WASHINGTON (Reuters) -
Securities regulators are locking
horns with some of America's most powerful mutual funds and
Wall Street players over plans to scrap requirements that money
market funds hold investment-grade securities.
For years, the Securities and Exchange Commission allowed
fund firms to buy only highly rated municipal bonds for money
market funds but now the SEC is considering changing that rule
in an effort to curb investors' reliance on credit ratings.
Ironically, players like The Vanguard Group, one of the
biggest in the $12.3 trillion mutual fund industry, want less
freedom instead of more, arguing the SEC-mandated ratings offer
would-be investors a sense of comfort.
The SEC's plan would remove an important investor
protection and weaken investment standards, and could pose a
risk to the stability of the $3.5 trillion money market fund
industry, Vanguard Chief Executive John Brennan said in a
letter filed with the agency.
The Securities Industry and Financial Market Association, a
Wall Street lobbying group, said the ratings give investors
faith in the funds and create standards for assessing credit
risks.
Michael Scofield, chairman of the board of trustees that
oversees mutual fund firm Evergreen Investments, a mutual fund
and asset management unit of Wachovia Corp (WB.N), said
eliminating the rating requirement would place an inappropriate
burden on trustees of money market funds.
Comments from SIFMA, Vanguard and others such as Target
Mutual Funds are trickling in to the SEC, which has proposed 38
changes aimed at weaning Wall Street and investors off credit
ratings.
Other proposals include finding alternatives to establish
net capital requirements for investment banks the SEC
supervises.
MONEY MARKET CHANGES CONTROVERSIAL
But one of the more controversial is the plan to eliminate
part of its rule that requires money market funds to hold
securities with ratings in one of the top two investment grades
from a major rating agency.
Without the ratings, mutual funds and SIFMA warned that
market participants would have to rely on vague standards and
that it increases the possibility that different funds will
apply varying standards of risk assessment.
In order to make their bonds investment-grade, many
tax-exempt debt issuers bought bond insurance and relied on the
traditionally top-flight ratings of the insurance companies.
When the three biggest agencies -- Moody's Investors
Services (MCO.N), Fimalac SA's (LBCP.PA) Fitch Ratings and
McGraw-Hill Cos Inc's (MHP.N) Standard and Poor's -- threatened
to downgrade, or downgraded, the ratings of the companies in
the winter, many bonds were abruptly ineligible to be held in
money market funds.
Some members of Congress and municipal bond issuers argued
that the investment-grade requirement was unnecessary, given
that even municipal bonds with low ratings have slim chances of
default.
SIFMA also said that substituting two new standards in the
SEC's net capital rule for the ratings requirement would also
create uncertainty.
The SEC's comment period for the proposals closes on Friday
and the agency's chairman has signaled that the new rules are a
priority.
(Reporting by Lisa Lambert and Rachelle Younglai; Edited by
Ken Barry)