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The Resource for the Global Finance Profession

FSOC Report Supports Long-Awaited SEC MMF Reform Proposals

  • By Jeanine H. Arnett, Director, Government Relations & Policy, AFP
  • Published: 2012-07-25

Last Friday, the Financial Stability Oversight Council (FSOC) issued its annual report as part of its Congressional mandate on the activities of the Council and describe significant financial market and regulatory developments, analyze potential emerging threats, and make certain recommendations. The Dodd-Frank Act requires FSOC to make recommendations to: enhance the integrity, efficiency, competitiveness and stability if U.S. financial markets; promote market discipline; and maintain investor confidence.

In the annual report, FSOC supported the U.S. Securities and Exchange Commission (SEC)'s efforts and recommended that it publish structural reform options for public comment and ultimately adopt measures that address the susceptibility of money market funds (MMF) to runs.

According to SEC Chairman Mary Schapiro, there are two remaining issues that were not addressed by the 2010 reforms of MMFs. First, there is currently no mechanism to absorb the sudden loss in the value of a portfolio security of a money market fund without threatening the stable net asset value (NAV). Second, investors remain incentivized to redeem their money market fund holdings at the first sign of a problem so they can recoup a full dollar, leaving other investors behind to bear all the losses.

To address these concerns, Chairman Schapiro recommended two alternative reforms, both of which were endorsed in the FSOC annual report:

1)       Implement a mandatory floating NAV; and/or

2)       Implement a capital buffer to absorb losses, possibly combined with a redemption restriction to reduce the incentive to exit the fund.

The FSOC consists of 10 voting members:

·         The Secretary of the U.S. Treasury (Chairman of the Council)

·         The Chairman of the Federal Reserve

·         The Chairman of the Comptroller of the Currency

·         The Director of the Bureau of Consumer Financial Protection

·         The Chairman of the U.S. Securities and Exchange Commission

·         The Chairman of the Federal Deposit Insurance Corporation

·         The Chairman of the Commodity Futures Trading Commission

·         The Director of the Federal Housing Finance Agency

·         The Chairman of the National Credit Union Administration Board

·         An independent member with insurance expertise.

All members of the FSOC are appointed by the President, with the advice and consent of the Senate, for a term of six years.

There are also five non-voting members on the FSOC. They are:

·         The Director of the Office of Financial Research, part of the Treasury Department and established by the Dodd-Frank Act, who is the Council's executive director

·         The Director of the Federal Insurance Office, part of the Treasury Department and established in Dodd-Frank

·         A state insurance commissioner, to be designated by a selection process determined by the state insurance commissioners for a two-year term

·         A state banking supervisor, to be designated by a selection process determined by the state banking supervisors for a two year term, and

·         A state securities commissioner, or officer performing like function, to be designated by a selection process determined by such state security commissioners for a two-year term.

AFP's Position

In June and July 2012, AFP released the results from our 2012 AFP Liquidity Survey, which found that organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings in MMFs in their short-term investment portfolio under three regulatory reform proposals, which were reported to be under consideration by the SEC. 

AFP has been vocal on this issue and our members have offered their views before Congressional Committees to explain the impact that MMF proposals would have downstream on both their investment choices and on their sources of funding. We believe that such changes to MMFs would greatly reduce investors' interest in utilizing MMFs as a cash management and investment tool, whether applied to all investors or just institutional investors. For purchasers of MMFs, the return of principal is a much greater driver of the investment decision than return on principal. For a large number of institutional investors, the potential of principal loss would preclude floating NAV MMFs from being an internally approved investment alternative.

To learn more about AFP's position on MMFs, visit the Money Market Fund Resource page at www.afponline.org/moneyfunds.

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All rights reserved.

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