As the SEC considers
the regulatory reform of money market funds, thirty-three House Members asked
the Commission to consider the impact additional changes to money market
funds would have on state and local governments throughout the country. In a
bi-partisan letter to SEC Chair Schapiro, the Members, all former state and local
government officials, emphasized how important it is for states and
municipalities to have access to the capital markets to fund community
projects, including roads and bridges,
hospitals, and low income housing projects.
States
and municipalities rely on the issuance of debt to fund many of these critical
public projects, they noted, and money market funds play a vital role in this
process. Money market funds hold roughly 60 percent of the short-term debt
issued by municipalities, making them the largest purchaser of the debt used to
finance these important activities. The House Members urged the SEC not do anything that would make it more
difficult or expensive for states and municipalities to raise capital.
Money market funds are also a cash management
tool and short-term investment option for states and municipalities, added the
Members, providing governments an efficient, liquid and regulated investment
vehicle that can be used to manage shorter-term investment needs. Further, many
state and local governments have investment policies in place that require
short-term investments to be held in stable value products, which makes the
stable $1.00 net asset value (NAV) of money market funds an important and
highly attractive feature for states and municipalities.
In the view of the House Members,
the SECs 2010 enhancements to Rule 2a-7 made money market funds safer and more
transparent. In addition to requiring that funds disclose their holdings every
month, Rule 2a-7 now requires that 10 percent of a fund's holdings have daily
liquidity and 30 percent be liquid within a week. As a result of shortening the
average maturities of holdings and restricting the ability of funds to invest
in longer-term securities, these funds are now better able to weather changes
in interest rates and market volatility.
The House Members also noted that
reforms under SEC consideration, such as mandating a floating NAV, capital
requirements, or imposing a holdback on customer funds, would alter the
fundamental structure of money market funds and, in turn, lead investors to
other less-regulated products. Any reduction in demand for money market funds
would reduce demand for the securities issued by state and local governments
and purchased by money market funds. As a result, concluded the Members, states
and municipalities would be deprived of a critical funding source and would be
faced with increasing debt issuance costs.
In an earlier letter to the SEC Chair,
House Financial Services Committee Chair Spencer Bachus (R-AL) questioned why
the Commission is considering discretionary regulatory reform of money market
funds, at a time when it has missed mandatory deadlines, without providing
Congress and the public with empirical data and economic analysis to justify
such a rulemaking. The letter was also signed by the Committee’s Vice Chair,
Rep. Jeb Hensarling (R-TX)
Citing the DC Circuit ruling that the SEC
relied on insufficient empirical evidence in adopting the proxy access rule,
the House leaders said it is incumbent on the SEC to first determine if further
money market reforms are necessary before selecting one of the reform options
that are reportedly under consideration. In making this determination, they
urged the SEC to conduct a thorough analysis of the money market fund industry,
including the effectiveness of the 2010 amendments to Rule 2a-7. In the view of
the House leaders, this approach to regulation will ensure that any future SEC
money market fund reform regulations will be grounded in rigorous economic
analysis and will survive judicial examination.