With respect to the designation of a payment, clearing or settlement activity as being systemically important, the FSOC has not proposed or adopted any regulations to guide its deliberations. Nor has the FSOC designated any payment, clearing or settlement activity as being systemically important.
Another important aspect of the authority given to the Council is the ability to call for particular regulators to take specified actions to reduce potential threats identified by the Council. Specifically, §120 of the Dodd-Frank Act authorizes the Council to issue recommendations to the primary financial regulatory agency of a bank holding company or a nonbank financial company for the conduct of a financial activity or practice by such companies. In order to make a recommendation, the Council must determine that the conduct, scope, nature, size, scale, concentration or interconnectedness of the activity or practice could create or increase the risk of significant liquidity, credit or other problems spreading among bank holding companies, nonbank financial companies, U.S. financial markets or low-income, minority or underserved communities.
On Sept. 27, 2012, Treasury Secretary Timothy F. Geithner, as chairman of the Council, issued a letter in which he urged his fellow Council members to exercise this authority to pursue MMF reforms. Geithner's letter followed a public statement by Chairwoman Mary L. Schapiro of the Securities and Exchange Commission (SEC) on Aug. 22, 2012, which announced that the SEC would not call a meeting to vote on a proposal for MMF reform that had been prepared by the SEC staff, in view of the fact that three of the other four SEC commissioners had informed Schapiro that they would not support the staff proposal.
On Nov. 19, 2012, the FSOC published its proposed MMF reform recommendations to the SEC for public comment. The FSOC set forth three potential alternatives for MMF reform. One alternative would require MMFs to move to the use of a floating net asset value (NAV), as other types of mutual funds commonly do. A second alternative would generally require MMFs to maintain an NAV buffer in an amount of up to 1 percent in excess of the assets needed for an MMF to maintain a $1.00 price per share. In addition, this alternative would generally require that 3 percent of an MMF investor's highest account balance in excess of $100,000 during the 30-day period prior to a share redemption be potentially subject to withholding for 30 days and to loss if the MMF "breaks a buck" during that period. The third alternative would require MMFs to maintain a risk-based NAV buffer of up to 3 percent, subject to reduction based on an MMF's asset composition. The deadline for comments on the proposed recommendations is Jan. 18, 2013.
Following its receipt of comments, the FSOC will decide whether or not to take further action on its proposed MMF reform recommendations. If it decides to adopt final recommendations, it will send them to the SEC. In that case, the SEC would be required to (i) impose the FSOC's recommendations, (ii) take similar actions that the FSOC deems acceptable, or (iii) explain in writing within 90 days to the FSOC why the SEC determined not to follow the FSOC's recommendations. The FSOC is required to report to Congress on any recommendations that it issues under §120 and on the implementation of such recommendations, or on the failure of the primary financial regulatory agency to implement such recommendations.
If the Council does not make a recommendation to the SEC, or if the SEC does not act on a recommendation, the letter from Secretary Geithner outlines additional actions that the Council may consider. These include designating MMFs, and possibly their sponsors or investment advisers, as SIFIs under the designation procedures described above, or determining that a payment, clearing or settlement activity that is conducted by MMFs is systemically important.
The Council has gained an increasingly high public profile during 2012 as much attention has been paid to its evolving process for SIFI designations. Most recently, the FSOC's consideration of potential recommendations to the SEC for MMF reform, as the potential first exercise of its authority to recommend that financial regulatory agencies take specific actions to mitigate a threat to financial stability, has highlighted the FSOC's significant and developing authority to identify perceived gaps in U.S. financial regulation and take action to seek to address them.
Stephen Bier is a partner at Dechert in New York. Robert Ledig is a partner and Gordon Miller is counsel in the firm's Washington, D.C., office. They are members of the firm's financial services group.