A bill introduced in Congress last year, the "Consumer Financial Choice and Capital Markets Protection Act of 2015," which would allow all money market funds continue to have a constant or stable NAV, is in the news once again. The bill's sponsor in the House, Rep. Gwen Moore (D-WI-4), along with co-sponsor Steve Stivers (R-OH-15) wrote in yesterday's Bond Buyer an article entitled, "Preventing Another Self-Inflicted Wound to Public Infrastructure Investment." It says the bill, which we covered in our March 8 News, "Long Shot Legislation Could Keep All Money Funds Stable, Ban Bailouts," is scheduled for a hearing by a Senate subcommittee this week. The Senate version of the bill (S.1802) was introduced on July 16, 2015, while the House version (H.R.4216) https://www.congress.gov/bill/114th-congress/house-bill/4216 was introduced on Dec. 10, 2015 by `Moore. We review the article below, but first some background.
As we quoted in our "Long Shot Legislation" piece, "This bill amends the Investment Company Act of 1940 to authorize any open-end investment company to elect, in its registration statement, to be a money market fund and to compute the current price per share, for purposes of distribution or redemption and repurchase, of any redeemable security issued by the company using the amortized cost method of valuation or the penny-rounding method of pricing, regardless of whether its shareholders are limited to natural persons, if: the company's objective is the generation of income and preservation of capital through investment in short-term, high-quality debt securities; the company elects to maintain a stable net asset value per share or stable price per share, by virtue of such methods, and the board of directors of the company has determined in good faith that it is in the best interests of the company and its shareholders to do so and that the money market fund will continue to use such method(s) only as long as the board believes that the resulting share price fairly reflects the market-based net asset value per share of the company; and the company agrees to comply with such quality, maturity, diversification, and liquidity requirements as the Securities and Exchange Commission (SEC) prescribes as necessary or appropriate in the public interest or for the protection of investors, if consistent with this Act."
The Bond Buyer article states, "This week, the Senate Banking Subcommittee on Securities, Insurance and Investment will hold a hearing on the Senate version of legislation we introduced in the House of Representatives, H.R. 4216, the Consumer Financial Choice and Capital Markets Protection Act, that will save a long-standing source of low-cost capital for public infrastructure investment. The bipartisan and bicameral legislation permits money market funds that invest in the short-term debt of commercial entities and state and local governments to continue to use amortized cost accounting for valuing fund assets. We introduced the legislation because it would preserve money market funds as a source of liquidity and capital for the public infrastructure needs of our citizens."
Moore and Stivers write, "State and local governments rely on access to robust capital markets to finance the construction and maintenance of schools, roads, public transportation systems, affordable housing, airports and other important infrastructure projects. Money market funds facilitate access by investing in short-term municipal debt and holding it to maturity. That access has been put at risk by a Securities and Exchange Commission (SEC) rule that requires certain money market funds offered to institutional investors change their method of calculating their net asset value (NAV) from fixed to floating."
Furthermore, the piece says, "Money market funds are among the largest investors in short-term municipal bonds. As of the end of 2015, money market funds held over $245 billion in municipal debt issuances from all 50 states and the District of Columbia.... Unfortunately, the SEC rule, which was adopted in July 2014 and that will take effect beginning on October 14, 2016, will make money market funds far less attractive to investors who desire a stable NAV cash management vehicle. Instead, their options will be limited to money market funds that invest exclusively in government securities, bank deposits, or non-SEC registered investment funds."
It continues, "As investors begin to leave funds that invest in municipal bonds, which has already started to happen, there will be less demand for municipal securities. According to a recent study by Treasury Strategies, a financial industry consulting firm, more than 40 percent of tax-exempt money market fund assets are directly at risk due to the floating NAV rule, and the indirect impacts are significantly higher because of the complexity of the rule's definition of non-natural persons. As demand decreases, the logical consequences will be higher borrowing costs for state and local governments in Wisconsin, Ohio, and across the nation."
The two Representatives add, "Over time, state and local taxpayers could be even more impacted from not having those options because current market conditions are favorable.... Our legislation simply provides institutional non-government money market funds with the option to offer and redeem their shares on a stable NAV basis, which would be consistent how money market funds operated in the past. It forbids any federal assistance from being provided directly to any money market fund, being it a stable or floating NAV. Equally important, it does not alter any aspect of the Dodd-Frank Wall Street Reform and Consumer Protect Act, nor does it alter any of the safety and soundness regulations adopted by the SEC in 2010 and 2014, which we strongly support. Those rules effectively addressed and enhanced money market fund liquidity, credit quality, transparency, and regulatory monitoring, and made money market funds more resilient to future market turmoil."
Moore and Stivers write, "While it is true that money market funds are not FDIC insured or hold regulatory capital like banks, money market mutual funds are far more liquid than banks, with a 10 percent of fund assets required to be convertible to cash overnight and 30 percent convertible in a week. Banks remain the cornerstone of U.S. financial markets, but money market funds are a safe and vital option for cash management, especially for amounts above FDIC insurance rates. Academics and studies have highlighted that, in the 40-year history of money market funds, only two have ever failed to pay investors the dollar par share value (known as "breaking the buck"); whereas, over the same 40 years, thousands of FDIC insured banks have failed."
They conclude, "The Senate subcommittee will soon hear important testimony that state and local governments need Congress to act on H.R. 4216 (S. 1802 in the Senate) so they can continue to have access to the indispensable financing options provided by money market funds. We urge our colleagues to heed this call and work with us to enact this legislation, which preserves those options while protecting the stability of the financial system."
As we wrote in our previous News article, an organization has formed to support the bill, the Coalition for Investor Choice, which is made up primarily of state treasurers, universities, state and local government, businesses, trade associations, and pension funds. The Coalition website explain, "These funds, which collectively have more than $1 trillion in assets, will be forced into a "floating" net asset value or "NAV" requiring them to value shares in increments of 0.0001 cents per share."
On the website's "Facts" page, the Coalition explains, "By ending the stable $1 per share valuation, new government regulations eliminated a key aspect of Money Market Funds that make them a vital tool for institutions. Without a stable valuation, institutions will have trouble using these funds as a way of handling daily cash needs. The effects will ripple across the financial sector where institutions already hold more than $1 trillion of assets in stable NAV, prime and tax-exempt money market funds."
