In the latest sign of trouble for bank-managed money market funds, Standard & Poor's Corp. has sharply downgraded a fund managed by a Wilmington Trust Corp. unit.

S&P cited the fund's investments in derivatives as the reason for the unusually severe two-level downgrade.

The episode comes on the heels of derivatives-related problems at BankAmerica Corp.'s mutual funds management unit. B of A announced last week that it would take a $30 million after-tax charge against earnings to cover derivative losses in two money funds.

The incidents underscore growing concerns about investment policies for money market funds, which account for two-thirds of the $219 billion in mutual fund assets managed by banks.

Money funds are popular among investors because of their relative safety. But regulators and ratings agencies have warned that several money funds, in a bid to boost shareholder returns, are buying derivatives that are too risky.

"People are concerned," said Geoff Bobroff, an independent consultant and mutual fund expert in East Greenwich, R.I.

S&P downgraded Wilmington Trust's Rodney Square U.S. government portfolio from the top-tier AAA level to A.

It was S&P's largest downgrade ever for a mutual fund, said Sanford Bragg, a managing director with the company in New York.

Indeed, S&P has downgraded only two other money funds since it began rating them in the mid-1980s. Every other money fund it rates now enjoys the AAA rating.

S&P said the downgrade was due to concern over the risks undertaken by the Rodney Square fund in holding 12% of its portfolio as of June 30 in so-called structured and variable-rate notes.

Mr. Bragg said this was too much of the fund's assets for it to get the highest rating.

The Rodney Square Fund, which is marketed principally to institutional investors, held $438 million of assets at the end of May, and has held roughly steady in total assets all year, according to Lipper Analytical Services, Summit, N.J.

Martin Klopping, president of Rodney Square Management Corp., Wilmington Trust's mutual fund unit, disputed S&P's assessment.

"They had come to the philosophical position that no AAA-rated fund should hold any structured notes," he said. "We have a philosophical disagreement on that."

Backed by the Government

Mr. Klopping said that all the derivative instruments that the fund purchased are safe, because they are backed by governmental agencies.

Nearly half the derivatives are of a type that would be banned from money funds in a proposed Securities and Exchange Commission rule, he acknowledged. But that rule is not yet in effect, and could be changed.

Mr. Klopping added that Rodney Square will no longer use S&P to rate its mutual funds, and instead will stick with rival Moody's Investor Service Inc., which last week reaffirmed its highest rating for the government money market fund.

He added that the fund will continue to hold its structured and variable notes, and will only sell the instruments if required to by regulators.

In contrast, BankAmerica announced that it was selling all U.S. government agency structured securities from its Pacific Horizon Prime and Government Money Market funds, managed by its lead bank.

These funds had a total of $5.2 billion of assets at the end of May, according to Lipper.

B of A said it sold the notes because of market conditions and indications that regulators will soon deem them inappropriate for a money fund. The structured notes were sold at a loss, which the holding company made up through a capital addition of $50.5 million, resulting in the charge to earnings.

The holding company also took a $10 million after-tax charge in May when it added $14.4 million of capital to the Prime Fund to cover redemptions by institutional investors.

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