WASHINGTON — The Securities and Exchange Commission's new money market fund rules will make MMF investors more conservative while retaining the funds' usefulness for most market participants, including tax-exempt investors and municipalities, according to a new report from Moody's Investors Service.
The SEC voted 3-2 July 23 to require institutional money market mutual funds to adopt a floating net asset value, and also empowered MMF managers to impose liquidity fees and redemption gates on funds whose levels of weekly liquid assets falls below 30% of their total assets. That will mean "a smaller, more conservative and concentrated industry," Moody's concluded, with fund managers forced to use a floating NAV seeking shorter term securities that are less exposed to market fluctuation.
The SEC exempted retail funds and federal government funds from having to use the floating NAV, but did not exempt municipal funds specifically. MMFs are the largest investors in short-term munis, holding about 80% of all outstanding short term bonds totaling over $350 billion. Market participants had lobbied hard for a muni fund exemption, but SEC staff opted not to grant it. Many municipal funds would likely meet the definition of "retail" SEC staff said, meaning that they have policies in place designed to limit investors to natural persons rather than business entities.
"The changes to product structure are likely to cause MMF investors to shift some balances to alternative liquidity products with differing risk characteristics to meet the multiple needs of liquidity investors," Moody's said. "These alternative liquidity products will include bank deposits, separately managed accounts, ultra- and short-duration bond funds, cash plus funds and cash exchange-traded funds."
Muni groups have repeatedly warned that a floating NAV would be bad for the industry and for municipalities. A coalition of nine groups representing public interests, including the Government Finance Officers Association and National Association of State Treasurers
"Changing the NAV from fixed to floating would make MMFs far less attractive to investors, thereby limiting the availability for MMFs to purchase municipal securities," the groups wrote. "Losing this vital investing power would lead to higher debt issuance costs for many of our members across the country."
Robert Callagy, a vice president and senior analyst at Moody's, said that although the new rules will be a major change, MMFs will still be useful investment vehicles. The two year implementation period settled on by the SEC provides time for education and thought about the implications of the rule, he said.
"People may get more comfortable with these features over time," he said.
Moody's does not believe that funds will be eager to use their fee and gate power, because it would frighten investors away.
"It is important to remember that even under existing rules, MMFs are authorized to freeze redemptions at the fund board's discretion, a measure that has been used only in extremely rare cases," the report states. "In practice, the imposition of redemption gates and liquidity fees are also unlikely to occur."
