What’s at Stake in Money Market Fund Changes?
April 30, 2012
Businesses in Florida and across the country have much at stake in a critical debate over increased regulation of money market funds (MMFs)—instruments that provide both valued cash-management services and critical financing for businesses, state and local governments, other investors, and the economy.
Proposals now under consideration at the U.S. Securities and Exchange Commission could undermine the key features of MMFs and destroy their value for investors and the economy. Under the SEC’s proposals, these funds could be:
- Forced to abandon their stable $1.00 per-share price and, instead, “float” their net asset value (NAV), or
- Forced to impose redemption restrictions that would deny investors full access to their assets invested in MMFs, creating a 30-day wait for investors’ cash.
Associated Industries of Florida has filed a statement with the SEC opposing the idea of forcing MMFs to float their value, and we have been working with the Investment Company Institute (ICI) to educate businesses about this important regulatory issue. We expect to oppose any proposals to impose asset freezes on MMF investors as well.
If either of these proposals is adopted, the utility of MMFs for cash management and short-term investment by businesses of all sizes would be impaired. In survey after survey, investors have said they’d be less likely to entrust their funds to MMFs with floating NAVs or redemption freezes. Either of these proposals would drive individual and institutional investors out of MMFs, potentially disrupting hundreds of billions of dollars in critical funding businesses and state and local governments.
For almost 40 years, MMFs have operated on the stable dollar-in, dollar-out principle. Forcing these funds to float would force most investors to treat every MMF transaction as a potentially taxable event, requiring onerous bookkeeping to track minuscule changes in the funds’ value. For many businesses and other investors, state law, investment policies, or accounting rules may disallow use of “floating” MMFs as cash-equivalent assets.
The SEC’s alternative—capital requirements backed by asset freezes—would turn MMFs into the only mainstream financial product forced by the government to freeze investors’ assets and deny them the use of their full account balance. In essence, every MMF shareholder would acquire a joint account-holder— the government.
Impact on Florida Businesses:
The impact of these proposals would be felt directly by Florida businesses. Does your business issue commercial paper to hire seasonal help, buy inventory, make payroll, or finance other critical functions? Money market funds currently hold more than one-third of the commercial paper in the U.S. As these changes squeeze the market for commercial paper, smaller businesses that depend on bank financing could face greater competition for credit.
Local Governments Also Affected:
Florida cities and counties will suffer, too. Money market funds more than half of the short-term debt local governments use to finance public projects such as roads, bridges, airports, low-income housing, schools, hospitals and more. Driving investors out of MMFs would raise these governments’ financing costs, resulting in potentially higher taxes or fewer projects or services. Bad news for the economy, in any case.
Learn More about this Issues and Take Action:
In today’s economy, federal regulators should pursue policies that make business more efficient and financing more available. The SEC’s MMF proposals would undermine business, investors, and the economy. AIF will continue to track these proposals and will join with scores of other business and municipal groups in opposition. We encourage our members to add their voices as well.
For more information on MMFs and the campaign to preserve their value to investors and the economy, visit www.PreserveMoneyMarketFunds.org.
A recent survey of U.S. treasurers found that they will sharply reduce their use of money market funds if the Securities and Exchange Commission (SEC) adopts any of the three concepts it is considering to reform money market funds.