It may be a long shot, but Federal lawmakers have filed a bill that would allow all money market funds continue to have a constant or stable NAV. The bill, the Consumer Financial Choice and Capital Markets Protection Act of 2015, was introduced in the Senate (S.1802) on July 16, 2015, by Sen Pat Toomey (R-PA), and in the House (H.R.4216) on Dec. 10, 2015 by Rep. Gwen Moore (D-WI-4). There is no mention of the pending SEC MMF reforms in the text of the bill. But if passed, this presumably would supersede reforms which call for a Floating NAV for Prime and Tax-Exempt Institutional money funds. Neither the House nor the Senate bill have progressed very far, and may not advance at all, but the issue bears watching. The Senate bill was referred to the Committee on Banking, Housing, and Urban Affairs, while the House bill was referred to the Financial Services Committee. Supporters are hoping to have a hearing on the issue in the coming months.
The Consumer Financial Choice and Capital Markets Protection Act, as currently written, says, "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 Bill's text continues, "The bill prohibits covered federal assistance from being provided directly to any money market fund. The bill defines: (1) "covered federal assistance" as federal assistance used for the purpose of making any loan to, or purchasing any stock, equity interest, or debt obligation of, any money market fund, guaranteeing any loan or debt issuance of any money market fund, or entering into any assistance arrangement, loss sharing, or profit sharing with any money market fund; and (2) "federal assistance" as insurance or guarantees by the Federal Deposit Insurance Corporation, transactions involving the Secretary of the Treasury, or the use of any advances from any Federal Reserve credit facility or discount window that is not part of a program or facility with broad-based eligibility established in unusual or exigent circumstances."
It adds, "No principal underwriter of a redeemable security issued by a money market fund nor any dealer shall offer or sell any such security to any person unless the prospectus of the money market fund and any advertising or sales literature for such fund prominently discloses such prohibition against direct covered federal assistance. A company that elects to be a money market fund shall remain subject to the provisions of this Act and SEC rules and regulations that would otherwise apply to a registered open-end company, if consistent with this Act."
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 .0001 cents per share. Only money market funds that hold more than 99 percent of their assets in U.S. government securities, along with funds for retail investors, will be allowed to offer a stable $1-per-share value. Any investor not considered a "natural person" -- meaning an "institutional" investor –- will be forced to use a Floating NAV."
It continues, "As a consequence, hundreds of billions in assets currently in stable NAV funds must now move to bank accounts or to government money market funds, providing lower returns for investors. The outflows from prime and tax-exempt funds will shrink the market for commercial paper and municipal debt, raising borrowing costs for both private and government issuers. Already, the repercussions of this rule change are being felt."
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."
It adds, "S. 1802/H.R. 4216, the "Consumer Financial Choice and Capital Markets Protection Act of 2015," will preserve Money Market Funds for all investors while ensuring continuing safeguards and the Securities and Exchange Commission's careful regulation. S. 1802/H.R. 4216 enables institutions to continue to access the high-quality, liquid cash management tools they have relied on for more than four decades."
One of the hundred-plus support letters, written by the Ohio Council of County Officials to Senator Sherrod Brown, comments, "Over the past two (2) years, several of our member organizations expressed their concerns with proposed securities and Exchanges commission ("SEC") Rule changes. We believe the proposed changes adopted in 2014 could have a negative impact upon the viability of money market funds ("MMFs") and in turn, the financial viability of local governments in Ohio. We respectfully request your support for legislation that is being developed by members of the Senate Banking, Housing and Urban Affairs Committee. The Act would appear to correct a significant impediment to the SEC's 2014 money market reform rule. If not corrected, these changes could be harmful to Ohio's local governments. While many local governments from numerous states appealed to the SEC directly in 2013 and 2014, the Commission was not persuaded to avoid the potential negative consequences resulting from these provisions, and ultimately chose to include them. The proposed legislation adds a mechanism for MMF sponsors to create a MMF with a fixed NAV, if the sponsor so requests at the time the fund is created."
It continues, "The OCCO supports this change for a number of reasons. As investors, local governments rely on MMFs as one of the main components of their short- and mid-term investing needs.... Many local governments are subject to policies and legal restrictions permitting them to invest only in funds that are stable and risk adverse. If the SEC's new floating NAV requirement is imposed on prime MMFs beginning in 2016, governments may be forced out of these funds and would have to look to other investment vehicles that have historically paid lower yields, or to other less secure products with equal or less liquidity than MMFs.... The new floating NAV requirement would also harm Ohio local governments that issue municipal securities or "tax advantaged" debt."
We became aware of bill via an article in Alabama Construction News', entitled, "Losing Money Market Funds: Why it Matters to the Construction Industry." It says, "There are many significant consequences of a floating NAV that will have negative effects on the construction industry. "By requiring institutional tax-exempt MMFs to change from a fixed NAV to a floating NAV, MMFs will be far less attractive to investors, thereby limiting the availability for MMFs to purchase municipal securities," said J. Lister Hubbard of Capell & Howard, P.C.... "Furthermore, these MMF changes are coming at precisely the same time that global banking regulations known as Basel III are being put in place, making banks less capable of filling the gap," Hubbard added."
It continues, "To address the negative impact of the SEC amendment, the Coalition for Investor Choice, Inc. is supporting S. 1802/H.R. 4216, the Consumer Financial Choice and Capital Markets Protection Act. The Act seeks to preserves MMFs as a source of liquidity and capital for public infrastructure needs. "It ensures that all MMFs, both institutional and retail, across the government, prime, and municipal spectrum, are able to continue to function at a stable $1 per share net asset value after pending SEC reforms take effect in October," said [The Coalition's Vince] Randazzo. Randazzo also noted that the legislation does not alter any aspect of the Dodd-Frank Act of 2010, which imposes new regulatory requirements on U.S. banks. Nor does it alter any of the other regulations adopted by the SEC in 2010 and 2014, which addressed and enhanced MMF liquidity, credit quality, transparency and regulatory monitoring and made MMFs more resilient to future market turmoil."
