Industry to propose money-market fund changes

BOSTON - An industry group said Tuesday it will recommend changes to money-market mutual funds, a $3.4 trillion industry trying to regain its footing after investors rapidly pulled out cash during September's volatile markets.

The Washington-based Investment Company Institute said it has formed a panel to develop recommendations on industry practices, regulatory reforms, and possibly legislative proposals to improve functioning of the money market and funds that invest in it.

The panel's leader will be John Brennan, chairman of Vanguard Group Inc. The Money Market Working Group also will include executives from several other major fund companies, including Fidelity Investments, BlackRock Inc., Legg Mason Inc. and Charles Schwab Corp.

ICI said the panel expects to present recommendations early next year.

"It is important that we learn from our recent experience," said Brennan, who headed an informal industry group that worked with the government to restore investor confidence in money funds. "We hope to offer concrete, positive suggestions to improve the way the money market functions, and the way money market funds operate."

About $3.4 trillion is held in money-market funds, which invest in corporate and government debt and are normally considered among the safest of investments. Money funds buy about 40 percent of commercial paper — a low-cost source of cash for companies to meet short-term financial needs — as well as one-fifth of marketable Treasury bills and nearly one-fifth of municipal securities, the ICI said.

But the safety of money funds came under strain in mid-September amid volatile markets. A soured investment in debt of Lehman Brothers by the Reserve Primary Fund triggered a rush of orders from institutional investors to pull out money from the more than $60 billion fund.

The resulting rapid sell-off of assets caused the value of fund assets to fall to 97 cents for each investor dollar put in — the first instance in 14 years of a money-market mutual fund "breaking the buck," or having its per-share value fall below $1, and exposing investors to losses.

The episode led institutional investors to pull out cash from money funds en masse, creating fears about the funds' safety and prompting the government to intervene with a temporary guarantee program for money funds.

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