On November 13, 2012, the Financial Stability Oversight Council (the “FSOC”) unanimously approved the publication of several proposed recommendations for money market mutual fund (“MMMF”) reform (the “Proposed Recommendations”). While these reform options are not proposed rules, their publication represents an important step in structural MMMF reform. It also represents one of the first major tests of the FSOC’s growing jurisdictional authority over the regulatory prerogatives of financial regulators, especially the Securities and Exchange Commission (the “SEC”).

Authority for Proposed Recommendations -

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the FSOC’s chief mandates are to identify risks to the financial stability of the United States, promote the expectation that the federal government will not guarantee losses in the event of a market failure, and respond to emerging threats to the financial stability of the United States. Thus, the Proposed Recommendations can be understood as the FSOC’s response to a perceived threat to the financial stability of the United States.

Section 120 of Dodd-Frank permits the FSOC to propose recommendations for more stringent regulation of a financial activity if “the conduct, scope, nature, size, scale, concentration, or interconnectedness of a financial activity or practice… could create or increase the risk of significant liquidity, credit, or other problems spreading among bank holding companies and nonbank financial companies, the financial markets of the United States, or low-income, minority, or under-served communities.” The Proposed Recommendations determine that the MMMF industry poses significant liquidity and credit risk for the following reasons...