The parent of regional brokerage Ferris, Baker Watts has committed up to $35 million to cover losses of clients who invested in the Reserve Primary Fund, a money-market mutual fund that was frozen last week after its net asset value dipped below $1 per share.
The fund became the first widely used money-market fund in decades to "break the buck," with its value falling to 97 cents a share Sept. 16. The decline was triggered by the Lehman Brothers Holdings Inc. bankruptcy last week, which wiped out a Primary Fund investment in Lehman debt.
Late Thursday, Royal Bank of Canada, which acquired Ferris, Baker Watts in June, said it would cover losses of up to 3 cents per share for Ferris clients with money in the Primary Fund. Ferris, which joined other brokerages in making the move this week, initially told clients they would lose that money. The fund is sponsored by independent mutual funds company The Reserve Funds, which is not affiliated with Ferris.
"We are taking this step, in partnership with the investment executives at FBW, to provide additional protection for the assets of FBW clients," John Taft, head of U.S. Wealth Management for RBC, said in a statement.
Ferris, Baker Watts already had moved to redeem its clients' money from what had been considered an ultra-safe investment in the Primary Fund and two other Reserve funds, the Reserve Government Fund and the Treasury Fund. Those funds maintained $1 per share values.
At the time of Ferris' request, Reserve had said it needed seven days to honor a high volume of redemption requests that came after skittish investors began pulling money out of mutual funds. So far, all client funds have been redeemed from the Reserve Treasury Fund, Robin Oegerle, a Ferris spokeswoman, said yesterday.
As for assets in other Reserve funds, including the Primary Fund: "We are posting funds to client accounts as we receive them," Oegerle said.
Oegerle said clients' funds will be invested in the Federated Investor Treasury Cash Series money market fund unless the brokerage is instructed otherwise.
Oegerle said yesterday that clients with Primary Fund accounts are not able to write checks or make withdrawals yet. Ferris expects shortly to send clients new checks and debit cards for the new money market accounts.
"Reserve fund checks are no good; throw them out," Oegerle said.
RBC's move to cover the losses for Ferris clients comes on the heels of similar action by financial services companies TD Ameritrade and Ameriprise Financial, which also has clients invested in the Primary Fund.
"Their clients had exposure to the Reserve funds through them," said Don Phillips, a managing director at Morningstar in Chicago. "This causes a lot of angst among the individual shareholders when they see their money tied up."
The losses in the Primary Fund and a subsequent run of withdrawals on stable accounts prompted the Treasury Department a week ago to announce plans to start insuring money market mutual funds to discourage investors from pulling out trillions of dollars. The insurance, which funds must apply for, is good for a year.
