SEC chairman Mary Schapiro may have admitted defeat in her fight to regulate money market funds, but the U.S. Federal Reserve hasn't given up just yet. That's what the WSJ, Bloomberg and the New York Times report this morning.

Money-market fund executives for one are still wary. President and chief executive J. Christopher Donahue of Federated Investors told the WSJ, "For me to try and predict what the various regulators do is always impossible. We always remain ready and vigilant to defend these funds."

Robert Deutsch, who heads up money funds at JPMorgan Asset Management, also told Bloomberg, "I think there's a sense of relief, but we don't think this is over yet."

All three media speculate that the Fed is next to take up arms against the money fund industry. Experts seem to expect that the next logical step is for the agency to act through the Financial Stability Oversight Council (FSOC) to formally demand that the SEC take action on money funds, report Victoria McGrane of the WSJ and Christopher Condon of Bloomberg.

Meanwhile, the NYTimes reports that agencies are surprised by the suddenness of the SEC's decision to drop the vote, and are wondering whether they can carry out bold moves and whether they have to rely on more modest alternatives.

"We're in new territory," John Rogers told the NYTimes. Rogers is chief executive of the CFA Institute and a member of the recently formed Systemic Risk Council, a body of former regulators and business leaders studying financial reform. "It's going to take awhile for the dust to settle from this particular chapter, and for us to get to a new one."

Whatever the case, the FSOC has several options to get regulation reform moving again. The panel of regulators could use its power to designate the entire money fund industry or individual financial companies as "systemically important" and thus subject to tougher regulation. It could also force banks to back funds with capital.

But whether the FSOC can move ahead with this in a timely manner is another issue altogether, both reporters agree. McGrane points out that the FSOC not only has a small staff, it also has not designed a single nonbank financial firm systemically important in the two years since Dodd-Frank became law.

In commentary, David Reilly, who took up his colleague's tune in the WSJ's Heard on the Street section, backed up McGrane's and Condon's doubts that the FSOC could move quickly in fixing the SEC's blunder. He also declared that the SEC should at least require publicly traded companies to make it clear in SEC filings whether they will provide support to money funds in the event of a loss.

His overall conclusion? "You can lead the Securities and Exchange Commission to a clear flaw in financial markets, but you can't make it regulate." 

Edited by: Irene Park


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