By Sarah N. Lynch
WASHINGTON, July 12 A U.S. 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
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.
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
"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.