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Financial Stability Oversight Council Considers Money Fund Designation

The U.S. risk council discussed using its powers under Dodd-Frank to impose more regulatory oversight on money market funds.

WASHINGTON -- The U.S. risk council on Thursday discussed potentially using its powers under the 2010 Dodd-Frank law to impose more regulatory oversight on money market funds, a U.S. Treasury Department spokeswoman said.

The closed-door discussions by the Financial Stability Oversight Council about ramping up regulation for large funds comes roughly a month after the panel rolled out a framework of possible new rules for the $2.6 trillion industry.

The FSOC is a council of regulators chaired by Treasury Secretary Timothy Geithner and comprised of the country's top banking and market regulators, including outgoing Securities and Exchange Commission Chairman Mary Schapiro, whose last day at the agency is Friday.

The panel has broad authority to designate individual funds, sponsors or advisers as "systemically important."

If large money market funds receive that designation, they would be subject to stringent supervision by the Federal Reserve and potential capital requirements.

The industry has broadly opposed the idea of designating funds and is also opposed to many of the reforms proposed by the panel.

The FSOC's proposal aims to pressure the SEC to adopt money fund reforms on its own after a package of reforms championed by Schapiro failed to win a consensus among her fellow commissioners and was broadly panned by the industry.

The proposal's regulatory framework largely mirrors the measures Schapiro had supported, such as capital buffers and redemption holdbacks, or a move from a stable to a floating net asset value so that investors would not be spooked by the prospect of funds "breaking the buck."

FSOC and Schapiro have argued that more reforms are necessary to repeat a run on funds like that seen in the 2008 financial crisis. During the crisis, heavy exposure to collapsed investment bank Lehman Brothers caused the net asset value of the Reserve Primary Fund to fall below $1 per share and "break the buck."

The FSOC cannot technically force the SEC to adopt any proposed rules, and the outlook for support among SEC commissioners is unclear.

Since Schapiro's efforts failed in August, two commissioners who had been skeptical of her proposal - Republican Daniel Gallagher and Democrat Luis Aguilar - have both come out and said they might be able to support a floating net asset value if certain conditions were met.

However, with Schapiro's departure, the SEC will be split between two Democrats and two Republicans, potentially making it even harder to reach a consensus.

A source familiar with FSOC's deliberations said if the SEC fails to act or if FSOC feels the agency does not sufficiently attack the problem, then the panel could step in.

Thursday marked Schapiro's last FSOC meeting. At the meeting, Geithner thanked her for her service, a Treasury spokeswoman said.

"Mary's dedication and leadership have been instrumental to the progress made by this Council and by the SEC over the last few years," he said.

Copyright 2010 by Reuters. All rights reserved.

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