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Securities Law

State, Local Groups Oppose Floating NAV, Call for SEC Roundtable

Ten state and local groups are urging the Securities and Exchange Commission not to require money market funds to use a floating net asset value instead of the current $1 per share fixed value, warning the shift would create major problems for investors and municipal bond issuers.

The groups, which include the Government Finance Officers, the National Association of State Treasurers and the National League of Cities, made their plea in a letter sent to the SEC about its proposed money market fund reforms.

The reforms, which the SEC proposed in June, are intended to reduce the risk of a run on MMFs similar to what occurred during the financial crisis in 2008 when the Reserve Primary Fund “broke the buck” and led investors to pull nearly $300 billion from prime money market funds. They would make quickly withdrawing from a MMF a less desirable option because investors would not be able to count on getting back exactly $1 for each share redeemed.

Under the proposal, funds that invest primarily in federal government securities and “retail” funds would be exempt from the requirement to float the NAV, but retail is defined “as a fund that limits investor redemptions to $1 million or less per day.” It is unclear how many funds would be willing to meet that definition, which is not currently used. Local leaders have said a floating NAV would greatly reduce the value of MMFs for local governments, which sometimes invest money in them so they can quickly redeem shares for cash when they need it.

“Forcing MMFs to float their NAVs will create significant accounting, operational, and tax problems for investors and issuers,” the groups said in the letter. “While we appreciate that the commission acknowledges these problems, the proposal provides no clear-cut solutions. Accordingly, we believe that it is incumbent upon the commission to work jointly with other bodies and interested stakeholders to make certain that accounting, tax, and operational implications are fully addressed before the proposal is finalized.”

The groups are requesting that the SEC convene a roundtable to closely examine the impact a floating NAV would generate for state and local governments. “Given the many questions raised in the proposal, we believe that convening a roundtable and continuing the dialogue with interested parties will aid the commission in generating a more informed, effective rule,” it states. “Such an approach will ensure that any potential regulatory changes aimed at MMF reform will be consistent with the commission’s statutory responsibility to promote efficiency, competition, and capital formation.”

Stakeholders at a meeting sponsored by the U.S. Chamber of Commerce in July warned the reforms would require them to completely overhaul their accounting, budgeting, and investment systems.

The letter was signed by Dustin McDonald, director of GFOA’s federal liaison center. The other groups included the International City/County Management Association, the National Association of State Auditors, Comptrollers and Treasurers, the National Association of Counties, the U.S. Conference of Mayors, the American Public Power Association, and the Council on Infrastructure Financing Authorities.

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