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We have passed an important milestone coming out of the financial crisis, though its watershed status has received surprisingly little notice. That milestone is the first significant test of how regulators (in this case, the SEC) approach individual investor protections in the post-crisis era.Several weeks ago, SEC Chairman Mary Schapiro failed to muster the needed votes from the SEC Commissioners to take the next step in increasing the safety of money funds. Note: this was not a final vote to enact new regulations, but simply a vote to put the proposal out for public comment. (!!) But she couldn’t get the votes for even that.
For those who have not been following the saga: Money funds are a $2.6 trillion industry; individual investors who place their cash in them generally believe the funds to be risk-free (which they are not), based on the stable value of the funds and the implicit guarantee that the asset management firms issuing them will return their money at 100 cents on the dollar.
An implicit guarantee to individual investors for an investment that entails risk but is not backed by capital, involving huge sums of money? What could possibly go wrong????
We already know the answer to this. Search the term Auction Rate Securities, for a product viewed by individual investors as cash with no capital backing, like money funds. That industry collapsed during the downturn, to great cost for the issuers. It is clear that the very painful lesson here has not been learned.
And so we now have the odd circumstance of the Chairman of the SEC taking to the Wall Street Journal OpEd pages to take her case to the public. And we have the first test of the Financial Stability Oversight Council, a council of regulators put in place by Dodd-Frank to oversee the stability of the financial system. They are taking up the issue; the risk around money funds certainly qualifies as a risk to the financial system.
The first real post-crisis test on investor protection has passed. The next one, on financial system stability, is now teed up. Stay tuned.
This post originally appeared on LinkedIn.
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