WASHINGTON, Sept 17 (Reuters) - 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 expenses.
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 lurch.
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.