Thursday, June 18, 2009

Fidelity Breaks With Money Funds on Plan Limit to Debt Holdings

Fidelity Investments, the largest manager of U.S. money-market mutual funds, has split with rivals over the industry’s proposal to limit approved holdings to top- rated debt securities.

Fidelity is pressing the U.S. Securities and Exchange Commission to allow funds to continue buying debt that doesn’t carry the highest rating, said a person familiar with the matter, who asked not to be identified because the Boston-based company’s lobbying efforts are private.

Ten fund managers including Fidelity helped draft proposals in March aimed at strengthening money funds, after the September collapse of the $62.5 billion Reserve Primary Fund sparked a run by investors. The report included a call to ban securities rated below A1 by Standard & Poor’s or P1 by Moody’s Investors Service. The Investment Company Institute, a Washington-based trade group that coordinated the effort, said the firms would adopt the recommendations.

“Fidelity has always had a maverick streak in them,” Peter Crane, president of Crane Data LLC, an industry research firm in Westborough, Massachusetts, said in an interview. “Being privately held, they tend to do things their own way.”

Vincent Loporchio, a Fidelity spokesman, said the firm opposes the ban on tier 2 holdings “for a number of reasons,” including their limited impact on portfolios. Tier 2 securities are those with the second-highest credit rating for short-term debt. Money funds can hold as much as 5 percent of their assets in tier 2 debt.

Loporchio declined to comment on whether Fidelity has discussed the possible ban with the SEC. The SEC is set to propose rule changes for money funds on June 24 that mirror those in the ICI report. Kevin Callahan, a spokesman for the SEC, declined to comment.

Fund Collapse

Ianthe Zabel, a spokeswoman for the Investment Company Institute, declined to comment on Fidelity’s position. She said the decision by fund executives to propose a tier 2 ban wasn’t unanimous.

The collapse of Reserve Primary, whose losses on debt issued by Lehman Brothers Holdings Inc. sent its share price below the $1 standard, spurred a wave of investor redemptions. Corporation couldn’t sell short-term debt as prime funds, which can invest in commercial paper, rushed to sell holdings to meet client redemptions.

The ICI, in its report, also recommended increasing the proportion of assets a fund must hold in cash or securities that can easily be liquidated, and reducing the average maturity of a fund’s securities.

‘Source of Diversity’

Fidelity’s Loporchio said tier 2 securities weren’t a source of problems for money funds and were often issued by “strong, creditworthy” companies that “provide an important source of diversity for money-market funds.”

The company supports shortening the allowable maturity for tier 2 securities in money funds from the current 397 days, he said. Fidelity managed $506 billion in money fund assets as of May 31.

J.T. Tuskan, a spokesman for Pittsburgh-based Federated Investors Inc., the third-largest money-fund manager with $313 billion in assets, said the company will adopt all the ICI recommendations by September.

Rebecca Cohen, a spokeswoman at Vanguard Group Inc. in Valley Forge, Pennsylvania, said the company has adopted the recommendations. Vanguard manages about $203 billion in money funds.