Panelists at ICI Conference Focus on Market Crisis and Regulatory Reform

The below post is courtesy of my colleague Amy Leisinger, who attended the below conference.

As the fund industry has evolved to meet the demands of recent economic events and to attempt to calm increasing investor anxiety, perspectives have been forced to change, Director of the SEC's Division of Investment Management Andrew Donohue explained in his keynote address at the Investment Company Institute's ("ICI") annual mutual funds conference. Market uncertainty has resulted in increased pressure on funds from all fronts, he continued, and reevaluation of current regulations, including Investment Company Act Rule 2a-7 governing money market funds, will be necessary in the coming months. Unprecedented market changes have cast doubt on even the most "basic tenets" of sound investment management, he explained.As such, the conference began with a panel focused on pinpointing the causes of the credit crisis and the lessons learned from recent events.

Robert Plaze of the SEC's Division of Investment Management explained that the most crucial fact that the Division learned from the onset of the economic crisis is that money market funds, while generally considered among the safe investment vehicles, could be subject to investor runs and numerous concurrent redemption requests. Robert Deutsch, managing director of JPMorgan Asset Management, pointed out that not all money market funds are the same; some funds focus on asset quality while others focus primarily on growing yield. More and more funds were engaging in the latter, he explained, and clients should have been informed as to the kind of investments in which their funds were involved.

Mr. Plaze also stated that after all of the turmoil in the money market fund industry, the SEC staff realized that Rule 2a-7 may have some flaws, including a lack of guidance concerning a fund's ability to take substantial risks and a lack of clear boundaries designed to address liquidity risks. There are competing interests between institutional investors and individual retail investors, and the rule needs to take that into account, he concluded.

At present, the main consideration in regulatory reform is the possible creation of a systemic-risk regulator, which would closely monitor the very large players in the financial services industry. According to Peter Wallison of the American Enterprise Institute, certain issues may arise under the systemic-risk approach. If we start looking at large institutions as special in some way, as "too big to fail," he explained, these entities may appear "safer" to the public because the government would be obliged to step in to save them. He expressed concern that this structure would result in the government basically selecting dominant financial players. Thus, the panel also considered a functional system with multiple regulators and an overarching systemic regulator broadly monitoring the industry.