Securities Law

SEC Head: Takes MMF Reform Case to Senate

WASHINGTON — Treasurers of municipalities should consider moving cash out of money market funds if they aren’t prepared to assume the inherent risks that come with such investments, the head of the Securities and Exchange Commission said Thursday.

In testimony before the Senate Banking Committee, SEC chairman Mary Schapiro laid out her case for additional regulation of the $2.6 trillion money market mutual fund industry, noting that governments that invest in such funds should be prepared to absorb losses.

“If a municipal treasurer can’t bear the risk of [losing] even a penny [per] share in their cash management account, one has to wonder whether a money market fund really is the right place for them to be in the first instance,” she said. “[Money market funds] do have that risk if the fund breaks the buck.”

Maryland Treasurer Nancy Kopp, who submitted written testimony on behalf of the National Association of State Treasurers, said in an interview that municipal treasurers read mutual fund prospectuses carefully and “know there’s a risk.”

But, she said, “there are many reasons why money market mutual funds are right,” for governments. The investments are safe, flexible, and liquid — qualities states need for short-term investments, she said.

Money market funds typically invest in high-grade short-term securities with the goal of maintaining a constant value of $1 per share.

During the financial crisis, at least one fund saw its share price drop below the sacrosanct $1 and the Treasury was forced to step in to guarantee all fund deposits.

Kopp added that shifting government cash to other financial institutions with less transparency entails potentially more risk. Also, the Federal Deposit Insurance Corp. only insures bank deposits up to $250,000.

Schapiro warned senators that despite regulations passed in 2010, money market funds still pose a systemic risk to the U.S. economy. She said the funds remain susceptible to “runs,” which could potentially freeze short-term credit markets.

Schapiro told the committee that she asked SEC staffers to examine two regulatory options. One would require money markets to peg share prices to the value of underlying assets — in other words, requiring funds convert from a stable $1 net asset value to a “floating” NAV.

The other option would be let funds retain stable NAVs, but add capital buffers and, possibly, redemption restrictions.

Municipal officials and groups like the Investment Company Institute, the Government Finance Officers Association, the American Public Power Association, the National Association of Counties, the United States Conference of Mayors and others submitted letters or testimony to the committee criticizing those options.

They said the new rules could result in higher short-term borrowing costs for governments and fewer reliable short-term investment options and adversely impact the market for muni debt. A paper released this week by Georgetown University professor James Angel estimated that money market funds hold 60% of state and local governments’ short-term debt.

Mary Christine Jackman, director of Maryland’s investment division, noted that local laws often require governments to invest in products with stable NAVs. Laws could change, but in the meantime, governments would have fewer investment options.

Schapiro said limitations posed by laws are why the SEC is considering capital buffers and redemption restrictions.

She said money market regulations passed in 2010 aren’t enough to prevent a repeat of what happened in September 2008, when the $62.5 billion Reserve Primary Fund’s NAV fell below $1. The federal government halted the run with a taxpayer-funded program, but Congress later banned the Treasury Department from repeating such bailouts.

ICI head Paul Schott Stevens and others have said the 2010 rules do prevent such runs. He said the rules increase transparency and allow orderly liquidation of funds that risk breaking the buck,

The 2010 rules required money markets to be able to convert 10% of funds into cash within one day and 30% within one week. They must also conduct stress tests and disclose more information.

In written testimony, Schott Stevens said changes being considered “would destroy money market funds, at a great cost to investors, state and local governments and the economy.”

Schapiro said the SEC will examine the implications of new rules and the potential for more runs, which she said could freeze credit, erode investor confidence and hinder the ability of investors to get their cash.

She said the SEC will also seek input from municipalities, and examine how rules could affect state and local governments.




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