Andrew Harrer/Bloomberg NewsTreasury Secretary Timothy F. Geithner said changes in the rules for money market funds were “essential for financial stability.”Treasury Secretary Timothy F. Geithner on Thursday urged the regulatory team that he leads to push ahead with new rules aimed at money market funds, which manage $2.6 trillion.
In a letter to the Financial Stability Oversight Council, a committee of senior regulators formed after the 2008 financial crisis, Mr. Geithner said the changes were “essential for financial stability.”
The Securities and Exchange Commission, which is the primary regulator for money market funds, had proposed the main changes favored by Mr. Geithner in his letter.
But the commission dropped its attempt at a money market fund overhaul last month after it became clear that a majority of its commissioners would not vote for the measures. Large mutual fund companies fiercely opposed the changes, saying they were unnecessary and could harm a type of investment fund that was popular.
“You can be sure that the firms on the receiving end won’t take this passively,” said Jay G. Baris, a lawyer at Morrison & Foerster, which represents money market funds.
During the 2008 crisis, investors fled money market funds, which worsened the credit freeze that gripped the banking system. The funds received a big bailout from the Treasury and the Federal Reserve.
Before the Dodd-Frank Act was passed, efforts to change the money market fund industry probably would have died after the commission dropped them. But the Financial Stability Oversight Council, set up by Dodd-Frank, can choose to take over from the commission.
In his letter, Mr. Geithner laid out a number of ways the council, which meets Friday, can act.
He urged it to gather public comments on a range of changes and then make a final overhaul recommendation to the S.E.C. The commission would be required to adopt those changes, or explain why it did not. Mr. Geithner said the council’s staff was already working on recommendations and said he hoped they would be considered at the council’s November meeting.
The recommendations would include two changes supported by the commission. One would require money market funds to hold loss buffers. The other would end the money market funds’ practice of valuing investors’ shares at $1 even when the funds’ assets should reflect a value slightly less than $1.
Mr. Geithner said in his letter that, while the S.E.C. is best positioned to regulate money market funds, the Financial Stability Oversight Council could proceed without waiting for the commission. The council, he wrote, could designate certain money market fund entities as systemically important and subject them to regulation by the Federal Reserve, which could then impose an overhaul.
Mr. Baris, the lawyer, said that designating a money market fund as systemically important could make it hard for it to stay in business. “Who would want to invest in a fund that has been designated by the federal government in this manner?” Mr. Baris said.
“It will drive investors away.” Mr. Baris said he believed that Mr. Geithner might face resistance on the council if any new rules were aimed at specific money market funds.
In addition, the council could designate money market fund activities as critical to the working of the financial system’s plumbing. That would allow regulators to impose heightened risk management standards on the funds.
Mr. Geithner wrote that without the changes, “our financial system will remain vulnerable to runs and instability.”
If the council acts, the mutual fund industry will almost certainly fight back. The industry’s lawyers will probably contest the council’s interpretation of Dodd-Frank and perhaps even the council’s authority to act.