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Fidelity happy SEC won’t tighten money market rules

Fidelity Investments on Thursday cheered the news that the Securities and Exchange Commission will not adopt stricter rules for money market mutual funds any time soon.

SEC chief Mary Schapiro had been pushing for new regulations on the $2.6 trillion business since the financial crisis. But Wednesday night, she was abandoning the effort for now, because she was unable to persuade enough of her colleagues on the five-member SEC board to support her proposal.

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Her proposal would have called on money market fund managers either to keep a larger cash cushion against losses or to allow the share prices of the funds to fluctuate, instead of promising that investors would never lose money.

Boston-based Fidelity, the world’s largest manager of money market funds, with $414 billion under management, lobbied hard against new regulations, warning that severe changes could harm an industry that has seen relatively few failures.

In a statement Thursday, Fidelity said: “We believe that fund shareholders and the economy benefit from the fact that there is no current plan for further regulation of money market mutual funds.”

Other industry titans, including Vanguard Group, applauded Schapiro’s decision.

Money markets are seen as safe places for investors to store cash they can access immediately. And they operate based on the understanding that investors won’t lose money — that every dollar invested will never fall below $1 in value.

‘The status quo is not acceptable.’

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Schapiro’s failure to garner support from three out of five SEC commissioners was an embarrassment for a powerful regulator. Two Republican commissioners opposed the measure, along with one Democrat, who said he wanted the issue studied further.

In an unusual announcement for an SEC commissioner, Schapiro said Wednesday that the three commissioners had “informed” her that they would not support her proposal. She went on to defend her position that the proposed changes were meant to protect investors, avoid future bailouts, and reduce the chance of a panic run on funds, as took place in the financial crisis of 2008.

Schapiro said she and other regulators “consider the structural reform of money markets one of the pieces of unfinished business from the financial crisis.”

Only two money market funds have ever in fact “broken the buck,’’ or fallen below the $1 per share value mark. The first was in 1994, when the Community Bankers US Government Fund lost money on derivatives. The second was in September 2008, when the Reserve Primary Fund lost millions of dollars invested in the debt of Lehman Brothers, a Wall Street firm that collapsed that month.

But the Federal Reserve Bank of Boston issued a report last week showing that, between 2007 and 2011, 21 money market mutual funds would have failed if their managers had not provided financial support during the period.

The Fed report said the financial crisis laid bare the fact that firms were taking on more risk in money market funds than investors or regulators may realize. The problems at Reserve Primary, for example, sparked a run on other money markets funds at the time, prompting the government to step in to restore confidence in the market.

The Boston Fed’s president, Eric Rosengren, had supported Schapiro’s efforts, saying in a speech in April that money market funds should be structured so that neither the firms that run them nor the government are on the hook if they lose money.

“The status quo is not acceptable,” said Rosengren, warning that under current rules, money market funds pose a threat to financial stability in the markets.

He declined to comment Thursday.

But former SEC chairman Arthur Levitt said in a Bloomberg radio interview that Schapiro’s failure to secure enough votes for the measure was “a national disgrace.”

US Representative Barney Frank, a Newton Democrat and coauthor of the Dodd-Frank financial overhaul law passed following the financial crisis, said he too was disappointed with Schapiro’s decision.

Frank said he objected to the idea of charging fees for withdrawals, even those by large investors who, critics say, could rock the system by taking out millions of dollars at a time. But he was in favor of other measures to strengthen money markets, particularly the one that would have required fund managers to increase reserves.

“Certainly the higher capital requirements were important,’’ Frank said. He noted that Schapiro could still take up the matter with the Financial Stability Oversight Council, a panel of regulators created by Dodd-Frank, of which Schapiro is a member.

Beth Healy can be reached at bhealy@globe.com.
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