Mutuals propose rules for safer investments

March 19, 2009|By From Baltimore Sun staff and news services

BOSTON - The nearly $4 trillion money-market mutual fund industry has a proposition for its play-it-safe investors: We'll tighten the rules we play by so you don't have to worry about not getting back at least a dollar for each buck you put in.

But beware if you want to take on the marginal risk of stashing cash in the most aggressive, highest-yielding category of money funds. You might see an even smaller return.

That's the crux of money fund changes that the industry's trade group recommended to federal regulators yesterday. Those include strengthening requirements to screen money fund investments for safety, and ensure that fund companies can return cash on demand to investors - even if redemption orders come in a panic-induced rush. The industry is rejecting private insurance to protect investors against losses, and opposes easing requirements that money funds hold at least $1 in assets for each investor dollar put in.

The Investment Company Institute is seeking to reassure investors after one large money fund last fall "broke the buck" and exposed clients to losses that could ultimately amount to roughly 8 cents on the dollar. The collapse of the more than $60 billion Primary Reserve Fund marked just the second such instance in the nearly four decades money funds have been available to keep money safe and readily accessible while earning a modest return.

The new proposals strengthen "what has been a very well-regulated investment vehicle to one that's even more effective against a severe crisis," said Mark R. Fetting, chief executive officer of Baltimore-based Legg Mason Inc. and a member of the advisory panel that developed the proposals.

"This product has delivered for almost 40 years, and we believe by enacting these recommendations it could do so with even greater confidence so that it continues to be a mainstream vehicle for Americans managing their cash," Fetting said in an interview yesterday.

Money funds are generally safe because they invest in the safest types of debt. Many buy government bonds such as Treasury bills, while so-called prime funds seek slightly higher yields but accept marginal risk venturing into short-term corporate bonds.

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