On Tuesday, Treasury Secretary Geithner presided over an open session of the Financial Stability Oversight Council (FSOC), which voted on a "final rule and interpretive guidance on the Council's authority to require supervision and regulation of certain nonbank financial companies." While we likely won't know until late this year whether money funds, or just some (perhaps $50 billion plus) money funds, may be classified as SIFIs (systematically important financial institutions), our reading is that the latest guidance has lowered the odds of this happening slightly. The "final rule and interpretive guidance" is entitled, "Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies."

It says, "Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") authorizes the Financial Stability Oversight Council (the "Council") to determine that a nonbank financial company shall be supervised by the Board of Governors of the Federal Reserve System (the "Board of Governors") and shall be subject to prudential standards, in accordance with Title I of the Dodd-Frank Act, if the Council determines that material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company, could pose a threat to the financial stability of the United States. This final rule and the interpretive guidance attached as an appendix thereto describe the manner in which the Council intends to apply the statutory standards and considerations, and the processes and procedures that the Council intends to follow, in making determinations under section 113 of the Dodd-Frank Act."

The rules' "Background" explains, "Section 111 of the Dodd-Frank Act (12 U.S.C. 5321) established the Financial Stability Oversight Council. Among the purposes of the Council under section 112 of the Dodd-Frank Act (12 U.S.C. 5322) are "(A) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (B) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and (C) to respond to emerging threats to the stability of the United States financial system."

It adds, "In the recent financial crisis, financial distress at certain nonbank financial companies contributed to a broad seizing up of financial markets and stress at other financial firms. Many of these nonbank financial companies were not subject to the type of regulation and consolidated supervision applied to bank holding companies, nor were there effective mechanisms in place to resolve the largest and most interconnected of these nonbank financial companies without causing further instability. To address any potential risks to U.S. financial stability posed by these companies, the Dodd-Frank Act authorizes the Council to determine that certain nonbank financial companies will be subject to supervision by the Board of Governors and prudential standards. The Board of Governors is responsible for establishing the prudential standards that will be applicable, under section 165 of the Dodd-Frank Act, to nonbank financial companies subject to a Council determination. Title I of the Dodd-Frank Act defines a "nonbank financial company" as a domestic or foreign company that is "predominantly engaged in financial activities," other than bank holding companies and certain other types of firms."

The rule explains, "The Council issued an advance notice of proposed rulemaking (the "ANPR") on October 6, 2010 (75 FR 61653), in which it requested public comment.... Commenters representing the asset management industry contended that asset managers are unlikely to pose a threat to U.S. financial stability, and some noted that the legal distinction between investment advisers and the funds they manage make the prudential standards contemplated by section 165 of the Dodd-Frank Act an inappropriate mechanism for addressing any threat posed by such firms. Others commented on behalf of financial guaranty insurers, captive finance companies, money market funds, and the Federal Home Loan Banks."

It continues, "Pursuant to the provisions of the Dodd-Frank Act, the Council is required to consider the following statutory considerations when evaluating whether to make this determination with respect to a nonbank financial company: (A) The extent of the leverage of the company; (B) The extent and nature of the off–balance-sheet exposures of the company; (C) The extent and nature of the transactions and relationships of the company with other significant nonbank financial companies and significant bank holding companies; (D) The importance of the company as a source of credit for households, businesses, and State and local governments and as a source of liquidity for the U.S. financial system; (E) The importance of the company as a source of credit for low-income, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities; (F) The extent to which assets are managed rather than owned by the company, and the extent to which ownership of assets under management is diffuse; (G) The nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the company; (H) The degree to which the company is already regulated by one or more primary financial regulatory agencies; (I) The amount and nature of the financial assets of the company; (J) The amount and types of the liabilities of the company, including the degree of reliance on short-term funding; and (K) Any other risk-related factors that the Council deems appropriate."

The FSOC says of its three-stage process, "The first stage of the process ("Stage 1") is designed to narrow the universe of nonbank financial companies to a smaller set of nonbank financial companies. In Stage 1, the Council intends to evaluate nonbank financial companies by applying uniform quantitative thresholds that are broadly applicable across the financial sector to a large group of nonbank financial companies. These Stage 1 thresholds represent the framework categories that are more readily quantified: size, interconnectedness, leverage, and liquidity risk and maturity mismatch. A nonbank financial company would be subject to additional review if it meets both the size threshold and any one of the other quantitative thresholds.... In Stage 1, the Council intends to apply six quantitative thresholds to a broad group of nonbank financial companies. The thresholds are -- $50 billion in total consolidated assets."

While there are a number of factors and criteria, there are only seven money fund portfolios currently with over $50 billion in assets. These include: JPMorgan Prime MM Capital (CJPXX, $120.2B), Fidelity Cash Reserves (FDRXX, $116.6B), Vanguard Prime MMF (VMMXX, $113.7B), JPMorgan US Govt MM Capital (OGVXX, $64.5B), Fidelity Instit MM: MM Port Inst (FNSXX, $58.1B), Fidelity Instit MM: Prime MMP Inst (FIPXX, $56.3B), and Federated Prime ObIigations IS (POIXX, $51.6B).

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