Money market fund reform continues to be an area of great importance to money market investors and the capital markets on both sides of the Atlantic Ocean. In the United States alone money market funds today hold approximately $2.9 trillion of assets [1] and they comprise over 25 percent of all U.S. mutual fund assets. [2] U.S. and European based money market funds play a critical role in the U.S. and the world economy, and although they may have taken somewhat different paths in their economic and regulatory development in Europe, there are more similarities than differences. In the United States, for instance, money market funds arose as a cash alternative to bank deposits principally for retail investors during the 1970s when interest rates were high but regulatory requirements capped interest rates banks could pay on deposits. [3] In this way, money market funds fulfilled a retail niche by providing a relatively high market-driven rate of return to investors with an expected high degree of safety. Since then the industry and its investor base have changed. Now, about two-thirds of money market fund assets are in institutional money market funds (or classes), and U.S. money market funds now provide institutional as well as retail investors with an important cash management tool. [4] Money market funds have grown from a convenience provided by fund managers who primarily offer equity and bond funds to becoming the primary engine for a substantial portion of the short-term credit in the U.S. economy. This includes over 40 percent of outstanding commercial paper and approximately 65 percent of short-term municipal debt. [5] Another significant development among U.S. money market funds is their concentrated nature: over 70 percent of all money market fund assets reside in the top ten money market fund complexes; for institutional money market funds, including tax-free funds, over 75 percent of assets are held in the top ten complexes. [6] I understand that in Europe, on the other hand, money market funds started primarily as institutional investments and have only recently moved into the retail space. [7]

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This year, not only is Congress considering comprehensive legislation that could impact even the most fundamental aspects of how our financial markets are governed, but we also saw last week the Supreme Court deliver a landmark decision concerning the regulation of investment companies. You just don’t see that every day (I guess thankfully, although in this case, it was gratifying to see the Court affirm a long-held approach regarding fund Boards’ review of advisory fees).

Much of the activity we are seeing now regarding financial regulation of course stems from the turmoil in our financial markets over the past few years. One result of working in the aftermath of these events is that we are trying to craft a regulatory regime with a view towards preventing or otherwise mitigating further problems – problems that we may not even be aware of today. Rather than reacting to a singular event, our regulatory goal in the Division of Investment Management, in many areas, is to try and create a more dynamic regulatory scheme – one that will be effective in increasing investor protection even as the investment company landscape continues to change and evolve at a rapid pace. In addition to adopting a forward-looking approach in the Division’s initiatives, we are also faced with new aspects of regulation. For example, as our markets have become more complex and intertwined, we must consider the effect of certain risks, although not new but certainly more pervasive – such as systemic risks – as an important element when seeking to achieve our mission of investor protection, maintaining fair, orderly and efficient markets and facilitating capital formation.

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