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Felix Shipkevich May 8, 2012

As the Securities and Exchange Commission struggles to complete new rules for money-market mutual funds, officials have begun to look into the possibility that the Financial Stability Oversight Council, created by the Dodd-Frank financial overhaul, could act if the SEC fails to do so.

Unlike banks, money funds, which invest in short-term, high-quality securities, are not subject to capital requirements or deposit insurance. Lehman Brothers’ 2008 collapse triggered a run on the Reserve Fund, which held Lehman debt. The panic then spread to the entire sector. Although the Treasury Department backstopped the industry to end the crisis, it has since been stripped by Congress of its ability to do so again. Regulators now fear that a failure to impose more stringent rules may lead to history repeating itself.

The SEC’s current proposal, led by Chairman Mary Schapiro, would limit investors’ ability to sell all their funds immediately and change how the funds are priced. Schapiro’s efforts are facing stiff resistance from industry groups, as well as lawmakers from both sides of the aisle who claim that the ideas now on the table would drive investors away from money funds. Schapiro also does not have support from a majority of the SEC’s board, with Luis Aguilar, a swing vote on the proposal, said to be undecided.

The uncertainty has led regulators to consider having the FSOC declare all money-market mutual funds to be “systemically important” and therefore subject to stricter oversight under Dodd-Frank. While a possibility, the option is politically and logistically difficult to implement. Until the SEC stops dragging its feet, however, the threat of FSOC action will continue to loom large.

Read more about the SEC’s failure to act.

Photo credit: Daniel Borman