State, local governments in limbo over new money market rulesNews added by Benefits Pro on August 5, 2014

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By Nick Thornton

When the Securities and Exchange Commission voted to change the way institutional shares of money market funds are priced, it left one investment vehicle in limbo: Local Government Investment Pools.

LGIPs are structured similarly to money market funds, though the only investors allowed are local and state governments or other “governmental units.”

Like money-market funds, their primary purpose is to provide a low-risk, liquid investment vehicle, the shares of which are priced at a stable net asset value of $1.

But the SEC’s reforms no longer allow institutional money-market fund shares to be priced at a stable $1 NAV, which means a dollar invested can always be redeemed for $1. Instead, prime funds will now have to price their shares in a way that will reveal fluctuations. Funds will have two years to comply with the change.

The new regulation is intended to discourage investors from fleeing funds in times of market turmoil.

Notably, LGIPs, though almost identical to money market funds in how they are structured and priced, are not regulated by the SEC. They are instead regulated by the Governmental Accounting Standards Board. But the GASB insists they comport with SEC investment liquidity rules.

Hence the tension.

“It is unclear whether LGIPs will now need to adopt a floating NAV,” Fitch Ratings said in a statement to investors. “GASB is aware of the ambiguity and has identified it as an agenda item to address in 2014. LGIPs will remain in limbo while new rules are being written.”

Fitch says a change in how shares are valued will leave some municipalities with “limited or no alternative cash management options.”

Of course, those “units” with the ability to do so may choose to invest elsewhere.

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