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Geithner plan seeks stricter oversight of money-market funds

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Treasury Secretary Timothy F. Geithner laid out a plan Thursday that aims to strong-arm a federal agency into more tightly regulating the money-market fund industry, a once-reliably safe sector that nearly imploded during the financial crisis.

The plan calls on a relatively new body of regulators — the Financial Stability Oversight Council — to come up with overhaul options, offer them to the public for comment and present a final recommendation to the Securities and Exchange Commission.

The SEC must adopt the recommendation or else explain to FSOC why it won’t, Geithner wrote in a letter to the 15-member council, which was created in 2010 by the Dodd-Frank bill that retooled financial regulatory laws. Geithner — who heads the council, which is made up of top financial regulators and includes the SEC — said his staff is drafting a proposal that could be unveiled in November.

The decision caps a series of dramatic turns that have taken place since the Reserve Primary Fund, a major money-market fund, nearly collapsed in 2008. Panicked investors withdrew billons of dollars from the sector. The short-term credit market, which relies on loans from these funds, froze. And the government intervened by temporarily guaranteeing that investors would be repaid.

Several regulators, including SEC Chairman Mary L. Schapiro, say change is needed to avoid a repeat.

In 2010, the SEC made its first attempt, adopting rules that called on money-market funds to take fewer risks with their customers’ money. But Schapiro wanted to go further, and she put forward more proposals last month only to abandon them when she couldn’t muster enough votes. Three of the five SEC commissioners opposed the plan.

She punted to other regulators.

“I urge [other policymakers] to act with the same determination that the staff of the SEC has displayed over the past two years,” Schapiro said at the time.

Enter Geithner, who said FSOC’s proposal should include two of the changes Schapiro proposed.

One of them would have required money-market funds to allow the value of a share to fluctuate. Currently, one share of a money-market fund is valued at $1. When the Reserve Primary Fund could no longer value a share at $1 (a situation called breaking the buck), investors panicked. Schapiro proposed letting the value float to avoid such panics.

The other option would have required funds to put aside reserves as a buffer in times of crisis. It also would have called on each shareholder to have a minium account balance and to keep it there for at least 30 days. That would complement the buffer and create an incentive to stay for investors, who would have to leave behind some portion of their money if they decided to run at the first sign of trouble.

Geithner put a third option on the table that would also involve enhanced standards for liquidity and reserves and may prohibit or impose extra charges for withdrawals during times of stress.

Ever since FSOC was created two years ago, it has been encouraging the SEC to tighten its regulation of money-market funds. But the industry has pushed back, and three SEC commissioners, including Democrat Luis A. Aguilar, said more study is needed. Aguilar has expressed concern that tighter rules would push money-market funds into markets the SEC does not oversee, thereby creating more risk of instability.

Aguilar declined to comment Thursday.

SEC spokesman John Nester said Schapiro is “very pleased” that the iniative is moving forward because it is a “critical piece of unfinished business.”

Zachary A. Goldfarb contributed to this report.

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