The Financial Stability Oversight Council, a group of 10 regulators that includes the S.E.C. chairwoman, voted Tuesday to offer three distinct alternatives and said it would recommend one or a combination of those to the S.E.C. for adoption.
The options, which mirror recent changes that failed to gain enough support to pass the five-member commission, include having money funds establish a floating net asset value, replacing the steady $1-a-share price that funds use now, or forcing the funds to set aside more cash to absorb possible losses in the value of its holdings.
If the S.E.C. does not follow through on the council’s proposals, officials said, the council could draw on other powers to impose its own tougher oversight on the mutual fund companies and banks that sell money market funds publicly or on the funds themselves.
The action Tuesday was the strongest instance yet of the council flexing the considerable muscle given to it by the Dodd-Frank Act, the financial regulatory overhaul enacted in 2010 after the financial crisis. The council, a centerpiece of the act, is led by the Treasury secretary and includes the chief regulators for the banking, housing finance, securities and consumer finance industries.
Efforts by Mary L. Schapiro, the S.E.C. chairwoman, to enact tougher rules on money market funds stalled last August after heavy lobbying by the industry. Three of the S.E.C.’s five commissioners had indicated that they would oppose the proposed rules.
But Timothy F. Geithner, the Treasury secretary, has consistently favored the tightened rules that Ms. Schapiro was advocating, and he persuaded the oversight board to leverage its new powers to push the S.E.C. to act.
Regulators were prompted to strengthen the rules governing money market funds after one of the largest funds, the $62 billion Reserve Primary fund, suffered significant losses on its investments in Lehman Brothers debt when Lehman failed in 2008.
The Reserve Primary fund “broke the buck,” meaning its net asset value fell significantly below the $1 a share that it was required to maintain. That failure prompted a run on money market funds, with investors withdrawing more than $300 billion in short order.
The panic caused the market for short-term loans between companies, known as commercial paper, to shut down even for the most financially secure companies. The Treasury Department stepped in to guarantee more than $3 trillion in money-fund assets, and the Federal Reserve devised liquidity programs to shore up the financial markets.
“At the time, there was no formal council of regulators tasked with searching for risks that could cascade throughout the financial system and harm our economy,” Ms. Schapiro said Tuesday before the council voted on the proposal. “With the creation of the Financial Stability Oversight Council, we are jointly committed to taking the actions necessary — and making the tough calls required — to avoid the type of financial collapse that this nation experienced in the fall of 2008.”
Mutual fund industry officials, who have been offering their own proposals, immediately expressed disapproval of the action. “It’s deeply disappointing that the council has proceeded without giving due weight to the views of fund sponsors, investors and the issuers who depend upon money market funds for vital financing,” said F. William McNabb III, chief executive of Vanguard and head of an industry money market funds group.
The council’s recommendation presents three alternatives, and officials said the council might adopt one, a combination of any of the three, or all or parts of other plans that have been offered by the mutual fund industry and others.
One action would require money funds to have a floating net asset value, or share price, instead of their current fixed price, an option that Ms. Schapiro called “the pure option, the simplest option, and the option that is most consistent with the S.E.C.’s regulatory approach to investment products.”
Another option would allow a $1 price but require funds to have a buffer of 1 percent of assets to absorb day-to-day fluctuations in the value of a fund’s investments; in addition, it would permit investors with more than $100,000 in a fund to withdraw only 97 percent of their assets immediately. The rest would be first in line to absorb the fund’s losses, thus discouraging redemptions.
A third proposal would require funds to have a buffer of 3 percent to absorb losses.
The oversight council will accept public comments on the proposals for 60 days beginning once the proposals are printed in the Federal Register, a process that takes several days.
Only the S.E.C. can enact regulations on money market funds. But if it fails to heed a council recommendation, the oversight group could designate individual funds or fund companies as “systemically important,” making them subject to even tougher oversight by regulators.
The council’s action was applauded by advocates for tougher financial regulation, including Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation, who now oversees the Systemic Risk Council, a nonpartisan group formed by the Pew Charitable Trusts.
“Never again should policy makers be forced to choose between a financial meltdown or a taxpayer bailout of money market funds,” Ms. Bair said. “I hope the Securities and Exchange Commission will recognize the risks posed by these products and implement the needed reforms.”
Original article on The New York Times