On July 23, 2014, the SEC voted 3-2 to approve a final rule on its 2013 proposal to institute reforms to money market mutual funds. The commission’s final rule contains a number of components that were included in its 2013 proposal – which the GFOA opposed and commented on in an independent letter and as part of a state and local association coalition last fall. (See both letters below.) Such provisions require institutional prime, retail, and municipal (tax-exempt) funds to maintain a floating net asset value instead of a stable NAV, which had existed previously. This change is expected to increase the cost of government cash management as jurisdictions adjust to new accounting systems from those currently predicated on a stable NAV.
Governments will also likely experience cost increases in debt management from other provisions of the final rule, which could drive investors away from the funds. These provisions include language that provides MMMF boards with discretion to impose liquidity fees and redemption gates during times of fiscal stress. A resulting loss of fund investors would be detrimental to governments, as MMMFs themselves are the largest purchasers of municipal securities – they hold more than 80% of state and local short-term debt, totaling over $350 billion. Finally the change to a floating NAV would also affect governments as investors, as many state and local governments are subject to policies and legal restrictions that only permit them to invest in funds that do not fluctuate in value. As such, many governments could be forced out of MMMFs and will have to look to other investment vehicles that have historically paid lower yields, or to less secure products with equal or less liquidity than MMMFs.
Beyond these issues, the final rule would also affect local government investment pools. Many state governments operate LGIPs, which are critical local government investment tools that must comply with standards set for them by the Government Accounting Standards Board. As the GASB requires LGIPs to operate in a manner consistent with the SEC rule governing money market funds (Rule 2a-7), the SEC’s proposal to modify this rule and institute a floating NAV would put many of these LGIPs out of compliance with GASB. GASB rules state that those LGIPs that do not comply with Rule 2a-7 must report its share of any unrealized gains or losses to each participant. Participants must also report these gains or losses on their balance sheets. Because this would not be an acceptable option for most states, many LGIPs will be faced with higher operational costs related to floating NAV compliance.
The compliance date for instituting the new rule will be two years after the rule is published in the Federal Register. In the coming weeks, the GFOA will develop resources to educate members about key components of the new rule, as well as initiating discussions on GFOA investment management best practices that need to be updated to account for the rule.
The GFOA conducted a comprehensive advocacy campaign opposing the 2013 proposed rule, working with GFOA members and state and local government association partners to send comment letters and meet directly with SEC commissioners and key members of the House and Senate to voice our concerns. Yesterday’s vote to approve the final rule marks the latest in a series of actions and proposals by SEC that harm state and local governments either deliberately or through indifference.