Google Inc., owner of the most widely used Internet search engine, is facing a hurdle other companies would love to confront: how to get better returns from investing its cash hoard without being regulated as a mutual fund.

Companies whose securities comprise more than 40% of their assets can fall under restrictions that govern the mutual fund industry. So Google, which has increased its cash and securities to almost $10 billion since its 2004 initial public offering, asked the U.S. Securities and Exchange Commission late last month for an exemption.

At stake for Mountain View, California-based Google is the chance to move more of its money from low-yielding U.S. government bonds to investmentgrade municipal and corporate debt. That would help Google match the investment returns of rivals such as Microsoft Corp., which obtained a similar exemption in 1988.

“It’s a high-class problem,” said James Corcoran, managing director of Treasury International LLC, a Timonium, Maryland-based firm that advises companies on corporate finance and treasury functions. “You have lots of cash and your return on capital may be coming down.”

SEC spokesman John Heine and Google spokesman Jon Murchinson declined to comment on the application.

Google had $9.8 billion of cash and securities on June 30, which came from stock offerings and company profits. According to an August 9 filing with the SEC, Google has earned an annual return of about 4% before taxes from its investments so far this year, excluding a one-time gain. Boosting this figure by 1 percentage point, to 5%, could provide Google with an additional $100 million of income.

Microsoft, the world’s biggest software developer, had a 7.3% average annual return on investments between 2001 and 2004, in part by buying common stocks as well as high-yield and emerging-market debt. For the year ended June 30, Redmond, Washingtonbased Microsoft had a 4.99% return on average assets of $35.9 billion.

“It’s critical that Google be permitted to invest its existing capital in instruments'” that would increase the amount of money available to fund future operations, new product development and acquisitions, Google said in its July 20 application for an exemption from the Investment Company Act of 1940. Being forced to invest in Treasuries, which don’t count toward the 40% cap, reduces Google’s returns and its “ability to compete with competitors,” the company said in the application.

Google slashed its municipal bond holdings to $700 million from $2.2 billion and loaded up on U.S. government debt during the past year.California municipal bonds that mature in five years currently provide a yield of 6.34% when their tax-free basis is counted, compared with the 4.76% yield for U.S.Treasuries that are taxable and have the same maturity, according to data compiled by Bloomberg.

Google’s $10 billion would make it a mid-sized mutual fund.The largest is the $142 billion Growth Fund of America, run by Capital Group Cos. in Los Angeles.

It would be “extremely onerous” for a company whose main business involves anything other than managing money to be regulated as a mutual fund, said Kenneth Berman, a former associate director in the SEC’s investment management division. For example, the 1940 law restricts companies’ ability to borrow money as well as issue stock options.

The SEC will provide an exemption to companies that can show their primary business is other than investing, owning and trading securities. Google’s application said the company’s Internet, advertising and new media operations accounted for 92% of net income in 2005.

Only three of the company’s 9,700 employees are involved in “cash management,” it said in the application. Google has hired outside money managers to invest its cash.

The 40% threshold is less of an issue for industrial companies that have factories and real estate. The primary assets of Internet companies, their software engineers and other employees, don’t show up in financial statements.

“Their assets are all walking around in blue jeans,” said Kathryn McGrath, a former director of the SEC’s investment management division, who now works for the law firm Mayer, Brown, Rowe & Maw LLP in Washington.

Forty-three companies have filed for exemptions since 2000, according to data compiled by Global Securities Inc., a Washington-based firm that tracks SEC filings.Yahoo! Inc., the second-largest online search company, obtained an exemption in 2000, after withdrawing an earlier application in the face of SEC opposition.

Alliance Semiconductor Corp. announced in March 2002 that it was denied an exemption it had requested almost two years earlier.Applied Materials Inc. asked for an exemption in August 2002 and then received four requests for more information from the SEC before getting approval in October 2005.

“The SEC looks very intently at the operations of the company,'” said Nicole Griffin, a securities attorney at Morrison & Foerster in Washington who has handled several requests for exemptions.”It tends to be a very long process.”