Tuesday, May 08, 2012

Bi-Partisan Group of House Members Cautions SEC on Money Market Fund Regulatory Reform

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.