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SEC Approves Final Rule on Money Market Mutual Fund Reform

Government Finance Officers Association announcement

Wednesday, July 23, 2014

On July 23, 2014, the SEC voted 3-2 to approve a final rule on its 2013 proposal to institute reforms to money market mutual funds. The commission’s final rule contains a number of components that were included in its 2013 proposal – which the GFOA opposed and commented on in an independent letter and as part of a state and local association coalition last fall. (See both letters below.) Such provisions require institutional prime, retail, and municipal (tax-exempt) funds to maintain a floating net asset value instead of a stable NAV, which had existed previously. This change is expected to increase the cost of government cash management as jurisdictions adjust to new accounting systems from those currently predicated on a stable NAV.

Governments will also likely experience cost increases in debt management from other provisions of the final rule, which could drive investors away from the funds. These provisions include language that provides MMMF boards with discretion to impose liquidity fees and redemption gates during times of fiscal stress. A resulting loss of fund investors would be detrimental to governments, as MMMFs themselves are the largest purchasers of municipal securities – they hold more than 80% of state and local short-term debt, totaling over $350 billion. Finally the change to a floating NAV would also affect governments as investors, as many state and local governments are subject to policies and legal restrictions that only permit them to invest in funds that do not fluctuate in value. As such, many governments could be forced out of MMMFs and will have to look to other investment vehicles that have historically paid lower yields, or to less secure products with equal or less liquidity than MMMFs.

Beyond these issues, the final rule would also affect local government investment pools. Many state governments operate LGIPs, which are critical local government investment tools that must comply with standards set for them by the Government Accounting Standards Board. As the GASB requires LGIPs to operate in a manner consistent with the SEC rule governing money market funds (Rule 2a-7), the SEC’s proposal to modify this rule and institute a floating NAV would put many of these LGIPs out of compliance with GASB. GASB rules state that those LGIPs that do not comply with Rule 2a-7 must report its share of any unrealized gains or losses to each participant. Participants must also report these gains or losses on their balance sheets. Because this would not be an acceptable option for most states, many LGIPs will be faced with higher operational costs related to floating NAV compliance.

The compliance date for instituting the new rule will be two years after the rule is published in the Federal Register. In the coming weeks, the GFOA will develop resources to educate members about key components of the new rule, as well as initiating discussions on GFOA investment management best practices that need to be updated to account for the rule.

The GFOA conducted a comprehensive advocacy campaign opposing the 2013 proposed rule, working with GFOA members and state and local government association partners to send comment letters and meet directly with SEC commissioners and key members of the House and Senate to voice our concerns. Yesterday’s vote to approve the final rule marks the latest in a series of actions and proposals by SEC that harm state and local governments either deliberately or through indifference.

Citigroup Reaches $7 Billion Mortgage-Bond Settlement

By Tom Schoenberg, Dakin Campbell and Christie Smythe      Jul 14, 2014

Citigroup Inc. (C) agreed to pay $7 billion in fines and consumer relief to resolve government claims that it misled investors about the quality of mortgage-backed bonds sold before the 2008 financial crisis.

The bank took a $3.7 billion charge in the second quarter ended June 30 to cover the cost of the settlement, the New York-based firm said today in a statement. Citigroup climbed 3.6 percent to $48.71 at 8:33 a.m. in early trading in New York.

Citigroup was among lenders including Bank of America Corp. investigated by the Justice Department for allegedly misrepresenting the quality of mortgage-backed bonds sold to investors before 2008’s credit crisis. JPMorgan Chase & Co. (JPM), the biggest U.S. bank, agreed in November to pay $13 billion to resolve similar federal and state probes. The government has sought about $17 billion from Bank of America, a person familiar with those talks has said.

“The bank’s misconduct was egregious,” U.S. Attorney General Eric Holder said, according to the text of his prepared remarks. “And under the terms of this settlement, the bank has admitted to its misdeeds in great detail.”

The accord includes a record $4 billion civil penalty to the Justice Department, $500 million to state attorneys general and the Federal Deposit Insurance Corp., and about $2.5 billion in various forms of consumer relief to be provided by the end of 2018, the bank said in a statement today.

‘Move Forward’

The settlement, which caps months of negotiations, covers securities issued, structured and underwritten between 2003 and 2008, according to Citigroup.

“We also have now resolved substantially all of our legacy RMBS and CDO litigation,” Citigroup Chief Executive Officer Michael Corbat said in a statement. “This settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past.”

Citigroup, the third-biggest U.S. bank, has been discussing a resolution with U.S. officials since April, a person familiar with the matter said last month. Discussions temporarily broke down in mid-June after the bank’s settlement offers failed to satisfy prosecutors, the person said. Government officials had demanded more than $10 billion to resolve the issue, while Citigroup raised its offer to less than $4 billion, another person said.

Fewer Bonds

Citigroup’s lawyers had argued during talks that the lender should face a far smaller penalty than JPMorgan because it sold fewer mortgage bonds, the person with knowledge of the deal said yesterday. The government rejected that position, citing what it considered Citigroup’s level of culpability based on e-mails, internal bank documents and the rates at

BofA Talks

Citigroup ranked ninth among non-agency underwriters of mortgage-backed securities in 2008, and wasn’t among the top 10 in the three previous years, according to data from Inside Mortgage Finance, a Bethesda, Maryland-based industry publication.

On June 19, Charlotte, North Carolina-based Bank of America was ordered by a federal judge to face two government lawsuits in which it was accused of misleading investors about the quality of loans tied to $850 million in residential mortgage-backed securities.

The Justice Department broke off negotiations last month because it was dissatisfied with Bank of America’s offer to pay more than $12 billion, which included at least $5 billion in consumer relief, the person familiar with the discussions said at the time. The department’s latest settlement request was for about $17 billion, the person said.

Bank of America and firms it purchased issued about $965 billion of mortgage bonds from 2004 to 2008, while New York-based JPMorgan and companies it bought issued $450 billion, according to analysts at Sanford C. Bernstein & Co.



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