Yesterday, the GFOA, ICI, and Chamber of Commerce hosted a webinar entitled, "Money Market Fund Regulation: The Impact on Municipal Finance," which discussed the potential and myriad impacts of the SEC's proposed changes on municipal investors and issuers. The session featured Kathryn Hewitt, Treasurer, Harford County, MD, Jane Heinrichs, Senior Associate Counsel, Investment Company Institute, and Alice Joe, Executive Director, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce. The GFOA's supporting materials, entitled, "SEC Money Market Proposal Will Harm State and Local Governments: Much Pain, No Gain in Forcing Tax-Exempt Money Market Funds to Adopt Floating NAVs," explain, "State and local entities across the United States benefit from the $2.6 trillion money market mutual fund sector. The Federal Reserve reports that as of the end of the first quarter of 2013 state and local governments hold over $120 billion of their short- and mid-term investments in money market funds. Beyond providing valuable cash management services for state and local governments, money market funds themselves are key purchasers of municipal securities. In fact U.S. money market funds are the largest investor in short-term municipal bonds, holding almost three-fourths of state and local short-term debt (72 percent as of April 2013)."
The webinar's slides discuss the "Key Role of Money Market Mutual Funds in the U.S. Economy and Municipal Finance." They cites "$2.6 trillion in assets" and money funds role as an "efficient cash management tool for treasurers and finance officials in: State and local governments, Corporations and other businesses, Colleges, universities, and other nonprofits." The webinar says money funds are "a significant investor in corporate commercial paper, holding more than one-third of all outstanding CP and the largest investor in short-term municipal securities."
Regarding the "The SEC Proposal and Its Implications," they explain, "[The] two fundamental policy alternatives, which could be adopted alone or in combination: Floating net asset values (NAVs) [and] Liquidity fees and redemption gates." They also cite,"Other significant reforms that would apply under either alternative; and, Enhanced standards on disclosure and reporting, diversification, and stress testing." On the "Floating NAV alternative," ICI's presentation adds, "Prime and tax-exempt institutional funds must adopt [a] floating NAV. Retail funds (defined as funds that limit redemptions per shareholder to $1 million or less per day) exempted U.S. government funds (Treasury, U.S. agency) also exempted."
The presentation says the "Implications of SEC floating NAV proposal" include: "Loss of simplicity, benefits for many fund investors; Accounting and tax issues: tracking daily gains and losses; Operational complexity: costly system changes for funds, investors, and intermediaries (e.g., broker-dealers, retirement plans); [and] Net effect of new complexities: many investors and intermediaries will exit money market funds."
The webinar says ICI's view is: "Like government funds, tax-exempt funds should be excluded from any floating NAV requirement. History shows that tax-exempt funds are not vulnerable to significant redemptions in times of market stress. In September 2008, net redemptions from tax-exempt money market funds totaled 7.5 percent of their assets as of August 2008. Tax-exempt funds hold enormous amounts of liquidity. As of March 2013, tax-exempt funds had $213 billion in weekly liquidity, 78 percent of their total assets. Tax-exempt funds provide significant benefits to the economy."
The Powerpoint asks, "Why do cash/investment managers of state and local governments use money market funds?" It cites as benefits, "Daily cash management -- keep your money invested; Daily liquidity -- unexpected events; Safety and security; Operational ease for accounting/recordkeeping; Hiring investment expertise at a low cost; Access to a broader group of investment securities; State or local investment requirements may make other alternatives difficult to execute; Bank sweep products may sweep into money market funds; Local Government Investment Pools (LGIPs) often use money market funds for part of their liquidity requirements."
They query, "How do these proposed changes impact the institutional investor?" The presentation tells us, "[The] Floating NAV causes many operational concerns. Additional recordkeeping -- costly system changes; Increased transaction costs -- Increased workload to handle daily investments; Increased risk by pushing investors into riskier less liquid/lower credit-quality investments; Different treatment of institutional versus retail investors; Accounting rules do not require market value or fair value reporting of investments with maturities less than a year.
Finally, the presentation adds under the "Effect on LGIPs," "[A] Decision for each LGIP on whether to make the same changes -- [they're] not regulated by the SEC; Rating agency actions; Conflict with GASB rules; Costly system changes; [and, finally, the] Use of money market funds within LGIPs."
