Mutual-Fund Group Says Risk Council Overstepping Powers

The mutual-fund industry’s main trade group said U.S. regulators exceeded their legal authority in urging the Securities and Exchange Commission to overhaul rules for money-market funds.

The Financial Stability Oversight Council drafted recommended rules for the SEC in November without the economic analysis required by the 2010 Dodd-Frank Act, the Investment Company Institute said today in a letter to the council. The ICI, reiterating arguments against the FSOC’s specific recommendations, urged the council to withdraw its proposals.

“FSOC has overstepped its legal authority as defined by Congress,” Karrie McMillan, the ICI’s general counsel, said in a statement accompanying the letter. “The fact that FSOC is acting with such haste and without adequate concern for the process outlined in the Dodd-Frank Act is very troubling.”

The SEC, under pressure from the FSOC to overhaul rules governing money funds, is expected to receive a rule-making proposal from the agency’s staff before the end of March, Republican Commissioner Daniel Gallagher said in a Jan. 16 speech. Regulators have been working to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund.

“Litigation would be way down the road and I suspect the industry doesn’t want to go down that road, but they are suggesting it’s a possibility,” Michael Krasner, managing editor at money-fund research firm iMoneyNet in Westborough, Massachusetts, said in an interview.

FSOC Report

Suzanne Elio, a Treasury spokeswoman, referred back to the council’s proposed recommendation in response to the ICI’s statement. The FSOC report included an eight-page section that seeks to address the potential long-term economic impact of the changes.

The ICI letter urged regulators to consider a plan it put to SEC commissioners in October that would allow money funds under stress to temporarily halt withdrawals and impose fees on withdrawals for an additional period of time. The plan would apply only to funds that are eligible to invest in corporate debt. Funds limited to government-backed securities wouldn’t be affected.

The FSOC began a process Nov. 13 by which it will recommend the SEC reconsider rule changes backed by former SEC Chairman Mary Schapiro. Her plan to abandon the funds’ traditional fixed $1 share value or force funds to set aside capital was shelved in August after three fellow commissioners said they would reject it.

Mary Jo White, a former U.S. attorney for Manhattan, was nominated by President Barack Obama today to be the next SEC chairman.

Paper Market

Money-fund executives say the changes would destroy the appeal of the funds to investors and deny companies, states and municipalities a source of cheap, short-term borrowing. U.S. money funds hold about $2.7 trillion and represent the largest collective buyer of commercial paper.

FSOC, which is headed by the Treasury secretary and includes the leaders of the U.S. Federal Reserve, SEC and Federal Deposit Insurance Corp., invited public comment on its draft recommendations. The FSOC was created by the Dodd-Frank Act to address systemic risks in the wake of the 2008 financial crisis.

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