The latest addition to the SEC's "Comments on Proposed Rule: Money Market Fund Reform" is a paper entitled, "Meddling in money market funds," written by former Federal Reserve counsel Melanie Fein. She writes, "This paper questions why twelve Federal Reserve Bank presidents have interposed themselves in a rulemaking by the Securities and Exchange Commission concerning money market funds. The Reserve Bank presidents recently submitted a joint letter urging the SEC to prohibit MMFs from pricing their shares at $1.00 per share and to require them to reflect infinitesimal fluctuations in net asset value in their share price. Numerous other letters to the SEC argue that such action would destroy the utility of MMFs and unnecessarily deprive investors of an efficient investment product while potentially increasing financial instability and systemic risk."

Fein explains, "The Reserve Banks have no jurisdiction over money market funds, no collective expertise in their operations, and no experience regulating them. The Reserve Banks have done seemingly little to advance the outstanding agenda of bank regulatory reforms mandated by the Dodd-Frank Act to address the causes of the 2008 financial crisis. It thus is curious why they have made money market funds a cause celebre when so many critical areas of banking supervision require their attention. Equally curious is why they have advocated changes in MMFs that are greatly at odds with informed views of investors, industry experts, and academic economists."

She continues, "This paper examines the substance of the Reserve Bank letter and concludes that it reflects a flawed view of the causes of financial crisis and current threats to financial stability. This paper also suggests that the Reserve Bank presidents may have ulterior motives unrelated to legitimate financial stability concerns. Among other things, they may be seeking to invent a new role for themselves as their relevance in the financial system declines when they should instead be focusing their joint advocacy efforts on bank compliance and supervisory issues. As far as the public record shows, the Reserve Banks have not submitted any written recommendations to the Federal Reserve Board of Governors for action in critical bank regulatory reform areas, either singly or as a group. Their reticence is striking compared to their highly publicized demands that the SEC adopt radical changes to MMFs."

Fein adds, "The Reserve Banks have an important role to play in their designated sphere within the financial system. Whether twelve of them are needed for that role is unclear. What is clear is that their sphere is not MMFs and that twelve of them are not needed to advise the SEC on how it should regulate MMFs. Rather than lobby the SEC to resolve what in reality are bank financial stability issues, the Reserve Bank presidents should focus their collaborative efforts on encouraging the Board of Governors to complete its unfinished agenda of bank supervisory reforms mandated by the Dodd-Frank Act."

She writes in her Introduction, "Among the many letters submitted to the Securities and Exchange Commission in response to its invitation for comment on potential regulatory changes for money market funds, only a handful supported eliminating the stable net asset value of $1.00 per share. Among these was a letter from the presidents of the twelve Federal Reserve Banks. In addition to supporting a "floating" NAV for all MMFs, which the vast majority of other commenters said would destroy the utility of MMFs and not prevent runs, the Reserve Bank presidents opposed the SEC's proposal to allow MMFs to temporarily suspend redemptions in a crisis, which many commenters said is the only way to stop a run in the rare event one should occur."

Her Conclusion states, "The core duties of the Federal Reserve Banks in check clearing, banking supervision, and monetary policy have diminished in recent years. The Reserve Banks appear to be looking for other areas to take up the slack. The regulation of money market funds is not an area they should be looking at. The Dodd-Frank Act sought to limit their role in financial regulatory policy matters. The floating NAV idea they advocate would worsen the problem they say they seek to solve. MMFs did not cause the financial crisis and do not pose a risk to U.S. financial stability. The Reserve Bank focus on MMFs is misplaced."

Finally, Fein tells us, "The floating NAV idea is not a substitute for regulations that curb inappropriate reliance on short-term credit by banks and strengthen bank liquidity and capital. Destroying MMFs will not solve the problem of too-big-to-fail banking organizations but will result in them becoming bigger. Eliminating the $1.00 NAV would deprive investors of a safe and efficient cash management tool not available from banks. It would diminish MMFs as efficient suppliers of short-term credit for banking organizations as well as other borrowers, including municipalities that rely on MMFs for short-term credit to fund a wide range of public projects."

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