PHOENIX - A proposed bill to roll back regulations on money market mutual funds would expand the market for municipal debt and provide municipalities with more investment flexibility, Government Finance Officers Association President Pat McCoy told lawmakers Friday.
McCoy was among several witnesses called before the House Financial Services Committee’s subcommittee on capital markets, securities, and investments to testify about a group of bills. McCoy, speaking on behalf of the GFOA rather than as finance director of the Metropolitan Transportation Authority, testified in support of H.R. 2319, the Consumer Financial Choice and Capital Markets Protection Act of 2017. That legislation, introduced earlier this year by Rep. Keith Rothfus, R-Pa., would allow institutional money market funds to return to a fixed net asset value after a 2014 SEC rule change required those MMFs to use a floating NAV.
The SEC rule, which took effect last year, 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. Natural persons means human beings, rather than business entities. 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. McCoy told lawmakers that a year into the effectiveness of the rule, those fears had been borne out.
“Between January 2016 and July 2017, tax exempt MMFs assets under management fell by 50%, from $254 billion to $135 billion, dramatically shrinking an important market for municipal debt,” McCoy said in his prepared testimony. “At the same time, municipalities issuing variable rate demand bonds saw their borrowing costs nearly double the Federal Reserve’s rate increases over the same period. Many state and local governments determined that issuing variable rate debt to MMFs was excessively costly, and opted to issue higher cost fixed-rate bonds. These increased costs are shouldered by taxpayers and ratepayers.”
When asked by Rep. Randy Hultgren, R-Ill., about his experience as an issuer on that matter, McCoy said that he felt muni issuers needed access to all parts of the yield curve to get the best deals when financing infrastructure.
“Our lowest cost of funding has always been achieved using variable-rate products at the short end of the yield curve, which go right into the money market complex,” McCoy said.
The GFOA president added that the change has stopped some local governments from using of MMFs altogether, because of state or local statutes and policies that require them to invest in financial products with a stable NAV.
“By allowing all MMFs – prime, tax-exempt and government funds accessible to both retail and institutional investors – to offer a stable NAV, H.R. 2319 would allow state and local governments to once again utilize suitable investments defined by state and local elected officials, rather than by the SEC,” McCoy testified.
Subcommittee chair Rep. Bill Huizenga, R-Mich., said he had corresponded about the issue with SEC chairman Jay Clayton and that Clayton had urged lawmakers to give the rule more time and to collect more data about its effects. McCoy said that wasn’t necessary.
“I would argue that we’ve had enough time,” he said.
The rule change was a contentious issue in 2014 and only passed by a 3-2 commission vote, with current commissioners Michael Piwowar and Kara Stein providing the two nays. While the SEC could change the rule on its own, Investment Company Institute president Paul Schott Stevens said his group’s members have little appetite for another multi-year rulemaking process and that the SEC has other priorities.
Lawmakers noted the bipartisan support for the bill, which counts 22 Democrats among its 56 co-sponsors. Rep. David Scott, D-Ga., said he hoped that Huizenga and full Financial Services Committee chair Rep. Jeb Hensarling, R-Tex. would work to move the bill to the floor soon. Huizenga said that was the goal.
“We will certainly be giving this full consideration,” he said.