Federated Investors, the third largest manager of money funds with $233 billion (according to our Money Fund Intelligence XLS), published the brief, "SEC rulemaking: A lengthy process Wednesday. It says, "Recent news articles report that the staff of the Securities and Exchange Commission (SEC) sent the agency's five commissioners a draft release proposing new rules for money market mutual funds (MMFs). While SEC rulemaking generally does not have a typical timeline, Federated thought it helpful to outline the process to illustrate how any potential rule change might be adopted and implemented."
They explain, "Under federal law, rulemaking generally involves multiple stages; the SEC may not simply change regulations overnight. The most critical part of agency rulemaking involves the requirement for both "notice" and "public comment." After the public comment period, the agency must consider and respond to those comments. In this case, if a majority of SEC commissioners vote to propose a new rule, a period for public comment would be specified and the agency would take additional time to evaluate those comments. At that point, the SEC may decide to adopt a rule as proposed, modify the rule or not adopt a rule at all."
Federated tells us, "Even if, at the end of the process, a majority of commissioners votes to adopt a rule, the SEC typically would allow a phase-in period for affected businesses and individuals to adjust before the rule change is effective."
The piece continues, "The anticipated steps that any SEC rulemaking on MMFs would take are as follows: The staff of the SEC would consider and develop a draft proposing release and share it with each of the SEC's five commissioners. Based on news reports, the staff has completed this step. The commissioners and their counsels may engage with the staff in order to evaluate and ask for changes in the draft proposal. Depending upon the nature and level of concern and the changes requested, this could take several weeks or a period of months."
Federated adds, "If there appears to be a majority of commissioners supporting a proposal, the chairman would then schedule a public meeting where the staff would describe the proposal and the individual commissioners would vote on it. Additionally, the chairman may choose not to bring a proposal to a vote as was the case with potential rule changes for money funds in 2012. If a majority of the commissioners votes at the public meeting to issue the proposal, a Notice of Proposed Rulemaking that details the proposed changes and the reasons for the proposed changes would be posted on the SEC website."
They write, "The Notice of Proposed Rulemaking would also be published in the Federal Register, which is the federal government's official newspaper. This is usually done within one to two weeks of the posting on the SEC's website, but may take longer. The Notice will specify a comment period so that any members of the public who wish to comment on the proposed changes may do so. `Comment periods for a significant rule generally will be for a period of at least 60 days. This is the minimum specified in the Obama Administration's orders relating to Executive Branch rulemaking. Although the SEC is not subject to these orders, the SEC typically would have a comment period of at least 60 days, from the date of the publication in the Federal Register."
Federated tells us, "For example, the last time the SEC amended Rule 2a-7, the comment period was open for 60 days. During the comment period, market participants, investors and other interested members of the public file comments with the SEC in which they oppose, support or suggest changes to the proposal. As part of the comment process, SEC commissioners and staff may also meet with market participants and investors in order to learn more about their positions. The commissioners and staff must carefully evaluate all input received during the comment process. This period of evaluating comments may last for months after the close of the comment period."
They say, "By law, the SEC must consider: Efficiency, competition and capital formation when it considers changing rules or adopting new rules. Whether such changes are necessary or appropriate in the public interest. The economic impact of the rule proposals. SEC rule proposals have been struck down in court on the basis of deficient cost/benefit analyses. Any reasonable alternative to the rules. Responding to substantial problems identified by commenters. If it does not and if affected persons challenge a rule adopted by the SEC, the rule may be struck down by a court as arbitrary and capricious."
Federated also writes, "At a public meeting, announced in advance, a majority of commissioners is required to approve any final rule. Typically, any rule that requires changes in processes and compliance specifies a "compliance date" or a future date by which affected parties need to change their processes or systems."
They add, "As the above suggests, rulemaking can be a lengthy process. For example, the last time the SEC amended Rule 2a-7 after significant conversation with market participants in 2008 and 2009, it voted to propose the rule changes on June 30, 2009; the proposal was then published in the Federal Register on July 8, 2009; and the period for public comment ran from that date until Sept. 8, 2009. The SEC took nearly six months to consider the comments and make changes to the proposal before approving final rule changes on Feb. 23, 2010. The SEC then gradually phased in the implementation of the changes to Rule 2a-7 by allowing compliance periods that ran from two months for some of the new requirements to more than 20 months for others. This was a relatively fast proceeding. Other SEC rule changes have taken years to complete. Some proposed rules are never adopted."
Finally, the piece comments, "Of course, Federated continues to be interested in any regulatory proposals that impact the utility of money funds. Most of the ... comments to the file of the President's Working Group on Money Fund Reform last year agreed. If the SEC does propose rule changes, Federated would encourage investors in Federated money funds to express their views on any proposed changes to Rule 2a-7 by sending a comment letter to the SEC."
