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Money Market Funds Called Upon to Make Non-Public SEC Filings

Subprime Exposure Weighs On Activist's Mind

How serious are liquidity problems with money market mutual funds?

Mercer Bullard, founder and president of Fund Democracy, believes they're serious enough to warrant an immediate rule requiring money market mutual funds to make non-public monthly electronic filings of their portfolios to the Securities and Exchange Commission.

In fact, he's upset that so far, the only SEC reaction had been a secretary's acknowledgement of the receipt of his Jan. 16 rulemaking petition.

Bullard's petition was co-signed with officials of the Consumer Federation of America, Consumer Action, AFL-CIO, Financial Planning Association and National Association of Personal Financial Advisors. And Bullard plans to round up more consumer groups to press harder for the new rule.

Bullard's worry is that the SEC isn't taking the relationship between money market funds and the current subprime lending crisis seriously enough. This is disconcerting, according to Bullard, since money market funds now rival bank deposits as cash management tools. There is $3.52 trillion in money fund assets under management, according to the Investment Company Institute. That compares with $4.4 trillion in insured bank deposits, based on the Federal Deposit Insurance Corp. data.

Monthly portfolio disclosure would let the SEC better monitor the reasonableness of portfolio pricing and the risk of loss of principal due to subprime holdings or other unforeseen risks, Bullard asserts.

"Electronic filings would permit timely comparisons of prices at which different funds were valuing identical securities," the petition said. This way, regulators could quickly discover any manipulation of portfolio security pricing systems that could serve to increase losses.

The petition suggests filings might show the percentage of an issue owned by a fund and its affiliates, last trade price and trade volume for each security.

Robert Plaze, associate director of the SEC's division of investment management, said the SEC is too busy right now concentrating efforts on working with money market funds that are holding troubled securities.

His agency's chief aim is to prevent any from "breaking the buck" or having shareholders lose principal.

"All my staff is involved in working with funds to deal with the situation," Plaze declared. "We are going to review rules dealing with money market mutual funds, including whether we need any reporting requirements, when we're out of the situation we're in.

"We want to be able to look back and see what's happened and see what types of changes in our rules we can consider. We're not in a position to do that yet," Plaze added.

Plaze said there still are funds holding structured investment vehicles (SIVs) complicated by related events occurring on a daily basis. In fact, during his interview with Money Management Executive, Plaze heaved a sigh of relief and revealed, "One of the SIVs just made a huge payment on securities."

Bailout Patrol

At any given time, Plaze said, his division is planning with two or three funds in case a bailout becomes necessary. The SEC conducted a random sweep of funds in January, involving physical examinations, he noted. The SEC also finished a sweep of the largest money market funds in April.

"It's in the middle of the situation," Plaze said. Before establishing a rule, "you need to be able to look back over the whole event."

Nonetheless, Bullard has been critical of the way the SEC has been dealing with the money funds' "breaking-the-dollar" risk. Funds typically come to the SEC staff "on an ad-hoc basis" to get "no-action" relief, he said. The SEC "essentially says, We understand that buying securities back violates federal law. We will not recommend enforcement action if you do so.'"

Relying on no-action letters, Bullard said, is a "bad idea when you're dealing with the most important cash management vehicle in the world."

Bullard believes it's inevitable that a money market fund will break a buck. "Unlike bank deposits, money market funds are not insured," he said.

Meanwhile, if a bank-sponsored money fund breaks a buck, banking regulators already have indicated that they don't want banks on the hook for bailing out money funds.

So what does happen if a bank-sponsored money market fund has problems?

"We would have concerns about the fund and how it was being managed and run," Plaze said. "The bank regulatory agencies would be concerned about the bank and any commitments it might have made to capital concerning the fund."

Bruce Bent, founder and chairman of The Reserve and creator of the first money market mutual fund, refutes any inference that a fund asking the SEC to take no action in exchange for buying back a security is necessarily wrong.

Rather, he said, even though the fund manager might have made a mistake, shareholders should be very thankful for the action.

Bent also believes the worst of the money market fund crisis is over, having hit the fan in June, July and August.

He already posts securities in his money market mutual funds online daily, and he hopes other funds continue to resist the idea of disclosing portfolio holdings.

"They're afraid of publishing what they own because they don't want to be caught with their pants down," he said. "I sincerely hope they [rulemakers] don't force them to do it, because then I continue to remain unique."

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