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Fidelity money fund clients sour on SEC proposals

By Tim McLaughlin

BOSTON (Reuters) - Adding to the outcry against new rules for money-market funds, Fidelity Investments has warned regulators that more than half of its money-fund clients would move some or all of their assets out of the investments if the net asset value of the funds were allowed to fluctuate.

That warning from the largest U.S. money-market fund manager came as the U.S. Securities and Exchange Commission considers two plans for tightening regulation of the $2.7 trillion money-market fund industry.

One proposal would allow the value of the funds to float, rather than being fixed at $1 per share as it is now. The other would require investors to stagger withdrawals. They could get 97 percent out at once and the remainder after 30 days.

A formal SEC proposal could come within a month, according to mutual fund industry executives.

The ideas are roiling the industry and investors. Shares of some major fund companies fell sharply Tuesday in response to news of the potential changes. Industry leaders voiced sharp criticism. Advisers suggested where investors should put their money instead.

Fidelity said a poll of customers found 52 percent of retail investors surveyed would invest less, or stop investing altogether, in money market funds if there were a waiting period on part of their redemptions. Results did not change significantly when the holdback scenario was dropped to 1 percent of redemptions, Fidelity said.

Fidelity General Counsel Scott Goebel shared the Boston-based company's research on how investors might react to potential reforms in a February 3 letter to the SEC. Fidelity had $433 billion in money-market fund assets under management at the end of 2011, representing 10.9 million accounts among retail and institutional investors.

Jason Weyeneth, an analyst at Sterne Agee Asset Management, said in a recent research note that SEC rule changes would hurt money market managers. But he also said the likelihood of new rules being implemented is reasonably low, given the industry's outcry and the prospect of legal challenges.

Nevertheless, money fund managers are on high alert to beat back any more regulation. Reforms being considered by the SEC "could spark retail and institutional investors to pull significant amounts of assets out of money-market mutual funds, leading to unintended consequences for the financial markets and U.S. economy," Fidelity said in its letter to the SEC.

Nearly 60 percent of institutional investors surveyed by Fidelity said they would move all or some of their assets out of money funds if the net asset value were allowed to fluctuate. And 47 percent of retail investors said they would do the same.

Fidelity and other money market managers oppose more regulations, especially since reforms in 2010 required the industry to hold more-liquid and shorter-duration investments.

Fidelity also said it tested the idea of a 1 percent non-refundable redemption fee to be triggered if a fund's share price dipped below $0.9975. Of the retail money-market fund clients surveyed, 70 percent said they would invest less, or stop investing altogether, if they were subjected to that sort of redemption fee.

"Given the importance retail investors place on the liquidity feature of money-market mutual funds, it is not surprising that investors reacted so negatively to a potential rule that would restrict access to principal," Fidelity said in its report.

(Reporting By Tim McLaughlin; Editing by Maureen Bavdek, Alwyn Scott, Gerald E. McCormick and Gunna Dickson)

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