June 11, 2023

DealBook: Geithner Urges an Overhaul of Rules on Money Market Funds

Treasury Secretary Timothy F. Geithner on Thursday urged the regulatory team that he leads to push ahead with new rules aimed at America’s money market funds, which manage $2.6 trillion.

In a letter to the Financial Stability Oversight Council, a special committee of senior regulators set up after the 2008 financial crisis, Mr. Geithner said the changes were “essential for financial stability.”

The Securities and Exchange Commission, which is the primary regulator for money market funds, had proposed the main changes favored by Mr. Geithner in his letter.

But the commission dropped its attempt at a money market fund overhaul last month after it become clear that a majority of its commissioners were not going to vote for the measures. Large mutual fund companies fiercely opposed the reforms, saying they were unnecessary and could harm a type of investment fund that had proved to be popular.

“You can be sure that the firms on the receiving end won’t take this passively,” said Jay G. Baris, a lawyer at Morrison Foerster, which represents money market funds.

During the 2008 crisis, investors fled money market funds in droves, which worsened the credit freeze that gripped the banking system. Money funds then received a big bailout from the Treasury and the Federal Reserve.

Before the passage of the Dodd-Frank Act, attempts to make changes to the money market fund industry would most likely have died after the commission dropped them. But the Financial Stability Oversight Council, set up by the Dodd-Frank financial overhaul legislation, can choose to take over from the commission.

Mr. Geithner lays out a number of ways in which the council, which meets Friday, can act.

In his letter, he urges the council to gather public comments on a range of reforms and then make a final overhaul recommendation to the Securities and Exchange Commission. The commission would be required to adopt those changes, or explain why it did not. Mr. Geithner said the council’s staff was already working on recommendations and he hoped they would be considered at the council’s November meeting.

The recommendation would include two changes supported by the commission. One would require money market funds to hold loss buffers. The other would end the money market funds’ practice of valuing investors’ shares at $1 even when the funds’ assets should reflect a value slightly below $1.

Mr. Geithner said in his letter that, while the S.E.C. is best positioned to regulate money market funds, the Financial Stability Oversight Council could move forward without waiting for the commission. The council, he wrote, could designate certain money market fund entities as systemically important and subject those firms to regulation by the Federal Reserve, which could then impose an overhaul.

Mr. Baris, the lawyer, said that a designating a money market fund as systemically important could make it hard for it to stay in business. “Who would want to invest in a fund that has been designated by the federal government in this manner?” he said. “It will drive investors away.” Mr. Baris said he believed that Mr. Geithner might face resistance on the council if any new rules single out specific money market funds.

In addition, the council could designate money market fund activities as critical to the working of the financial system’s plumbing. That would allow regulators to impose heightened risk management standards on money market funds.

Mr. Geithner wrote that without the changes, “our financial system will remain vulnerable to runs and instability.”

If the council acts, the mutual fund industry will almost certainly fight back. The industry’s lawyers will most likely contest the council’s interpretation of Dodd-Frank and perhaps even the council’s authority to act.

Geithner Letter to FSOC

Article source: http://dealbook.nytimes.com/2012/09/27/geithner-urges-changes-to-strengthen-mutual-funds/?partner=rss&emc=rss

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