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.