The mutual fund industry, including some banks that serve as advisers, is coming under scrutiny from the Securities and Exchange Commission for investment practices in money market mutual funds.
The attention, which follows a series of publicized losses by money funds, raises the prospect of legal action to halt investments regulators believe are inappropriate.
BankAmerica Corp. is the only bank holding company that has acknowledged losses in a money fund this year.
Other Banks, Funds Have Similar Losses
But regulators have confirmed reports that at least three other banks, all among the 50 largest in the country, have incurred similar losses, along with several other mutual fund companies.
Losses of principal in money funds are rare, since these funds are designed to pursue conservative investment strategies that protect principal.
Robert Plaze, assistant director of the SEC's division of investment management, expressed concern that some of the money funds got into trouble by buying derivative instruments that the agency considers too risky.
The SEC has outlined its views on which investments pose excessive risk to money market funds in letters and in proposed guidelines.
Instruments Called Inappropriate
Specifically, Mr. Plaze said the SEC is concerned that some money funds bought instruments called inverse floaters, capped floaters, CMT floaters, leveraged floaters, and instruments linked to an interest rate that significantly lags prevailing short-term rates.
The agency singled out these investments as inappropriate for money funds in a proposed regulation that was released for public comment in December.
A BankAmerica spokesman said the bank believes that money fund managers can't be blocked from using these investments because the rule proposed last year has not yet been adopted.
But Mr. Plaze said that the SEC believes the proposal merely "clarifies an interpretation of existing law" and should therefore be followed by fund managers.
SEC Rule Violations
Buying instruments prohibited by the guidelines "would be a violation of the rules" for a money fund, Mr. Plaze said. He declined to say if any specific investigations were under way.
Lawyers said that fund advisers found to have violated SEC rules could be subject to censure, fines, and, in extreme cases, compulsory management changes or prosecution for fraud.
The Bank of California last year was disciplined by the SEC for mispricing a fund.
For its part, BankAmerica has reiterated earlier statements that the $4.7 billion fund that lost money did not hold any instruments the regulators have said it should not have, nor does it hold such instruments now.
Bank Forced to Add to Fund
The fund is the Pacific Horizon Prime Money-Market Fund, which earlier this year suffered from a surge in redemptions, as institutional investors bought short-term securities to maximize yields from rising interest rates.
In May, the holding company was forced to add $17.4 million to the fund to keep its share price dropping below $1, the stable price at which money funds traditionally are traded.
The spokesman said that while the fund held some derivatives, its portfolio did not include futures, swaps, or options traded on exchanges or over the counter.
Neither did the fund hold mortgage-backed securities, inverse floaters, interest-only strips, principal-only strips, collateralized mortgage obligations, capped notes, principal-linked redemption notes, or coupon-linked notes, he said.