Several new comment letters have been posted on www.regulations.gov, the website where feedback letters on the `Financial Stability Oversight Council's Proposed Recommendations Regarding Money Market Mutual Fund Reform. Among the latest batch is a "Comment from Arnold & Porter LLP on behalf of Federated Investors." Written by John Hawkes, it says, "We are writing on behalf of our client, `Federated Investors, Inc. and its subsidiaries, to provide initial comments in response to the Financial Stability Oversight Council's recently issued Proposed Recommendations Regarding Money Market Mutual Fund Reform. The Release is issued pursuant to Section 120 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the Council, subject to specified criteria and conditions, to issue recommendations to a primary financial regulatory agency to apply new or heightened standards or safeguards. Federated plans to submit detailed comments and data on the Proposed Recommendations in the coming weeks."
Hawke explains, "As discussed below, the Council should not issue the Proposed Recommendations, for the following reasons: (1) Section 120 of Dodd-Frank should not be invoked arbitrarily where an agency is continuing to consider regulatory reforms, simply because the agency's chair is unable to prevail on a particular approach at a particular time. The legitimate concerns raised by a majority of members of the SEC -- an agency bound by statute and its own administrative procedures to consider and assess the economic consequences of any regulatory action -- should have been respected by the Council. (2) In issuing the Release, the Council failed to consider overwhelming public comments that raised substantial concerns about the costs and effectiveness of the very proposals -- a floating net asset value ("NAV"), minimum balance at risk, and capital requirement -- that the Council is putting forward. At minimum, the Release should have addressed those comments, which it did not."
The reasons continue, "(3) The Release fails to meet Dodd-Frank and SEC statutory and other criteria for economic analysis. It omits any recognition or assessment of significant economic costs that were raised in surveys, analyses and reports in the SEC's public comment file. The benefits identified by the Release are purely speculative and contrary to the data, surveys and reports in the SEC's file, and the Release admits that the proposed reforms would not prevent runs during a financial crisis. (4) The Release fails to consider the impact of the proposals in shrinking MMF assets and leading to further growth of the largest systemically important banks and expansion of the federal safety net.... (7) Bank regulators' inconsistent treatment of bank short term investment funds demonstrates a lack of understanding by the Council of the factors affecting MMF stability. (8) The Release fails to recommend workable reforms that would enhance, rather than harm, MMFs and their investors and has failed to address the need for actions by regulators other than the SEC to address identified systemic risks. The Council should focus on reforms mandated by Congress that are directly relevant to mitigating or preventing future financial crises."
Hawke's letter for Federated also says in a section, "The Council Should Not Use the Dodd-Frank Section 120 Process at this Time for this Purpose," "The Council issued the Release because the Chair of the SEC was unable to obtain support from three members of the SEC, a majority, for a draft rulemaking release proposing significant structural changes to MMFs, prepared by the SEC staff at the Chairman's direction. The Commissioners had access to an extensive docket containing hundreds of individually distinct comment letters, reports, surveys, articles, and other materials filed by a range of MMF users, market participants, government officials and academics. These comments were filed over a two-year period in response to the SEC's request for comment on the 2010 Report of the President's Working Group on MMF Reform Options, and, during the past year, in response to public statements made by the SEC Chair in which she outlined what she believed a formal rule proposal would include."
He continues, "Based upon their review of the docket and their analyses of the staff draft proposals, three Commissioners issued statements on August 23 (Commissioner Aguilar) and August 28 (Commissioners Gallagher and Paredes) stating their views that the staff draft proposals lacked sufficient foundation; specifically, the draft proposals "were not supported by the requisite data and analysis, were unlikely to be effective in achieving their primary purpose, and would impose significant costs on issuers and investors while potentially introducing new risks into the nation's financial system." The Commissioners' statements called for additional study and analysis but in no way ruled out further MMF reforms. In fact, the statements reflected an intention by the majority of the SEC to "do better" than the staff draft in addressing MMF regulation."
The letter adds, "The Council's Release acknowledges that "[t]he SEC by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risks that MMFs present to the economy." The SEC also is subject to statutory requirements that it consider the effects of any regulations on efficiency, competition, and capital formation, and must comply with its own mandatory requirements to assess the economic consequences of any rule before even proposing it. Yet, the Council invoked Section 120 in an attempt to pressure the SEC to move forward on the very proposals that a majority of the SEC found unsupported by data or sound economic analysis and potentially risky to the financial system. While the Chair of the SEC has the ability to set the agency's agenda, each member of the SEC (1) is appointed by the President, (2) is confirmed by the Senate, and (3) has an equal vote and an equal responsibility not to put forward regulatory proposals that he or she believes ineffective in achieving their purpose and costly and potentially risky to investors."
Hawkes continues, "We do not believe Congress intended the Section 120 process to be used arbitrarily and in disregard for agency processes, in circumstances where an agency is continuing to grapple with a regulatory issue under its direct jurisdiction, simply because the agency's chair is unable to prevail on a particular approach at a particular time. The Release threatens other actions by the Council -- including actions that exceed the Council's authority under Dodd-Frank -- in the event the SEC fails to move forward with reforms satisfactory to the Council. For these reasons, the Release violates both the letter and intent of the relevant provisions of Dodd-Frank."
He writes under, "The Floating NAV Proposal Would Not Enhance the Stability of MMFs, But Would Cause MMFs to Shrink," "Hundreds of comment letters addressed the question of whether MMFs should be required to sell and redeem shares based on a floating NAV. Surveys and other comments provided evidence that the vast majority of investors understand that MMFs may lose value, are not insured, and that the underlying assets may deviate from $1.00 per share. MMFs publish their "shadow" NAV as a regular benchmark, and it is not credible to suggest that investors are misinformed or that a floating NAV would better inform them of MMF risks. Comment letters explained that many instruments in a MMF portfolio cannot be "marked-to-market" in any event, and therefore to promote a floating NAV as a true mark-to-market price is misleading."
Hawke tells FSOC, "Most important, the evidence is clear that requiring MMFs to use a floating NAV would not advance the regulatory goal of reducing or eliminating "runs" in a crisis. Data from floating NAV funds and ultra short bond funds during the recent financial crisis confirm this conclusion. The Council in its Release, as well as the Federal Reserve Bank of New York in a recent staff report, acknowledge this."
He writes, "Congress in Dodd-Frank did not direct regulators to take action regarding MMFs, but it did direct the Federal Reserve "[a]s soon as practicable" after the date of enactment, to establish, by regulation and in consultation with the Secretary of the Treasury, policies and procedures governing emergency lending for the purpose of providing liquidity to the financial system. Two-and-one-half years after Congress gave the Federal Reserve and the Secretary of the Treasury this mandate, no rules have been proposed. Instead, the Federal Reserve and the Secretary of the Treasury are advocating the imposition of capital and other requirements on MMFs that the Council, in its Release, admits would not staunch a run in a crisis <b:>. Instead of using its Section 120 authority arbitrarily to pressure the SEC to adopt these unsupported and ineffective proposals, the Council should address authorities of other financial regulators who have failed to take steps mandated by Congress that are directly relevant to mitigating or preventing future financial crises. `We urge all members of the Council to give serious thought to these matters and to incorporate appropriate data and rigorous economic analysis before proceeding with the Proposed Recommendations."
