The Reserve Fund Update

THE RESERVE MONEY MARKET FUNDS CRISIS:

A SUMMARY AND RECOMMENDED CORRECTIVE ACTIONS
FOR INDIVIDUAL INVESTORS

The failure of The Reserve funds is among the most critical of all the events that have occurred during the financial system crisis currently gripping our markets and economy: It threatens the basic, implicit trust of virtually every individual American investor, small and large.

Following is a summary of the events surrounding The Reserve and its impact on Securities America clients, a statement on why this matters to market confidence, and the need for immediate corrective actions.

What Happened?

At the close of business on Friday, September 12, 2008, The Primary Fund, a money market mutual fund managed by Reserve Management Co., held approximately $64 billion of assets. The investors in this fund—a mix of individuals and large institutions—had every reason to believe their assets were safe.  For four decades money markets have been the safest of havens for investors’ cash.

By the close of business on Tuesday, September 16, The Primary Fund was at $23 billion in assets, with $41 billion in assets poised to exit. Most of those assets were redeemed by institutional investors. Of the remaining $23 billion, $3.2 billion in assets is held in more than 300,000 accounts belonging to clients of Ameriprise Financial and our subsidiary, Securities America. We are aware that other large firms serving individual investors are in a similar situation.

The impetus for the fund’s rapid downfall was the announcement, in the early morning hours of September 15, that Lehman Brothers Holdings Inc. had filed for bankruptcy protection. Administrators of The Primary Fund were aware that the fund held $785 million in Lehman Brothers securities and knew that a significant write-down of these assets could threaten the fund’s ability to maintain a $1.00 net asset value (NAV). Ameriprise Financial has filed suit in federal court alleging that the administrators of the fund provided this critical, material information to selected large, institutional clients, allowing those clients to withdraw their funds quickly before the fund would “break the buck,” or see its NAV dip below the $1.00 level.

Once these preferred institutional investors had safely withdrawn their funds, the suit alleges, on the afternoon of September 16, The Reserve issued a news release stating that it had reduced the NAV on The Primary Fund to $0.97 and that it was imposing a hold of up to seven days on all redemptions. Not only had individual investors lost value in a money market fund, but they also could not access their funds.

The Reserve has since further reduced the NAV of The Primary Fund and has imposed a ban on all redemptions from all its funds. Because many individual investors rely upon their money market accounts to fund their daily needs—their mortgages, groceries and utilities—the current situation is unusually harmful to the retail investor.

Why this Matters to Market Confidence?

Because no significant money market fund had ever “broken the buck,” Americans who invested their cash in these accounts had no reason to doubt the safety of their investments. Now, following the situation with Reserve, Americans have reason to doubt the safety of the $3 trillion they have invested in money markets. At the same time, these events reaffirm many Americans’ belief that individual investors are disadvantaged against large institutional investors. In this case, many institutional investors got all of their money out of the failing Primary Fund, while the individual investor, lacking information, now faces investment losses and has no access to his or her funds.

Immediate Corrective Actions Required

We believe federal regulators must take steps to restore investor trust and ensure equitable treatment of all investors. We recommend:

• The situation with The Reserve must be addressed immediately. We believe the remaining assets in The Primary Fund should be liquidated in an orderly, expeditious manner and that the proceeds of this liquidation should be distributed fairly. Further, we believe all holders of the fund should bear equally the losses associated with the Lehman Brothers bankruptcy filing—including those institutional investors who redeemed their funds before the fund “broke the buck.”

• While we applaud the Treasury’s proposal to assist money market funds, it is not clear to us that the proposal will provide relief for those impacted by the Reserve situation. We believe the new proposal should apply retroactively in order to provide assistance to hundreds of thousands of adversely affected individual investors in The Primary Fund.

• We believe new rules are necessary to ensure that institutional and individual investors are treated equitably and have equal access to their funds.  

These actions are necessary to restore investor confidence and to provide for the long-term credibility of the nation’s financial system.

The following is in response to the recent unprecedented issues consumers are facing regarding money market mutual funds including The Reserve Funds. These serious issues are evolving quickly.  As we learn more we will keep you informed of changes that may affect you.

Securities America is a wholly-owned subsidiary of Ameriprise Financial, Inc., a fortune 300 company with decades of experience, growth and success in financial services. Securities America with their parent company continue to operate from a position of strength and stability.

Q. How have money market funds with which Securities America has relationships been affected by recent market events? How have accounts been affected?

 Client FAQs about Money Market Fund Developments