Two money market mutual funds managed by a Wilmington Trust Co. unit have sold derivative holdings at a loss to comply with demands from securities regulators.
One of the funds, the U.S. Government Portfolio, sold $25 million worth of cost-of-fund index floaters and constant-maturity Treasuries, said Wilmington Trust senior vice president Peter J. Succoso.
The loss forced the bank's mutual fund unit, Rodney Square Management Corp., to make an $804,000 capital infusion to maintain the fund's net asset value at $1 a share.
The infusion will not have a material impact on Wilmington Trust's earnings, the Delaware bank said. As of last week, the fund had $404 million of assets.
Mr. Succoso also said that $28 million worth of COFI floaters and constant-maturity Treasuries were sold from the second fund, the Money Market Portfolio, which had $774 million of assets as of last week.
While these notes were also sold at a loss, they made up a smaller portion of the fund's total assets, so a capital infusion wasn't needed.
Mr. Succoso said these are the only money funds run by Rodney Square that held these types of derivatives.
In a press statement, Wilmington Trust said that both sales were made to comply with a letter the Securities and Exchange Commission released on June 30.
SEC's Position on Risk
In the letter, the SEC asked money fund managers to make an "orderly disposal" of securities that it considers too risky for them to own.
The bank contended that the derivatives the funds sold were permissible investments for money market funds until the SEC letter was released. But SEC officials have said that money funds were never authorized to hold those securities.
The U.S. Government Portfolio's holdings of structured notes, including the COFI floaters and constant-maturity Treasuries, spurred Standard & Poor's Corp. to downgrade the fund sharply earlier this month, from its top tier AAAm rating to Am, the lowest rating S&P has ever given to a money market fund.
Will Seek to Regain S&P Rating
Wilmington subsequently dropped S&P's rating of the fund, and criticized the downgrade.
Sanford Bragg, an S&P managing director, praised Wilmington's decision to sell the derivatives.
"We think their step is commendable," Mr. Bragg said. "What they have done is good for the fund's shareholders."
People familiar with the situation said that Wilmington Trust and S&P plan to discuss next week having S&P again rate the U.S. Government Portfolio. S&P has never rated the Money Market Portfolio.