OREANDA-NEWS. US municipal accounting rules will soon permit certain externally managed local government investment pools (LGIPs) to qualify for reporting constant net asset values (NAV) without meeting the standards applied to US money market funds. The change better aligns accounting rules with characteristics of LGIPs and their investors, says Fitch Ratings.

Under the current US Governmental Accounting Standard Board (GASB) requirements, certain LGIPs can report a constant NAV only when conforming to the SEC's Rule 2a-7, which is a set of qualification standards specific to US money market funds, not LGIPs. Though GASB originally embraced the SEC framework, on Dec. 7 the board reversed course and voted to delink LGIPs from money market fund regulation.

While the new standard removes the direct reference to Rule 2a-7, GASB replicated many of Rule 2a-7's risk-limiting provisions. However, the rule excludes some of Rule 2a-7's recent structural amendments such as the switch to floating NAV reporting or the requirement to implement liquidity fees and redemptions gates during times of stress.

The different investor profiles for LGIPs and money funds are driving the divergence of key structural features for the two investment vehicles. While money fund investors typically choose to invest in the funds from a menu of investment options, LGIP participants are often highly incentivized to invest in their local LGIP. In some cases, they are required to do so by law. In addition, the staff managing the LGIP is often integrated with the local municipal entities that invest in the LGIP, contributing to greater visibility of cash flows compared to money funds, often aided by required advanced notice periods for withdrawals. Because of these characteristics, LGIPs (with total assets of approximately $250 billion according to iMoneyNet and JP Morgan) are less likely than prime money funds (with $3.1 trillion in assets according to the SEC) to experience a run or otherwise pose the types of systemic risks that compelled the SEC to amend Rule 2a-7.

GASB's new rules also recognize the generally more limited operational capabilities of some LGIPs compared to money funds. In many cases, LGIPS are managed by local municipalities with constrained resources, whereas money funds often are managed by large investment companies with a variety of products and the scale and resources to absorb the cost and complexity of reform.

While the SEC recently removed the required use of ratings in credit analysis for money fund managers, GASB largely maintained the requirement to provide for an easy-to-use and uniform standard of risk measurement. In addition, GASB will only require LGIPs to calculate their shadow NAV on a monthly basis, in contrast to the SEC's requirement of daily valuation. The high cost of money fund reform has forced small managers to restructure or leave the space altogether. However, GASB's new rules will likely allow small municipalities to continue managing LGIPs effectively.