Alert May 28, 2013

Financial Stability Oversight Council Chairman Pressing Money Market Fund Reform

On May 21, 2013, U.S. Treasury Secretary Lew, who serves as the chair of the Financial Stability Oversight Council (“FSOC”), testified before the Senate Committee on Banking, Housing and Urban Affairs regarding FSOC’s 2013 annual report.  Secretary Lew emphasized FSOC’s position that money market funds (“MMFs”) remain subject to “run-risk vulnerabilities” despite an initial set of reforms implemented by the SEC in 2010.   He noted that FSOC had proposed recommendations for money market mutual fund reform (which were discussed in the November 20, 2012 Financial Services Alert) (the “Reform Alternatives”) and that FSOC was currently considering public comments on the Reform Alternatives.  In this regard, he reiterated that “[i]f the SEC moves forward with meaningful structural reforms of MMFs before [FSOC] completes its process, [FSOC] expects that it would not issue a final recommendation to the SEC.  However, if the SEC does not pursue additional reforms that are necessary to address MMFs’ structural vulnerabilities, [FSOC] should use its authorities to take action in this area.”

In issuing the Reform Alternatives, FSOC asserted its authority under Section 120 of the Dodd-Frank Act. Under Section 120, FSOC may recommend to a primary regulator (in the case of MMFs, the SEC) new or heightened prudential standards and safeguards for activities FSOC determines create systemic risk.  In order to designate a financial activity as systemically significant, FSOC must determine that the conduct, scope, nature, size, scale, concentration, or interconnectedness of the activity or practice could create or increase the risk of significant liquidity, credit or other problems spreading among bank holding companies and nonbank financial companies, U.S. financial markets or low-income, minority or underserved communities.  In issuing the Reform Alternatives, FSOC also noted its position that it has other options at its disposal in regulating MMFs.  Namely, the release describes FSOC’s  designation authority under Title I of the Dodd-Frank Act with respect to Systemically Important Financial Institutions (so called, SIFIs) and under Title VIII with respect to financial market utilities or payment clearing or settlement activities that FSOC determines are, or likely to become, systemically important.  The release also notes the potential involvement of primary banking regulators.