MutualFundWire.com: Could Regulators Attack a Mutual Fund For Posing a 'Systemic Risk'?
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Friday, May 21, 2010

Could Regulators Attack a Mutual Fund For Posing a 'Systemic Risk'?


As the financial regulatory reform bill inches closer to law, the Investment Company Institute (ICI) worries that the bill may hit some big mutual funds in hard-to-predict ways.

"We support the broader regulatory reform effort; however, the legislation approved by the U.S. Senate must be improved to address several issues that could adversely impact mutual funds and their investors," stated Paul Schott Stevens, president and CEO of the ICI. "The bill passed by the Senate could subject mutual funds to unworkable forms of bank-like regulation, in the unlikely event that regulators deem a mutual fund a source of 'systemic risk.'"

Stevens' concerns bring to mind the collapse of the once-$60-billion Reserve Primary Fund after Lehman Brothers went bankrupt in September 2008. That move prompted the creation of a new FDIC-like guarantee program for other money market funds.

Stevens also echoed previous fundsters' concerns about the bill's provision granting the Federal Deposit Insurance Corporation (FDIC) the authority to discriminate amongst "similarly situated creditors" when winding down a firm.

The bill passed the Senate last night but must still be reconciled with the House version and signed by President Barack Obama. Dow Jones' Daisy Maxey covered the ICI's response and included commentary from several fundsters, including consultants Geoff Bobroff and Burt Greenwald.

Company Press Release

Washington, DC, May 21, 2010 - ICI President and CEO Paul Schott Stevens made the following comment on U.S. Senate approval of H.R. 4173, as amended by S. 3217, a bill designed to reform the nation’s financial regulatory system:

"ICI continues to support efforts to modernize financial services regulation to reflect today’s markets and practices. America’s mutual funds invest nearly $12 trillion on behalf of their almost 90 million shareholders, all of whom benefit from a sound, well-regulated financial system.

"Congress deserves credit for tackling the difficult and timely issue of financial regulatory reform. The sweeping legislation that emerges from this process will impact financial services and the financial markets for generations, and it is imperative to get it right.

"We support the broader regulatory reform effort; however, the legislation approved by the U.S. Senate must be improved to address several issues that could adversely impact mutual funds and their investors. Among other things, the bill passed by the Senate could subject mutual funds to unworkable forms of bank-like regulation, in the unlikely event that regulators deem a mutual fund a source of 'systemic risk.' In addition, the bill raises concerns for mutual funds that are creditors of a nonbank financial company undergoing ‘orderly liquidation’ as outlined in the bill, because the Federal Deposit Insurance Corporation would have discretion to treat similarly situated creditors differently and because financial contracts such as repurchase agreements would not be promptly enforceable.

"We look forward to working with Congress to resolve these and other outstanding concerns."


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