Below, we excerpt from the article "Nutter's Hunt on Regulations, Europe, Waivers," which was featured in the August issue of MFI. It reads: This month, Money Fund Intelligence interviews attorney John Hunt, a Partner in the Business Department at the law firm of Nutter McClennen & Fish LLP. Hunt recently joined Nutter from his own firm McLaughlin & Hunt LLP, and he specializes in Rule 2a-7, offshore money market funds, and other types of cash management products. (Hunt also will again lead the "Money Fund Regulations: 2a-7 Basics & History" session at Crane's Money Fund University, which will next be held Jan. 24-25, 2013, at The Roosevelt Hotel in New York.) We discuss recent regulatory and other issues in our Q&A below.
MFI: Tell us a little bit about your own history in the money fund space? My introduction with money market funds began with the amendments to Rule 2a-7 in the mid-1990s. At the time, I was as an associate with another law firm, and none of the other associates at that firm seemed interested in learning the complexities of the rule. After that, I became the "go-to" person for questions involving money market and other types of cash management funds, and relished the role.
MFI: What's been your biggest challenge recently? The biggest challenge is answering the questions of what will be in the new money market regulations and when will they be proposed. The problems are that first, a number of government agencies are weighing in on potential money market regulations, each with a different approach to new regulation. Before, you just had to read the tea leaves coming from the SEC. Now, there is the President's Working Group, the Financial Stability Oversight Counsel, and the Federal Reserve Bank of Boston. Second, there seems to be a number of rumors of what could be in new regulations. All of this is increasing the anxiety of fund sponsors. Third, the suggestions coming from regulators all appear to be adding significant costs to running a money market fund. In light of the Fed's low interest policies, most fund sponsors are concerned whether money market funds, if they survive the regulatory gauntlet, will be too costly to operate.
MFI: What are your thoughts on pending regulatory changes? I hate guessing at what regulators are going to propose. But if I have to, I would say that the SEC will take action before any other regulator. From what I understand, the SEC Staff would like to propose rules that, if adopted, would give money market funds a choice -- either float their NAVs or include some sort of liquidity facility. Whether the SEC actually adopts new rules along those lines, or any rule for that matter, is a different thing. Any proposed regulations would bring hundreds of comments, from fund sponsors and investors. It would take time for the SEC to sort them out and respond. By that time, there could be a different President bringing a different approach to regulation, who could elect to throw out these proposed rules and start all over.
In regulating money market funds, the biggest issue to me is whether the SEC, the Fed and others will accept that an investment in a money market fund includes a risk of losing money and that that risk is in line with investor expectations. If regulators will accept that risk, there is little reason to pile on more regulation. If they do not accept that risk, money market funds, as we currently know them, will no longer exist for retail investors, and only will exist overseas and in the private funds available to large institutional investors. That, to me, would be a loss for investors.
MFI: Do you expect to see any other changes in money fund regulations outside of the main ones? If the SEC proposes new rules, I do not see other regulators proposing additional regulations, at least for awhile. While a number of regulators have expressed concern over money market funds and their potential impact on the financial markets, those regulators would have to approach regulating the market differently than the SEC's approach. For example, banking regulators only have the tools of bank regulation to regulate money market funds, not the tools that the SEC has for regulating investment companies and the offering of securities. If Rule 2a-7 isn't complex enough, Rule 2a-7 plus bank regulations would be a nightmare. (Look for more excerpts from this article in coming days.)