The first comment letter to be posted on the SEC's newly redesigned website and the latest Comment posted on the "President's Working Group Report on Money Market Fund Reform" page is another stemwinder from Arnold Porter's John Hawke. He writes in his letter, "Enclosed is a copy of comments we submitted on behalf of our client, Federated Investors, to the Board of Governors of the Federal Reserve on the Board's proposal to adopt new Regulation YY ("Enhanced Prudential Standards and Early Remediation Requirements for Covered Companies"). As you are aware, we believe that designation of money market mutual funds as systemically significant, and subjecting them to bank-type supervision, would be inappropriate and could have serious adverse consequences."
Hawke continues, "As we have outlined in the attached comment letter, the Commission's robust regulation and oversight of money funds has been very successful. The Commission's 2010 amendments to its rules governing money funds have made them even more liquid, transparent and stable than ever before. Indeed, money funds were able to meet shareholder requests for redemptions during recent periods of significant turmoil. Under these circumstances, requiring a money fund to comply with an additional body of regulations, especially regulations that are premised on banking industry models, is simply not warranted. In any event, as we have noted before, the standards that would be applied to systemically important firms under proposed Regulation YY are not appropriate for money funds."
The attached extensive (162 page) comment letter to the Fed explains, "Federated, as a participant in the money markets and a sponsor of the Federated Money Funds, and the Federated Money Funds themselves, are interested in many of the details of the NPR and related rulemakings. We are concerned that certain aspects of Titles I and II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the implementing rules, and the way they will be interpreted and applied, will increase uncertainty, risk and volatility in the money markets and other fixed income markets, particularly in times of crisis. For instance, as we have stated in prior comment letters, we believe the process for designation of firms for Board oversight by the Financial Stability Oversight Council, should include formal consideration of the effects of a particular designation throughout the economy and the financial system. This would help to ensure that efforts to constrain risks in one firm do not simply shift risk to other parts of the financial system where the exposure of taxpayers and the financial system may be larger and more direct. Similarly, we are concerned that certain proposed rules and guidelines may be used inappropriately to designate Money Funds under Title I, which would harm not only Money Funds but the persons who use them, with many unintended consequences across the economy."
It says, "Here, while the NPR recognizes that the rules the Board must apply to designated non-banking firms must be tailored to the types of business activities in which such firms engage, it nonetheless proposes to apply bank-type regulations to any company that is designated for supervision by the FSOC, whether or not the company is a bank, and regardless of its business, structure, regulatory oversight, or the types of services that it offers. But shoehorning different types of financial firms into a single regulatory model will have negative consequences. As applied to a Money Fund, these would include potentially weakening a crucial source of short-term funding, disrupting capital markets operations, and actually increasing systemic risk, all in contravention of Congressional intent."
Hawke writes, "Money Funds are subject to robust regulation by the SEC, which has an excellent record in its oversight of Money Funds and a superior track record in this area in comparison to bank-type regulation or receivership by the Federal Deposit Insurance Corporation. Further, the receivership process created by Title II of the DFA is inappropriate for Money Funds, which rely on equity, rather than debt financing, are essentially self liquidating by the nature of their assets, and are already covered by existing regulatory and judicial protocols when necessary for a prompt and efficient wind-down. Thus, FDIC wind-down procedures and banking supervision are inappropriate for Money Funds. As the Board is aware, Section 170 of the DFA dictates that in connection with Council rules implementing Title I, the Board "shall promulgate regulations in consultation with and on behalf of the Council setting forth the criteria for exempting certain types or classes of U.S. nonbank financial companies ... from supervision by the" Board. Contrary to a recent statement by the FSOC, Section 170 is not merely a grant of authority, it is a specific rulemaking requirement that the exemptive rules shall be promulgated. The Section 170 exemption criteria the Board must adopt should make clear to investors and the public that Money Funds will not be designated for Board supervision under Title I of DFA or FDIC receivership under Title II."
He adds, "In fact, it is doubtful that any open-end investment company (e.g. a mutual fund), including a Money Fund, is within the definition of a "nonbank financial company" that is subject to designation under Title I or Title II of the DFA.... Thus, mutual funds are not "nonbank financial companies" for purposes of Title I of Dodd Frank. The Board cannot have it both ways. If Sections 4(c)(8) and 4(k) do not authorize a bank holding company to engage in the activity of being or controlling a mutual fund, then a mutual fund cannot be a nonbank financial company within the meaning of Title I."
The letter continues, "To the extent that the Council and the Board were to consider applying Titles I and II to them, Money Funds should be excluded from designation because they are already subject to rules and regulations that address the concerns that underlie each of the rules that the NPR proposes. Thus, even if the FSOC designates any Money Funds for supervision by the Board, the regulations proposed by the NPR would be ill-suited to Money Fund supervision, and at the least, duplicative. In this regard, the NPR does not demonstrate adequate consideration of the collateral consequences of applying duplicative rules to entities that are already subject to regulations that address their stability. Nor does its scanty discussion of compliance burdens differentiate among types of financial service companies -- again reflecting a one-size-fits-all approach toward regulation."
Hawke adds, "Finally, and aside from the issues associated with their application to Money Funds, the proposed rules should be revised to permit designated firms to meet asset liquidity standards with additional types of instruments. Specifically, owing to their long history of stability and the fact that they are a pass-through for U.S. government securities, and because they are "a type of asset that investors historically have purchased in periods of financial market distress during which market liquidity is impaired," we suggest that government money market funds (money market funds that invest exclusively in securities issued by the United States, including those subject to repurchase agreements), be added to the definition of "highly liquid asset" in each of the proposed rules where that term is defined."
The letter concludes, "Regulation of Money Funds under the securities laws and regulations has been far more effective than banking regulation. In the past 40 years only two Money Funds have broken the buck, and both were liquidated with relatively minimal losses to investors on a percentage basis and zero cost to the federal government. During that same period, almost 2,900 depository institutions failed, and almost 600 were kept afloat with government infusions of capital, at a cost to the government of more than $188 billion. There is nothing in the historical record to suggest that imposing "bank like" regulatory requirements on Money Funds will make Money Funds, or the American economy, safer. The prudent course, in our view, is to continue to build upon what has worked and to continue the current system of regulation of Money Funds under the supervision of the SEC."
