Money market mutual funds have quietly begun taking out insurance as a means of further safeguarding these conservative instruments, industry executives said.

However, fund companies are not advertising or promoting this insurance because the Securities and Exchange Commission does not want fund companies to lead customers to believe that money market funds are insured like bank accounts, which are backed up by the Federal Deposit Insurance Corporation, said Peter Crane, vice president and managing editor of iMoneyNet of Westborough, Mass.

"This is a very hush-hush subject because the SEC and regulators have worked for 30 years to make sure the public knows these are not insured or guaranteed," Crane said. "That's why insurers generally refer to such insurance policies as NAV protection policies or isolated default insurance."

Whatever advertising or promotion fund companies do of this insurance is done discreetly, said Crane.

Institutional investors pay close attention to such benefits, he said.

A spokesperson for the SEC declined to comment on whether the commission would prohibit a fund company from promoting a net asset value protection policy or similar insurance. However, the spokesperson said a fund company can mention such protection in the credit quality section of a prospectus.

Besides potentially helping to sell a money market fund - especially to the sophisticated institutional market - insurance on money market funds provides an added layer of protection for fund companies, Crane said. Fund firms almost invariably feel obliged to bail out any shareholder who suffers losses in a money market fund since these are perceived as such conservative investments, Crane said.

"Shareholders have come to expect advisers to bail out a money fund if there is a problem," Crane said. "As a result, advisers are starting to feel an implied liability. So far, they've been willing to step in to buy troubled securities. Now they're thinking, why not pass off this liability on someone else?"

"It's to the advantage of the adviser to get another layer of protection, which generally only costs a nominal one to two basis points," said Geoffrey Bobroff, president of Bobroff Consulting of East Greenwich, R.I. "Otherwise the adviser becomes tantamount to an insurer."

"There are some skeptics who believe such insurance is not necessary," said Crane. "Our view is that it is not fully necessary - but eventually we believe it will be a competitive necessity, particularly as the share of institutional money grows and a lot of that is run for fiduciaries and third-parties, where CYA' takes precedence over yield."

Putnam Investments of Boston first purchased net-asset-value protection in the fall of 1996, according to Laura McNamara, a Putnam spokesperson. Today, all five of Putnam's money market funds are covered for aggregate losses of up to $30 million, McNamara said.

"The reason we did this was to protect the funds against certain losses related to security default," McNamara said. "If a security in a fund defaulted, the shareholder's investment would be at least partially protected against the loss."

Putnam saw that other mutual fund companies were looking at the same type of insurance, she said.

Fidelity Investments of Boston took out its own money market insurance on Jan. 1 1999 by forming the Fidelity Money Market Mutual Insurance Company to insure the firm's then 33 money market mutual funds, said Dan Flaherty, a Fidelity spokesperson. That company now insures all 39 of Fidelity's money market funds with total net assets of $158.6 billion, as of March 31, Flaherty said. Fidelity Money Market Mutual Insurance Company charges 0.0033 percent for net asset value protection, Flaherty said. Like other net asset value protection policies, Fidelity's covers only credit risk.

Fidelity decided to offer net asset value protection on its money market funds because the firm "saw it as a cost effective and tax efficient method of dealing with the remote issue of default," said Flaherty. "Our goal always is to protect shareholders, and this is another efficient method of acting in their best interest."

The Investment Company Institute's own insurance spin-off, ICI Mutual Insurance Group of Washington, D.C., introduced its version of money market fund protection in November 1998, said Dan Steiner, general counsel of the ICI Mutual Insurance Group.

ICI Mutual estimates that approximately $240 billion, or 25 percent of the total $968 billion of assets invested in money market funds, is insured. Of this, ICI Mutual insures $145 billion worth of money market funds, or 15 percent of the total assets invested in money market funds.

"We have seen an increasing interest as companies look at this product - it is a relatively new product in the market and requires some lead time by complexes to evaluate," he said. "But this is a product that the industry has been interested in for some time."

Failures in money market funds do occur. But, since 1974 when they were created, money market funds have lost less than $100 million as a result of failures of underlying creditors, said Crane.

For example, Mercury Finance of Lake Forest, Ill. failed in January 1997 when it was discovered that the comptroller of the company had disappeared, Crane said.

"That was something out of the control of the investment firms that had invested in Mercury Finance short-term bonds because they were rated double- or triple-A," Crane said. "Here was a clear case of fraud."

In 1994, a number of money market funds suffered when derivative instruments they had invested in failed due to a sudden increase in interest rates by the Federal Reserve, Crane said.

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