Fidelity, Federated Lead Charge Against Money Fund Reform

NEW YORK (TheStreet) -- Fidelity Investments and Federated Investors(FII) have been leading the charge as the investment industry lobbies fiercely against reforms to money market funds.

Runs on money market funds were among "several key events during the financial crisis that underscored the vulnerability of the financial system to systemic risk," according to an Oct. 2010 report by the President's Working Group on Financial Markets, comprised of the U.S. Secretary of the Treasury, and the Chairmen of the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The threat of money market reforms has prompted four letters and nine visits to the SEC from Fidelity over the past 15 months.

While the SEC made some reforms in early 2010, the PWG report concluded "more should be done to address systemic risk and the structural vulnerabilities of money market funds to runs."

The SEC is expected to come out with a new rule proposal in the next few weeks.

The stakes for the $3 trillion money market fund industry could hardly be higher, since its success rests largely on investors' assumption that the funds are as safe as bank accounts. Reforms that would undermine that assumption "would be detrimental to Federated's money market fund business and could materially and adversely affect Federated's operations," Federated Investors argued in its 2011 10-K. Federated gets more than 40% of its revenues from its money market business.

William Birdthistle, professor at Chicago-Kent College of Law, believes money market sponsors such as Federated are right to worry that regulatory changes designed to demonstrate to investors that money market funds are not risk free could spell the end of the business.

"I don't think the industry will collapse overnight, but it wouldn't be difficult for banks to say, 'if you want a safe investment there is one and only one safe investment, and that's a bank account,'" he says.