iMoneyNet, a Westborough, Mass.-based research firm. “Anything that you do would lower the potential for yield,” she said. “If the funds were required to buy insurance, that would eat into yield.” Without the yield, the funds would lose their advantage. “If you don’t get the yield, people will march,” she said. “What will be the advantage to keep the funds going?” The SEC is currently seeking public comment on proposed rule changes which would prohibit money funds from purchasing illiquid securities and anything less than the highest-quality securities. Additionally, for liquidity purposes, they would be required to hold a certain percentage of assets in cash or Treasury securities. New disclosure requirements would also go into effect. Charlie Morrison, president of the Money Market Group at Fidelity Investments of Boston, questioned whether the bank model was appropriate for money funds, but said the SEC’s proposed regulation changes were “the right thing.” We have suggested some modifications and changes,” he said. “But I think the focus of the SEC overall is correct.” Fidelity manages $521 billion in money market mutual funds. Recommendations about money funds will be part of the report from President Obama’s Working Group on Financial Markets next month. Money market mutual funds have been under regulatory scrutiny since September when The Reserve Primary Fund, offered by The Reserve Management Co. Inc. of New York, fell below its net asset value of $1 per share, resulting in a run on the fund. Radical changes could cause lower yields, said Jim Lowell, chief investment officer at Adviser Investments Inc. of Newton, Mass., which manages $1 billion in assets. “But it won’t be the end of the business,” he said. “Money funds are a key asset class.”

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