At its November meeting the Financial Stability Oversight Council (“FSOC”) approved proposed recommendations for MMF reform and authorised the publication of those recommendations for public comment.

The recommendations are as follows:

• Requiring MMFs to adopt a floating net asset value, meaning that MMF shares would not be fixed at $1
• Requiring MMFs to have a capital buffer of up to 1 percent of the fund’s value to absorb losses, combined with a requirement that a small percentage of MMF shareholders’ funds could be redeemed only on a delayed basis
• Requiring MMFs to maintain a buffer of up to 3 percent, potentially combined with other measures that could reduce the size of the required buffer if they are deemed to be sufficiently strong.

At the November meeting, the Chairman of FSOC stated that other possible reform options also exist and that FSOC would seek public comments on such options. He also emphasized that if, at any point, the SEC finds a majority to support a set of recommendations for MMF reform, the FSOC would suspend its work, to allow the SEC process to play out.

Appointment of Elisse Walter as SEC Chairman

On 26 November 2012, President Obama designated SEC Commissioner Elisse Walter as Chairman Schapiro’s successor. Walter supported Schapiro’s proposals for MMF reform but she has previously indicated that she may be willing to adopt a more conciliatory approach. In a speech in March, Walter said that she wanted “a process of constructive engagement instead of one of unconstructive disengagement”.

If the impasse within the SEC continues, the FSOC may be prepared to place one or more MMFs under the Federal Reserve’s supervision by determining that such MMFs are systemically important financial institutions (“SIFIs”). The MMF industry have actively opposed SIFI designation, and argue that the Federal Reserve lacks sufficient expertise in the securities industry to regulate MMFs. 

For further information, please contact one of the key contacts listed above or your usual contact in our Asset Management and Investment Funds Team.