Fidelity money fund clients react negatively to SEC proposals

The warning comes as the U.S. Securities and Exchange Commission weighs controversial proposals to add more regulation to the $2.7 trillion money-market fund industry. SEC Commissioner Mary Schapiro has been pushing for more reserves and to do away with the money funds' fixed $1 net asset value.

The industry vehemently opposes more regulation.

On Tuesday, the Wall Street Journal reported that Federated Investors Inc. Chief Executive Christopher Donahue plans to sue the SEC if the new regulations interfere with his firms' ability to do business. Federated manages about $256 billion of money-market fund assets.

Meanwhile, in a February 3 letter to the SEC, Fidelity General Counsel Scott Goebel shared the Boston-based company's research on how investors might react to potential reforms. 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.

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.

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 was allowed to fluctuate. And 47 percent of retail investors said they would do the same.

Fidelity also surveyed how investors may react to liquidity restrictions, such as implementing a holdback feature to make money-market funds less susceptible to runs during a time of market stress.

Fidelity said it tested versions of a holdback feature, and said 52 percent of retail investors surveyed would invest less, or stop investing altogether, in money market funds if a 3 percent holdback feature was instituted on redemption. Results did not change significantly when the holdback was dropped to 1 percent, Fidelity said.

For example, if an investor redeemed $1,000 from a money- market fund, 1 percent -- or $10 -- would be held back and delivered after a waiting period of 30 days, according to one potential scenario presented in Fidelity's survey.

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 that is triggered if a fund's share price dipped below $.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)