A proposal by the Visa U.S.A., Inc. credit card company to start a new money market fund that would channel its cash back to local banks yesterday produced an intense backlash from the mutual fund industry.
The Visa plan would create conflicts of interest, produce lower yields for investors and breach the regulatory barriers separating banking and securities activities, the mutual fund forces warned at a Securities and Exchange Commission hearing.
Visa officials had testified a day earlier that their plan would answer the persistent complaint that money market funds siphon deposits from regional and local banks and invest them in large central banks.
The SEC took the rare step of holding a public hearing to decide whether Visa should be allowed to establish a money market fund subsidiary that invests in the same banks that sell shares in the fund.The proposed fund raises fundamental legal, economic and social issues that both proponents and opponents say are likely to affect the future of the money market fund industry.
Visa representatives maintain that the yield, safety and liquidity of its fund would be comparable with other money market funds.
Visa's fund is designed to staunch the flow of cash from small local banks to big regional ones by returning the dollars invested in the fund to the smaller banks that are members of the Visa organization by buying their certificates of deposit.
This so-called "sales related investment policy" was repeatedly attacked by Visa opponents, who claimed that the obligation to invest 90 percent of the dollars only in certain banks and to invest those funds roughly in proportion to the amount of sales would be carried out at the expense of the investor.
Former SEC commissioner Roberta S. Karmel argued against the Visa fund. While admitting that the cash outflow from banks and thrift institutions was serious, she said it was not the SEC's fault