NEW YORK (
) -- It's been a rough summer for
Securities and Exchange Commission
chairwoman Mary Schapiro. Her fight to shine light on some shadowy corners of Wall Street that failed ordinary investors during the financial crisis and in subsequent years has descended into a darkness befitting the secretive world of dark pools and big money trading.
In separate moves to bring more transparency to stock trading and money market funds, the SEC's efforts have been overwhelmed and undermined by the opacity of the existing structure. The results indicate that the SEC and by proxy, investors, face a chicken and egg conundrum as they try to make stock markets and money market funds -- a major source of liquidity for markets -- more reliable in response to failures that highlighted the vulnerable structure of funds and fragility of trading networks.
Schapiro may be better served responding to setbacks in the fight against market darkness with Batman-like action over Bruce Wayne-like despondency. In spite of the SEC's failed efforts, post-crisis financial sector rules signal that attempts at reform aren't dead. In fact, they're a major test of whether SEC-inspired regulations like Dodd-Frank have any lasting bite.
This week, Schapiro was forced to punt on a four-year effort to rewrite the rules on the $2.6 trillion money market fund industry, primarily by requiring more accurate calculation of funds' net asset values, new rules on capital to buffer against losses, and restrictions on shareholder redemption practices. Schapiro's money fund industry rethink came after the
Reserve Primary Fund
"broke the buck" in September 2008, when its holding of Lehman Brothers bonds caused the fund's $62.5 billion in assets to fall below $1 a share in value, leading to investor losses.
After the Reserve Primary Fund "broke the buck" in the days following Lehman's demise, investors fled money markets fearing other funds at a stable $1 a share in net asset value were actually worth far less. Among the most troubling signs of distress during the financial crisis, the investor flight ended when then-Treasury Secretary Hank Paulson guaranteed the assets of the entire industry. Meanwhile, without money market funds buying short-term debt, companies as strong as
lost a key financing mechanism for operations and payroll.
Schapiro proposed forcing funds to either disclose the fair value of assets on a daily basis -- a floating net asset value, or hold capital -- 3% of total assets -- to buffer against losses.
This week her efforts were thwarted by a SEC vote blocking the rule change, with dissenting voters among SEC chairs in a 3-2 split arguing that the already opaque nature of money markets and short-term investment funds are prohibitive to immediate change. Four years is lightening speed in regulatory circles.
"I remain concerned that the Chairman's proposal will be a catalyst for investors moving significant dollars from the regulated, transparent money market fund market into the dark, opaque, unregulated market," said SEC Commissioner Luis Aguilar, in a statement of his dissenting vote to Schapiro's proposed industry rethink.
Aguilar, the former general counsel of
, an investment company with large money market funds, highlighted that current low interest rates would make capital buffers prohibitively expensive and the rule changes could actually push investors further into shadowy corners of finance. Apparently, there's just too much darkness to go around when it comes to the pools in which big market money is swimming, so why send investors from one opaque structure to another that might be more opaque still?