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Financial Stability Oversight Council may intervene in SEC debate over money-market rules

Mary Schapiro

Internal disagreements at the SEC could force other federal agencies to intervene in the debate over stricter rules for the money-market fund industry.

Should the agency be unable to reach an agreement, the Financial Stability Oversight Council, a Dodd-Frank agency designed to monitor risks to the U.S. financial system, could decide to label money funds as “systemically important.” This move would put pressure on the SEC to come to an agreement on the new rules, according to the San Francisco Chronicle.

Karen Shaw Petrou, a co-founder and managing partner at Federal Financial Analytics, Inc., said that the FSOC would intervene soon if the SEC cannot overcome internal divisions.

“I expect the FSOC to declare money-market funds” as systemically significant “if it becomes clear the SEC cannot act,” Petrou said, the San Francisco Chronicle reports. “And I expect them to do so by the summer.”

SEC Chairwoman Mary Schapiro has tried unsuccessfully to convince her colleagues that more restrictive rules on the money-market industry are necessary, warning that failure to impose the rules could harm the U.S. economy.

Federal Reserve officials in particular have put increasing pressure on the SEC to make a move. Chairman Ben Bernanke also advocated imposing stricter regulations on the money-market industry, saying that “steps to increase the resiliency of money-market funds are important for the overall stability of our financial system,” according to the San Francisco Chronicle.

U.S. money funds at present hold a total $2.56 trillion in assets. In 2010, the SEC adopted rules that set liquidity minimums, new disclosures and average maturity limits. Another option included changing the traditional $1 share price, a price that critics say makes money funds more vulnerable to runs similar to those in 2008.

Commissioner Luis Aguilar is undecided and is noted as the swing vote necessary for Schapiro to attain the majority needed to issue a rule for public comment. Opposition to added money-market fund regulation is also preventing the SEC from coming to an agreement.

If the FSOC does intervene, the council may designate money-market activities as “systemically important” or designate individual money funds as systemic risks, according to the San Francisco Chronicle.

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