While the SEC's Norm Champ declined to say much on money market mutual funds at Monday's "Mutual Funds and Investment Management Conference" in Palm Desert, the Investment Company Institute's Karrie McMillan did address the topic at length. In her opening speech, entitled, "Regulatory Climate Change and the New Environment for Funds," McMillan says, "We can also see how high the stakes are in another area marked by shifting regulatory patterns: money market funds. As you know, last summer, the SEC staff were working on set of proposals for structural reform. A bipartisan majority of SEC Commissioners, however, declined to support making those proposals. One reason for their resistance -- a highly commendable reason in my view -- was that the SEC, simply put, hadn't laid the groundwork for the staff's proposals. Namely, they felt that there hadn't been enough study of the impact of the comprehensive reforms for money market funds that the SEC had adopted in 2010. As Commissioner Aguilar said at the time, "This critical analysis must precede any proposals to further amend our rules.""

She continues, "At this point, shifting regulatory patterns became apparent when then-Chairman Schapiro got the newly-created Financial Stability Oversight Council (FSOC) engaged on the issue of money market funds. Her thinking, as she's said recently, was that "otherwise it would have died at the SEC." At ICI, we viewed this handoff to FSOC with deep concern, and we still do. For one, we never thought the issue was going to "die at the SEC" -- and indeed, it has not. Last November, the agency's Division of Risk, Strategy, and Financial Innovation released an economic study that was a thorough and dispassionate examination of what happened with money market funds during 2008, as well as the effectiveness of the 2010 reforms. We commend that study and hope to see more like it in other complicated rulemakings."

McMillan tells us, "A second concern with the FSOC intervention: as the regulator of mutual funds, the SEC is far and away the most appropriate agency in Washington to evaluate additional money market fund reforms. It has the strong expertise. It has the seven-plus decades of experience. Yet the FSOC's actions, taken despite the RiskFin's study, seemed calculated to undermine the SEC's role, its independence, and the democratic process at the heart of its approach to rulemaking. As a group of former SEC commissioners and senior staff recently wrote to FSOC, the Council's intervention "could disrupt the long-standing collaborative nature of the [SEC's] deliberative processes.""

She adds, "Finally, consider the substance of the FSOC's recommendations. The Council put forth last November the very same concepts that the majority of SEC commissioners had declined to support just three months prior. More recently, we've seen SEC reassert its authority over money market funds, which we welcome. The shifting regulatory patterns that led to money market funds getting tangled up in the FSOC process, however, remain something I think we should stay wary of."

McMillan also comments, "[W]e've seen the increasing clout of a new class of global super-regulators like the Financial Stability Board (FSB), headquartered in Basel, and the Madrid-based International Organization of Securities Commissions (IOSCO). It's clear by now that these super-regulators are not just comparing and contrasting existing regulatory regimes -- or making vague pronouncements that can be safely ignored. Even if your business is focused only on the U.S. market, you need to pay attention to what they're doing."

She explains, "The broadest of these global issues, of course, is systemic risk. The Lehman Brothers failure illustrated the need to pay closer attention to the interconnected aspect of global markets. Ferreting out and mitigating systemic risk has now become a guiding principle of global regulation. This search has led, for example, to heightened scrutiny of so-called "shadow banking." Now, if the phrase "shadow banking" sounds pejorative to you, that's because it is pejorative. Nonetheless, this is the mindset of many super-regulators who, like the FSOC, are largely made up of banking regulators and thus naturally tend to look at things through the prism of what they know best: banking regulation."

Finally, she adds, "Remember, the financial crisis was at its origin a banking and real estate crisis. I can't help but recall a comment that former Federal Reserve Chairman Paul Volcker made at an SEC roundtable on money market funds two years ago. He was suggesting, essentially, that the 650 U.S. money market funds should be turned into banks. He said, "This country could use 650 more banks. We just lost about 1,000 during the crisis!" That kind of thinking, in our view, is deeply flawed. Moving more financial activity into the banking system will concentrate risks and make the financial system more vulnerable, not less."

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