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New Legislation Seeks to Stabilize NAV for Money Funds

  • By Andrew Deichler
  • Published: 5/8/2017

legislation
Representatives Keith Rothfus (R-Pa.), Gwen Moore (D-Wis.) and Steve Stivers (R-Ohio), have introduced new legislation that would allow for the net asset value (NAV) for prime and municipal money market funds to stabilize. The NAV has been permitted to float following the October 2016 implementation of the Securities and Exchange Commission (SEC)’s reforms.

According to the Coalition for Investor Choice, the floating NAV has negatively impacted both prime and municipal funds. More than $1.15 trillion has left non-government funds for Treasury and Government funds. “As a result, short-term interest rates, including rates on short-term municipal debt, spiked to their highest levels since the financial market crisis,” the Coalition said. “Prime funds, a key source of funding for corporations, saw a 72 percent drop from January 2015 while tax-exempt funds, a key source of funding for municipalities, universities and hospitals, experienced a more than 50 percent decline over the same period.”

The Coalition added that borrowing costs have risen by tens of billions of dollars as a consequence of money market funds reforms, and institutional investors no longer have access to the low cost financing that prime and tax exempt funds provide.

The Consumer Financial Choice and Capital Markets Protection Act (H.R. 2319) would allow money market funds to elect to be stable value funds if they meet certain criteria.

  • The fund’s objective must be the generation of income and preservation of capital through investment in short-term, high-quality debt securities.
  • The fund’s board of directors must elect to maintain a stable NAV per share by using the amortized cost valuation method or the penny-rounding method. The board must also determine that the stable NAV is in the best interests of the fund’s shareholders, and can only continue to use it as long as it believes that the resulting share price fairly reflects the market-based NAV per share of the fund.
  • The fund complies with certain quality, maturity, diversification, liquidity and other requirements that the SEC has determined are in the public interest or protect investors.

Under the new bill, companies that meet the requirements for the stable NAV would in turn be exempt from the default liquidity fee requirements established by the SEC’s money market fund rules. The bill also prohibits the use of taxpayer dollars to bail out money funds.

“The Consumer Financial Choice and Capital Markets Protection Act enables institutions to continue to access the high-quality, liquid cash management tools they have relied on for more than four decades,” the Coalition said.

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