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

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

By Jonathan Spicer

PHILADELPHIA, Oct 10 (Reuters) - It would be much better ifthe Securities and Exchange Commission finally moved forwardwith money market reforms, instead of leaving the job to the newU.S. financial risk council, a top Federal Reserve official saidon Wednesday.

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

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

"Each of the options open to the FSOC and the rest of itsconstituent agencies is decidedly a second-best alternative ascompared to a change in SEC rules to remove the fixed net assetvalue exception, to require a capital buffer that would staunchor buffer runs, or measures of similar effect," Tarullo said inprepared remarks at the University of Pennsylvania Law School.

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

The industry says money market funds are a safe investmentwith attractive returns, while critics worry that they arevulnerable to runs and create a false sense of security forinvestors who do not realize they are not backed by federalinsurance.

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

On Sept. 27, U.S. Treasury Secretary Timothy Geithner calledon the FSOC to formally ask the SEC to move forward with newrules, and he said the council sh ould consider exercising otherpowers to regulate the money market fund industry more tightly.

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

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

(Reporting by Jonathan Spicer; Editing by Diane Craft)

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