Market Groups, Several Lawmakers: Exempt Muni MMFs from SEC Reforms

Municipal money market funds should not be required to have floating rate net asset values, most of the witnesses and several lawmakers said at a hearing held here on Wednesday by a House Financial Services Committee panel.

Even before the witnesses began speaking at the capital markets subcommittee hearing, Reps. Randy Hultgren, R-Ill., Stephen Lynch, D-Mass., and David Scott, D-Ga., expressed concerns about the impacts the Securities and Exchange Commission’s proposed reforms would have on state and local governments and muni money market funds.

The SEC has proposed moving most MMFs to a floating net asset value from the current stable NAV of $1 per share. It also has proposed funds have liquidity fees and gates to discourage redemptions. The proposals are aimed at preventing runs on MMFs such as the one that occurred during the financial crisis in 2008 when the Reserve Primary Fund “broke the buck” and led investors to pull more than $300 billion from prime money market funds.

Under the SEC’s proposed changes to its 2a-7 rules on MMFs, the floating NAV requirement would not apply to “retail” MMFs, which are defined as those limiting each shareholder’s redemptions to $1 million per business day, and to funds holding U.S. government securities. It also would not apply to funds holding Treasuries and federal agency securities.

Lynch said during the hearing that he is concerned the SEC proposals “may have a negative effect on local governments that rely on” MMFs.

Hultgren, formerly an Illinois lawmaker, said, “Money market funds provide a unique and widely-used municipal cash management product” for state and local governments that “may no longer be available” if  the SEC proposals are approved.

“I’m also concerned that the SEC’s inclusion of tax-exempt [MMFs] will drive away money market investors,” he said. “Currently, over 50% of outstanding short-term municipal debt is held by money market funds, If this demand dries up, municipalities will see higher issuance costs.”

Scott warned the floating NAV requirement would “eliminate prime money market funds and state and local governments in turn would lose a valuable tool in money management and would drive up the cost of financing short-term borrowing.”

Georgia Treasurer Steve McCoy, the first witness, speaking on behalf of the National Association of State Treasurers, said the SEC’s proposals would force many states’ local government investment pools out of business because typically state laws prohibit LGIPs from having floating NAVs as well as liquidity fees and redemption gates. LGIPs are not directly regulated by the SEC, but would be affected by commission’s proposals because the Government Accounting Standards Board mandates they be run like MMFs.

McCoy said bank deposits for local investments would not be a viable alternative because states typically require they be collateralized.

Marie Chandoha, president and chief executive officer of Charles Schwab Investment Management, Inc., told the lawmakers: “Municipal money market funds should continue to have a stable NAV” because “these funds are much more liquid than prime funds and therefore much more resistant to runs.”

She said municipal MMFs represent 10% of whole MMF market “yet have outsized importance for state and local governments to finance themselves.”

Schwab is one of the largest managers of MMFs in the nation, with three million MMF accounts and $168 billion under management as of June 30 of this year.

Chandoha also warned the tax problems related to a floating NAV would require investors to track and report hundreds of gains and losses, which would be overly burdensome.

Investment Company Institute president and CEO Paul Schott Stevens, another witness, said that ICI agrees with the SEC that there’s no reason to apply these reforms to funds that primarily invest in Treasuries and other government securities. “Similarly, funds that invest in short-term debt of state and local governments should be exempted from these structural changes,” he said, adding, “The characteristics that the SEC attributes to government funds apply with equal force to those of tax-exempt municipal funds.”

“There is no evidence that investors in tax-exempt [MMFs] redeem en masse during periods of market stress. Moreover, these funds hold the great majority of their assets in highly liquid securities that can be liquidated to make redemptions,” he said.

Stevens said the ICI looked at Detroit’s bankruptcy filing and Orange County, Calif.’s financial problems years ago and found that those major shocks in the market “did not precipitate outflows en masse from tax-exempt money market funds.”

He said the SEC’s two proposals “would render money market funds entirely unattractive” and would “confront investors with a choice: sacrifice stability, in the case of floating NAVs on prime institutional funds, or face the prospect of losing liquidity under extreme circumstances, through the proposal for liquidity fees and redemption gates.”  

The only witness in favor of requiring floating NAVs for all MMFs was Sheila Bair, chair of the Systemic Risk Council.

But she said the liquidity fees and gates proposal “could make the situation worse’ and exacerbate runs on MMFs because investors will rush to redeem their shares first.

Rep. Steve Stivers, R-Ohio, and McCoy said the floating NAV would exacerbate a run because it would encourage investors to redeem as soon as possible.

Meanwhile, earlier in the hearing, Garrett took the SEC to task for its earlier money market fund proposals, floated in 2012 during the chairmanship of Mary Schapiro.

Garrett claimed there was a “closely coordinated effort” by Schapiro, the Financial Stability Oversight Council and the Federal Reserve Board to develop the earlier proposed rules — which would have required MMFs to have capital cushions or buffers — and "to exert undue political influence on the commission to accept them."

"Commissioner [Dan] Gallagher ... pointed out, the only real purpose for the proposed buffer was to serve as the price of entry into an emergency lending facility at the Federal Reserve that they could construct during any future crisis," said Garrett, "In short, the buffer would provide additional collateral to provide a Fed bailout for troubled funds.”

For reprint and licensing requests for this article, click here.
Law and regulation
MORE FROM BOND BUYER