PHOENIX – A bill that backers say would expand the market for municipal debt and provide municipalities with more investment flexibility appears to be on its way to the full House after receiving strong support by the House Financial Services Committee on Wednesday.
Rep. Jeb Hensarling, R-Tex., the committee chairman, said he supports the bill, despite having some reservations. The voice vote by committee members that he ordered appeared to clearly favor the bill’s passage. A formal recorded vote will be taken at a later time.
The legislation, the Consumer Financial Choice and Capital Markets Protection Act of 2017, would allow institutional money market funds to return to a fixed net asset value after a 2014 Securities and Exchange Commission rule change required those MMFs to use a floating NAV.
The bill, which was primarily driven by Reps. Gwen Moore, D-Wisc., and Keith Rothfus, R-Pa., received bipartisan support from members of the committee.
The bill has also garnered support from many municipal market participants and interest groups, including the Government Finance Officers Association.
The SEC rule, which took effect in 2016, allows funds investing in federal government securities, as well as "retail" funds that have policies and procedures in place designed to limit investors to "natural persons," to use a stable NAV. Other MMFs were required to “float” their NAVs, meaning that the value of a share can fluctuate rather than remain at a fixed $1.
The change was designed to prevent investors from causing a "run" on MMFs by pulling out of them in a scenario similar to one that occurred during the financial crisis in 2008. Muni groups had warned that the floating NAV requirement would hurt the market by making such funds less attractive to investors. They said the requirement would deprive local governments of an important financing tool since many municipalities had used MMFs as vehicles for short-term cash-flow management.
GFOA president Pat McCoy testified in support of the bill during a November hearing before a subcommittee of this panel.
Rothfus, speaking on Wednesday, said he believes the SEC rule was “misguided” and has created a “clear and consistent problem.” Echoing McCoy’s testimony, Rothfus said issuers have had to endure higher borrowing costs.
“This is not just a theoretical point,” he said.
Moore said the bill is really an infrastructure bill because it will help facilitate more efficient municipal financing. Local governments have had to rely increasingly on bank loans, swaps, and derivatives due to the SEC’s MMF rule, something she said she was uncomfortable with.
The bill has more than 60 co-sponsors, and Moore touted the positive reception it has received.
“This legislation has tremendous support,” she said.
There was some opposition, which was also bipartisan. Rep. Carolyn Maloney, D-N.Y., said she opposed the bill because it undermines what she characterized as an important protection to prevent runs on certain funds. She would vote for the bill if it applied only to municipal funds, she said, but could not support it because it would also eliminate the floating NAV requirement for funds investing in corporate debt.
Maloney noted that some investment management firms opposed the bill. The Investment Company Institute said in previous testimony about the bill that, because it had membership with conflicting opinions regarding the legislation, it would not take a formal position.
Rep. Bill Huizenga, R-Mich., said he would also oppose the bill because SEC chairman Jay Clayton was urging that the MMF rule be given more time for evaluation.