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Dispelling More Myths: Money Funds Don't Buy Auction Rate Securities. We've been amazed by the number of errors and the amount of misinformation circulating about money market funds over the past six months, but it doesn't seem like reporters or analysts are showing much improvement. Following the Wall Street Journal's implication that tax-exempt money funds purchase auction rate securites (they don't) on Monday, several other publications have propagated the error. Dow Jones via CNN Money said incorrectly, "Between $250 billion and $360 billion of auction-rate securities are held by investors who range from money-market funds and corporations to wealthy individuals." Now, MarketWatch adds to the confusion with "Latest credit-market trap could hit closed-end funds". As we've said, money market funds are prohibited from buying auction-rate securities by Rule 2a-7, which requires a "hard put" or a non-negotiable option to exit a security for anything with a variable rate. (Corporations have also been prohibited from classifying ARS as "cash equivalents" for two years.) Also, the Financial Times, among the worst violators when it comes to stretching the facts on money market conditions, quotes Jon Schotz, CIO of Saybrook Capital, "Money market funds and corporate treasurers are trying to get out of auction rate securities because they are worried about liquidity and whether bond insurers will be downgraded." This too, is untrue, since money funds don't own any ARS. Finally, another recent error being made repeatedly involves money funds ability to hold securities with ratings below AAA or AA. While money funds would be reluctant to purchase a A or BBB security, they would be allowed to buy many securities at this level, and they certainly would be allowed to hold onto a security downgraded to such a level.
