A coalition of mayors from across the country is urging Securities and Exchange Commission chairman Mary Jo White to reconsider proposed structural changes to municipal money market mutual funds, especially requiring them to have floating net asset values.
They made their pleas in a Sept. 12 letter to White that was signed by 12 mayors and one group representing a number of Chicago-area cities. The letter stresses the importance of municipal money market funds (MMMFs) to municipalities and warns the chairman that changes could make these funds less attractive to investors and have a detrimental effect on cities’ financial operations.
The mayors’ letter comes at the same time as another from the 12 presidents of the Federal Reserve system urging the SEC to widen the proposal to include retail funds currently exempt under the proposal. In their letter, the Fed bank presidents urge the SEC to move forward with the floating NAV proposal but suggested that the associated proposal to incorporate liquidity fees and redemption gates “do not constitute meaningful reform.”
The SEC proposed earlier this year to require most money market funds to use a floating net asset value rather than the current stable $1 per share. The proposal would allow funds investing in federal government securities, as well as “retail” funds that limit redemptions to $1 million per day or less, to use a stable NAV.
“MMMFs represent both an important short-term financing option that municipalities rely on and a cash management tool to manage liquidity,” the letter states. “While we support regulatory efforts aimed at reinforcing the viability and liquidity of MMMFs, forcing MMMFs to move to a floating NAV under the present proposal has the potential to drive investors away from MMMFs, preclude their use for many public entities, and ultimately eliminate their utility for local governments.”
The reforms are designed to prevent investors from causing a “run” on money funds by pulling out of them in a scenario similar to one that occurred during the financial crisis in 2008.
Supporters of the floating NAV proposal have said they believe money market funds would remain a viable investment option for municipalities even with a floating NAV, and that any locality unable to use a floating NAV fund could choose to use a government fund. The mayors argue that municipal funds should be exempt from the floating NAV requirement.
“We are particularly concerned that the SEC proposal fails to treat municipal MMMFs like other MMMFs that invest primarily in government securities, and instead proposes both a floating NAV and restrictions on redemptions for municipal MMMFs,” the mayors wrote. “Municipal MMFs are an exceptionally high quality and stable short term investment alternative. Like other government MMMFs, municipal MMFs did not experience redemptions during the financial crisis.”
The commission has not yet moved forward with money market fund reform proposals, and has solicited comment from market participants and the public.