Key money fund reform gets green light

This past summer, I posted a piece explaining my aversion to mutual funds, even the purported safety of money market accounts. In that post I detailed how the Securities and Exchange Commission (SEC) tried to implement reforms in the money fund industry, but was ultimately thwarted by a former industry participant who sat on the Commission. Because of the logjam, the proposed new rules ending the accounting fiction of the $1 peg for money-market funds could not be put into place. In this morning’s Wall Street Journal, however, reporter Jessica Holzer writes that Luis Aguilar, the key No vote from earlier this year, has changed his mind. Ms. Holzer writes:

“Mr. Aguilar's shift also comes after a group of top regulators, the Financial Stability Oversight Council [FSOC], put pressure on the SEC to fix what they see as a weak link in the financial system. The council has the power to step in and act on perceived threats to the financial system if front-line regulators don't act. Ms. Schapiro called on the council to intervene after the collapse of her plan.”

The article seems to insinuate that Mr. Aguilar was pressured into breaking the impasse by FSOC, a new creation of the Dodd-Frank legislation. FSOC acts as a kind of overseer for the entire financial system and has broad powers to intervene in both the marketplace as well as the regulatory system meant to police it. It would seem that, if Mr. Aguilar was motivated in part to green light the new reforms by FSOC, the new cops on the block did their jobs, enabling a beneficial piece of rulemaking to proceed.

Of course, the “new” cops on the block are really just the old cops with enhanced powers. FSOC is composed of the top bureaucrats from across the financial system.

Most of the attention that Dodd-Frank receives has been in the areas where rulemaking is still pending, such as the rules concerning proprietary trading (the so-called Volcker Rule), the new derivatives clearinghouse, and the chairmanship of the new consumer protection agency; however, FSOC could have the biggest impact of all over the long term. Many of the powers vested in the new financial overseer have not been exercised, and frankly, there is some debate about how to define and delineate those powers. Although the ultimate goal in creating FSOC was to anticipate crises and steer us away from danger, we won’t get a full sense of what this new piece of bureaucratic machinery can do until the next crisis hits. Many of the Council’s most far-reaching powers, such as its ability to label even non-financial companies as “systemically important,” will only likely be exercised during a crisis. Given the state of things, we’ll probably hear a lot more about FSOC over the next few years.