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In Money Market Fund Reform, FSOC Must Act Carefully: Dechert

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Responding to the Financial Stability Oversight Council’s (FSOC) intention to move ahead and recommend to the Securities and Exchange Commission (SEC) further reforms the agency should make to money-market funds, industry lawyers are urging the FSOC to tread carefully.

Thomas P. Vartanian, chairman of Dechert LLP’s Financial Institutions practice, told members of FSOC in a Nov. 1 letter to “act in a careful, deliberate manner in evaluating any possible recommendations to the SEC regarding changes in the regulatory structure for MMFs.”

In a late September letter, Treasury Secretary Timothy Geithner told other members of FSOC that because SEC Chairwoman Mary Schapiro stated in late August that a majority of the commission would not support a staff proposal to reform the structure of the funds, FSOC should move forward in recommending such reforms as “further reforms to the money-market fund industry are essential for financial stability.”

Daniel Gallagher, the newest commissioner at the SEC, was one of the commissioners—along with Troy Paredes and Luis Aguilar—who would not go along with Schapiro’s money-market reform plans. But Gallagher conceded in a recent speech that “crisis-related” areas that the agency must focus on include further money-market reforms.

In response to Geithner’s letter, Vartanian said that “the secretary’s proposal seeks to have the FSOC make recommendations to the SEC for MMF reform before it has established a fair process for considering and evaluating such recommendations and without addressing how the statutory requirements for consultation with the SEC, determining eligibility for a recommendation, conducting a comprehensive cost-benefit analysis and considering public comments will be satisfied.”

Vartanian then laid out a series of issues in his letter that the FSOC must consider in connection with any potential money fund recommendation:

  • What internal agency rules will define the FSOC’s exercise of its Section 120 authority to ensure the appropriateness of the process, and the absence of bias and predisposition of relevant issues?
  • How can the FSOC conclude that funds come within its statutory purview over “nonbank financial companies” when the Board of Governors of the Federal Reserve System has not completed the necessary regulatory action under the Dodd-Frank Act to define that term?
  • Has the FSOC determined that funds are engaged in “financial activities” that pose the financial stability threat required under section 120?
  • How will the FSOC consult with the SEC commissioners and key SEC staff who are most knowledgeable about how money funds work and are regulated?
  • What will be the parameters of the required analysis of the costs to long-term economic growth (cost-benefit analysis) associated with each proposed recommendation?
  • How will the FSOC’s notice and request for comment on any proposed recommendations address the requirements of the law, including the need for public comment on the cost-benefit analysis?
  • How will the FSOC inform the public of its responses to the comments that it receives and of the basis for any final recommendations it may make to the SEC?


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