Fourteen municipal market groups are urging the Securities and Exchange Commission to refrain from requiring money market funds’ net-asset values to float, warning such a change would hurt state and local governments and money market funds.
“The fixed NAV is the fundamental feature of money market funds,” the groups said in a two-page letter to SEC chairman Mary Schapiro. Funds currently maintain a stable $1.00 per-share value. “Forcing funds to float their value likely would eliminate the market for these products by forcing many investors, including state and local governments, to divest their [money market mutual fund] holdings, and discouraging others from using these funds,” the muni groups said.
Their warning comes as SEC officials have considered proposing rule changes, including one that would require money market funds to move to floating NAVs to prevent money market funds from “breaking the buck” or falling below their $1.00 per share value and triggering an investor run.
The groups told Schapiro that many state and local governments view MMFs as an integral part of their cash-management practices and that as of the third quarter of 2011, they held a total of $86 billion.
“Many governments have specific policies or statutes that mandate investing in financial products with stable values, and money market funds are the investments used to ensure compliance with these state and local laws and policies,” the groups said.
They warned that if the SEC requires funds to move to floating NAVs, “we expect that most if not all of our organizations’ members would divest a significant percentage of their investments in [MMFs] and would be forced to look at competing products that could be more susceptible to market conditions, more difficult to account for and manage, and may pose market risk.”
“That would contrast sharply with the SEC’s goals,” the letter said.
The groups also pointed out that the funds are the largest investors in short-term municipal bonds and that, with $288 billion in assets, tax-exempt money market funds hold 57% of all outstanding short-term muni debt.
Moving to floating NAVs would make these funds less attractive to investors and limit their ability to purchase munis, they said, adding: “Such a decrease in demand would lead to higher debt-issuance costs for many state and local governments across the country.”
The SEC’s concerns stem from Lehman Brothers’ collapse in mid-September 2008, which led Reserve Primary Fund, suffering from heavy losses from investments tied to the firm, to break the buck several days later.
The Treasury Department, worried about a run on money market funds, calmed investors by announcing on Sept. 22, 2008, that it would provide a $50 billion temporary insurance program for money market funds that would not jeopardize the tax-exempt status of the muni bonds they held.
The SEC has worried ever since then that money market funds were still susceptible to breaking the buck and facing redemptions of share.
In 2010, the commission adopted tighter standards on the kinds of securities MMFs could hold and permitted those that break the buck to suspend redemptions while they undertake orderly liquidations of assets.
The SEC said it was considering requiring money market funds to go to floating rather than stable NAVs. That disclosure drew a great deal of opposition.
Now the SEC is considering additional reforms, including requiring muni money market fundss to move to floating NAVs. It is also considering requiring MMFs to set aside capital reserves and place limits on how much of their holdings investors could get back immediately if they wanted to sell shares.