Bloomberg News

BlackRock Says Money Funds Would Survive Floating NAV

March 02, 2012

BlackRock Inc. (BLK), taking a new position in the debate over money market mutual fund reform, said the $2.6 trillion industry would survive without its stable $1 share price if a reform plan being drafted by regulators included key additions.

“We think there will be some shrinkage, but we don’t think it would eliminate the product,” Barbara Novick, co-founder and vice chairman of the New York-based firm, said today in a telephone interview.

The company, which previously opposed the idea, published a report today outlining how regulators could make a floating net- asset value, or NAV, acceptable to investors and managers.

Money market mutual funds, having survived mass withdrawals of assets by investors following the September 2008 collapse of the $62.5 billion Reserve Primary Fund, are confronting their biggest challenges since they first appeared in 1971. Along with potential new regulations, they face Treasury yields near record lows and a shrunken supply of available debt, forcing most managers to cut fees to keep customer returns above zero.

BlackRock, in seeking a workable version of the floating NAV plan, stands in contrast with industry peers as the three- year effort to make money funds more stable approaches a key phase. Boston-based Fidelity Investments, Federated Investors Inc. (FII) and leaders of the fund industry’s main trade group have rejected the idea, saying it would destroy the product.

Pragmatic Path

While a floating NAV will hurt the industry, regulators are insisting on further reforms and alternative proposals are unacceptable, BlackRock, the world’s largest asset manager, said in its report.

“I wouldn’t say we’re opposed to or in favor of” the floating NAV, Novick said. “We’re pragmatists. The regulators are going down this path. Do you want to fight them or try to work for the best possible solution?”

Meghan McAndrew, a spokeswoman for Pittsburgh-based Federated, said the company continues to believe the Securities and Exchange Commission did enough when it enforced new rules for money funds in 2010.

“We believe the SEC’s 2010 enhancements have significantly improved oversight and transparency of money market funds,” she said today in a telephone interview.

The funds’ resiliency through the European debt crisis and U.S. debt downgrade illustrated the effectiveness of the reforms already passed, she said.

Vincent Loporchio, a Fidelity spokesman, declined to comment on the BlackRock proposal.

Declining Revenue

A floating NAV would force money funds to value their assets at market prices, allowing the share price to fluctuate.

The BlackRock plan calls on the SEC to apply market pricing only to securities more than 60 days from maturity, and to exempt funds altogether that buy only government-backed securities. It also proposes that the Internal Revenue Service not treat small gains and losses as taxable events for investors in money funds.

BlackRock oversaw $143 billion in money market mutual funds as of Jan. 31, making it the seventh-largest U.S. manager, according to data compiled by research firm Crane Data LLC of Westborough, Massachusetts.

The industry’s annual revenue has fallen 59 percent since 2008 to $5.1 billion, according to Crane Data. Funds charge about half as much per dollar invested compared with the end of 2008, and assets have shrunk 30 percent.

Reserve Primary

Regulators and the funds industry have debated how to make the funds safer since Reserve Primary Fund’s collapse, which triggered an industrywide run on funds by clients and helped freeze global credit markets.

The run abated only after the U.S. Treasury guaranteed money fund shareholders against losses for a year. The Dodd- Frank financial overhaul prohibits the Treasury from repeating such a bailout and government officials, including SEC Chairman Mary Schapiro, have vowed to avoid putting taxpayer money at risk again in defending the product.

In 2010 the SEC introduced liquidity minimums, average maturity limits and new disclosure requirements. Schapiro has since said additional steps were necessary.

The staff of the SEC is expected to make two reform proposals this month. The first would force money funds to drop their traditional $1 share price. The second would require funds to create capital cushions capable of absorbing losses and hold back a portion of a client’s money if they asked to redeem all their funds for as long as 30 days.

‘Destroy’ the Industry

Fund company representatives have grown increasingly strident in their protests, saying either plan would ruin the product’s attraction to investors by removing its stable value and liquidity.

Fidelity said in a letter to the SEC yesterday it believed either of the two proposals “will ultimately destroy the money market fund industry” and deny U.S. businesses an important source of short-term financing. Fidelity is the biggest U.S. money market mutual fund manager, with $419 billion, according to Crane Data.

Paul Schott Stevens, president of the Investment Company Institute, a Washington-based trade group, has said the plans won’t reduce risk or help investors.

“My concern is that within the councils of government there are people whose agenda it is to kill money market funds,” Stevens said in a Feb. 7 telephone interview. “We won’t go quietly.”

Ianthe Zabel, a spokeswoman for the institute, today reiterated the group’s position that no additional regulations are required. “The goal here should be preserve the utility of money market funds for investors and in the economy and to maintain a robust and competitive industry,” she wrote in an e- mail.

‘Die by Hanging’

Christopher Donahue, Federated’s chief executive officer, has threated to sue the SEC if it proceeds with either of the two plans.

“It’s like the choice between you wanted to die by hanging or by bullet,” Donahue said during a conference call with analysts on Jan. 27.

Federated is more dependent on money funds than any other top fund company. It managed $256 billion in money market funds as of Dec. 31, according to the company, representing about 69 percent of total assets.

Money funds account for about 28 percent of assets at Fidelity, and about 4.1 percent at BlackRock.

“BlackRock is essentially a bond shop,” Peter Crane, president of Crane Data, said in an interview. “They certainly have less to lose in this.”

Gathering Support

BlackRock’s Novick declined to comment on the stance of other companies. She said the proposal combining capital cushions and redemption restrictions is “a nonstarter for clients.”

“We think it’s time to focus people’s energies and brainstorm on how to make floating NAV as appealing to clients as possible,” she said.

Money market funds are used by millions of U.S. households and companies as a vehicle for parking cash that can be quickly accessed for paying bills. They also play a key role in helping fund managers hold on to customers as investors shift between asset classes.

“Money funds are usually the first stop and the last stop for most mutual fund investors,” Crane said.

Opponents of the SEC’s two proposals have been gathering support on Capital Hill and among SEC commissioners.

Swing Vote

U.S. Senator Pat Toomey, a Pennsylvania Republican, said Feb. 8 he wouldn’t rule out proposing legislation to protect money market mutual funds from new SEC rules.

SEC Commissioner Daniel M. Gallagher, also a Republican, said in a Nov. 14 speech that he believed “any rulemaking in this space could be premature, and possibly unnecessary.”

Any proposal would require the support of at least three of five commissioners in a final rule-making vote to be implemented. Four people who have discussed the topic with commissioners and agency staff have said that Gallagher and fellow Republican Troy A. Paredes oppose the two proposals. Schapiro and Democrat Elisse B. Walter would support the capital cushion plan, while Democrat Luis Aguilar was said to be undecided.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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