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updated: 9/27/2012 4:40 PM

Geithner urges regulators to press SEC on money-market overhaul

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Bloomberg News

Treasury Secretary Timothy F. Geithner urged a council of regulators to recommend that the U.S. Securities and Exchange Commission tighten rules on money- market mutual funds.

The Financial Stability Oversight Council should release for public comment options for an overhaul of the funds, an alternative to bank accounts for individuals and companies, Geithner said in a letter to the council today.

"The SEC, by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risks that MMFs present to the economy," Geithner wrote. "However, while we pursue this path, the council and its members should, in parallel, take active steps in the event the SEC is unwilling to act in a timely and effective manner."

Geithner recommended considering three steps to reduce the risk funds might pose to the financial system: floating net asset values, requiring funds to hold capital buffers of "adequate size," likely less than 1 percent, and imposing capital and enhanced liquidity standards.

"Without further reform of MMFs, our financial system will remain vulnerable to runs and instability," Geithner, who is chairman of FSOC, wrote. He said he wants the council to consider the recommendations at its November meeting.

The SEC, along with the Federal Reserve and the Treasury Department, has pressed to make money funds safer since the September 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industrywide run and helped freeze credit markets. The crisis calmed only after the Treasury temporarily guaranteed shareholders against losses and the Fed began buying fund assets at face value to help them meet redemptions.

Schapiro Proposal

SEC Chairman Mary Schapiro gave up on her plan on Aug. 22 after three of the five commissioners -- Republicans Daniel Gallagher and Troy Paredes, joined by Democrat Luis Aguilar -- told her they wouldn't vote to issue it for public comment. Her proposal spelled out two options, the capital cushion coupled with some restrictions on redemptions, or the floating share price.

Schapiro has argued that the funds' $1 share price encourages investors to flee at the first sign of trouble. That's because those who react quickly can sell their shares at $1 each even if the net asset value has dropped below that level.

The industry has maintained that a floating share price would make money funds unworkable for many investors by saddling them with new accounting and tax obligations. In addition, insurers, municipalities and other large users of money funds are often legally bound to invest assets they account for as cash in funds with a stable share price.

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