Mutual Fund Company Cites Credit Unions Use of Short-Term Treasury Funds in Opinion to Amend SEC Proposal

WASHINGTON – One of the nation’s largest mutual fund companies is throwing its support behind an SEC proposal that would amend the way broker-dealers invest shares in certain companies and credit unions may help bolster its position. New York-based Dreyfus Corp., which manages $168 billion in more than 200 mutual funds, wrote the SEC on the regulator’s proposal to amend Rules 15c3-1 and 15c3-3 – titled the Net Capital Rule and Customer Protection Rule, respectively. Under the SEC rules, short-term Treasury Money funds are not treated as the equivalent of direct holdings of U.S. government securities. In the Jan.7 letter, Dreyfus Vice Chairman J. Charles Cardona relayed the fund’s support of the SEC proposal that would treat shares of money market mutual funds that comply with Rule 2a-7 under the Investment Company Act of 1940 as either direct holdings of securities issued or guaranteed by the United States government with maturities of less than three months or as loan collateral to meet the regulator’s Net Capital and Customer Protection rules. Rule 2a-7 requires, among other things, that the portfolio maintain a dollar-weighted average maturity of 90 days or less, and prohibits the portfolio from investing in any security maturing in more than 397 days. While Dreyfus supports the SEC changes, Cardona said the regulator should take into consideration that the assets of financial institutions have all been invested in shares of short-term Treasury money funds and similar products. “Examples of such circumstances include investment of the assets of national banks, state-chartered banks and federal credit unions; customer funds held in custody by futures commission merchants and futures clearing organizations, margin collateral and the assets of state and municipal entities,” Cardona wrote. In determining net capital requirements, broker-dealers make various adjustments to net worth, including “haircuts,” Cardona wrote. Haircuts are reductions in the market value of securities positions carried by the broker-dealer and therefore deductions from net worth. Dreyfus proposes an addition to the rule that would clarify a “designated fund will have no haircut under the Net Capital Rule.” Cardona acknowledged the “importance of the Financial Responsibility Rules and the key role they play in maintaining the financial soundness and accountability of broker-dealers.” “As has been demonstrated, investments in shares of short-term Treasury Money Funds provide a degree of safety, stability and liquidity comparable to direct investments in U.S,” Cardona wrote. The fact that a short-term Treasury Money Fund “has no maturity, minimal risks, and offers the ability to effect seamless purchases and sales of exact dollar amounts, makes it in fact a superior alternative to the direct purchase of a Treasury bill,” he wrote. Putting such funds on the same playing field as direct investments in government securities or loan collateral “entails no material additional risk, and will provide greater efficiencies to broker-dealers in managing their positions in satisfaction of the requirements of the Financial Responsibility Rules.” Cardona addressed his letter to SEC Secretary Jonathan Katz; Paul Roye, SEC director of its Division of Investment Management; Robert Plaze, associate director, Division of Investment Management and Michael Macchiaroli, associate director, Division of Market Regulation. Dreyfus manages the Dreyfus 100% U.S. Treasury Money Market Fund. It is a wholly owned subsidiary of Mellon Financial Corp., which has approximately $2.845 trillion in assets under management, administration or custody. [email protected]