By Sarah N. Lynch
WASHINGTON, Nov 1 (Reuters) - A prominent law firm is
raising concerns about the new U.S. financial risk council's
approach to tackling money market fund reform, saying the
council could expose itself to legal challenges if it does not
watch its step.
In a letter to the U.S. Treasury Department, Dechert partner
Thomas Vartanian laid out his concerns with the recommendations
that Treasury Secretary Timothy Geithner presented to the new
Financial Stability Oversight Council for the $2.6 trillion fund
industry earlier this fall.
Dechert wrote the 12-page letter on behalf of clients who
would potentially be impacted by new reforms. It did not name
Among Geithner's chief recommendations is for the FSOC, a
council of regulators created by the 2010 Dodd-Frank law, to put
pressure on the U.S. Securities and Exchange Commission to adopt
new money market fund rules after SEC Chairman Mary Schapiro
could not muster enough votes from her fellow commissioners.
Such a move would entail the FSOC's formally presenting the
SEC with a list of recommendations and forcing the agency to
respond in writing if it is unwilling to adopt them.
But Vartanian warns that such action could violate federal
policymaking rules, leading the FSOC to act "arbitrarily,
capriciously and contrary to law."
That is the same type of legal argument that has been used
successfully in the past by trade groups seeking to kill SEC
rules on mutual fund director independence and "proxy access."
Whether a similar argument could ever work in a potential
future legal fight against the FSOC, however, remains unclear.
The nascent regulatory body's authority is still untested.
"A failure by the FSOC and its members to adhere to
appropriate legal, administrative and substantive standards of
decision-making could expose the recommendation process to
numerous potential challenges," said Vartanian.
The FSOC is one of the newest regulatory bodies to come out
of the Dodd-Frank law. Chaired by the Treasury secretary, its
membership consists of the heads of the top banking and market
regulators, including Schapiro.
Since last year, Schapiro has been urging the SEC to adopt
reforms that she says will protect investors from runs on money
market funds like the one seen in the financial crisis, when the
Reserve Primary Fund "broke the buck."
Schapiro had circulated a draft proposal on reforms that
included requiring the funds to build up capital buffers and
impose limits on redemptions.
The proposal also included a plan to move away from funds'
policy of maintaining a stable $1 per share net asset value.
But three of the SEC's commissioners - Democrat Luis Aguilar
and Republicans Troy Paredes and Dan Gallagher - said they could
not support her specific proposals.
They, along with many large players in the fund industry and
corporate treasurers, have all expressed skepticism about the
need to adopt additional money market reforms beyond the ones
enacted in 2010.
After the SEC failed to back Schapiro's proposal, Geithner
drafted a letter to regulators in late September urging the FSOC
to step in. Geithner said he hoped to have the FSOC consider a
draft proposal in November and put it out for comment.
Vartanian said he was concerned that Geithner is asking the
FSOC to "rush" and feared there are no internal procedures in
place for the nascent regulatory body to follow so that the
process is fair and open.
Geithner's proposed course of action "raises significant
legal and regulatory issues of first impression for the FSOC
regarding how it will, and must, conduct its business in a
manner consistent with the law," said Vartanian.
"There are no clear rules of engagement to guarantee
transparency, fairness and accountability in this unprecedented
action that the Secretary requests the FSOC to take."
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