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From Securities Regulation Daily, April 2, 2014

Commissioner Aguilar says FSOC has “undercut” SEC expertise

By Mark S. Nelson, J.D.

SEC Commissioner Luis A. Aguilar today raised concerns about the influence of the Financial Stability Oversight Council (FSOC) on federal agencies in a lengthy speech about the Commission’s ongoing effort to adopt more money market mutual fund (MMF) reforms. FSOC, and the Office of Financial Research (OFR) at Treasury, have worked in tandem to study and make recommendations about MMFs and the asset management industry without enough input from the SEC’s commissioners, said Aguilar.

The commissioner noted that FSOC had issued its own recommendations in advance of the SEC’s latest MMF proposal, which the Commission issued unanimously in June 2013. This was after a contentious period that followed its last final rules for MMFs, which were adopted in 2010. Aguilar also recounted the difficulties he and other commissioners faced in getting the SEC’s own MMF data analysis released prior to the 2013 proposal.

Aguilar cited the OFR’s asset management study as an example of a poorly conducted study. The commissioner said the OFR study had many “factual and analytical” defects and failed to carefully distinguish asset managers from managed funds. He also noted bipartisan criticisms made by a group of senators who had reviewed the OFR study.

Said Aguilar, “The concerns voiced by commenters and lawmakers raise serious questions as to whether OFR’s report provides an adequate basis for FSOC to designate asset managers as systemically important under the Dodd-Frank Act, and whether OFR is up to the tasks called for by its statutory mandate.”

Aguilar also voiced concerns over SEC commissioners’ inability to participate more directly in consultations with FSOC and OFR. He noted that FSOC’s membership, as required by the Dodd-Frank Act provisions that created it, only permits agency heads (or designated persons) to participate in its meetings. According to Aguilar, commissioners get only infrequent, minutes-long updates about FSOC’s activities.

While acknowledging that FSOC and OFR do “important” work, Aguilar said the Dodd-Frank Act implies a need for greater reliance on agencies’ expertise. Said Aguilar, “However, rather than continuing to discuss the merits of the research and analysis — or lack thereof — in OFR’s report, I would simply note that there needs to be a mechanism by which the full Commission, not just the Chair and SEC staff, provide meaningful input and coordinate with the leadership of FSOC and OFR.”

Just over a year ago, Commissioner Daniel M. Gallagher raised similar concerns in a speech at The SEC Speaks 2013 conference. Gallagher said he had reviewed the SEC’s history of independence and posed the question of whether the Dodd-Frank Act’s creation of FSOC, imbued with power to influence the SEC’s MMF reforms, exceeded historical and constitutional limits on executive and congressional interference in independent federal agencies’ affairs.

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