The Securities and Exchange Commission reportedly is set to vote this month on whether to propose further reforms to money market funds. But whichever way the vote goes, asset management firms have been busy making contingency plans.
The SEC's five commissioners on Aug. 29 reportedly plan to vote on whether to issue a formal proposal that would require money market funds to adopt a floating net asset value or a capital buffer. Even though the planned vote on the proposal shows the SEC is moving forward on money market reform, the end result is still very much up in the air.
That hasn't stopped some of the biggest money market fund managers from preparing for a worst-case scenario, however. The industry has argued that further reform could send investors fleeing from the cash-like products and reportedly has spent at least $2 million lobbying against it.
To protect themselves against massive outflows from money market funds — which already had declined to $2.55 trillion as of Aug. 1 from their 2007 peak of more than $4 trillion — 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, for one, was launched in March 2011 and already has gathered $1.6 billion in assets.
BlackRock (BLK) Inc. (BLK), another top 10 money market provider, with $138 billion in assets, plans to launch similar mutual 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 market funds in 2010. Those regs came after the Primary Reserve's “breaking of the buck” in 2008, which led to a run on money market funds.
That's the scenario the SEC is desperate not to let happen again.
The 2010 reform limited the average weighted duration money market funds could invest in to 60 days, from 90 days, and put stricter requirements on what quality paper the funds could invest in. The new ultrashort-bond funds invest in the securities that money market 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 market funds. “It's one of the more attractive features,” said Peter Crane, president of Crane Data.
The Vanguard Group Inc. has gone a different route. The world's largest mutual fund manager is considering adding banking services, such as Federal Deposit Insurance Corp.-insured accounts and certificates of deposit, according to a report by Reuters. Vanguard had $159 billion in money market funds as of the end of July.
Christopher Donahue, chief executive of Federated Investors (FII), the third-largest money market fund manager, with $228 billion in assets, has been one of the most vocal critics of additional money market reform. Like most in the industry, he contends that the reforms done in 2010 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 last three years, Federated has made three separate acquisitions of money market fund assets totaling almost $6 billion.
“We believe the money fund business is a good business to be in,” said Meghan McAndrew, a spokeswoman for Federated.
Jason Kephart writes for InvestmentNews, a sister publication of Pensions & Investments.