money market fund regulation: the impact on municipal finance government finance officers...

Money Market Fund Regulation:The Impact on Municipal Finance

Government Finance Officers AssociationInvestment Company InstituteU.S. Chamber of Commerce

August 27, 2013

Copyright © 2013. All rights reserved.

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Agenda

• Speakers

• Key Role of Money Market Mutual Funds in the U.S. Economy and Municipal Finance

• The SEC Proposal and Its Implications

• The Public Investor’s Viewpoint

• Campaign Efforts

• Next Steps: What Can You Do?

• Questions

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Speakers

• Alice Joe Executive Director, Center for Capital Markets

Competitiveness, U.S. Chamber of Commerce

• Jane Heinrichs Senior Associate Counsel, Investment Company Institute

• Kathryn Hewitt Treasurer, Harford County, Maryland Member, Government Finance Officers Association

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Key Role of Money Market Mutual Funds in the U.S. Economy and Municipal Finance

• $2.6 trillion in assets

• An efficient cash management tool for treasurers and finance officials in: State and local governments Corporations and other businesses Colleges, universities, and other nonprofits

• State and local governments hold more than $120 billion of their short- and mid-term investments in money market funds.

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Key Role of Money Market Mutual Funds in the U.S. Economy and Municipal Finance

• A significant investor in corporate commercial paper, holding more than one-third of all outstanding CP

• The largest investor in short-term municipal securities

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The SEC Proposal and Its Implications

• Origins of the SEC proposal on money market funds 2008 financial crisis: pressure on prime money market

funds 2010 SEC reforms for money market funds November 2012: Financial Stability Oversight Council

issues recommendations for money market funds

• SEC in 2012–2013 Economic study published, November 2012 SEC Chairman Mary Jo White sworn in, April 2013 New proposal issued, June 2013 Comments due September 17, 2013

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The SEC Proposal and Its Implications

• Two fundamental policy alternatives, which could be adopted alone or in combination Floating net asset values (NAVs) Liquidity fees and redemption gates

• Other significant reforms that would apply under either alternative Enhanced standards on disclosure and reporting,

diversification, and stress testing

The SEC Proposal and Its Implications

• Floating NAV alternative Prime and tax-exempt institutional funds must adopt

floating NAV Retail funds (defined as funds that limit redemptions per

shareholder to $1 million or less per day) exempted U.S. government funds (Treasury, U.S. agency) also

exempted

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The SEC Proposal and Its Implications

• Implications of SEC floating NAV proposal Loss of simplicity, benefits for many fund investors Accounting and tax issues: tracking daily gains and

losses Operational complexity: costly system changes for funds,

investors, and intermediaries (e.g., broker-dealers, retirement plans)

Net effect of new complexities: many investors and intermediaries will exit money market funds.

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The SEC Proposal and Its Implications

• ICI view: Like government funds, tax-exempt funds should be excluded from any floating NAV requirement. History shows that tax-exempt funds are not vulnerable

to significant redemptions in times of market stress.• In September 2008, net redemptions from tax-exempt

money market funds totaled 7.5 percent of their assets as of August 2008.

Tax-exempt funds hold enormous amounts of liquidity. • As of March 2013, tax-exempt funds had $213 billion in

weekly liquidity, 78 percent of their total assets. Tax-exempt funds provide significant benefits to the

economy.

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The Public Investor’s Viewpoint

• Why do cash/investment managers of state and local governments use money market funds? Daily cash management—keep your money invested Daily liquidity—unexpected events Safety and security Operational ease for accounting/recordkeeping Hiring investment expertise at a low cost Access to a broader group of investment securities

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The Public Investor’s Viewpoint

• Why do cash/investment managers of state and local governments use money market funds? State or local investment requirements may make other

alternatives difficult to execute. Bank sweep products may sweep into money market

funds. Local Government Investment Pools (LGIPs) often use

money market funds for part of their liquidity requirements.

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The Public Investor’s Viewpoint

• How do these proposed changes impact the institutional investor? Floating NAV causes many operational concerns. Additional recordkeeping—costly system changes Increased transaction costs Increased workload to handle daily investments Increased risk by pushing investors into riskier less

liquid/lower credit-quality investments Different treatment of institutional versus retail investors Accounting rules do not require market value or fair

value reporting of investments with maturities less than a year.

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The Public Investor’s Viewpoint

• Effect on LGIPs Decision for each LGIP on whether to make the same

changes—not regulated by the SEC Rating agency actions Conflict with GASB rules Costly system changes Use of money market funds within LGIPs

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The Public Investor’s Viewpoint

• Money market funds as a purchaser of tax-exempt securities Money market funds purchase about 72 percent of

short-term tax-exempt securities issued by state and local governments.

Fewer purchasers would increase borrowing costs for local governments, which increases the cost of the capital infrastructure.

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The Public Investor’s Viewpoint

• Tax-exempt money market funds should have the same treatment as government money market funds. SEC proposal favors financing the federal government

over the funding needs of state and local governments. It is important to the taxpayer that all governmental

financing achieve the lowest cost.

Campaign Efforts

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Campaign Efforts: Who has spoken out?

STATE AND LOCAL GOVERNMENT

Association of Indiana Counties, Inc.Colorado County Treasurers Association

Council of Development Finance Agencies Council of Infrastructure Financing Authorities

County Commissioners Association of Pennsylvania County Commissioners’ Association of Ohio

County Treasurers Association of Ohio Government Finance Officers Association

International City/County Management Association International Municipal Lawyers Association

Metropolitan Mayors Caucus National Association of Counties

National Association of Health and Educational Facilities Finance Authorities National Association of Local Housing Financing Agencies

National Association of State Auditors National Association of State Treasurers

National Council of State Housing Agencies National League of Cities

New Hampshire State Treasurer New Jersey Association of Counties

New Jersey State League of Municipalities New Mexico Association of Counties

New York State Association of Counties Port of Houston Authority

State of Rhode Island General Treasurer Tennessee Municipal League

Texas Municipal League The Pennsylvania League of Cities and Municipalities

U.S. Conference of Mayors Utah Association of Counties

Utah League of Cities & Towns Utah State Treasurer

BUSINESS

Associated Industries of Florida Associated Oregon Industries

Association for Financial ProfessionalsBusiness Council of New York StateCincinnati Chamber of Commerce

Dallas Chamber of Commerce Financial Executives International

Financial Services Institute Financial Services Roundtable Florida Chamber of Commerce

Greater Albuquerque Chamber of Commerce Greater Boston Chamber of Commerce

Greater Pittsburgh Chamber of Commerce Greater Providence Chamber of Commerce

Greater Raleigh Chamber of Commerce Greater Springfield Chamber of Commerce

Indiana Chamber of Commerce Jacksonville Regional Chamber of Commerce

Kentucky Chamber of Commerce Massachusetts Chamber of Commerce Midland Area Chamber of Commerce

Mohawk Valley Chamber of Commerce National Association of Corporate Treasurers

National Shooting Sports Foundation New Jersey Chamber of Commerce

New Mexico Association of Commerce and Industry North Carolina Chamber

Northern Kentucky Chamber of Commerce Pennsylvania Chamber of Business and Industry

Retail Industry Leaders Association (RILA) Rowan County Chamber of Commerce

Texas Association of Business

• Comment period open until September 17

• Take action now! Send a letter to the SEC Mayors: add your name to the sign-on letter Weigh in with members of Congress Meet with SEC staff and commissioners Spread the word with colleagues

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Next Steps: What Can You Do?

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Next Steps: What Can You Do?

• Get more information and sample letters www.MoneyMarketFundReform.com (U.S. Chamber) www.PreserveMoneyMarketFunds.org (ICI)

• Submit comments by September 17 Visit www.sec.gov/spotlight/money-market.shtml Visit www.PreserveMoneyMarketFunds.org

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Questions