House panel probes risk council role in SEC money fund rule

WASHINGTON Fri Jul 12, 2013 6:18pm EDT

Committee Chairman U.S. Representative Darrell Issa (R-CA) holds a House Oversight and Government Reform Committee hearing on alleged targeting of political groups seeking tax-exempt status from by the Internal Revenue Service (IRS), on Capitol Hill in Washington, May 22, 2013. REUTERS/Jonathan Ernst

Committee Chairman U.S. Representative Darrell Issa (R-CA) holds a House Oversight and Government Reform Committee hearing on alleged targeting of political groups seeking tax-exempt status from by the Internal Revenue Service (IRS), on Capitol Hill in Washington, May 22, 2013.

Credit: Reuters/Jonathan Ernst

WASHINGTON (Reuters) - A House of Representatives Republican who oversees an investigative committee said on Friday the new U.S. systemic risk council overstepped its authority with an attempt to push through rules to rein in the $2.6 trillion money market fund industry.

Making those rules was the responsibility of the Securities and Exchange Commission, which is supposed to be independent, said House Oversight Committee Chairman Darrell Issa.

He released excerpts of documents showing that internal SEC draft rules contained what he called inappropriate input from staffers of the Federal Reserve, which serves with the SEC on the risk council, also known as the Financial Stability Oversight Council (FSOC).

The council was created after the 2007-2009 financial crisis to improve the way U.S. financial regulators coordinate efforts to police systemic risks.

Lawmakers are concerned that the risk council "may be structured and operating in a manner that vitiates the independence and core competence of the council's constituent regulatory bodies," wrote Issa and Ohio Republican Jim Jordan, who chairs a subcommittee of the oversight panel.

Issa also released an 11-page letter he sent July 10 to SEC Chairwoman Mary Jo White and several other members of FSOC demanding additional records.

The letter accuses the office of former SEC Chair Mary Schapiro of "surreptitiously" cloaking its opinions and advocacy for money fund rules.

"The heavy-handed and destructive approach exercised by FSOC was neither advisable nor necessary," they added.

The lawmakers said they want more documents to help them understand the FSOC's structure and operations, and how it may affect the independence of other regulatory agencies.

They sent letters to five FSOC members, including Federal Reserve Board Chairman Ben Bernanke, seeking records by July 24.

A spokesman for the Federal Reserve acknowledged receipt of the letter and said the board planned to respond. An SEC spokesman declined to comment until the agency has had a chance to respond to the letter.

Both former SEC Chair Schapiro and a Treasury spokeswoman declined to comment.

NAME AND SHAME

Last fall, the FSOC sought to force the SEC to consider adopting reforms for the money market fund industry after Schapiro was unable to convince a majority of her colleagues on the five-member commission to issue her proposal for public comment.

Schapiro had pushed reforms for funds, saying they remained vulnerable to runs like one in 2008 when investors yanked money from the Reserve Primary Fund. The run on that fund, which had heavy exposure to collapsed investment bank Lehman Brothers, pushed its net asset value below $1 a share. It was the first money-market fund in years to "break the buck."

Schapiro advocated for capital buffers and redemption holdbacks, or a switch to a floating net asset value. The industry launched a fierce lobbying campaign to stop her plan, and three of the five SEC commissioners said they could not support it without further study.

In August 2012, Schapiro announced she could not get the votes to release a proposal and asked the FSOC to use its powers under the 2010 Dodd-Frank financial reform law to try and "name and shame" the SEC into action.

In November last year, the FSOC issued its own proposed framework for money fund reforms in an effort to spur the SEC into action. Schapiro departed the SEC about a month later.

Last month, under new Chairwoman White, the SEC ultimately proposed a package of money fund reforms, though it differs in many ways from the FSOC's proposal.

FED INVOLVEMENT

Issa and Jordan said in their letter they obtained internal emails and memos which substantiate concerns that the FSOC was inappropriately involved in internal SEC affairs.

In one June 2012 email, a Fed deputy director wrote to three SEC officials, including a former adviser to Schapiro and official representative for Schapiro at FSOC. The email concerns edits to a draft letter purporting to be from the FSOC, urging the SEC to take steps to address vulnerabilities of money funds.

"In the event the SEC does not act, the council will have no alternative but to consider the entire range of tools at its disposal to address identified threats to U.S. financial stability," says the letter.

The letter was drafted roughly two months before Schapiro publicly announced she had failed to get the votes for a money fund proposal. It was unclear what became of the draft, or whether it was ever sent to the SEC.

Issa and Jordan said they had concerns about another document which appears to show a Fed economist making edits to an internal SEC document containing a high-level summary of Schapiro's money fund plan.

That document, known as a "term sheet" in SEC parlance, is usually drafted by SEC staffers and not shared outside the building.

"It appears that four SEC commissioners were presented with what they believed represented the views of the SEC's professional staff, when in reality the document reflected the views of another FSOC member agency," Issa and Jordan wrote.

(Reporting by Sarah N. Lynch; additional reporting by Emily Stephenson)

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