* Gallagher says risk council should leave money funds to
* Says SEC needs to take leading role on Volcker rule
By Sarah N. Lynch
WASHINGTON, Feb 22 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
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
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
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
"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."