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Money Funds: The Legislative Push for a Stable NAV Continues

  • By Andrew Deichler
  • Published: 11/6/2017

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In a hearing last week on legislative proposals to improve small businesses’ and communities’ access to capital, Rep. Keith Rothfus (R-Pa.) referenced a new letter by the Association for Financial Professionals in support of the Consumer Financial Choice and Capital Markets Protection Act (H.R. 2319). The bill would allow the net asset value (NAV) for prime and municipal money market funds to stabilize if the funds meet certain criteria.

H.R. 2319 has received support from more than 200 groups and community leaders, given the mass exodus out of prime and municipal funds. From July 2015 to July 2017, prime funds went from $1.73 trillion in investments to $0.62 trillion, while tax-exempt funds, a key funding source form municipalities, universities and hospitals, fell from $254 billion to $135 billion, according to Treasury Strategies.

“We know what happened; $1.2 trillion has moved out of the private mutual fund sector,” Rothfus said, during the hearing.

Many of AFP’s 16,000 members have long relied on prime and municipal for their short-term cash management needs. But once the Securities and Exchange Commission enacted is rule in October 2016, prohibiting money funds from offering a stable NAV to investors other than “natural persons,” organizations began moving their cash out of prime and municipal funds into other investment vehicles that do not support adequately companies’ capital access needs.

AFP’s members prefer money funds because they provide liquidity, principal preservation, diversification, built-in credit analysis, and ease of accounting. “In addition, these funds are a key source of short-term financing for businesses to purchase seasonal inventory, pay suppliers, and fund payroll and other expenses when cash outflows are greater than inflows,” Jeff Glenzer, CTP, vice president and chief operating officer for AFP, wrote in the letter. “Issuing short-term variable rate debt held by money market funds is preferable to secured bank loans for businesses because it provides more efficient and affordable short-term financing, and allows businesses to invest more in job creating activities.”

The implementation of the floating NAV has resulted in the capital pool available to business borrowers shrinking by about $160 billion since early 2016, while many companies are paying higher rates to alternative lenders. Meanwhile, municipal entities and non-government conduit borrowers like hospitals and universities have seen their borrowing costs increase from under 10 basis points to about 90 basis points in that time.

Glenzer recommends that H.R. 2319 be enacted as soon as possible “to reverse the long-term damage being done to the indispensable capital markets financing options provided by money market funds.”

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