SEC Fight Against Big Money Enters Darkness: Street Whispers

NEW YORK (TheStreet) -- It's been a rough summer for Securities and Exchange Commission chairwoman Mary Schapiro. Her fight to shine light on some shadowy corners of Wall Street that failed ordinary investors during the financial crisis and in subsequent years has descended into a darkness befitting the secretive world of dark pools and big money trading.

In separate moves to bring more transparency to stock trading and money market funds, the SEC's efforts have been overwhelmed and undermined by the opacity of the existing structure. The results indicate that the SEC and by proxy, investors, face a chicken and egg conundrum as they try to make stock markets and money market funds -- a major source of liquidity for markets -- more reliable in response to failures that highlighted the vulnerable structure of funds and fragility of trading networks.

Schapiro may be better served responding to setbacks in the fight against market darkness with Batman-like action over Bruce Wayne-like despondency. In spite of the SEC's failed efforts, post-crisis financial sector rules signal that attempts at reform aren't dead. In fact, they're a major test of whether SEC-inspired regulations like Dodd-Frank have any lasting bite.

This week, Schapiro was forced to punt on a four-year effort to rewrite the rules on the $2.6 trillion money market fund industry, primarily by requiring more accurate calculation of funds' net asset values, new rules on capital to buffer against losses, and restrictions on shareholder redemption practices. Schapiro's money fund industry rethink came after the Reserve Primary Fund "broke the buck" in September 2008, when its holding of Lehman Brothers bonds caused the fund's $62.5 billion in assets to fall below $1 a share in value, leading to investor losses.

After the Reserve Primary Fund "broke the buck" in the days following Lehman's demise, investors fled money markets fearing other funds at a stable $1 a share in net asset value were actually worth far less. Among the most troubling signs of distress during the financial crisis, the investor flight ended when then-Treasury Secretary Hank Paulson guaranteed the assets of the entire industry. Meanwhile, without money market funds buying short-term debt, companies as strong as McDonalds(MCD) and General Electric(GE) lost a key financing mechanism for operations and payroll.