The sparring about the money fund industry is far from over. The Financial Stability Oversight Committee (FSOC) is about to enter the fray. Regulators are not satisfied with the SEC’s dropping the matter last week because of lack of support from commissioners.
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The FSOC’s creation is a mandate by the Dodd Frank Act. After the SEC stopped pursuing additional regulations for the mutual fund industry last week, there seemed to be two paths the FSOC could take. Neither was without some type of drawback.
One of those options was to designate money market fund companies and individual funds as systematically significant. This would have effectively moved money fund oversight from the SEC to the Federal Reserve.
The other option was to state that activity in general by money funds posed a risk to the financial system. This approach would trigger other steps laid out by Dodd Frank that would lead oversight back to the SEC.
But a third option has been identified that may overcome the drawbacks of the other two. There’s a section of Dodd Frank called Title VIII that focuses on the inner workings of the financial system. These inner workings involve activities like processing transactions and organizing financial payments.
Utilizing this third option would involve a two-step process. First, an activity or feature of money funds would have to be titled as a systematic utility function. Second, reforms would be proposed to support that function.
For example, the stable net asset value of money funds could be declared as systematic by the FSOC. This would open the door to the requirement that funds hold capital.
This would keep oversight of the funds in the hands of the SEC. It would also avoid some type of stalemate on money fund regulation. With this option, however, the money fund industry
could make the claim that money funds are not part of the payment functions of the financial system.