Fidelity seeks to insure its funds SEC approval sought

could give sales edge

Securities industry


Fidelity Investments has asked the Securities and Exchange Commission for permission to set up an affiliated insurance company to guarantee its money market mutual funds against certain losses of up to $100 million.

The plan, if approved, would give Fidelity a potential advantage over competitors in the mutual fund industry: the ability to assure shareholders in all of Fidelity's nearly 40 money market funds that their investments would be at least partially insured against losses if an issuer of a security owned by the funds defaulted.

That could serve to give Fidelity, a unit of FMR Corp., a big lift in sales of its money market funds, particularly to people who up to now have shunned such funds, preferring the safety of federally insured money market accounts at banks.

Unlike bank money market accounts, money market funds, like all mutual funds, are not insured. So investors face the theoretical possibility of losing some or all of their investment, although such occurrences are very rare.

Robert C. Pozen, a senior vice president at Fidelity, said yesterday that Fidelity does not intend for the insurance program to guarantee its money market funds against all losses. He said the insurance would offer only a "modest amount" of protection in light of the $80 billion in assets invested in Fidelity's money market funds.

In addition, Fidelity said in its application to the SEC that it did not intend to use the insurance plan as a marketing tool. However, Pozen said the plan likely would be disclosed in each money fund's prospectus.

Some industry analysts said that the insurance plan could give Fidelity a big advantage over its much-smaller competitors, which would be hard-pressed to match the plan.

That is because the Internal Revenue Service, which has already approved part of Fidelity's insurance plan, said that the plan is feasible in part because Fidelity could spread the risk across more than three dozen money market funds. Few, if any, other mutual fund companies can match that ability.

The proposal by Fidelity contemplates the formation of a mutual insurance company, which would be owned by the mutual funds it insures. Those funds, in turn, are owned not by Fidelity but by the shareholders in the funds. Barry Barbash, director of the SEC's division of investment management, said that although the agency had dealt with some of the legal issues involved in Fidelity's request, "this kind of proposal is novel and unique.

Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I., said the self-insurance option would give Fidelity "a huge advantage" as investors seek safe places for their money.

Pub Date: 8/16/96

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