Below, we excerpt from an interview in our latest Money Fund Intelligence. The piece entitled, "Navigating New Rules: Q&A w/Stephen Keen," interviews the veteran Reed Smith LLP money market mutual fund attorney and partner about the current changes to, and history of, Rule 2a-7 of the Investment Company Act of 1940, the body of regulation governing money market mutual funds.

We asked, "What would you say are the big changes in the current batch? Keen responds, "Liquidity is to this amendment what diversification was to '91. The rule had not previously dealt with liquidity as a regulatory requirement. Even without diversification requirements to 2a-7, funds were diversified.... It's not that funds didn't pay any attention to liquidity, that's always been an important part of management. But it's never been a regulatory requirement, and consequently it's never had a minimum standard."

He explains, "The rule is almost always -- you have to do what you decide is appropriate for a stable value fund. The rule isn't that you can run your securities at an average maturity of 90 days. It is that you run them at a average maturity consistent with the stable net asset value, not to exceed 90 days.... [N]ow you need to operate with adequate liquidity to meet your expected redemptions."

"You can't have less than 10% in daily liquidity assets and 30% in weekly liquidity assets. That's a third of the fund that is effectively maturing in a week or less, a pretty significant mandate. I don't see how that's not going to make it a lot harder to run funds and really constrain their ability to develop yield. In terms of just the fundamental impact on how a MMF performs, that 10 and 30 requirement is going to have the biggest impact," he tells us.

MFI also asked, "What else are you concerned about? Keen says, "The other [major] change is that everyone's shadow NAV is going to be published monthly now with a 60 day lag.... Basically none of the changes were as bad as they might have been ... or as good as they could have been. But that's the nature of regulation." He adds, "The 60-day lag gives you a lot of time, if you know that there is going to be a public announcement of something that might make investors concerned, to deal with it. I don't see how they responsibly could have gone any shorter."

Keen also notes, "None of the revisions [to 2a-7] have ever been good for fund boards. All that ever happens to fund boards is that they have more and more things they have to do. They have to deal with this liquidity requirement, they have to deal with stress tests, and they have to pick which NRSROs they want to rely on. Generally, those kinds of things, the board can delegate, but it still puts it in a different posture."

Finally on further changes, Keen tells MFI, "I assume we are going to get the same comments every time they ask.... I don't quite know how by asking for more comments, it's going to change things. Look at the floating price proposal, which was in the June 2009 release.... People who actually have money invested in funds, particularly individuals, uniformly said, 'Don't do that. I don't want a fluctuating product, and I don't want to have to put my money in a bank. I like what money market funds do. I know I have a risk of loss. I accept that.'"

Watch for the full final rules to be posted on the SEC's Final Rules page later this week. For a full copy of the latest Money Fund Intelligence, e-mail

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