Almost a year ago I posted a blog entitled SEC, Dodd Frank, Money Market Reform and FSOC: Connecting the Dots Between the Acronyms. In the post, I expressed my dismay with the passing of the Money Market Reform (MMR) laws, and how it seemed to me that the cure was worse than the disease it was trying to cure. Typically, the SEC does an OK job at assuring us with cost/benefit analysis of its rules. However, something about the MMR rule did not feel right, so I decided to do a little research on how the MMR rule came to be.
It was in my research that I discovered that the Financial Stability Oversight Council (FSOC) did not think that the SEC’s proposed rules for money market reform were strong enough. The FSOC thought that the SEC rules did not address “structural vulnerabilities” of money-market funds and so used their power under Dodd-Frank to force the SEC to implement new money market reform rules. These new rules to address structural vulnerabilities included floating NAVs, fees and gates, and all the things that made the money market reform solution worse than the problems.
It was rather eye-opening that there was a council of individuals that had the power to basically overrule or unduly influence any of our financial regulatory agencies when they disagreed with the approach of the actual agency responsible for the oversight. In the case of their intrusion into money market reform, it could be argued that this was an overreach by the FSOC, disrupting money market funds at an excessive cost to the industry. It is hard to imagine that the SEC’s approach wouldn’t have accomplished the same goal while also maintaining stability within the industry at far less cost.
Many in the industry seem to take this point of view when it comes to FSOC. Some have complained that FSOC is opaque and that they carry out their mandates with a blunt instrument. But with a new administration in place, we may finally see some changes to both Dodd-Frank as well as FSOC. During his second week in office, President Trump signed an Executive Order that would scale back Dodd-Frank regulations. While broad in scope, the Executive Order sets the stage for changes to current law, and if pushed through Congress could lead to a significant reform of Dodd-Frank.
Two of the items called out in the Executive Order referred to as Core Principals that could be especially beneficial to the industry are as follows:
(1) Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis.
(2) Make regulation efficient, effective and appropriately tailored.
In the Executive Order, the Secretary of the Treasury is directed to “consult with the member agencies of FSOC and report to the President within 120 days of the date of the order (February 3, 2017) and periodically thereafter on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements … promote the Core principals and what actions have been taken, and are currently being taken, to promote and support the Core Principals.”
The new administration’s agenda includes a long list of regulatory overhaul across sectors, so it remains to be seen how much attention will be given to FSOC and Dodd-Frank when their numbers are eventually called. Given what we know now, and from examining the Executive Order, FSOC might not go away completely under the new administration, but hopefully, it will work more effectively and enable the industry to drive economic growth.
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L. Burton Keller was a principal founder of the company in 1985 and currently focuses on strategic initiatives for the company. Mr. Keller is a former member of the Bank, Trust and Retirement Advisory Committee of the Investment Company Institute. He has served on numerous committees and task force groups with the ICI over the last 17 years including Co-chair of the Dividend Distribution Task Force.