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Economic Situation Complicates Reform Of Money Market Funds, SEC Official Says, Securities Regulation & Law Report

February 13, 2012

Reproduced with permission from Securities Regulation & Law Report, 44 SRLR 313 (Feb. 13, 2012).  Copyright 2012 by The Bureau of National Affairs, Inc. (800-372-1033)

By Yin Wilczek

Eileen Rominger, director of the Securities and Exchange Commission Division of Investment Management, Feb. 9 acknowledged that it is a very "difficult environment" right now to make structural changes to money market mutual funds.

The current zero interest rate environment presents "business challenges" for money funds with respect to "next steps in that space," Rominger told a legal gathering. I am "very cognizant of that."

Rominger spoke on a panel with former IM directors at the Practicing Law Institute's 2012 Investment Management Institute. She also provided updates on other IM priorities.

Rominger said she voiced her own views, which did not necessarily reflect those of the commission or its staff.

Potential Reforms

The SEC-the primary regulator for money funds-has announced that it intends in the near future to propose certain reforms for the $2.6 trillion industry. According to a speech SEC Chairman Mary Schapiro gave in November to industry representatives, the commission's proposal will center on two options: capital buffers, or moving funds from their $1 net asset values to floating NAVs (43 SRLR 2540, 12/19/11).

IM is the division responsible for crafting the reforms.

Co-panelist Andrew Donohue, Rominger's immediate predecessor as IM director, added that the zero interest rate environment is a "major constraint" on reform of the industry. None of the recommendations under consideration to make money funds less susceptible to runs "works very well" in such an environment, said Donohue, now a partner at Morgan, Lewis & Bockius LLP, New York. "There is no room for investors to pay for some of the protections that you might want."

Money fund representatives and others have voiced similar concerns over the potential changes [see related report in this issue].

Rominger also observed that although reform of money funds often is discussed in terms of financial stability and reducing systemic risk, "I think it's important to remember that there also are investor protection issues here as well."

Fund Use of Derivatives

Moreover, the panelists discussed the SEC's concept release on mutual fund use of derivatives, which the commission voted to issue in August 2011 (43 SRLR 1825, 9/5/11). Comments responding to the release ultimately will inform an ongoing study by IM staff as to whether regulatory actions and guidance are warranted to update 1940 Investment Company Act requirements.

Donohue, who was instrumental in pushing forward the review, suggested that the SEC use the study as an "opportunity to think about a safe harbor" that would allow funds flexibility in how they employ derivatives.

However, co-panelist Barry Barbash, a Washington-based partner at Willkie Farr and Gallagher LLP, questioned whether the SEC, in the current regulatory environment, can take an interpretive position that "doesn't jive with the rest of the statute."

Barbash-who served as IM director from September 1993 until October 1998-noted that the industry pushback against SEC rulemaking is much harder today because of potential legal challenges. Certain rulemakings could end up "being a tremendous waste of time" with "staff putting in lots of time with no results." He added that he is not sure the original Rule 12b-1, governing mutual fund distribution fees, could be adopted today. "I am not sure it wouldn't be attacked in court," he said.


Rominger also told the audience that staff is working with a "sense of urgency" on the study in light of the SEC's moratorium on exemptive relief for exchange-traded funds that make significant investments in derivatives (42 SRLR 568, 3/29/10). Industry representatives have voiced concern that the suspension of relief for such ETFs has created a competitive imbalance (43 SRLR 2307, 11/14/11).

"We are aware of those situations, and certainly it was not the intention of the agency to inadvertently contribute to or enable an unequal playing field," she said.

Rominger added that the division also might take the approach of tackling various issues arising from the derivatives study in a piecemeal fashion.

In other updates, Rominger told the panel that reform of Rule 12b-1 remains an important item on the division's agenda. However, "I would hasten to add that there is a bit of a queue of important projects that developed over the course of last year, where the division's priorities are determined by Dodd-Frank deliverables," she said. "I don't think one can assume anything of where Rule 12b-1 is in that queue."

In July 2010, the SEC issued a proposal extensively to overhaul Rule 12b-1 fees that remains pending (42 SRLR 1402, 7/26/10).

Fund Directors

In addition, Rominger said staff is "actively considering" the possibility of severing, and acting more speedily on, a portion of the 12b-1 proposal that would revise mutual fund director duties by doing away with the need for directors to approve and re-approve fund distribution financing plans.

Barbash suggested that severing the director portion of the proposal would be a "good use of resources." The issue is one that continues to concern many independent fund directors, he said.

On the issue of potential rulemaking to impose a universal fiduciary standard for broker-dealers and investment advisers who advise retail clients, Rominger said staff from IM, the Division of Trading and Markets, and the Division of Risk, Strategy, and Financial Innovation are meeting frequently on the task of "designing a cost-benefit analysis approach" for any policy steps the SEC might take.

Moreover, Rominger said staff is "in the latter stages of analyzing" investor feedback relating to a proposal to improve target date fund disclosures (42 SRLR 1185, 6/21/10). However, she declined to provide any timeline as to when the proposal can move forward. "It's not just up to us," she said. "The commissioners have so much on their plates. They have a lot going on."