Consumer Financial Choice and Capital Markets Protection Act

Last spring, the Securities and Exchange Commission (SEC) adopted a rule over the objection of thousands of units of local government and money market managers which will require the underlying net asset value (NAV) of money market funds to move from a fixed sum to a floating value. The rule is effective in October 2016.

Caucus Position

The member mayors of the Metropolitan Mayors Caucus Executive respectfully urge Congress to pass the Consumer Financial Choice and Capital Markets Protection Act currently pending in both the House and Senate (S 1802/HR 4216) and, thus, rescind the above mentioned SEC rule.

Local governments use short-term debt to finance various capital and public works projects. Money market funds are significant purchasers of municipal obligations. Without S 1802/HR 4216, many money market fund managers will no longer purchase such debt once their underlying net asset value (NAV) moves from a fixed sum to a floating value as proposed by the SEC. The historically largest purchasers of local government debt have indicated they will get out of the market if money market funds are not permitted to retain a fixed NAV. This will significantly reduce competition and, thus, increase the borrowing costs for local governments and their taxpayers. This will no doubt result in fewer economy-stimulating public works projects being built.

A second costly impact, if the SEC rule is allowed to stand, is that a floating NAV would eliminate money market funds as a viable cash management tool. Many local governments use money market funds for a variety of cash management and investment purposes. Certain users may be unwilling or unable to conduct their cash management through an investment vehicle that does not offer stable value. Removing the stable NAV of money market funds will be a significant change for a multi-trillion dollar industry in which the stable $1.00 share price has been a core feature. This will undoubtedly reduce overall investor demand for money market funds and thus diminish, if not completely eliminate their capacity to invest in the short-term securities of local governments. This will have a devastating impact on the ability of local governments to manage their cash flow needs.