The mutual fund industry is taking issue with a House bill that would permit the Federal Reserve to step in to regulate large funds that pose “a grave threat to the financial stability or economy of the U.S.”

The House passed the bill, H.R. 4173, “The Wall Street Reform and Consumer Protection Act of 2009,” last month. Title I, the “Financial Stability Improvement Act,” would grant the additional power to the Fed. It would also require financial companies or individual mutual funds with more than $50 billion in assets to contribute to a government insurance fund.

The Investment Company Institute sent a letter to the House Financial Services Committee arguing that it would be a “fundamentally inappropriate construct for mutual funds” to permit the government to restrict what funds invest in or impose capital requirements. The ICI also said the insurance fund would result in higher fees.

The House passed the bill in light of the financial crisis and the September 2008 run on the $3.286 trillion money market fund industry and subsequent crippling of capital markets when Primary Funds’ Reserve Fund broke the buck. Many fund analysts said that failure underscored the critical importance that the mutual fund industry plays in the markets and that funds can pose systemic risks.

“The ICI’s unwillingness to distinguish money market funds undermines their credibility,” said Fund Democracy founder Mercer Bullard. “It suggests that they do not know what systemic risk is and should be ignored on this issue.”

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