The Securities and Exchange Commission's proposal for money market funds to use floating net asset values could cost state and local governments millions dollars and force them to abandon MMF investments, market participants and a new study asserted Thursday.
Speaking as part of a panel discussion hosted by the U.S. Chamber of Commerce, Maryland State Treasurer Nancy Kopp said the floating NAV piece of the SEC MMF reforms proposed June 5 would have a serious effect on state and local finance.
The SEC proposed two reforms. The first would require that all institutional prime money market funds operate with a floating NAV, instead of the current stable NAV of $1.00 per share. The other would allow money market funds to use a stable NAV, but would require them to impose a 2% liquidity fee if the fund's weekly liquid asset level falls below 15% of total assets, unless the fund's board determines this was not in the best interest of the fund. After falling below the 15% weekly liquidity asset threshold, the fund's board could temporarily suspend redemptions for 30 days.
Retail funds and funds investing primarily in U.S. government securities would be exempt from the floating NAV requirement. But the SEC is defining a retail MMF as one that limits each shareholder's redemptions to no more than $1 million per business day. All money market funds would be subject to the liquidity fee and gate proposal.
The SEC could choose to adopt both the floating NAV and the liquidity fee/gate proposals or only one of them.
Kopp told attendees that from her perspective, MMFs using the stable NAV provide state and locals a valuable financing tool because they provide liquidity with easy transfers and allow governments to count on being able to put a dollar in and get a dollar out. Kopp said Maryland invests about 10% of its available money in MMFs, but a floating the NAV would force the state to withdraw its investment.
"We would do much less," she said.
Kopp added that local leaders have told her office that floating NAV MMFs would not be useful to them because the changes would restrict their ability to access cash on a same-day basis. Kopp said she fears local governments and government entities would be forced to migrate to other financial products that more flexibility but offer less transparency.
There would also be significant costs to public entities and negative impacts on their ability to issue debt, according to a study presented at the event by Paul LaRock, principal at Treasury Strategies, Inc. The study asserts that in addition to the reduced use of a fund with reduced liquidity, government MMF investors would be forced to overhaul their investment policies and budgeting as well as make operational changes with generally limited staff. For one northeastern city, the cost of overhauling their system to deal with floating NAV funds could reach $350,000, according to the study.
Public institutions would especially suffer if investors are chased out of MMFs, according to the study. Short-term variable rate demand notes are a form of debt widely held by MMFs and frequently issued by governments. Though the amount of VRDNs outstanding has already been trending down during the past three years, the study points out.
"Additional declines in the number of MMF investors will further damage the ability of public institutions to obtain financing," it states. "The floating NAV, coupled with additional financial institution downgrades, will increase public sector financing costs and help to worsen the financial conditions at many local governments struggling to recover from the recent recession."
Rep. Gwen Moore, D-Wis. also spoke, telling the attendees that the issue concerns her because of the potential impact on municipalities. Moore said she maintains concerns, which she expressed to then-SEC chairman Mary Schapiro last year, that requiring a floating NAV could drive money into a handful of "too big to fail" banks or even offshore.
Moore said she believes the dialogue between regulators and the industry has improved since then, and urged stakeholders to comment on the SEC proposals. Moore added that she hoped Congress would play an observer role in the debate, because the SEC style of rulemaking is usually preferable to the "blunt instrument" of congressional action.
"You guys do not want us substituting our judgment for the experts," she said.