Law firm Dechert LLP posted a press release late last week entitled, "Dechert Submits Letter to Financial Stability Oversight Council Regarding Treasury Secretary Geithner's Proposed Agenda for the FSOC to Take Money Market Fund Actions, which said, "Thomas P. Vartanian, chair of Dechert LLP's Financial Institutions practice, has sent a letter to the Financial Stability Oversight Council (FSOC) in regard to Treasury Secretary Geithner's September 27, 2012 letter to members of the FSOC concerning recommendations for actions by the FSOC in regard to Money Market Funds (MMFs), including recommendations to the Securities and Exchange Commission (SEC) regarding reform of the MMF regulatory structure."
Vartanian commented, "The Secretary's proposal seeks to have the FSOC make recommendations to the SEC for MMF reform before it has established a fair process for considering and evaluating such recommendations and without addressing how the statutory requirements for consultation with the SEC, determining eligibility for a recommendation, conducting a comprehensive cost benefit analysis and considering public comments will be satisfied. We have asked the FSOC to act in a careful, deliberate manner in evaluating any possible recommendations to the SEC regarding changes in the regulatory structure for MMFs."
The press release added, "Dechert's letter discusses a series of issues that the FSOC must consider in connection with any potential MMF recommendation: What internal agency rules will define the FSOC's exercise of its section 120 authority to ensure the appropriateness of the process, and the absence of bias and predisposition of relevant issues? How can the FSOC conclude that MMFs come within its statutory purview over "nonbank financial companies" when the Board of Governors of the Federal Reserve System has not completed the necessary regulatory action under Dodd-Frank to define that term? Has the FSOC determined that MMFs are engaged in "financial activities" that pose the financial stability threat required under section 120? How will the FSOC consult with the SEC commissioners and key SEC staff who are most knowledgeable about how MMFs work and are regulated? What will be the parameters of the required analysis of the costs to long-term economic growth (Cost Benefit Analysis) associated with each proposed recommendation? How will the FSOC's notice and request for comment on any proposed recommendations address the requirements of the law, including the need for public comment on the Cost Benefit Analysis? How will the FSOC inform the public of its responses to the comments that it receives and of the basis for any final recommendations it may make to the SEC?"
Dechert's full 12-page letter says, "`On behalf of clients of this Firm that may be impacted by actions of the Financial Stability Oversight Council ("FSOC"), we are writing to request clarification of, and to comment upon, the Recommendation Letter (a copy of which is attached), which Secretary ofthe Treasury Timothy F. Geithner (the "Secretary") sent to his fellow members of the FSOC in his capacity as Chairman of the FSOC and released to the public."
They explain, "In the Recommendation Letter, the Secretary proposed an agenda for the FSOC in light of the announcement, in August, by the Chairman of the Securities and Exchange Commission ("SEC") that she would not ask the other SEC Commissioners to vote on an SEC staff proposal for structural reforms of money market funds ("MMFs") at that time. Among the actions that the Secretary proposed to his fellow FSOC members, he asked them to consider for the first time issuing a recommendation to a primary financial regulatory agency under section 120 of the Dodd-Frank Act ("DF A"), by which the FSOC would recommend that such agency (here, the SEC) fundamentally change the MMF regulatory regime."
Dechert adds, "The Recommendation Letter raises significant legal and regulatory issues of first impression for the FSOC regarding how it will, and must, conduct its business in a manner consistent with the law. Because this is a novel action by a nascent agency and because the potential consequences for the U.S. economy are so serious, the FSOC must establish processes that follow not only the statutory requirements but also administrative best practices that ensure the accountability and transparency that a recent Government Accountability Office ("GAO") report calls on the FSOC to provide."
In its "Conclusions," it writes, "There are no clear rules of engagement to guarantee transparency, fairness and accountability in this unprecedented action that the Secretary requests the FSOC to take under section 120 of the DFA. He has asked the FSOC to rush, by any standard of regulatory action, to endorse significant changes in the MMF industry, without first establishing the appropriate process to analyze transparently the purported need for and benefits of regulatory changes and the enormous impact such changes may have on the industry, financial system and U.S. economy. The Recommendation Letter does not call for the FSOC to establish internal agency rules that would serve as a template to ensure fair, appropriate and consistent evaluation of potential section 120 recommendations, nor has the FSOC established any internal agency rules or procedures to implement the express statutory requirements of section 120. On the contrary, the Recommendation Letter implies that the predicates for a section 120 recommendation regarding MMFs have already been satisfied. For the reasons set forth in this letter, we do not believe that is the case."
Later in the letter, Dechert explains, "FRB Governor Tarullo recently identified several reasons for the FSOC to proceed cautiously in regard to any MMF reform actions. In a speech on October 10, 2012, he observed that the SEC already has ample regulatory authority and is best positioned to address the systemic risk problems that MMFs may present. It should also be noted that the SEC's status as the primary and most appropriate regulator of MMFs has not changed simply because Chairman Schapiro could not persuade a bipartisan majority of her fellow Commissioners to support her proposed reform options, on her preferred timeline, without the benefit of the additional analysis that they requested."
They continue, "Regarding the SEC's primary role, Governor Tarullo also noted that Congress considered and rejected giving the FSOC the power to override agency action or inaction regarding systemic financial stability. In his opinion, the actions that Congress authorized the FSOC to take, including making recommendations under section 120, are a "decidedly second-best alternative" to action by the SEC. He observed that "[t]he protective tools available to the Council do not fit the problem precisely and thus will not regulate at the least cost to the [MMFs] while still mitigating financial risk." Governor Tarullo also noted in his speech that there is little academic, administrative, legislative, or judicial analysis of how financial stability is defined, not to mention threatened, and no official consensus on the subject."
Finally, Dechert writes, "How the FSOC as a body and its individual members respond to the Recommendation Letter and the administrative record that they create to support any recommendation under section 120 will establish important precedents for how the FSOC exercises its authority over a wide range of issues going forward. The large role that MMFs play in the U.S. economy only raises the stakes and adds a further imperative for the FSOC to consider carefully the need to act and the effects of its actions. A failure by the FSOC and its members to adhere to appropriate legal, administrative and substantive standards of decision-making could expose the recommendation process to numerous potential challenges, which would only confuse the marketplace and delay the implementation of appropriate policies. We appreciate your and the FSOC's consideration of the points contained in this letter as the FSOC evaluates potential actions with respect to MMF reform. Please feel free to contact us if you would like to discuss any of the issues that we have raised."
