By Denny Gulino

WASHINGTON (MNI) – On the eve of Friday’s meeting of the Financial
Stability Oversight Council of regulators, Chairman Tim Geithner told
members to prepare money market fund reforms even if the SEC remains
stymied on the issue, even designating the largest as subject to Fed
supervision if necessary.

In a letter to the Council’s member agencies, which includes the
SEC, the CFTC, the Federal Reserve and any others involved in financial
or markets supervision, Geithner said he is asking FSOC staff “to begin
drafting a formal recommendation immediately” to be voted on in
November.

Geithner’s letter to Council members follows a strong industry push
to stop SEC Chair Mary Schapiro’s effort to publish reform proposals,
with a necessary vote on the Commission balking at the effort, denying
the effort a majority.

SEC spokesman John Nester late Thursday told MNI, “The Chairman has
long believed that addressing the susceptibility of money market funds
to destabilizing runs is a critical piece of unfinished business from
the financial crisis. That is why,” he continued, “she has advocated
for reforms to bolster the structure of these funds. She is very
pleased that this important reform initiative is moving forward.”

The trade group that speaks for the mutual fund industry, the
Investment Company Institute, had no immediate reaction. In late August,
when Schapiro had to concede defeat, the ICI repeated, “We have strongly
opposed the structural changes to money market funds under consideration
at the SEC, because of the adverse consequences of these proposals for
investors, issuers and the economy.”

“Further reforms to the MMF industry are essential for financial
stability,” the Treasury secretary wrote to Council member agencies as
FSOC chairman. The Council, he said, has “both the responsibility and
the authority to take action to address risks to financial stability”
even if the SEC “fails to do so.”

Geithner said only Treasury’s guarantee of more than $3 trillion of
MMF shares, a series of liquidity programs by the Fed and support from
many mutual fund companies stopped panic withdrawals during the
financial crisis.

Geithner said he has “asked staff to begin drafting a formal
recommendation immediately” for publication after the November FSOC
meeting. An agenda for Friday’s FSOC meeting has not been disclosed but
it is expected to include consideration of non-bank financial
institution risk, and whether any large insurance funds should be
designated as systemically significant. It is a designation firms would
rather avoid if possible, since it can require expensive additional
safeguards such as additional precautionary reserves and frequent
reports, even on-site examinations, by regulatory authorities.

Geithner’s letter said FSOC should consider the same “SIFI”
designation for the largest money market mutual funds. “the Council
should closely evaluate the MMF industry to identify firms that meet
this standard” of posing a “threat to U.S. financial stability.”

Such a designation, he said, “would subject those firms to
supervision by the Federal Reserve and would give the Federal Reserve
board authority to impose enhanced prudential standards.”

Beside drafting reform proposals for comment, Geithner said FSOC’s
member regulators should seek industry input, engaging with “key
stakeholders” including MMF investors and customers to gather “informed
perspectives on the extent to which any mix of the specific reforms …
would achieve the same level of protection for investors and the broader
economy.”

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** MNI Washington Bureau: 202-371-2121 **

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