MMA urges SEC to reject proposed rule changes

The MMA submitted comments to the federal Securities and Exchange Commission on Sept. 9 opposing proposed rule changes affecting money market mutual funds.

Under the proposed new rules, money market mutual funds would use a floating “net asset value” (NAV) rather than a fixed NAV. Currently, many money market funds use a fixed value of $1 per share.

The changes would also make it more difficult for investors to redeem these money market funds.

“We are very concerned that the proposals would harm local governments by taking away an important cash management tool, increasing market instability, and making municipal bonds less attractive to investors,” wrote MMA Executive Director Geoffrey Beckwith. “We urge the SEC to retain a fixed NAV as an important component of both established municipal financial practices and continued economic growth.”

Money market funds with a fixed NAV are an effective cash management tool for local governments because they are considered both stable and low-risk – and they enable local governments to use automated accounting tools to track their investment. A floating NAV would make it virtually impossible for local governments to use money market funds for cash management.

Demand for money market mutual funds drives demand for municipal bonds, which 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. If the municipal bond market becomes less attractive to investors due to changes in the money market fund market, state and local borrowing costs would increase significantly.

“The ensuing instability would cast a shadow on MMMFs and jeopardize financial recovery at the municipal level,” wrote Beckwith.

The changes were proposed in June by the SEC in response to the financial crisis of 2008, when a run on prime money market funds played a central role. Money market mutual funds behave more like Treasury and government funds during times of market stress, however, maintaining high levels of asset liquidity. The SEC proposed subjecting money market mutual funds to new regulations, but not the Treasury and government funds with which they share characteristics.

The MMA joins organizations such as the U.S. Conference of Mayors, the National League of Cities, the International City/County Management Association, the National Association of Counties, the Government Finance Officers Association, and the Council on Infrastructure Financing Authorities, among others, in opposing the proposed rule changes.