NEW YORK - Although for the second year in a row, money market mutual funds attracted more than half of net new money going into mutual funds last year, their rate of growth may begin to taper off, said Peter Crane, vice president and managing editor of iMoneyNet of Westborough, Mass.

Crane spoke at a conference on money market mutual funds here last week sponsored by International Business Communications of Southborough, Mass. IBC sponsors conferences on financial services issues.

By the end of last year, retail and institutional investors held $1.565 trillion worth of money market mutual funds, up 16 percent from assets of $1.349 trillion in 1998, Crane said.

Growth in money market mutual funds has been particularly strong in the past five years, when assets more than doubled from $763 billion at the end of 1995, to $1.638 trillion as of May 30, Crane said. The growth is remarkable, given that returns have hovered around four to six percent, he said.

Anxious to enjoy some of this growth, banks have begun to offer certificates of deposit with competitive yields, Crane said. Money market mutual fund fees have also risen lately, and both these factors could slow money market mutual fund sales, Crane said.

Institutional investors have been attracted to and become the largest holders of money market mutual funds because of their low fees, Crane said. The average cost of holding a money market mutual fund is 0.46 percent, down from 0.54 percent in 1980, Crane said.

But, fund companies have begun pushing up their management fees for their institutional clients by creating new institutional share classes charging 12b-1 fees, Crane said. Fund companies are also responding to pressure from retail customers seeking a variety of services with their money market mutual fund accounts, such as free checking and ATM usage, Crane said. While these services may appear to be free to customers, fund companies simply pass along these costs to clients through higher fees, he said.

Money market mutual funds have done well in the past five years in part because of the tremendous growth in the stock market, Crane said. As investors found their assets ballooning, some moved their gains into these safer instruments, he said. So, the slowdown in the stock market so far this year does not bode well for money market mutual funds, he said.

"It may be too early to say that the money-fund asset explosion is ending, but there are certainly signs that it is slowing," he said.

Also at the money market mutual fund conference, Gene Gohlke, associate director of the SEC's office of compliance, inspections and examinations, said that 90 percent of mutual fund companies fail SEC examinations on some technical matter. Almost always, the SEC sends those firms a deficiency letter that asks the company to correct the problem, Gohlke said.

SEC examiners usually recommend that four percent to five percent of the fund companies that fail a routine SEC exam be investigated further, he said.

The SEC usually conducts exams every five years and will give a firm one to two weeks' notice, he said.

"We very rarely just show up on a surprise basis," he said.

"We're not coming in to say, We've got you!'" he said. "You may think that is the case, but it isn't. We merely want to make sure that the fund, its adviser and all of its affiliates are complying with [the Investment Company Act] and with proper disclosure to shareholders."

Documenting and sharing problems with SEC inspectors is wiser "than sticking them in a desk drawer," Gohlke said. Since the SEC finds technical problems or minor infractions at 90 percent of the fund companies it examines, SEC examiners expect to find such problems, Gohlke said.

"If a firm tells us they don't have any problems, I hope they don't think we are so nave to believe this," said Gohlke. "If they tell us they don't have any problems, that makes us think they have poor control systems."

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