[ by Howard Haykin ] Ahead of this week's aborted SEC vote on money market reform, SEC Chairman Mary Schapiro introduced and actively promoted various measures, including requiring the money funds to hold a capital buffer against losses. Ms. Schapiro canceled the vote when it became clear she could not secure a majority of SEC Commissioners to vote in favor of the reforms.  For the most part, regulators support such reforms, notwithstanding arguments by the fund industry that says some 2010 reforms are sufficient, and the SEC's latest reforms would needlessly damage a popular investment product. Overriding the SEC. The regulators, however, may be able to successfully override the SEC and approve some reform measures, says NYTimes reporter Peter Eavis.  By involving the Financial Stability Oversight Council ("FSOC"), a special committee of senior regulators set up after the crisis by the Dodd-Frank Reform Act. It's council's job to spot big risks in the financial system and to take action to address them, even if it means acting itself or pressuring individual regulators.  So, after the SEC's proposals were shelved, speculation began to grow that the council might try and step in where the SEC left off. Implementing Plan B. Two alternate options were quickly dropped, but a third appears to be gaining support.  It centers around the FSOC, which is chaired by Treasury Secretary Tim Geithner, who has publicly backed the SEC's money fund reforms.  The issue can be addressed in late September, when the council is next scheduled to meet. Initially, one approach would be to designate fund companies or individual money funds as systemically significant, and follow up by delegating the Federal Reserve as the regulator for the funds.  That would be problematic, because it would remove money fund regulation from the SEC - an action that likely would undermine the standing of the Agency.  It also could also lead to a 2-tier, unevenly regulated money fund sector, where larger funds might come under Fed oversight and smaller ones wouldn't. A second approach, would be to declare the general activity of money market funds as risky to the system.  But to do that, the council would have to follow a series of steps laid out by Dodd-Frank, and it puts the issue back to the SEC, which remains deadlocked.  If the SEC then punted, as would be expected, Dodd-Frank then would probably move the issue to Congress, though there's no consensus between Republicans and Democrats as to how to break the stalemate. Enter Approach Three. Here, the FSOC would use Title VIII under Dodd-Frank, which addresses regulation of the plumbing of the financial system - referred to as "utility" activities, like organizing financial payments and processing transactions. Under Title VIII, the council could take a 2-step approach:  first, designating a single activity or feature of money funds as a systemically important utility function;   next, it could then require reforms to buttress that function.

e.g. - money funds have a special feature called a fixed net asset value ("NAV"), which allows them to say each share in a fund is worth $1 when in reality it may be worth slightly less.  Regulators fear the stable NAV could mask the risks of money funds from investors, who tend to use the funds like bank accounts.

The conclusion could be drawn that the stable NAV should be designated as systemically important, requiring funds to hold extra capital reserves.  The big apparent advantage for the regulators is that it avoids the pitfalls of the other options.  It would keep money fund regulation at the SEC And, unlike the 2nd approach, this part of Dodd-Frank doesn't map out steps that could lead to stalemate.  Instead, it allows the FOSC to require the SEC to introduce the sort of reforms that the council favors. However, a weakness to this approach is that Dodd-Frank gives the council a lot of leeway for determining a financial entity as being a systemically important activity, opening up numerous arguments that opponents of reform could take.  For example, they may challenge that money funds simply aren't part of the payment functions of the financial system, which really is what title VIII was intended to address.  Morrison & Foerster attorney Jay Baris agrees, saying:  "On the face of it, this is not what Title VIII was designed to regulate. He adds that such an approach would be "a last resort." For further details, go to:  [Dealbook 8/30/12].