Washington — For those who don't live in New York, San Francisco, or other centers of financial activity, investing in a money market fund means shipping cash out of their local communities. Last year, the top 10 money market funds invested more than half their assets in big money-center banks in major metropolitan areas.
Visa USA, best known for its familiar blue-and-white credit cards, is proposing to divert some of this flow of funds with a controversial money fund designed to keep cash in investors' hometown depository institutions.
''Minimally, we'd be flowing cash back to regional banks,'' says Charles Russell, president of Visa USA. ''Then we'd encourage regional banks, through their network of banking correspondents, to flow money back into community institutions. There's nothing magic about a bank east of the Hudson or west of the San Francisco Bay.''
Visa's proposal was the subject of Securities and Exchange Commission hearings this week. But the SEC, concerned about investor safety, has turned down the proposal once before. By contrast, the commission has already approved a money fund run by MasterCard, Visa's main competitor.
Visa's money market fund ''might have a significant effect on the development of the money market fund industry,'' an SEC document cautions. Many observers feel Visa is once again going to get a red light from the government.
Visa USA would run its money fund in concert with its members - the 12,000 depository institutions which are members of Visa or Visa International. These member banks and S&Ls would sell shares in the fund, each customizing the retail product with its own features (such as check-writing) and minimum-balance requirements.
Visa - not its members - would be responsible for advertising the fund. Assets would be managed by Alliance Capital Management, a subsidiary of Donaldson, Lufkin & Jenrette Inc. According to a registration statement filed with the SEC, investments would be ''primarily'' 14-day certificates of deposit.
But it is the fund's ''reflow'' provision that has raised the hackles of the SEC and the mutual fund industry. To keep dollars working in local communities, the Visa Fund would make a point of buying the CDs of its member institutions, ''in the approximate amount of fund shares held . . . by customers of that particular institution,'' the registration statement says.
In other words, the more Visa fund shares a bank or thrift can sell, the more of its CDs will be purchased by the fund, a relationship that Visa's Mr. Russell says ''keeps the money back in the communities.''
Only creditworthy Visa institutions with over $300 million in assets would be eligible. Smaller Visa members could join in the operation by selling their CDs to Visa through their larger cohorts.
The Investment Company Institute, a mutual fund trade group, charges that such a cozy relationship violates various parts of the Investment Company Act of 1940.
''Visa's economic premises and legal claims are incorrect and . . . its proposals would be harmful to investors,'' ICI president David Silver told the SEC Tuesday.
The social benefits of recycling money are a noble goal, critics of the fund say, but an investment company is not the proper forum for such do-gooding. Money funds exist solely to serve their shareholders, these critics say, and Visa's ''reflow'' provision will just make its fund less safe.
''The Visa fund manager will be asking, 'Can I justify, based on safety, putting this money where I want to put it?' '' says Glen Parker, chairman of the Institute for Econometric Research, a mutual fund research firm. ''It's very difficult to get somebody to be objective in that case. Beauty is in the eye of the beholder.''
Mr. Parker says he would not recommend investing in the Visa Fund - but he thinks the SEC should still approve it. ''It's a terrible thing that the ICI can blackjack people into not having a choice,'' he says.
Visa officials, citing such examples as university endowment funds that won't invest in South Africa, say there is ample precedent for their attempt at injecting social responsibility into investment decisions. Such added considerations don't make funds less safe, they say.
The Visa president says his company can (and will) legally proceed with its fund without the SEC's official seal of approval. Others say Russell is technically correct - but that the SEC would drag Visa into court faster than you can say ''Charge it.''