The mutual fund industry rejected plans for new rules governingmoney market funds, escalating a three-year confrontation withregulators over how to make the investments safer.

Two proposals being worked on by the SEC's staff “are neitherconstructive nor likely to make financial markets more resilient,”Paul Schott Stevens, president and chief executive officer of theInvestment Company Institute, said today in a statement posted onthe group's website.

“My concern is that within the councils of government there arepeople whose agenda it is to kill money market funds,” Stevens saidin a telephone interview. “We won't go quietly.”

The statement marks a shift to a more confrontational approachin a debate that has lasted for more than three years. The tradegroup said previously it might accept one of the plans the SEC'sstaff is likely to propose before the end of March. With newdetails of the plans emerging last month, the ICI is now on recordopposing both.

The SEC's first proposal would call for money funds to abandontheir traditional $1 share price, adopting a so-called floatingnet-asset value. Industry executives have fought the idea since itwas raised in January 2009 by a think tank headed by former FederalReserve Chairman Paul Volcker.

The second plan would require funds to build a capital cushiondesigned to absorb potential losses and hold back at least 3percent of client redemptions for 30 days.

The ICI, whose members include Fidelity Investments in Bostonand New York-based BlackRock Inc., had engaged in talks with theSEC over versions of a capital cushion plan.

“The combination of capital requirements and redemptionrestrictions may well be the one idea that's worse than forcingfunds to float,” Stevens wrote today.

Christopher Donahue, chief executive officer of Pittsburgh-basedFederated Investors Inc., the country's third-largest money fundmanager, said Jan. 27 his firm would take legal action to block thechanges being contemplated by the SEC.

Regulators have debated how to make the funds more stable sincethe September 2008 collapse of the $62.5 billion Reserve PrimaryFund, which triggered an industry-wide run by clients that helpedfreeze global credit markets.

Preventing Runs

The SEC enacted new rules in 2010 in an attempt to preventfuture runs and government bailouts. Those changes includedliquidity requirements, shorter maturity limits and enhanceddisclosure mandates.

The ICI had long said it would oppose any regulation thatwouldn't leave a “robust and competitive industry in place” or“fundamentally alter the characteristics” of funds for investors,Stevens said in the interview.

As a second step, SEC Chairman Mary Schapiro “is advocatingstructural reforms to money-market funds to address theirsusceptibility to runs and provide a buffer against losses,” JohnNester, an agency spokesman, said today in an e- mailedstatement.

Bloomberg

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