WASHINGTON, Sept 17 A federal proposal to
regulate money market funds will have indirect, costly and
burdensome consequences for U.S. local governments and states,
say state treasurers who are pressing the Securities and
Exchange Commission to drop attempts at reforming the funds'
valuations and withdrawals.
"The SEC's proposed rule changes would be detrimental to
competition, efficiency, and capital formation for our members
as well as cities, counties, and other municipal entities. We do
not believe additional changes to money fund regulation are
needed at this time," the National Association of State
Treasurers wrote in a letter released on Tuesday.
The commission is hoping to prevent a repeat of the problems
faced by the $2.5 trillion money market fund industry during the
2008 financial crisis.
On Wednesday Georgia State Treasurer Steve McCoy will
testify before a House of Representatives Financial Services
Committee subcommittee to argue the organization's position that
the proposed reforms would lead to higher financing costs to
issuers of short-term municipal securities.
The treasurers' dominant concern involves special investment
accounts that some states operate for their local governments.
Municipalities put cash in these local government investment
pools (LGIPs) instead of banks, and then withdraw sums for
paying operational expenses, such as debt service and payroll.
The pools must follow the same rules as money market funds,
according to the Governmental Accounting Standards Board (GASB),
which oversees how governments account for investments and
But states will not be able to meet those standards if the
SEC decides to change its money market rule, known as "2a7," to
require funds to use a floating net asset value (NAV) and to
"gate" the funds by limiting withdrawals or charging liquidity
fees to prevent runs on the funds, the treasurers say.
Determining the floating NAV could prove costly for the
pools, Virginia State Treasurer and association President Manju
Ganeriwala told Reuters in an interview.
"Even if we were to spend all that money doing daily
accounting, a lot of the state statutes prohibit treasurers from
putting money where investment value may fluctuate," she said.
States could be forced to alter the pools' structures so
they do not resemble money market funds and therefore do not
have to abide by rule 2a7. They could also have to disband their
funds or encourage local governments to turn to banks that are
often reticent to take their deposits because of collateral
restrictions, she said.
"The current proposal of requiring gating and redemption
restrictions we don't believe will work," she added. "If there's
a run and if I'm an account holder in an LGIP ... then I won't
be able to get everything out. I'll have to wait 30 days. And
what if I have a debt service payment coming due?"
Heads of the 12 U.S. Federal Reserve regional banks last
week warned that allowing money funds to restrict investor
withdrawals could accelerate runs by sophisticated investors
before triggers are breached, leaving other shareholders in the
Fidelity Investments, the largest provider of U.S. money
market funds, have told Securities and Exchange Commission
officials the floating NAV could increase the borrowing costs of
municipalities by up to $13 billion by requiring the funds to
buy expensive, longer-term municipal bonds.
Comments on the proposal are due by Friday. This spring,
state treasurers made their case in a meeting with the head of
the SEC's municipal bond unit, John Cross.
The treasurers plan to meet with the GASB if the SEC
approves it proposal and investigate possibly changing the
accounting standards, Ganeriwala said.