SEC proposal would harm municipalities

From The Beacon, October 2013

A few weeks ago, the MMA called on the Securities and Exchange Commission to reconsider and reject their recent proposal to implement far-reaching and disruptive changes to the regulation of money market mutual funds (MMMFs). This may seem like a complex and obscure issue for us to address, but the matter is actually quite straightforward, and the negative impact on cities and towns is easy to grasp.

I first wrote about this issue 21 months ago in this column, when the SEC was considering a similar proposal that stalled because of a strong backlash from municipalities, states and private investors. For unknown reasons, the staff at the SEC is continuing to push changes that would impose intrusive and destabilizing regulations, so the MMA submitted comments to the SEC on behalf of our members last month, asking the commissioners to reject the proposals.

A quick refresher on money market mutual funds is helpful to clarify the relevance of this matter. The Investment Company Institute provides a good summary: “A money market fund is a type of mutual fund that seeks to offer investors a variety of features, including return on principal, liquidity, and a market-based rate of return, all at a reasonable cost. Although the net asset value (NAV) per share of a traditional mutual fund changes daily in response to market factors, money market funds are structured to avoid these changes by seeking to maintain a stable share price, typically $1 per share … [and] investors use money market funds as a ‘parking place’ for cash between investments because money market fund yields are typically competitive with those of most savings accounts. For institutions of all kinds – businesses, nonprofit organizations, government agencies, and financial institutions – money market funds are a preferred vehicle for cash management.”

The proposed SEC rule changes would mandate a shift from a fixed net asset value (NAV) for money market mutual funds to a floating net asset value. Importantly, the SEC’s proposals would also depress the municipal bond market, leading to higher borrowing costs for local government on important infrastructure projects at a time when such projects are crucial drivers to our fragile economic recovery.

The SEC’s proposed regulatory changes would require MMMFs to sell and redeem shares based on the present market-based value of the securities in their underlying portfolios (that’s what a floating NAV would require), and would make it more difficult for investors to redeem MMMFs. This would make money market mutual funds less desirable for investors, driving down the capacity of MMMFs to purchase municipal bonds.

Additionally, a fixed NAV allows local governments to use automated accounting software. Many communities simply to do not have the software to manage the financial complexities of a highly variable floating NAV system, so they could experience problems with purchases and redemptions. Ironically, the adoption of a floating NAV could make less-regulated or more risky cash management vehicles more attractive to municipalities from an administrative perspective.

Robust municipal MMMF demand for short-term bonds increases demand in the long-term municipal bond market, resulting in lower financing costs for crucial local government capital projects. Municipal bonds are widely used to finance critical infrastructure projects in communities nationwide. Approximately 90 percent of municipal bond financing over the past decade went toward schools, hospitals, water infrastructure, sewer facilities, public power utilities, roads and mass transit. Last year, municipal bonds financed $179 billion in state and local infrastructure projects nationwide.

If the municipal bond market becomes less attractive to investors due to changes in the MMMF market, state and local borrowing costs would increase significantly. This would have a chilling effect on local capacity for growth and development. Because MMMF demand and municipal bond demand are linked, it is essential to retain the attractiveness and stability of fixed-NAV MMMFs.

The MMA is not alone on this issue by any means. We are grateful that Gov. Deval Patrick has also written to the SEC, urging the agency to reject the proposed rule changes. The National League of Cities, dozens of governors and hundreds of municipal associations and leaders from across the country have also petitioned the SEC to protect and preserve MMMFs.

It is important to talk about this issue with our congressional delegation and ask them to weigh in with the SEC against the proposed regulations. Fortunately, Massachusetts has outstanding federal lawmakers who intuitively understand that municipal bonds and investments must be protected, but with so many issues circling on Capitol Hill, it is particularly helpful when they hear directly from the cities and towns in their districts.

It is always frustrating when an agency proposes a new rule or regulation that disregards or ignores the negative impact on communities and local taxpayers. The SEC commissioners should move on to more relevant and productive issues, and stop trying to fix something that is not broken.