On Wednesday, the Investment Company Institute released a white paper, "Financial Services Regulatory Reform: Discussion and Recommendations," with "recommendations on how to achieve meaningful reform of the current system for regulating the U.S. financial services industry, with particular emphasis on the functioning of the capital markets and the regulation of investment companies." They propose a new "Capital Markets Regulator" to "encompass the combined functions of the Securities and Exchange Commission and the Commodity Futures Trading Commission, thus creating a single independent federal regulator responsible for oversight of U.S. capital markets, market participants, and all financial investment products."

The paper says, "Congress should affirm the role of the Capital Markets Regulator as the regulatory standard setter for all registered investment companies. The Capital Markets Regulator's jurisdiction should include money market funds. ICI further envisions the Capital Markets Regulator as the first line of defense with respect to risks across the capital markets. The new agency should be granted explicit authority to regulate in certain areas where there are currently gaps in regulation -- in particular, with regard to hedge funds, derivatives, and municipal securities -- and explicit authority to harmonize the legal standards applicable to investment advisers and broker-dealers."

A footnote explains, "ICI has formed a Money Market Working Group that is developing recommendations to improve the functioning of the money market and the operation and regulation of funds investing in that market. The group will identify needed improvements in market and industry practices; regulatory reforms, including improvements to SEC rules governing money market funds; and possibly legislative proposals. The Working Group expects to report its recommendations in the first quarter of 2009."

ICI's report says, "How these issues are resolved will have a very real impact on registered investment companies, as both issuers and investors in the capital markets. Money market funds, for example, are comprehensively regulated under the Investment Company Act of 1940 and subject to special requirements that limit the fund's exposure to credit risk and market risk. These strong regulatory protections, administered by the SEC for nearly three decades, have made money market funds an effective cash management tool for retail and institutional investors and an important source of short-term financing for American business and municipalities.

It continues, Given the size of this industry segment and its important role in our nation's money markets, money market funds are likely to be on the radar screen of the Systemic Risk Regulator as it monitors the financial markets. The type of information about money market funds that the Systemic Risk Regulator may need to perform this function, and how the regulator will obtain that information, are just two of the specific issues that will need to be carefully considered. As a threshold matter, however, ICI firmly believes that regulation and oversight of money market funds must be the province of the Capital Markets Regulator." (See also the AEI's "Regulation Without Reason: The Group of Thirty Report.")

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