CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 1041
For the above reasons, uninsured MMMFs should be prohibited
from representing, either explicitly or implicitly, that they will redeem
shares based on a stable NAV. If Congress imposed this prohibition
on MMMFs and also adopted my proposal for a two-tiered structure
of bank regulation, many MMMFs would probably reorganize as
FDIC-insured narrow banks and would become subsidiaries of
second-tier FHCs. 391 As noted above, my proposed rules restricting
the assets of narrow banks to commercial paper, government
securities, and other types of marketable, highly-liquid investments
should protect the DIF from any significant loss if a narrow bank
failed. 392
(ii) Four Additional Rules Would Prevent Narrow Banks from
Transferring the Benefits of Their Safety Net Subsidies to Their
Affiliates
Four supplemental rules are needed to prevent second-tier holding
companies from exploiting their narrow banks’ safety net subsidies.
First, narrow banks should be absolutely prohibited—without any
possibility of a regulatory waiver—from making any extensions of
credit or other transfers of funds to their affiliates, except for the
payment of lawful dividends out of profits to their parent holding
companies. 393 Currently, transactions between FDIC-insured banks
and their affiliates are restricted by sections 23A and 23B of the
Federal Reserve Act. 394 However, the FRB repeatedly waived those
restrictions during recent financial crises. The FRB’s waivers
allowed bank subsidiaries of FHCs to provide extensive support to
affiliated securities broker-dealers and MMMFs. By granting those
waivers, the FRB enabled banks controlled by FHCs to transfer to
391 See Quinn, supra note 387 (describing strong opposition by Paul Schott Stevens,
Chairman of the Investment Company Institute (the trade association representing the
mutual fund industry), against any rule requiring uninsured MMMFs to quote floating
NAVs because “[i]nvestors seeking guaranteed safety and soundness would migrate back
to banks” and “[t]he remaining funds would become less attractive because of their
fluctuating price”); see also PWGFM-MMF Report, supra note 380, at 32–35 (discussing
potential advantages and logistical challenges that could result from adopting the Group of
Thirty’s proposal to require MMMFs with stable NAVs to reorganize and operate as
regulated banks).
392 See supra notes 380–81 and accompanying text.
393 Scott, supra note 381, at 929; Wilmarth, supra note 6, at 771–72.
394 12 U.S.C. §§ 371c, 371c-1 (2006).