Risk Council Led by Lew Hears SEC Update on Money Fund Rules

The Financial Stability Oversight Council, led by new Treasury Secretary Jacob J. Lew, met today in Washington and heard an update from the Securities and Exchange Commission on possible changes to rules governing money-market mutual funds.

Lew, who was sworn into office at the White House earlier today, also presided over a discussion on non-bank financial companies, which could be designated systemically important and subject to Federal Reserve oversight, Treasury spokeswoman Suzanne Elio said in a statement.

The council, created by the Dodd-Frank law to prevent another financial crisis, “has made significant progress to promote market stability by taking actions to issue rules, identify risks and increase oversight,” Lew said at the meeting.

As Treasury secretary, Lew heads the council, which also includes the chairmen of the Fed, SEC and Federal Deposit Insurance Corp. The panel, known as FSOC, missed former Treasury Secretary Timothy F. Geithner’s target of designating some non-bank financial companies as systemically important by the end of 2012.

American International Group Inc., Prudential Financial Inc. and General Electric Co.’s finance unit have been under review to be designated. Companies branded systemically important are considered a potential risk to the financial system and will be subject to Fed supervision.

Draft Rules

SEC staff members are preparing a draft of proposed new rules for the $2.7 trillion money-market fund industry. The agency is being pressed to revisit the issue by the oversight council six months after a majority of commissioners rejected a reform plan backed by former SEC Chairman Mary Schapiro. Three commissioners said in August they wanted to see more study on the impact of rules changes introduced in 2010.

Regulators have been working to tighten oversight of money funds since the September 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, because it owned debt issued by Lehman Brothers Holdings Inc., set off a wider run by money-fund investors that helped freeze global credit markets.

The largest money-fund providers, including Boston-based Fidelity Investments and Pittsburgh’s Federated Investors Inc., have resisted additional regulation, saying Schapiro’s plan and rules recommended by the FSOC in November would destroy the appeal of money funds to investors and deny companies and municipal borrowers a critical supply of short-term funding.

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