Two proposals being worked on by the Securities and Exchange Commission’s staff “are neither constructive nor likely to make financial markets more resilient,” Paul Schott Stevens, president and chief executive of the Investment Company Institute, said in a statement posted on the group’s Web site. (AP)

By Christopher Condon February 7, 2012

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

Two proposals being worked on by the Security and Exchange Commission’s staff “are neither constructive nor likely to make financial markets more resilient,” Paul Schott Stevens, president and chief executive of the Investment Company Institute, said in a statement posted on the group’s Web site.

“My concern is that within the councils of government there are people whose agenda it is to kill money market funds,” Stevens said in a telephone interview. “We won’t go quietly.”

The statement marks a shift to a more confrontational approach in a debate that has lasted for more than three years. The trade group said previously it might accept one of the plans the SEC’s staff will probably propose before the end of March. With new details of the plans emerging last month, the ICI is now on record opposing both.

The SEC’s first proposal would call for money funds to abandon their traditional $1 share price, adopting a so-called floating net-asset value. Industry executives have fought the idea since it was floated in January 2009 by a think tank headed by former Federal Reserve chairman Paul Volcker.

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

The ICI, whose members include Fidelity Investments in Boston and New York-based BlackRock, had engaged in talks with the SEC over versions of a capital cushion plan.

“The combination of capital requirements and redemption restrictions may well be the one idea that’s worse than forcing funds to float,” Stevens wrote Tuesday.

Christopher Donahue, chief executive of Pittsburgh-based Federated Investors, the country’s third-largest money-fund manager, said Jan. 27 that his firm would take legal action to block the changes being contemplated by the SEC.

Regulators have debated how to make the funds more stable since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run by clients that helped freeze global credit markets.

The SEC enacted new rules in 2010 in an attempt to prevent future runs and government bailouts. Those changes included liquidity requirements, shorter maturity limits and enhanced disclosure mandates.

The ICI had long said it would oppose any regulation that wouldn’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 advocating structural reforms to money-market funds to address their susceptibility to runs and provide a buffer against losses,” John Nester, an agency spokesman, said today in an e-mail.

— Bloomberg News