Friday, August 24, 2012

Regulatory Capture at the SEC: A Prime Example

Many economists, on both the left and right, have bemoaned the capture of the SEC by the very institutions the SEC was designed to regulate.  Rarely, though, is there such clear evidence of this capture as was on display this week.

...Securities and Exchange Commission Chairman Mary Schapiro had to cancel an Aug. 29 vote on sensible new rules to make money-market mutual funds safer. Although Schapiro had the support of Federal Reserve Chairman Ben S. Bernanke and leading conservative economists, she knew that three of the five commissioners would oppose her. This came after an intensive and often-misleading campaign by the $2.6 trillion money-fund industry to gloss over the inherent instability of the funds. 
Among those swayed by the lobbying was Luis Aguilar, a Democratic commissioner (the other is Elisse Walter) who usually sides with Schapiro. Aguilar, a former general counsel of Invesco, one of the country’s major sponsors of money-market funds, met 11 times with industry lobbyists this year. Among his concerns was that additional rules might lead investors to funnel cash into shadowy, unregulated funds. 
This incidentally is a claim of the Investment Company Institute, a mutual-fund lobbying group, which never offered persuasive evidence to back up the assertion. Enough had already been done, the ICI argued, citing modest changes made in 2010 requiring the funds to hold investments that could be quickly converted into cash.
The ICI's lobbying was successful and, for the money market fund managers, a victory.  For the rest of us?  Not so much.
If the ICI and its backers want an industry that can still act as a tripwire for financial panic, they should be congratulated. For the investing public, former SEC Chairman Arthur Levitt say it all: The SEC’s inability to act is “a national disgrace.”

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