Mutual fund industry publication ignites.com and Bloomberg both reported Friday on comment letters submitted to the new Financial Stability Oversight Council in response to the FSOC's "Advance Notice of Proposed Rulemaking Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies." In ignites' "Big Guns to Feds: Don't Tread on Money Funds" and Bloomberg's "Mutual Funds Seek to Avoid Risk Supervision by Fed", fund managers and the ICI argue that money market mutual funds should not be "designate[d] nonbank financial companies for enhanced supervision" under the Dodd-Frank Act. (See Crane Data's Oct. 7 "Link of the Day".)

Ignites says, "Fidelity, Vanguard and Federated are going on the offensive to ensure money market funds are not designated as products that pose a potential systemic risk to the economy. The fund giants submitted comments to the Financial Stability Oversight Council acknowledging the importance of money market funds as a source of liquidity and financing for the wider economy, but insist that the funds are nowhere near posing a systemic risk. The council is the product of the Dodd-Frank Act and is charged with determining if individual nonbank financial firms pose a systemic risk. It has the power to recommend new regulations for entities it deems to pose a risk."

The Bloomberg piece explains, "Mutual funds pose little threat to the U.S. financial system and should remain beyond the reach of Federal Reserve oversight, the firms's lobbying group said. It quotes an ICI letter, "Many characteristics of funds -- including their simple capital structure, limited used of leverage and comprehensive regulatory scheme -- put funds at the 'less risky' end of the spectrum when considering the potential for systemic risk'."

ICI's comment letter continues, "In this advance notice of proposed rulemaking, the Financial Stability Oversight Council requests information to assist in its development of 'the specific criteria and analytical framework by which it will designate nonbank financial companies for enhanced supervision' pursuant to Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FSOC's ability to determine that an individual company poses potential risk to the entire U.S. financial system -- and the regulatory oversight and heightened standards that would flow from that determination -- is an extraordinarily potent legal authority powerful tool, and one that should be used with great care. ICI believes that the designation of individual companies for heightened supervision should be reserved for those circumstances, presumably quite limited, when the FSOC has determined that a specific company poses significant risks to the financial system that clearly cannot otherwise be adequately addressed through enhancements to existing financial regulation and/or other regulatory authorities provided by the Dodd-Frank Act."

A footnote in the ICI letter adds, "Money market funds have been subject to heightened regulatory attention following the market crisis. In January 2010, the SEC issued comprehensive rules designed to strengthen these funds by, among other things, adding strong liquidity buffers, improving credit quality, shortening the average maturity limits of the funds' portfolios, mandating periodic stress tests, and increasing the information reported to fund shareholders and the SEC. The President's Working Group on Financial Markets recently issued a report on Money Market Fund Reform Options, requesting that the FSOC consider the options discussed in the Report. We agree that the FSOC should examine possible structural reforms to the way money market funds operate, as outlined in the PWG Report. To assist the FSOC in its analysis, the SEC, as the regulator of money market funds, was tasked with soliciting public comments. ICI's comment letter to the SEC will include a detailed discussion of money market funds and the options outlined in the PWG Report."

Vanguard's comment letter says, "We believe [recent SEC and other] changes strike the appropriate balance between allowing money market funds to continue to finance the short-term needs of private and public borrowers and mitigating any one fund's systemic risk. To the extent the Council has any remaining concerns with respect to money market funds, we believe they should be addressed by the options in the PWG Report, and not through the Council's authority to designate financial companies for further supervision by the Board.... In conclusion, we urge the Council to focus its efforts on overseeing only those entities that pose the greatest systemic risk to our markets. It is impossible and unwise to attempt to eliminate all risk from our financial system. Efforts to identify any entity that could impose any degree of systemic risk will be overwhelming and fruitless, and could cause the Council to miss the next systemically risky actor that threatens the markets."

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