Overruled by three of her commissioners, Securities and Exchange Commission Chair Mary Schapiro has been rebuffed in her two-and-half-year effort to reform money market funds.

In a statement issued at 9:20 p.m. on Wednesday night, Schapiro made public that the majority had squashed proposals she has championed to impose structural reforms on the $2.4 trillion domestic marketplace (only Commissioner Elisse Walter broke rank to offer support). These efforts, she said, were needed to “reduce the susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts.”A pending vote on the matter has been cancelled.

“The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away,” Schapiro said, adding that other policymakers including the Financial Stability Oversight Council (of which she is a member) may need to step in where the SEC stepped aside.

Money market funds exist as a result of a special exemption granted by the SEC three decades ago. It allows them to seek to maintain a stable $1 net asset value by using penny rounding and amortized cost accounting. These funds do not have to comply with the mark-to-market valuation standards required for all other mutual funds, but must follow strict limitations on their investments.

The longstanding sense of stability has led retail investors to use them as substitutes for checking accounts and institutional investors to rely upon them as a cash management tool. During the financial crisis, however, the Reserve Primary Fund broke the buck and panicked investors redeemed more than $300 billion from prime money market funds across the country. Short term credit markets froze and many companies were unable to effectively fund their daily operations, and the Treasury Department was forced to temporarily guarantee investments.

Schapiro says these events show that money market funds have “no ability to absorb a loss above a certain size without breaking the buck” and that investors “have every incentive to run at the first sign of a problem.”

Among the reforms she has actively campaigned for are having money market funds float the NAV and use mark-to-market valuation like other mutual funds. “This would underscore for investors that money market funds are investment products and that any expectation of a guarantee is unwarranted,” she said.

Schapiro also has pitched a “tailored capital buffer” to absorb day-to-day variations in the value of a money market fund's holdings. In times of stress, it would be combined with a minimum balance at risk requirement. Investors would be allowed to redeem up to 97% of their assets in a given money market fund, but there would be a 30-day holdback of the final 3%.

Both proposals have been criticized by the industry as fundamental changes that would scare away investors.