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UPDATE 1-Tarullo warns on passing the buck on money-fund reforms

Wednesday, 10 Oct 2012 | 5:32 PM ET

(Adds comments, background on SEC efforts, Geithner letter)

By Jonathan Spicer

PHILADELPHIA, Oct 10 (Reuters) - It would be much better if the Securities and Exchange Commission finally moved forward with money market reforms, instead of leaving the job to the new U.S. financial risk council, a top Federal Reserve official said on Wednesday.

Fed Governor Daniel Tarullo said it was unfortunate that the SEC, the primary regulator of the $ 2.6 trillion i ndustry, has so far failed to advance new rules for the market that since the financial crisis has been seen as posing a systemic risk.

On Aug. 22, SEC Chairman Mary Schapiro said the regulator would not formally put forward its money market reform proposals since three of five commissioners opposed them. That left the next move to the Financial Stability Oversight Council (FSOC).

"Each of the options open to the FSOC and the rest of its constituent agencies is decidedly a second-best alternative as compared to a change in SEC rules to remove the fixed net asset value exception, to require a capital buffer that would staunch or buffer runs, or measures of similar effect," Tarullo said in prepared remarks at the University of Pennsylvania Law School.

Any FSOC reforms would be worse for the funds themselves, he argued, b ecause the tools available to the council " d o not fit t h e problem precisely and thus will not r e gulate at the least cost to the funds while still mi t igating financial risk."

The industry says money market funds are a safe investment with attractive returns, while critics worry that they are vulnerable to runs and create a false sense of security for investors who do not realize they are not backed by federal insurance.

Schapiro has argued that a series of reforms the SEC adopted i n 2010 d o not go far enough to prevent runs on funds like the one experienced in 2008 when t he Reserve Primary Fund "broke the buck," meaning it s net asset value (NAV) fell below $1 a share.

On Sept. 27, U.S. Treasury Secretary Timothy Geithner called on the FSOC to formally ask the SEC to move forward with new rules, and he said the council sh ould consider exercising other powers to regulate the money market fund industry more tightly.

The next day, Daniel Gallagher, a Republican SEC c ommissioner who had previously helped block t he f und reforms, told Reuters he hopes the agency will consider a fresh package of reforms.

In a nod to those comments, Tarullo said: " My hope, of c ourse, is t hat recent indications that other SEC commissioners a r e now willing to move forward with r e forms will lead to the SEC adopting first-best measures in the near-term."

(Reporting by Jonathan Spicer; Editing by Diane Craft)

((jonathan.spicer@thomsonreuters.com)(+1 646 223 6253)(Reuters Messaging: jonathan.spicer.reuters.com@reuters.net))

Keywords: USA FED/TARULLO