Frequently Asked Questions About the Financial Stability Oversight Council and Money Market Funds

What is the Financial Stability Oversight Council (FSOC)?
What are the FSOC’s statutory powers?
What role could the FSOC play regarding money market funds?
What Dodd-Frank provisions could the FSOC seek to rely on in the context of money market funds?
What is the significance of Treasury Secretary Timothy F. Geithner’s September 27 letter to FSOC members about proposed money market fund regulations?
What would be the process for FSOC recommendations regarding money market funds?
How can investors and issuers make their voices heard in this process?

What is the Financial Stability Oversight Council (FSOC)?

Established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the Financial Stability Oversight Council is an interagency body created with the mission of identifying and responding to risks to U.S. financial stability.

The FSOC is chaired by the Secretary of the Treasury and is composed of 10 voting members (the heads of nine federal financial regulatory agencies, including the Securities and Exchange Commission [SEC], and an independent member with insurance expertise) and five nonvoting members (including one state insurance commissioner, one state banking supervisor, and one state securities commissioner).

What are the FSOC’s statutory powers?

By statute, the FSOC has a number of powers, including:

designating nonbank financial companies that could pose a risk to U.S. financial stability (often referred to as systemically important financial institutions, or SIFIs) for heightened regulation and supervision by the Federal Reserve Board; and
recommending new or heightened standards and safeguards for systemically significant financial activities or practices (i.e., activities or practices that could create or increase risks of significant liquidity, credit, or other problems spreading among bank holding companies, nonbank financial companies, and U.S. financial markets).

The FSOC’s authority, however, is new and untested. The agency’s powers are subject to at least one legal challenge at this time.

What role could the FSOC play regarding money market funds?

Actions that have been widely discussed as ones that the FSOC could seek to undertake include the following:

determining that sponsoring or managing money market funds is a systemically significant activity or practice;
determining that being a money market fund is a systemically significant activity or practice; or
designating specific money market funds or their sponsors or advisers as SIFIs.

What Dodd-Frank provisions could the FSOC seek to rely on in the context of money market funds?

There are two primary provisions to be aware of:

Dodd-Frank Act Section 113: Section 113 permits the FSOC to designate a nonbank financial company as a SIFI if the company’s “material financial distress” or activities could pose a threat to U.S. financial stability. The FSOC has adopted rules and interpretive guidance governing the SIFI designation process.
Dodd-Frank Act Section 120: Section 120 allows the FSOC to recommend enhanced measures to the appropriate primary financial regulatory agency, if the FSOC determines that a financial activity or practice conducted by a bank holding company or nonbank financial company is systemically significant. In the case of money market funds, the SEC is the appropriate primary financial regulatory agency.

What is the significance of Treasury Secretary Timothy F. Geithner’s September 27 letter to FSOC members about proposed money market fund regulations?

As he notes in his letter, Secretary Geithner wrote to the FSOC to “urge the Council to use its authority under section 120 of the Dodd-Frank Act to recommend that the SEC proceed with [money market fund] reform.” Secretary Geithner indicated that if the SEC is unwilling or unable to act in a timely and effective manner, the FSOC should closely evaluate the money market fund industry to identify firms that meet the standard for SIFI designation, under the Section 113 process.

In his letter, Secretary Geithner also indicated that the FSOC’s “objective should be to propose reforms to [money market funds] that protect the stability of [money market funds] without creating a competitive advantage for unregulated cash-management products.”

In a statement, ICI noted that several of the money market fund proposals offered in the letter “already have been the subject of extensive analysis and commentary” and “have elicited strong opposition for their adverse impacts on investors, issuers, and the economy.” The statement also noted that “ICI will continue to present empirical analysis to inform this regulatory debate, in the hopes that regulators will take an objective, fact-based view of the issues.”

What would be the process for FSOC recommendations regarding money market funds?

The FSOC is a relatively new regulatory entity and many of its powers are untested. Uncertainty remains on how exactly it will proceed and whether its actions would survive a legal challenge. The basic steps of the Dodd-Frank Section 120 process are as follows:

The FSOC would have to consult with the primary regulator (in the case of money market funds, the SEC) and provide public notice and an opportunity for comment for any proposed recommendation. The FSOC’s recommendation must take into account “costs to long-term economic growth.”
The SEC would have to issue its own proposal, which would be subject to notice and comment under the Administrative Procedures Act (APA).
The SEC would have to impose the recommended standards, or “similar” standards that FSOC deems acceptable, or explain in writing within 90 days of the recommendation why it has decided not to follow the recommendation.
The FSOC is required to report to Congress on any recommendations it issues and the primary regulator’s implementation of or failure to implement such recommendation.

Note: The FSOC cannot force the SEC’s hand. The SEC cannot take action without the votes of a majority of the Commissioners. The SEC remains bound by the APA, including the requirement for a meaningful cost-benefit analysis.

How can investors and issuers make their voices heard in this process?

Should the FSOC propose recommendations, investors, issuers, and others will have the opportunity to comment. Further, investors, issuers, and others will have the opportunity to comment on an SEC proposal, if any, issued in response to an FSOC recommendation. For updates and more information, visit www.preservemoneymarketfunds.org.

October 2012