* FSOC lays out three main options for money fund reforms
* Two of the options are similar to SEC Chairman proposal
* Third option entails larger capital buffer, other factors
* Industry blasts FSOC proposal, calls it flawed
* Proposal downplays alternatives sought by industry
By Sarah N. Lynch and Emily Stephenson
WASHINGTON, Nov 13 The U.S. financial risk
council rolled out a framework of new rules for the $2.5
trillion money market fund industry on Tuesday, saying current
regulations are not enough to prevent runs in a time of crisis.
The Financial Stability Oversight Council's proposal largely
mirrors a plan championed this summer by Securities and Exchange
Commission Chairman Mary Schapiro, but it failed to garner
enough support from three of her colleagues.
The proposal by the FSOC, a council of federal financial
regulators created by the 2010 Dodd-Frank reform law and chaired
by Treasury Secretary Timothy Geithner, could pressure the SEC
to agree on a course of action.
The recommendations are not binding and Geithner indicated
the council would suspend its work should the SEC reach an
agreement on its own.
Regulators said money fund reforms remain a key piece of
unfinished business after the 2007-2009 financial crisis.
During the crisis, heavy exposure to collapsed investment
bank Lehman Brothers caused the Reserve Primary Fund's net asset
value to fall below $1 per share, or "break the buck" in
"Some basic vulnerabilities in the design of money market
funds helped accelerate the financial crisis of 2008 and 2009,"
Geithner said during the public portion of the FSOC's meeting on
"We are not yet at the point where we have achieved and put
in place a set of reforms that provide us a sufficient degree of
comfort against those basic vulnerabilities."
The council's recommendations are largely centered on
concepts widely rejected by the industry and some regulators,
such as capital buffers and a floating net asset value. Funds
and corporate treasurers have said such changes could drive
investors out of the products and harm companies that use them
for short-term borrowing.
The proposal does touch on an alternative concept supported
by funds such as Blackrock Inc that would impose
liquidity gates in times of stress, but the idea is not given a
starring role in the council's 73-page document.
Government officials largely downplayed that alternative,
saying they fear it could actually accelerate a run on funds.
The FSOC proposal generated a negative response almost
immediately from critics such as the Investment Company
Institute (ICI), the U.S. Chamber of Commerce and Republican
Senator Pat Toomey, who called it "a mistake."
"The proposed regulations would significantly shrink the
industry and would result in less borrowing, less economic
growth, less investment options for households, and ultimately
fewer jobs," Toomey said in a statement.
ICI president and CEO Paul Schott Stevens said the plan
"fails to advance the debate" and is "deeply flawed."
DEVIL IN THE DETAILS
The council's recommendation consists of three main
options, which are not mutually exclusive and could potentially
be implemented in combination.
One would call for funds to hold a capital buffer of up to 1
percent of a fund's value and require a 30-day redemption
hold-back of 3 percent of a shareholders' account value.
Another would call for a move from a stable to a floating
net asset value so investors would not get spooked by the
prospect of funds breaking the buck.
Both of those proposals were also considered by the SEC. The
FSOC also announced a third option that securities regulators
did not propose.
This alternative would impose a higher buffer of 3 percent
of a fund's value, but funds could potentially hold less capital
if they met other liquidity and diversification requirements.
For instance, if a fund were to reduce its exposure to any
one company, that could allow it to meet a lower capital buffer
Sheila Bair, the former head of the Federal Deposit
Insurance Corp, who also has championed reforms, praised the
recommendations in a statement on Tuesday.
"I hope the Securities and Exchange Commission will
recognize the risks posed by these products and implement the
needed reforms," she said.
The FSOC's plan will now be issued for a 60-day public
comment period after which the council may vote on a final
recommendation. The SEC would have 90 days to embrace the
recommendation or reject it in writing.
However, Geithner said he hopes the SEC will continue
efforts on its own to come up with rules everyone can agree on.
"Our hope, of course, is that a public debate on a series of
concrete options would provide a basis for the SEC to move
forward," Geithner said.
Just how the FSOC proposal will play at the SEC remains to
Three of the SEC's commissioners, Republicans Dan Gallagher
and Troy Paredes and Democrat Luis Aguilar, have remained
skeptical about implementing new reforms, noting that a series
of rules imposed by the SEC in 2010 may be enough to address the
risk of runs.
Those reforms tightened credit quality standards, shortened
weighted average maturities, imposed a liquidity requirement on
money market funds and increased disclosure of fund holdings.
Earlier this year, the three commissioners asked the
agency's economists to study the impact of the 2010 rules before
forging ahead on new regulations.
In a prepared statement, Aguilar said on Tuesday he is
"anxiously awaiting" the results of that study and expects it to
be available soon.
He said he had not yet reviewed the FSOC's plan, but he is
"optimistic that the resulting public discussion and dialogue
will shed light into what is best for the public interest."
In addition, he added that he hopes that FSOC's plan will
lead to a "serious inquiry about the possible adverse impact of
migration from the transparent, regulated markets of money
market funds to the opaque, unregulated parts of the cash