Thursday, November 15, 2012

FSOC Pulls Rank and Issues Its Own Money Fund Reform Proposals

Pursuant to powers granted to it by Section 120 of the Dodd-Frank Act, on November 13, 2012, the Financial Stability Oversight Council ("FSOC") approved proposed recommendations for the structural reform of money market mutual funds ("MMFs").  The FSOC's release proposes three alternatives for public comment:

  1. Floating Net Asset Value. Require MMFs to have a floating net asset value ("NAV") per share by removing the exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV of $1.00.
  2. Stable NAV with NAV Buffer and "Minimum Balance at Risk." Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds' portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would be paired with a requirement that 3 percent of a shareholder's highest account value in excess of $100,000 during the previous 30 days — a minimum balance at risk ("MBR") — be redeemed on a delayed basis.
  3. Stable NAV with NAV Buffer and Other Measures. Require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. 
Proposed alternatives 1 and 2 are nearly identical to the reform options advanced by SEC Chairman Schapiro earlier in the year. Schapiro's proposal was not brought to a vote of the full Commission due to a lack of support from a majority of the SEC Commissioners.  In addition to these alternatives, the FSOC release describes other measures could that could be implemented in addition to or in lieu of the proposals. These could include more stringent investment diversification requirements, increased minimum liquidity levels, more robust disclosure requirements, standby liquidity fees, and redemption gates.

In his remarks, Secretary Geithner emphasized that the FSOC urges the SEC to issue its own proposal, taking back the initiative and allowing public comment and consideration to occur among the Commissioners and SEC staff.  Mr. Geithner also mentioned the the possibility of designating MMFs Systemically Important Financial Institutions, which could put them under the jurisdiction of primary banking regulators should the SEC fail to act yet again.  

Comments are due no later than 60 days after the release is published in the Federal Register.