The nation's chief mutual fund regulator urged the industry Friday not to bail out money market funds when they "break the buck."

Barry P. Barbash, director of the Securities and Exchange Commission's division of investment management, said investors have now come to expect that the value of money market funds will never fall below $1 a share.

"Do we really want investor perceptions of money market funds to be inconsistent with risk?" he asked in a speech to the Investment Company Institute's annual meeting here. "The answer is a resounding no."

Mr. Barbash has been an outspoken critic of money market fund bailouts since assuming his SEC post in 1993. Early in his tenure, several banking companies, including BankAmerica Corp. and the former First Chicago Corp., used their own capital to shore up proprietary money funds during the 1994- 95 bond market downturn.

More recently, fund manager Strong Capital bought commercial paper from several of its money market funds when the paper issued by the troubled Mercury Finance Co. lost its value. While Mr. Barbash said he was not surprised by the move, he said he was discouraged.

"What that fund manager proved, like dozens before it, is that investors may as well hold the highest-risk money market fund they can find," he said.

Mr. Barbash told his audience that the SEC has no intention of prohibiting fund bailouts, since such a move would not be in the public interest. He also dismissed the idea of requiring fund managers to hold capital commensurate with the risk in their money market funds.

"I would be loath to follow in the footsteps of banking regulators" and ask fund companies to maintain risk-based capital, he said.

Mutual fund companies are also working to develop insurance for their money funds. Such a plan could be expensive and may not work out, Mr. Barbash said.

"We continue to think of ways to address the bailout issue and encourage you to do the same," he said.

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