Groups Contest Legality of FSOC's MMF Recommendations

WASHINGTON — The Financial Stability Oversight Council lacks legal authority to recommend additional money market fund regulations, which a variety of municipal market participants oppose, say industry and business advocacy associations in recently filed comment letters.

The Investment Company Institute and the Center for Capital Markets Competitiveness, part of the U.S. Chamber of Commerce, are among the groups that say proposed recommendations made by FSOC in November are invalid because the Board of Governors of the Federal Reserve System has not clarified the entities over which the council has authority.

Comments on oversight council’s proposal, which laid out regulatory options designed to help money market funds better withstand heavy redemptions, were due Friday.

The Securities Industry and Financial Markets Associations also filed comments, as did a coalition of state and local groups, which said the recommendations will deprive issuers of valuable investment vehicles and raise issuers’ debt costs.

FSOC’s proposal recommended that the Securities and Exchange Commission consider three regulatory options. One would convert money market shares’ from having a “stable” net-asset value, pegged at $1, to having “floating” values based on actual market values.

Another option would maintain the stable NAV but add capital buffers.

A third would set new investment diversification requirements, require more disclosure and increased minimum liquidity levels.

FSOC, which the Dodd-Frank Act created to prevent systemic economic risks, released proposed recommendations after the SEC announced in August it would not pursue additional money market rules.

If FSOC issues final recommendations, the Dodd-Frank Act requires the SEC to impose them or provide written explanation of why not.

ICI and the Center for Capital Markets Competitiveness note the act allows FSOC to make recommendations that apply to “nonbank financial companies,” which Congress defined as being “predominantly engaged in financial activities.”

But the act also charged the Federal Reserve with creating criteria to determine if a company is engaged in those activities, the groups note.

The Federal Reserve published a proposed “Financial Activity Rule” in February 2011, and updated the proposal in April 2012, but has not a issued final rule.

FSOC does not have authority to make recommendations for nonbank financial companies until the Federal Reserve “issues regulations that establish the requirements for a company to be determined to be predominantly engaged in financial activities,” said the Center for Capital Markets Competitiveness in a letter signed by chief executive officer and president David Hirschmann.

“The council has no authority to identify any category of companies, including [money market funds], as nonbank financial companies,” the letter said.

“FSOC has not provided an adequate basis to support a determination that any money market funds would qualify as nonbank financial companies, and thus lacks the authority to issue these recommendations,” said ICI in a letter from president and chief executive officer Paul Schott Stevens.

In its proposal, FSOC disagreed, saying it believed money markets are primarily engaged in financial activities and can be considered nonbank financial holding companies.

Muni participants also commented on FSOC’s proposal.

A coalition of 13 groups, including the Government Finance Officers Association, National Association of Counties, National League of Cities and the National Association of State Treasurers noted that state and local governments have $127 billion invested in money markets, and that money markets are the largest investor in short-term municipal bonds.

Many governments are required to invest in products with stable values, the groups said in a Feb. 13 letter. A floating NAV could lessen investor demand for money markets and raise issuers’ debt costs, they added.

SIFMA’s Jan. 14 letter said regulations put in place in 2010 increased the resilience of the funds, and that neither a floating NAV or capital buffers would make funds more stable. SIFMA suggested there be a “redemption gate,” which would prohibit investors from redeeming shares for a period of time while the funds restored liquidity.

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Law and regulation
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