S.E.C. Effort to Change Money Market Funds Stalls

Attempts to make sweeping changes to a popular type of that played a central role in the 2008 financial crisis have been derailed.

The chairwoman of the , Mary L. Schapiro, wanted to bring her vision for regulating money-market mutual funds to a vote as early as next week. But Ms. Schapiro acknowledged Wednesday evening that three of the five commissioners opposed her plan and said she was calling off the vote.

While opposition was certain from the two Republican members of the commission, the crucialswing vote, a Democratic commissioner, Luis A. Aguilar, said in an interview on Wednesday afternoon that he would feel comfortable voting only after significant further study of the industry.

Ms. Schapiro wanted the $2.6 trillion money market fund sector to start holding cash reserves or to let their share prices fluctuate, instead of promising to pay investors $1 for every $1 they put in, among other changes.

After being informed of Mr. Aguilar's comments, Ms. Schapiro said Wednesday evening that she had given up on trying to sway her colleagues. Her decision is at least a short-term victory for the financial industry, which has sunk millions of dollars into lobbying against her plan.

“It's a tragedy that serious thoughtful proposals to shore up a major weakness in the financial system and protect American taxpayers from the potential need to bail out this industry can't even receive public comment and debate,” Ms. Schapiro said in an interview.

Until the financial crisis, money market funds were considered a dull, low-return corner of the markets. But now, most of the nation's top financial regulators view the sector as one of the most vulnerable parts of the American financial system.

The Federal Reserve and the Treasury Department, which supported Ms. Schapiro's plan, had been preparing for the possibility that the financial industry might prevail in stopping the S.E.C. regulations. The officials have discussed the possibility of using new powers to move regulation of money market funds to the Federal Reserve, according to people with knowledge of their thinking.

Ms. Schapiro said that she would now support efforts by other regulators to force reform on the industry.

“The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away,” Ms. Schapiro said.

Officials have not used the new powers that were delegated to a body of top regulators, the Financial Stability Oversight Council, by the 2010 Dodd-Frank law. It is unclear what they could mandate and how long the process would take.

Ms. Schapiro had the support of one of the S.E.C.'s two Democratic commissioners, Elisse B. Walter. But Mr. Aguilar, who was formerly the general counsel for Invesco, an asset manager that operates money market funds, said Wednesday that Ms. Schapiro and the S.E.C. staff had not adequately studied the issue before pushing for a vote.

“There's a lot that we know we don't know,” said Mr. Aguilar, who had not talked about his views publicly for months. “It would make sense for us to get a handle on those before we do a proposal.”

One of the Republican commissioners who had previously stated his opposition to Ms. Shapiro's proposal, Daniel M. Gallagher, said Wednesday that Ms. Schapiro and the S.E.C. staff had been unwilling to consider alternatives that he and others presented.

Ms. Schapiro said that she had seriously considered numerous proposals since the financial crisis, but had eventually decided it was time to act.

“This has been a very thoughtful and deliberative process that's taken two and a half years,” said Ms. Schapiro. “When regulators identify problems and don't speak up, you get financial crises. That's why it was so important to speak up about this issue.”

Regulators view the funds as vulnerable because they act like banks by taking in money and promising to return every dollar that investors put in. Unlike banks, though, they don't have to pay deposit insurance or keep capital buffers to protect against defaults.

This article has been revised to reflect the following correction:

Correction: August 22, 2012

An earlier version of this article misspelled the name of an S.E.C. commissioner. She is Elisse B. Walter, not Elisse Walters.