In more than a hundred comment letters, industry representatives often "strongly" objected to all three of the council's proposals for reform, arguing they would significantly reduce the size of the industry and potentially create further systemic risk.
But some also went further, claiming the FSOC was acting inappropriately in pursuing reform in the first place, saying that was the sole jurisdiction of the Securities and Exchange Commission.
"The SEC is the only agency with the appropriate statutory authority to recommend additional MMF reforms," wrote William McNabb, chairman and chief executive for Vanguard, which invests roughly $200 billion on behalf of shareholders into money market funds. "FSOC should not make specific MMF reform recommendations to the SEC at this time, but should permit the agency, as the primary regulator of the capital markets and MMFs, to proceed with its statutory authority to consider reasonable reforms narrowly tailored to address FSOC's concerns, if they are supported by facts."
Fidelity Investments, the largest money market mutual fund provider in the U.S. that manages more than $430 billion in money fund assets, also questioned whether the FSOC had appropriately provided justification to use its Dodd-Frank authority to make recommendations to the SEC.
"Respectfully, Fidelity's message to the FSOC is simple: take no further action on MMFs at this time," Scott Goebel, senior vice president and deputy general counsel for Fidelity wrote in a Feb. 14 letter. "The SEC is the regulator with the authority and expertise to consider whether and how to adopt additional reforms on MMFs. Furthermore, the alternatives the FSOC has proposed are not workable, and the FSOC has failed to meet the procedural and substantive requirements as well as the policy justifications that are necessary to exercise its authority under Sec. 120 and make the proposed recommendations."
Regulators from across a range of different agencies, including the heads of all 12 Federal Reserve banks, have expressed concerns that money market mutual funds pose a systemic risk without significant structural reforms. Regulators worry that the funds are particularly susceptible to runs because investors are not necessarily aware of the market risks associated with them. They also argue that a stable net asset value creates a "first mover" advantage for early redeemers if there is a market crisis.
In November, the FSOC released three proposed recommendations to reform the industry. The move by the council — utilizing its authority under Dodd-Frank — was intended to break through a logjam at the SEC, where former Chairman Mary Schapiro had been unable to win board approval to move forward with the agency's own reform plan (Schapiro supported the FSOC's move).
In its proposal, the FSOC said funds could be required to float their net asset values; required to hold a capital buffer in order to absorb losses; or required to keep a buffer of 3% to absorb losses combined with other measures to bolster resiliency.
But in comment letters, stakeholders said all three recommendations have fatal flaws.
"Each of the three recommendations would significantly reduce the appeal of MMFs, which would curtail the size of the industry," said McNabb. "We believe regulators should give more consideration to reform options that could reasonably address their more pressing concerns while retaining the key features of MMFs, particularly for the retail investor."
Stakeholders also said there was no pressing need for reform because past efforts had already addressed the risks raised by regulators.
"Fidelity believes that the 2010 SEC reforms have made all types of MMFs more resilient, and that additional reform is not necessary," said Goebel. "There are vast differences in portfolio composition, liquidity, and risk profiles across the different types of MMFs. Inexplicably, the FSOC failed to consider these varying levels of risk within each category of MMFs and would apply their proposed recommendations to the entire MMF industry, with very limited exceptions. This is not a prudent and balanced approach to reform, and risks imposing excessive costs on the economy and investors."
Commenters specifically objected to the structural reforms proposed by the council, saying that additional reforms should be limited only to those funds that invest primarily in securities issued by banks, other financial institutions, or operating companies. Those funds, commonly known as "prime money market funds," are subject to the runs that regulators are concerned about.
They urged regulators to take a narrowly tailored approach, rather than provide additional regulation to a wider swath of funds that would include Treasury, government, tax-exempt, or retail prime MMFs.
