Reserve’s Primary Fund To Be Valued Below $1/Share

A money-market fund - the Reserve’s Primary Fund - has broken the buck, as a result of Lehman Brothers Holdings Inc.’s (LEH) bankruptcy filing, the first time since 1994 that a money-market fund’s net asset value has dipped below the $1-a-share level.

New York money manager the Reserve said Tuesday that its Primary Fund is valuing its debt securities issued by Lehman, which have a face value of $785 million, at zero effective at 4 p.m. EDT Tuesday.

As a result, the net asset value of the Primary Fund, which had $64.85 billion in assets as of May 31, was 97 cents per share as of 4 p.m., the firm said in a statement late Tuesday. All redemption requests received prior to 3 p.m. EDT Tuesday will be redeemed at NAV of $1, it said.

The Primary Fund’s board of trustees approved the action “after reviewing the unprecedented market events of the past several days and their impact” on the fund, and taking into account recommendations by Reserve Management Co., the fund’s investment manager, the firm’s statement said.

In addition, effective Tuesday and until further notice, the proceeds of redemptions from the Primary Fund will not be transmitted to the redeeming investor for up to seven days after the redemption. The delay will not apply to debt card transactions, ACH transactions or checks written against assets of the Primary Fund provided that any such transaction from an investor, individually or in the aggregate, does not exceed $10,000, the firm said.

The fund will continue to accept purchase orders.

Effective Wednesday, the Primary Fund’s NAV will be calculated once a day at 5 p.m. EDT.

The Investment Company Institute, the Washington, D.C.-based trade group representing the mutual-fund industry, said in a statement Tuesday that the fundamental structure of money-market funds “remains sound,” and that it’s ” extremely rare” for a money-market fund to break the buck. The trade group said it’s working closely with fund companies, the Securities and Exchange Commission and the Federal Reserve on market conditions and their impact on mutual funds.

SEC investment management division director Andrew Donohue said in a statement that the SEC staff was alerted to the fund’s situation earlier Tuesday by the fund company and its counsel. Donohue said talks between the SEC staff, the fund company and its counsel are continuing.

“In addition, SEC examiners are on-site at the fund to monitor activities,” Donohue said.

Peter Crane, president of Crane Data LLC, said, “It appears to that this is an isolated incident, unless more defaults and downgrades occur and unless runs develop elsewhere.”

The Primary Fund experienced giant outflows Monday, and had no choice but to take this action, Crane said. “This was a flight away from somebody with a problem lacking deep pockets,” he said. “In the past, support actions by parents with big financial pockets or banks were enough to keep people put,” but it this case, he said The Reserve couldn’t do enough to keep investors from leaving.

The Reserve, which provides cash management for institutions, banks, brokers, advisors and individual investors, had no comment on the action beyond its statement.

Bruce Bent, chairman of the Reserve, created the first money-market fund in 1970. Bent recently said that money-market funds were meant to be boring and safe, but that some have become high-yield-chasing vehicles.

In 1994, the U.S. Government Money Market Fund, operated by Community Bankers Mutual Fund fell below a $1 per share net asset value and was liquidated due to losses in adjustable-rate derivative securities.

Sources: CNN.com