The Secretary’s letter of September 27 to members of FSOC urging action on money market mutual funds noted that the Dodd-Frank Act gives the Council both the responsibility and the authority to take action to address risks to financial stability if an agency fails to do so. The Chamber noted that private and public statements by financial regulators appear to confirm that the FSOC is poised to act on money market mutual funds later in November. The Chamber described such action as inherently premature, irresponsible, and potentially damaging to investors, businesses, state and local governments, and other users of money market mutual funds.
By using its Section 120 powers under the Dodd-Frank Act, cautioned the Chamber, FSOC may be endangering rather than promoting the safety and soundness of the financial markets. Prematurely invoking Section 120 under the guise of systemic risk regulation will work at cross-purposes with the SEC’s mandate to promote capital formation. In addition, subjecting money market mutual funds to what amounts to joint FSOC oversight, which is over-populated with bank regulators and unduly influenced by that regulatory perspective, will blur the distinction between an investment product and traditional bank deposit products. The Chamber warned that FSOC oversight of money market mutual funds as deposit-like products will necessarily foster a view in the marketplace that there is an implied guarantee of these funds. By doing this, FSOC action may blunt market discipline and increase the potential for a run on these funds
The FSOC should only consider incurring these risks and proposing changes to the regulatory regime for money market funds with a full understanding of the SEC’s analysis and proposed course of action, and after following the requisite regulatory procedures itself. The Chamber urged the Council to conduct a comprehensive analysis of the SEC’s 2010 reforms to Rule 2a-7 in order to understand their impact so that FSOC can identify and clearly define the problem it is seeking to solve and to develop only those reform options that address the problems identified.
Also, in compliance with the requirements of Section 120 and Executive Order 13563 issued by President Obama, the Council should conduct a thorough cost benefit analysis of the options it plans to propose, including an evaluation of the proposal’s impact on cash management and short-term financing for businesses, state and local governments, investors, and other users of money market mutual funds. In addition, the Council should consider the cumulative impact of its proposal and other rulemakings completed or underway by its member agencies, such as the Volcker Rule and the Basel III capital rules, all of which will limit corporate treasurers’ ability to get needed capital and manage risk.
The Chamber understands that the SEC is moving forward with this prudent approach. Reports indicate that the SEC is now embarking on such a study of the 2010 amendments, and after such study is completed, the SEC will decide what action, if any, to take regarding the regulation of money market funds. Only at that time, with a full understanding of the SEC’s analysis and proposed course of action, should FSOC consider using Section 120 of the Dodd-Frank Act.
In the Chamber’s view, the process recommend in the Geithner letter to FSOC members, including the SEC, would only repeat or exacerbate the flawed approach the SEC has taken over the past year. While the Secretary indicated that FSOC should also consider alternative reform options, he also recommended that the Council rush to endorse recommendations without actually considering any alternatives or even reviewing the impact of the proposals.
Over the past year, noted the Chamber, the SEC failed to do any of the necessary work to study the impact of prior money market fund reforms and identify any additional needed changes. Because it failed to define the specific areas in need of further reform, the Commission did not even consider options that would have strengthened rather than destroyed the utility of money market funds. For example, regulators have not studied how the expanded credit and liquidity requirements adopted by the SEC in 2010 impact fund resiliency and the risk of runs. The SEC did not recommend approaches or even consider the results of the stress tests it began to require of money market funds as part of the 2010 reforms. And, the SEC did not examine the impact of the proposals it was considering on either systemic risk or the continued viability of money market funds.
The Chamber noted that a majority of SEC Commissioners have indicated a willingness to consider options to further strengthen the resiliency of money market funds if such action is justified by a careful examination of the impact of the 2010 reforms to Investment Company Act Rule 2a-7. Doing so will allow the SEC to complete the long-delayed review and engage in a deliberative decision making process free from FSOC interference. As the primary regulator of money market funds, said the Chamber, the SEC is the only regulator that Congress directed to review any recommendations for money market fund reform that the FSOC members could recommend. The Chamber fears that the actions the Secretary asked the Council to take would hinder the SEC as it weighs the likely impacts of potential changes against these and other public policy goals. Instead of allowing the SEC to complete its deliberative process, if the FSOC were to accede to Treasury’s request, it would be promoting a rush towards what appears to be a predetermined outcome.
In late August, SEC Chairman Mary Schapiro withdrew her proposal to modify the regulation of money market funds because of a lack of support and a fundamental disagreement within the Commission on the appropriate course of action to take, and the necessary basis for taking it, rather than an outright refusal to act. While the Schapiro Proposal was never publicly introduced, SEC Commissioners Troy Paredes, Luis Aguilar, and Daniel Gallagher opposed its introduction at that time and issued statements individually and jointly that expressed deep concern about proceeding down the regulatory path suggested by Chairman Schapiro without first evaluating the impact of the 2010 changes to Rule 2a-7 on investors, issuers, the fund industry, and the economy. These three Commissioners further stated that a greater understanding of the impact of changes to money market funds to cash management was needed before moving forward with any regulatory action.
Importantly, noted the Chamber, none of the dissenting Commissioners rejected the notion that further reforms might be appropriate. In fact, they suggested that a thorough and comprehensive analysis of these funds under the current regulatory regime and their role in the cash management industry needs to be completed in order for the SEC to determine the appropriate course of regulatory action regarding money market funds. The Chamber agrees with this prudent approach and believes that an SEC study and a concept release will help inform the Commission of the central role that these funds play in cash management. Such a course of action will help ensure that the needs of investors, businesses, and state and municipal governments are met, that appropriate protections are put in place if needed, and that any unintended consequences are minimized.