The mutual fund industry's argument that new money-market fundrules would hurt companies, states and cities that sell short-termdebt has been contradicted in a new Securities and ExchangeCommission study.

Should new rules shrink money funds, non-financial companieswouldn't be significantly affected because they don't lean heavilyon the funds, while banks are well suited to find alternativefunding, according to the report prepared by SEC staff for three commissioners. Thereport also said a reduction in demand by money funds wouldn'tnecessarily cause a drop in demand for short-term debt.

“Given the supply of very short-term securities is likely to belimited to the same securities in which money funds currentlyinvest, shifts in investor capital are likely to increase demandfor these same assets, reducing the net effect on the short-termfunding market,” the report said.

The SEC report, made public yesterday, undermines the case putforth by fund companies that a planned overhaul of money fundswould hurt the U.S. economy by disrupting markets for short-termdebt. Fund executives have been fighting efforts by regulators toimpose changes the companies believe would destroy the attractionof the products that manage about $2.6 trillion and represent thelargest collective buyer of commercial paper in the U.S.

Ianthe Zabel, a Washington-based spokeswoman for the InvestmentCompany Institute, a trade association that has fought the proposedrules, declined to comment.

“These changes would destroy money-market funds, at great costto investors, state and local governments and the economy,” ICIPresident Paul Schott Stevens said in written testimony before theSenate Banking Committee on June 21.

Regulators, including outgoing SEC Chairman Mary Schapiro, haveworked to impose tighter restrictions on money funds since theSeptember 2008 collapse of the $62.5 billion Reserve Primary Fund.Its failure, because it owned debt issued by Lehman BrothersHoldings Inc., set off a run by money-fund investors that helpedfreeze global credit markets.

The SEC created liquidity minimums, lowered maturity limits andrequired more disclosure in rules introduced in 2010. Schapiro alsosupported another round of changes that would have forced funds tochoose between abandoning their traditional $1 share price orbuilding capital buffers to absorb losses and imposing redemptionrestrictions to discourage runs.

Plan Shelved

Schapiro shelved her plan in August when commissioners Luis A.Aguilar, Troy A. Paredes and Daniel M. Gallagher signaled theywould reject it, saying they wanted more study of the issue. Thethree then asked SEC staff to examine the 2008 crisis, the impactof 2010 reforms and the potential impact of further changes.

The Financial Stability Oversight Council, a panel of regulatorsheaded by Treasury Secretary Timothy Geithner, on Nov. 13 began aprocess by which it will pressure SEC commissioners to reconsiderSchapiro's plan and other overhaul proposals.

The SEC paper, prepared by its division of risk, strategy andfinancial innovation, said the run on money funds in 2008 was dueto many factors, including the Reserve Primary failure and thecollapse of Lehman Brothers. It said 2010 changes had reduced risksposed by funds.

“Funds are more resilient now to both portfolio losses andinvestor redemptions than they were in 2008,” the report said.

Examining short-term debt markets and issuers, the reportconcluded that most companies had little to worry about from anypotential drop in demand from money funds.

“Commercial paper financing by non-financial businesses is asmall portion (1 percent) of their overall credit marketinstruments,” the report said.

While financial companies are more reliant on commercial paper,that dependence has declined “dramatically” since 2008, accordingto the report. In addition, financial companies are “by theirnature, well suited to identify alternate mechanisms for short-termfunding,” it said.

The report said municipal issuers have also already shifted awayfrom money funds since 2008. At the same time, they have increasedaggregate borrowing even as money funds have decreased municipalholdings by 40 percent.

“A decline in demand from money-market funds is unlikely tosignificantly reduce the ability of municipalities to fund theirdebt,” the report said.

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