Money market funds are creating a new muddle in US regulation. The Securities and Exchange Commission couldn’t agree this week to invite comment on possible reforms. Other watchdogs may take on the $2.4-trillion industry. But the episode shows America’s system of regulation in an unflattering light.
SEC Chairman Mary Schapiro had suggested that money market funds behave like other mutual funds and quote a floating net asset value. Currently, their NAVs are pegged at $1 per share. Alternatively, she said, they could hold extra capital and deploy other mechanisms to limit the likelihood and impact of customers rushing to withdraw their cash. The Federal Reserve and the Treasury lined up to support her.
But the fund industry pushed back, pouring millions of dollars into lobbying and warning that customers might move their cash to opaque, unregulated recesses of the financial system. Luis Aguilar, the swing vote among the five SEC commissioners and a former executive at fund manager Invesco, echoed these concerns in a statement saying that the matter needed further, broader study. It’s hard to escape the sense that the fund industry got the better of watchdogs’ genuine concerns this time. After all, the beginnings of a run on money market funds in September 2008 forced the Treasury to offer a hurried guarantee to ensure the crisis didn’t take another turn for the worse.
Schapiro wasn’t even trying to pass reforms — only to table them for public debate. Meanwhile, earlier this week, the SEC finalised a rule on company disclosures aimed at curbing funding for combatants in the Democratic Republic of Congo. To be fair this stricture, although ill-suited to the SEC’s capabilities, was mandated under the Dodd-Frank Act. Even so, the contrast makes the regulator look more serious about policing a distant conflict than tackling a known systemic risk.
Now the Fed or the Treasury may act. The Fed could, for instance, tell banks to curb their dealings with money market funds. Or the Treasury might work to designate big fund managers systemically important, bringing a new layer of oversight to bear. But such Plan B approaches are indirect and could have unintended consequences. America’s patchwork of financial regulation again seems to be undermining clarity of thought and action.