Turf Battle Over Money Funds

Photograph by Andrew Harrer/Bloomberg

Dan Gallagher, SEC Commissioner.


A unique Washington turf war spilled into public this week as some regulators worry the Securities and Exchange Commission could see its authority to regulate money-market mutual funds usurped by the Obama administration.

The SEC partisans are worried the Financial Stability Oversight Council, a sort of super-regulator chaired by the Treasury secretary, will preempt the SEC’s rule-making. The FSOC issued recommendations in November to overhaul the $2.6 trillion money-fund industry after the SEC’s plan melted down amid disagreements among commissioners.

At a speech today in Washington, SEC Commissioner Dan Gallagher said FSOC threatened to run roughshod over the SEC’s status as an independent agency and expert regulator of investment products.

“It is not difficult to see the potential tension between the SEC and FSOC missions and the resulting threat to the Commission’s ability to function independently,” said Gallagher, a Republican commissioner. “As the old adage goes, ‘no one can serve two masters.’ “

Gallagher’s complaints follow an earlier battle in the turf war. Arthur Levitt, a former SEC chairman under President Bill Clinton, refused to sign a letter spearheaded by Paul Atkins, a former commissioner, which told the FSOC to back off money-fund regulation.

The SEC “abdicated responsibility on money market mutual funds” and “without the threat of FSOC action I don’t believe the commission will act,” Levitt said Tuesday during a radio interview on “Bloomberg Surveillance” with Carol Massar and Michael McKee.

Fourteen former SEC chairmen, commissioners and top staffers signed Atkins’ letter, which didn’t take a position on money-fund rules but said the FSOC shouldn’t issue them. The letter said the FSOC was composed of a disparate group of regulators, most of whom regulate banks and lack the SEC’s expertise in overseeing investment products.

“I would characterize it as a lunch bunch,” Richard C. Breeden, a former SEC chairman who signed the letter, said at an event today in Washington. “They all have day jobs. Maybe someday they will put the chairman of the patent office and the post office on there.”

Former SEC Chairman Mary Schapiro, who presided over the SEC’s failed attempt to further regulate money funds, says FSOC is a critical backstop to SEC regulation. “Otherwise it would have died at the SEC,” she said in a brief interview this week.

The debate over money funds stems from the 2008 collapse of the $62.5 billion Reserve Primary Fund. Its failure, because it owned debt issued by Lehman Brothers Holdings Inc., set off a run by money-fund investors that helped freeze global credit markets.

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