This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis profoundly contradicts widely accepted theoretical and regulatory approaches to financial oversight. More alarmingly, the SEC’s newest rules increase rather than decrease the likelihood of future failures in money market funds and the broader capital markets.
Scholars – of both neoclassical and behavioral economic theory – have long insisted that transparency and disclosure play essential roles in ensuring efficient capital markets and sound financial regulation. Professors Gilson and Kraakman notably argued that the efficient capital market hypothesis, and its reliance on a market for information, “is now the context in which serious discussion of the regulation of financial markets takes place.” The SEC itself subscribes – at least publicly – to a corresponding regulatory framework: its mission statement declares that “[o]nly through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions.”
Yet in newly promulgated regulations addressing the “breaking of the buck” in the $3-trillion money market – an unstudied debacle at the fulcrum of the 2008 financial meltdown – the SEC endorses practices that obfuscate rather than illuminate the capital markets, including fixed pricing for money market funds and the continued use of discredited ratings agencies. These policies, premised implicitly upon doubt in the ability of markets to process information effectively, obscure true perils of money market funds. Rather than swaddling investment risks in these misleading, self-sabotaging regulatory buffers, the SEC should emphasize the menace of these funds. This Article offers transparent solutions to alleviate moral hazard and systemic risk in the broader market and to end the regulatory subsidy of these specific investments.
William A. Birdthistle,
Breaking Bucks: SEC Regulation by Obfuscation,
Available at: http://scholarship.kentlaw.iit.edu/fac_schol/78