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Securities Law

FSOC Extends MMF Rule Comment Period; SIFMA Suggests Redemption Gate

WASHINGTON — The Financial Stability Oversight Council has extended the deadline for submitting comments on proposed regulations of money market mutual funds to Feb. 15 from Jan. 18.

FSOC extended the deadline at the request of the chairman of Securities and Exchange Commission to give the public more time to review the proposal and submit comments, as well as to review the SEC's Nov. 30 staff report on money market mutual funds, the council said in a release.

FSOC's proposal, released in November, included three regulatory options aimed at helping money markets better weather heavy redemptions like those in 2008.

One option would require funds to peg share value to actual market value — the so-called "floating net-asset value" option.  Currently, the funds value shares at a stable $1.

Another would maintain the stable NAV but add capital buffers to help funds maintain them amid fluctuations.

The third option would set more stringent requirements for investment diversification, more robust disclosure and increased minimum liquidity levels.

Some organizations, including the Securities Industry and Financial Markets Association, already submitted comments to FSOC.

SIFMA's Jan. 14 letter said regulations put in place in 2010 "significantly increased the resilience of money market funds," and that the funds successfully weathered an unusually volatile market in 2011.

The group said neither the floating NAV or capital buffers would make the funds more stable.

SIFMA suggested the SEC examine rules to create a "redemption gate," which would prohibit investors from redeeming shares for a period of time while the funds restored liquidity. At the end of the period, funds could charge a "liquidity fee" for redemptions, SIFMA said.

"Only a gate can truly stop a run," the letter said.

FSOC's release said the public should have enough time to review the SEC's staff report, which summarized a September memo in which three of the SEC's five commissioners asked former SEC chairman Mary Schapiro questions about money markets.

In the letter, those commissioners — Democrat Luis Aguilar and Republicans Troy A. Paredes and Daniel M. Gallagher — discuss the stability of money market funds, the effectiveness of 2010 money market regulations and the causes of heavy money market redemptions in 2008.

The report followed the SEC's August announcement that it would not pursue additional money market regulations like those advocated by Schapiro and Elisse Walter, who took over as SEC chairman in December.

Schapiro and Walter had supported rules similar to those proposed by FSOC.

FSOC, created by the Dodd-Frank Act to identify and prevent systemic economic risks, took up the money market fund issue after the SEC dropped it.

If FSOC issues final recommendations for rules, the SEC is required by the Dodd-Frank Act to impose them.

Muni bond issuers have strongly opposed additional regulations, saying investors have adequate protection under the 2010 SEC rule changes.

New rules could result in higher short-term borrowing costs for governments and fewer reliable short-term investment options for issuers, they have warned.

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