[by Larry Goldfarb]

It was a complete shock to many when the SEC failed in its efforts to pass rules designed to strengthen money market funds, which have been roundly criticized in the wake of the financial crisis.  In fact the given the lack of support from the commissioners, the proposal was not discussed.

In an Editorial in the 9/21/2012 Wall Street Journal, Mary Shapiro makes a case for the proposal and notes that the Financial Stability Oversight Council (FSOC) is the right organization to tackle this issue. Under the 2010 financial-reform legislation, Congress created this council to serve as a cross-regulatory body tasked with identifying risks to financial stability and promoting market discipline.

The essence of the proposal, which was the result of a study that took more than two years and was designed to determine why these funds are susceptible to runs.  With that knowledge, SEC staff developed 2 alternative reform measures.

• Float the net asset value, so it would behave like all other mutual funds, reflecting the actual value of the funds' portfolios
• Require a tailored capital buffer together with a minimal redemption holdback that would apply only to the final portion of an investor's account. When triggered, the fund would escrow a tiny percentage of the investor's account for 30 days to help cover any losses the fund incurs

Both were fraught with a lack of support by the members of the commission.

The council already has signaled its support for action on money-market funds. In each of its 2 annual reports, the council identified the susceptibility of these funds to runs as a risk to financial stability and encouraged the pursuit of reform.

The FSOC has the power to issue formal recommendation to the SEC to apply new or heightened standards to money-market funds. The SEC would then be required to apply those standards—or within 90 days explain in writing the justification for not applying them.

A run on money-market funds hurt our financial system once and American taxpayers had to backstop them. The Financial Stability Oversight Council and all who care about financial stability must act to prevent it from happening again.

For more information, go to [WSJ, 9/21/12]  .