'Significant' Premium
The fund would pay bond investors interest, reducing the return to fund shareholders. Shareholders would benefit from the insurance provided by the buffer.
A key question is how much bond investors would demand in return for taking on the fund's investment risk.
"We don't think it would be difficult to attract investors or that the premium would be very significant," René M. Stulz, an economist at Ohio State University's Fisher College of Business and a Squam Lake Group member, said yesterday in a telephone interview. "We're really talking about an extremely low probability risk."
The SEC could release a proposed rule and ask for public comment as early as October, two of the people familiar with the process said.
Gus Sauter, chief investment officer at Valley Forge, Pennsylvania-based Vanguard Group Inc., said he would need to study the Squam Lake plan in greater detail before saying whether his firm would support it.
Fidelity Plan
"We certainly haven't gotten to the point where we're satisfied enough to say any particular plan is the right way to go," Sauter said in a telephone interview yesterday.
Under the idea floated by Boston-based Fidelity in May and backed by Wells Fargo & Co. and Charles Schwab Corp., funds would build buffers gradually over a number of years by withholding returns. The money, which wouldn't be segregated from the fund, would be capped at 0.5 percent of assets to prevent the fund price from rising above a stable $1 share price.
"We are reviewing the details of the Squam Lake proposal and are exploring several questions related to it, as well as several variants of the concept," Adam Banker, a Fidelity spokesman, said yesterday in an e-mailed statement.
Banker said the firm looked forward to "continued dialogue" with regulators and others in the industry.