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Abstinence in the Face of the Mutual Fund Debt Elixir: In Response to Professor John Morley

This piece responds to Professor John Morley’s article, “The Regulation of Mutual Fund Debt.” The article grapples — albeit from an academic point of view — with many of the issues that fund structurers encounter, on a more practical level, as we imagine, structure and develop innovative products for investors. As importantly, Professor Morley’s article represents a significant contribution to the discussion of mutual fund regulation, providing — in the professor’s own words—“the first general examination of mutual fund capital structure regulation under the Investment Company Act of 1940.” More basically, Professor Morley succeeds in establishing a firm foundation for additional examination and discovery and highlights the importance of imagining what might be instead of settling for what already is. This short Response attempts to buttress the still nascent discussion surrounding mutual fund capital structure and encourages Professor Morley and the broader academic community to advance the examination of investment vehicles and their limitations in light of the evolving needs of today’s investing public. The seriousness and complexity of the subject matter, and its tangible ramifications for investors, necessitate a more thorough examination. This Response proceeds in three parts. Part I reintroduces the basic framework through which the article’s author analyzes the features unique to the mutual fund capital structure. This Part suggests that the strictures imposed on mutual fund capital structure represent a small part of the patchwork that forms the Investment Company Act of 1940 (“the Act”). The individual sections of the Act are not easily decoupled. Instead, the overall application of the entire Act exceeds the sum of its parts. Part II challenges the regime proposed by the article, arguing briefly that a regulatory accommodation allowing mutual funds to issue debt would not fulfill enough of an investor need to justify the change and, at the same time, might not be as harmless as the author suggests. Finally, Part III concludes the Response by cautioning that any change to the regulation of mutual funds requires further consideration and deliberation.