Mutual fund leaders aim to end jam over rules

Worried about a regulatory crackdown, mutual fund executives are pushing for limited restrictions on a controversial type of fund in an effort to end a bitter dispute between the government and the financial industry.

Representatives from BlackRock, Fidelity, Vanguard and other large asset managers met Friday with the head of the Securities and Exchange Commission and other regulators to present a plan designed to ward off runs on money market funds, low-risk investment vehicles that faced crippling withdrawals by investors during the financial crisis.

The meetings represented a sharp turn after months of acrimonious debate between the industry and an array of regulators who say that money market funds still pose a systemic threat to the financial system.

The chairwoman of the SEC, Mary Schapiro, was forced to call off her efforts to apply new regulations in August after facing industry opposition. That led Treasury Secretary Timothy Geithner to warn that the SEC’s failure to act on the issue could result in the Fed- eral Reserve taking over regulation of the funds.

But the industry has come together in the last month around a plan proposed by the giant money manager BlackRock, under which the funds would charge a 1 percent fee if investors wanted to withdraw their money during times of financial stress. BlackRock’s chief executive, Laurence Fink, wrote in The Wall Street Journal this month that the industry’s fight with regulators did not “instill the sort of trust we need” from investors.

It was unclear if Friday’s meetings would lead to a compromise. John Nester, a spokesman for the SEC, said that while “there were many questions asked” in the meetings, “neither the chairman nor the staff gave any indication of their views on the presentation.”

The companies involved said that the discussions were part of an unbroken effort to reach an agreement with regulators. But an employee at one of the firms said that after Geithner’s warning, the industry had grown concerned about losing the ability to influence reform.

“That’s when people started to say, ‘Is that really what we want,

or is it better to try to be more open to working with the regulators?’ ” said the employee, who spoke on condition of anonymity because the negotiations are continuing.

Money market funds hold $2.6 trillion, although investors have steadily pulled money out of them because of the tiny yields they offer in the current low interest rate environment.

Most investors still view money market funds as riskfree investments. They rarely lose money, because they make short-term loans to governments and businesses. But in the depths of the financial crisis, the shares of one prominent fund dipped below $1, provoking a run on all funds that was only stopped when the federal government stepped in with guarantees.

The industry opposes the two options that Schapiro has proposed, which would require funds to keep a cushion of money at all times to cope with possible losses, or to give up their promise to pay investors $1 for every $1 they put in, a so-called fixed net asset value. Regulators have said that fixed value leads investors to believe, incorrectly, that the value cannot go down.

The proposal presented Friday was similar to one of the three options that Geithner recommended when he called for stronger regulations in a letter to regulators on Sept. 27. The plan would require investors to pay 1 percent of their investments if the fund’s ability to turn assets quickly into cash suddenly decreased. This would encourage investors to leave money in their accounts until the fund recovered lost value.

Besides the meetings at the SEC, industry executives met Friday with one of Geithner’s deputies, Mary Miller, the Treasury’s undersecretary for domestic finance. A Treasury spokesman, Anthony Coley, said only that the department “continues to be receptive to alternative approaches to reform” the funds.

New regulations were imposed in 2010, but regulators said more change was needed. The industry grew increasingly opposed to these efforts, saying they would lead to a mass exodus from the funds.

In May, negotiations broke down after the last group meeting between Schapiro and industry representatives. Fund executives were furious that they were portrayed as supporting regulatory reform, according to people who were at the meeting.

The new plan has not won universal approval in the industry. John Hawke, an industry lobbyist, said the plan would be likely to accelerate any future runs on money funds by encouraging investors to remove their money before the 1 percent fee kicked in.

But the industry group for asset managers, the Investment Company Institute, said that member companies were “in a united effort” to build on earlier reforms.