US money-market fund reform ideas should be reconsidered, state and local officials say

State and local officials are asking federal regulators to go back to the drawing board on money-market mutual fund changes they floated in the wake of pandemic-related market turbulence last year.

In a letter to the US Securities and Exchange Commission, state and local groups said: “While we recognize the need to thoroughly examine the root causes of the market turmoil seen in March 2020, we caution the commission to examine the full impact of any potential MMF reform on state and local governments as investors and issuers”.

The SEC sought public comment in February on ideas floated by the US President’s Working Group on Financial Markets, of which the SEC is a member.

Ideas in the presidential working group report included new liquidity and capital requirements; more flexibility for fund boards to charge for or suspend investor fund redemptions in a market panic; and “swing pricing,” or the authority to adjust funds’ value to transfer costs to investors redeeming shares.

The presidential working group, which also included the Treasury Department, the Federal Reserve, and the Commodity Futures Trading Commission, said that 2014 SEC changes went part of the way to increase market stability but not nearly far enough.

— State and local officials —

Taking issue with this assessment, the National Association of State Treasurers and the Government Finance Officers Association said these Obama-era measures created “unintentional and burdensome consequences for state and local governments.”

Tax-exempt money-fund assets under management fell 47 percent, to $135 billion, from 2016 to 2018, the letter said.

That’s because government and other money-fund investors preferred or were required to hold stable $1-a-share US government money funds rather than tax-exempt money funds with a floating net asset share value that can sink below $1, the letter said.

As a result, some tax-exempt money funds opted for higher cost issuances of variable rate demand bonds and fixed-rate bonds. These higher costs are borne by taxpayers and ratepayers, the letter said.

— SEC’s 2014 changes —

The SEC took a shot at money fund reform during the Obama administration on the heels of runs in that market during the 2008-09 financial crisis.

The agency’s 2014 rules require a floating net asset value for prime money funds for institutional investors and tax-exempt funds, allowing the daily share price to fluctuate along with changes in the market-based value of fund assets. Boards of directors of these non-government money funds are allowed to use liquidity fees and redemption suspensions, or gates, to try to block investor runs.

Last March, investors stampeded from prime money funds at a pace exceeding that in fall 2008.