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Univ. of Toledo College of Law

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Sunday, June 3, 2012

Morley on Allowing Mutual Funds to Issue Debt

Let Mutual Funds Issue Debt, by John Morley, University of Virginia School of Law, was recently posted on SSRN.  Here is the abstract:

At present, the only type of security open-end mutual funds can issue is common stock. This paper contemplates a broader set of possibilities: maybe mutual funds should be allowed to issue debt securities, such as redeemable bonds, in addition to common stock. Debt securities might hold many advantages. Most obviously, they might offer superior alternatives to money market fund shares. Unlike money market fund shares, debt securities could offer fixed interest rates as well as fixed redemption values and would be insulated from risk by loss-bearing equity. There is no obvious mechanical obstacle that prevents open-end mutual funds from issuing debt: these funds already borrow from banks and derivative counterparties, and they used to issue redeemable bonds and preferred stock in the past. This draft is preliminary and suggestions are welcome.

http://lawprofessors.typepad.com/securities/2012/06/morley-on-allowing-mutual-funds-to-issue-debt.html

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