A key Republican lawmaker criticized the floating net-asset value for money market funds Friday, citing the toll such a shift would have on state and local governments.
"There is compelling evidence that such an action would lead to a loss of access to a significant source of short-term funding" for state and local governments, said Rep. Scott Garrett, R.-N.J., who chairs the House Financial Service Committee's capital markets panel.
The remarks came at the opening of an oversight hearing on the state of the mutual fund industry — the panel's first such hearing in six years. Last month, the Securities and Exchange Commission and other regulatory officials weighed recommendations for money market funds made last October by the President's Working Group on the Financial Markets. The working group suggested several reforms, including requiring money market funds to shift to a floating NAV from the current stable $1-per-share NAV.
But groups representing issuers and state and local governments mobilized in support of the stable NAV, citing it as key to their short-term cash-management strategies. They also said, in a letter filed last week with Garrett and the panel's top Democrat, Maxine Waters of California, a floating NAV would make money market funds less attractive to investors. In the case of muni money market funds, a floating NAV would limit purchases of municipal bonds and drive up the cost of municipal-debt issuances.
During the two-and-a-half-hour hearing, several witnesses and lawmakers echoed the issuers' concerns.
In his testimony, Paul Schott Stevens, the president and chief executive officer of the Investment Company Institute, said a floating NAV would prove "disruptive" to money-market funds, which, he said, hold more than half of all short-term municipal debt — totaling roughly $350 billion.
"The funding they provide is part of the lifeblood of jobs and communities — and in today's economy, we can ill-afford to disrupt it," Stevens said.
In response to a question from Rep. Carolyn Maloney, D-N.Y., Stevens said a floating NAV would drive away investors, restricting issuers' access to credit.
"For communities around the country, access to that financing is very important," he said.
Only one of the panel's six witnesses, who hailed from academia and the fund industry, appeared to back the floating NAV, citing it as necessary to reforming the financial system.
"Money market funds are still vulnerable to runs," said René Stulz, an economics professor at Ohio State University.
Still, during the hearing, Garrett said: "There seems to be not much love for the floating NAV."
Late last week, Garrett introduced a bill, the SEC Regulatory Accountability Act, that would require the SEC to adhere to President Obama's executive order, issued in January, obligating government agencies to perform cost-benefit analysis of proposed rules. The bill would require the SEC's Office of the Chief Economist to conduct cost-benefit analysis of proposed regulations and "ensure that the regulatory consequences on economic growth and job-creation are properly accounted for," according to a statement released by his office.
The bill would also require the SEC to write new and existing rules in plain, easy to understand language, the statement said.
As an independent agency, the SEC is not required to follow the executive order.
John Nester, an SEC spokesperson, declined to comment on the bill and pointed to a statement on the SEC's website. In the statement, the SEC said, "Many of our existing practices are consistent with those described in the order," including cost-benefit analysis of proposed rules.
