SEC's Gallagher says money fund reform should be left to SEC

Fri Feb 22, 2013 2:49pm EST

* Gallagher says risk council should leave money funds to SEC

* Says SEC needs to take leading role on Volcker rule

By Sarah N. Lynch

WASHINGTON, Feb 22 (Reuters) - U.S. Securities and Exchange Commission member Daniel Gallagher has a message for the U.S. financial risk council as it seeks to pressure the SEC to enact reforms for the money market fund industry: back off.

In remarks prepared for delivery to the Practising Law Institute's "The SEC Speaks" conference, Gallagher said it was "immensely troubling" to see the Financial Stability Oversight Council pressing ahead on reforms, even though the SEC is working diligently to put forth a proposal.

"My colleagues and I have made it clear that, having now been provided with the rigorous study and economic analysis on money market funds that a bipartisan majority of the commission asked for from the start, we fully expect the commission to move forward with a rule proposal shortly," said Gallagher, one of two Republican commissioners at the SEC.

"Why, then, is FSOC still involved in the process?" he asked.

Gallagher's comments come just a few days after a group of 15 former SEC chairmen, commissioners and senior officials sent the FSOC a letter making a similar plea.

The risk council is currently reviewing public comments it has received on a proposed regulatory framework to help prevent runs on money market funds.

Chaired by the Treasury secretary and comprised of the country's top banking and market regulators, the FSOC waded into the money market fund debate last year after former SEC Chairman Mary Schapiro could not win enough support for reforms from her fellow commissioners.

Gallagher said he feels FSOC's involvement goes against the kind of work it should be doing, which is to promote cooperation and encourage information-sharing.

"It is immensely troubling then to think of the FSOC as an institutionalized mechanism for one set of regulators to pressure another in the latter agency's field of expertise - yet that is exactly what is happening," Gallagher said.

Schapiro had argued that more reforms are necessary to repeat a run on funds like that seen in the 2008 financial crisis. During the crisis, heavy exposure to collapsed investment bank Lehman Brothers caused the net asset value of the Reserve Primary Fund to fall below $1 per share, something known as "breaking the buck."

Among the proposals Schapiro wanted to consider were capital buffers and redemption holdbacks, or a move from a stable to a floating net asset value so that investors would not be spooked by the prospect of funds breaking the buck.

The FSOC was created by the 2010 Dodd-Frank Wall Street reform law that aims to police for potential systemic threats to the marketplace. The law gives it the authority to try and pressure regulators to act, though the FSOC cannot force the SEC to follow its recommendations.

If the SEC does not act on its own, the FSOC may formally present the SEC with its recommended reforms. The SEC would need to accept or reject them in writing within 90 days.

VOLCKER RULE ALSO CRITICIZED

Gallagher also called on the SEC to take a stronger leadership role in crafting a final Volcker rule, a key provision in the 2010 Dodd-Frank Wall Street reform law that would ban banks from engaging in proprietary trading.

The law calls for the banking regulators including the Federal Reserve to write a joint rule after consulting with the SEC and Commodity Futures Trading Commission. The SEC and CFTC are also required to write a Volcker rule targeting the entities they regulate, though they are not required to issue a joint rule.

However, in proposing the rule, the SEC opted to join forces with the banking regulators.

The proposal is lengthy, complex, and has drawn major scrutiny from the financial industry amid concerns it will harm the markets and hurt banks' ability to hedge risks.

Gallagher said on Friday the SEC should stop playing second fiddle to the banking regulators as it works on final regulations.

"The commission for too long has taken a back seat to the banking regulators in this rulemaking process," he said.

He added that it makes little sense "for the commission to defer to the banking regulators in this area when for decades it has regulated securities market-making in order to facilitate liquidity and promote the efficient allocation of capital."

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