Money Market Mutual Funds May Have To Manage More Scrutiny
Tuesday, August 19, 2008SUSIE GHARIB: The Securities and Exchange Commission plans to issue new rules to address short-selling abuses. The SEC issued a temporary emergency ban last month against short sales of Fannie Mae, Freddie Mac and 17 investment firms that act as primary dealers of Treasury debt. Now, SEC Chairman Christopher Cox says the commission will issue permanent rules in the next few weeks to curb so-called naked short selling abuses. Separately, the commission is also beefing up its electronic database of corporate filings to include data tagging software. Eventually, it will switch from the current system known as Edgar to a fully interactive database, making it easier to search filings and compare data.
PAUL KANGAS: Several banks and investment firms have filed disclosure forms with the SEC during the past year regarding their money market funds. But many investors may have overlooked the filings that showed firms pumping in billions of dollars to shore up their funds. As Stephanie Dhue reports, with the credit crisis in full swing, money market funds are now facing greater scrutiny.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bruce Bent was one of the creators of money market funds in the 1970s. The idea was simple -- to give people safe, liquid investments they don't have to worry about. But in recent years, as money market funds chased higher returns, they got into sub-prime and structured investment vehicles that pushed safety limits. Bent says some fund managers lost sight of what he calls the money fund mantra.
BRUCE BENT, FOUNDER AND CHAIRMAN, THE RESERVE: It's supposed to be a mantra. Every morning, every night, a money fund provider should be safety of principle, liquidity, a reasonable rate of return and a sound night's sleep. And they forgot the mantra.
DHUE: During the past year, at least 17 money market management firms have quietly unwound their riskier investments to prevent what's known as breaking the buck. That's when investors don't get a dollar-for-dollar return on their investment. For example, Suntrust put up $1.4 billion to remove structured investment vehicles from two of its money funds in December. Bank of America purchased $1.56 billion of SIV securities and pledged $760 million to shore up several of its Columbia Management funds and Wells Fargo entered into a capital support agreement to cover potential losses in commercial paper holdings. Bent thinks the worst is likely over.
BENT: It's now a year since it hit the fan, as far as the credit markets are concerned. And that, indeed, unless we have a total fool situation -- and frankly, I'm not aware of total fools that are money fund providers -- that they have gone through and checked these things out five times to Sunday. So if investments had to be bailed out, my opinion is that they have been done.
DHUE: The Securities and Exchange Commission quietly gave firms the go ahead to shore up their money market funds. The disclosures were made after-the-fact. Mercer Bullard, the founder of the investor advocate group Fund Democracy, wants money market funds to provide real-time disclosure of their holdings to regulators.
MERCER BULLARD, LAW PROFESSOR, UNIVERSITY OF MISSISSIPPI: What this crisis shows is that often what seem to be highly liquid, easily priced securities turn out not to be. And real-time disclosure would, if it included the right information, allow the SEC to look at the bona fides of the prices at which these funds are valuing their portfolio securities.
DHUE: The SEC considered doing just that in the late 1990s but the proposal didn't go anywhere. The SEC's investment management director, Buddy Donahue, says the credit crisis has pushed the commission to reevaluate the idea.
BUDDY DONAHUE, DIR., DIVISION OF INVESTMENT MANAGEMENT, SEC: It's caused us to go back and look at whether or not there's information that we might have had available to us that would enable us to deal with issues. And that's certainly something that we're doing, going back and looking at whether we get enough information in a timely fashion.
DHUE: Some firms are already making more than the required quarterly disclosures of their investments. For example, Deutsche Bank's DB Advisors money market fund now reports its holdings twice a month. Kevin Bannerton, the fund's manager, says the change was driven by investors.
KEVIN BANNERTON, MANAGING DIRECTOR, DB ADVISORS: I think it's critical to stay vigilant within this environment and that's what we want to do is provide information so that investors can feel that not only they're comfortable with the investments, but to provide tools that they can conduct surveillance on an on-going basis.
DHUE: Experts say the risk of losing principle in a money market fund is remote. Still, it's important to know that not all those funds are created equal. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
