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MMF Reform Among Highlights at Hearing on Dodd-Frank Implementation

On July 30, Mary Jo White, Chair of the U.S. Securities and Exchange Commission and Gary Gensler, Chairman of the Commodity Futures Trading Commission testified at a Senate Banking Committee hearing entitled “Mitigating Systemic Risk in Financial Markets through Wall Street Reforms.” The Committee called for this hearing to review efforts by the SEC and CFTC in implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The bulk of White’s testimony focused highlighting the steps the SEC has undertaken in attempts to mitigate systemic risk in the securities markets in response to the actions mandated by the Dodd-Frank Act. Among the topics White addressed were over-the counter derivatives, increased regulation of financial market utilities, reporting requirements for investment advisers to private funds, and proposals to implement the Volcker Rule.

Additionally, White noted the SEC’s proposal to reform the money market fund regulations to further diminish systemic risk in the securities market beyond actions required by the Dodd-Frank Act. The money market reform proposal, released in June, includes two alternatives, which could be adopted separately or in combination. The first would require that all prime institutional money market funds operate with a floating net asset value. The second would require that all non-government money market funds impose a 2 percent liquidity fee if the fund’s level of weekly liquid assets fell below 15 percent.

In response to White’s report on the money market fund reform proposal, Sen. Robert Menendez (D-NJ) shared his concerns that a floating NAV would not solve the concern of fund solvency issues. He suggested that gating would be a better safeguard. White responded by saying that the SEC economists have done that kind of analysis and the SEC continues to examine the alternatives. Sen. Pat Toomey (R-PA) focused his MMF reform questions on whether it might be better to merely disclose the shadow NAV instead of operationally changing to a floating NAV. White said that the disclosure itself would not change the transaction value and does not address the perceived risk of a run, but those are among the questions the SEC is considering. Sen. Toomey also asked about the tax implications of a floating NAV, given that the SEC does not have the authority to address tax issues. White explained that the SEC has been working with the Treasury and the IRS about how to deal with tax issues related to the floating NAV proposal.

To view the archived webcast, click here.