In another broadside (see yesterday's "News") against the Treasury Secretary's recent letter to the Financial Stability Oversight Council (FSOC), the U.S. Chamber of Commerce extensively critiques Tim Geithner's "mad dash to a predetermined outcome" on money market mutual fund reforms in a letter released yesterday. The Chambers's Center for Capital Markets Competiveness writes, "[T]he Chamber is concerned by your request that the Financial Stability Oversight Council ("FSOC" or "the Council") use its authority, under Section 120 of the Dodd-Frank Act, to recommend changes to the Securities and Exchange Commission's ("SEC") regulatory regime for money market mutual funds. Such action would create uncertainty, weaken financial regulation, harm investors, and damage the capital formation process needed for businesses to grow and create jobs."
The Chamber's David Hirschmann explains, "Over the past year, the SEC failed to do any of the necessary work to study the impact of prior money market mutual fund reforms and identify any additional needed changes. Because it failed to define the specific areas in need of further reform, it did not even consider options that would have strengthened rather than destroyed the utility of this product. For example, regulators have not studied how the expanded credit and liquidity requirements adopted 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 mutual 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 mutual funds."
He continues, "The process you recommend in your letter to the FSOC members would only repeat or exacerbate the flawed approach the SEC has taken over the past year. While you indicate in your letter that you believe FSOC should also consider alternative reform options, you also recommend that the Council rush to endorse recommendations without actually considering any alternatives or even reviewing the impact of the proposals you outlined. The Chamber respectfully requests that you withdraw your request and that the Council refrain from making recommendations, and instead encourage the SEC, an independent regulatory agency, to move forward with a different approach. A majority of Commissioners of the Securities and Exchange Commission have indicated that they are willing to consider options to further strengthen the resiliency of money market mutual funds if such action is justified by a careful examination of the impact of the 2010 reforms to Rule 2a-7."
The Chamber letter adds, "Doing so will allow the SEC to complete the long-delayed review and engage in a deliberative decision making process -- free from FSOC interference, which could undermine that process. As the primary regulator of money market mutual funds, the SEC is the only regulatory body that Congress directed to review any recommendations for money market mutual fund reform that the FSOC members could recommend. The actions that you have asked the Council to take would hinder, not help, 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 your request, it would be promoting a rush towards what appears to be a predetermined outcome."
It states, "As stated in your September 27th letter to members of FSOC urging the Council to take action on money market mutual funds, "[t]he Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) gives the Council both the responsibility and authority to take action to address risks to financial stability if an agency fails to do so." Private and public statements by financial regulators appear to confirm that the FSOC is poised to act on money market mutual funds later this month. Such action is inherently premature, irresponsible, and potentially damaging to investors, businesses, state and local governments, and other users of money market mutual funds."
The letter explais, "SEC Chairman Mary Schapiro withdrew her proposal to modify the regulation of money market funds because of a lack of support in late August. The Schapiro Proposal was withdrawn because of 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, a bipartisan group of SEC Commissioners, Troy Paredes, Luis Aguilar, and Dan Gallagher, opposed its introduction at that time and they issued statements individually and jointly that expressed deep concern about proceeding down the regulatory path suggested by the Chairman 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, a bipartisan majority of the independent agency, further stated that a greater understanding of the impact of changes to money market mutual funds to cash management was needed before moving forward with any regulatory action."
It adds, "Importantly, it should also be noted that none of the dissenting Commissioners rejected the notion that further reforms might be appropriate. In fact, the three dissenting Commissioners 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 mutual 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."
The Chamber continues, "The FSOC, by using its Section 120 powers under the Dodd-Frank Act, may be endangering rather than promoting the safety and soundness of the financial markets. First, prematurely invoking Section 120 under the guise of systemic risk regulation can and will work at cross-purposes with the SEC's mandate to promote capital formation. Second, subjecting money market mutual funds to what amounts to joint oversight by the FSOC, which is over-populated with bank regulators and unduly influenced by that regulatory perspective, and the SEC will blur the distinction between an investment product and traditional bank deposit products. This is not simply a matter of investor confusion; 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."
Finally, they say, "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 mutual funds. Only at that time, with a full understanding of the SEC's analysis and proposed course of action, should the Council consider using Section 120 of the Dodd-Frank Act. In short, the Council's mad dash to a predetermined outcome not only could jeopardize an important intermediary for investors and state and corporate finances, but it could also unnecessarily compromise the integrity of our regulatory system. We urge you to take these risks into account before hastily interjecting the Council in the money market mutual fund regulatory process. We would be happy to further discuss our concerns with you and your staff."
