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WASHINGTON, July 19 (Reuters) - If the Securities and Exchange Commission does not beef up its oversight of money market funds, a council of regulators should take the reins, former U.S. bank regulator Sheila Bair said on Thursday.
Bair, who formerly chaired the Federal Deposit Insurance Corp, applauded the reforms that SEC Chairman Mary Schapiro has floated to bolster the funds, four years after a fund "broke the buck," letting its shares tumble before a dollar a piece and rattling markets.
But Bair, in a letter to regulators, said that if Schapiro cannot get the votes needed to push the rules through, the Financial Stability Oversight Council should step in.
"The risk that emergency government support may again be needed to stem large outflows from money market funds remains a serious challenge for U.S. and other markets," Bair wrote, as chair of the Systemic Risk Council, a private group that monitors reform.
"If the SEC fails to move forward, we believe the FSOC should use the full range of authorities given it under Dodd-Frank to effectuate the proposed reforms."
The letter comes a day after the FSOC - which was set up to monitor risks in the financial system - issued its second annual report on financial headwinds, citing money market funds as a major concern.
"We need to put in place additional reforms for money market funds," Treasury Secretary Tim Geithner, who chairs the council, said at a meeting where the report was presented.
One of the plans under consideration would combine a capital buffer coupled with a holdback on redemption requests by investors. The other would feature a floating net asset value - a move that aims to curb investor complacency over the stable $1-per-share value that funds currently quote.
But the new safeguards are strongly opposed by the $2.7 trillion money market fund industry and the U.S. Chamber of Commerce. Three of the SEC's five commissioners have also publicly expressed skepticism about the need for money market reforms beyond the ones adopted in 2010.
"These are the wrong reforms at the wrong time," Tom Quaadman, a vice president at the Chamber of Commerce's Center for Capital Markets Competitiveness, noting that many companies rely on money market funds for capital.
The funds own more than 40 percent of U.S. dollar-denominated financial commercial paper outstanding, according to the New York Fed.
A money market fund is a type of mutual fund that is required to invest in low-risk securities.
Money market funds are generally considered safer than other mutual funds that pay dividends, which critics believe can cause a false sense of security because they are not federally insured
Confidence in the money fund industry was shaken in 2008 when the Reserve Primary Fund, one of the oldest and biggest money funds, broke the buck, or its per-share value fell below $1. That happened because of the fund's heavy losses on debt holdings in Lehman Brothers, which had collapsed a few days earlier.
The SEC enacted money market reforms in 2010 that tightened credit quality standards, shortened weighted average maturities and imposed a liquidity requirement on money market funds.
But Bair, who now chairs the Systemic Risk Council, says the reforms don't go far enough.
"You still have a guarantee with no capital behind it. You either end the guarantee or you put capital behind it," Bair said in a telephone interview.
She said that FSOC could designate the funds as "systemically important," which would give the Federal Reserve the power to impose new reforms.
Alternately, the council could formally recommend the SEC take action, she said, which would require the agency to draft rules or write a report on why it did not. If the SEC failed to comply, FSOC could step in.
"It's kind of a litmus test of whether the industry is going to get its way or whether obvious problems are going to get fixed."
Bair left her FDIC post last year and now is a senior adviser to the Pew Charitable Trusts, which helped to form the Systemic Risk Council.
During the 2007-2009 financial crisis, Bair was an outspoken critic of Wall Street executives and often clashed with other regulators who were more supportive of taxpayer bailouts of banks.
Despite industry opposition, pressure for reform is growing.
The New York Fed on Thursday also issued a report, advocating a redemption restriction to mitigate the risk of runs on the funds in times of crisis.
"This further adds pressure on the three SEC commissioners who have refused to endorse a proposal," Jaret Seiberg a senior policy analyst at Guggenheim Partners, said in a note to clients. "Our view is that the SEC will eventually adopt Schapiro's proposal."