[Federal Register Volume 74, Number 129 (Wednesday, July 8, 2009)]
[Proposed Rules]
[Pages 32688-32741]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-15906]
[[Page 32687]]
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Part II
Securities and Exchange Commission
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17 CFR Parts 270 and 274
Money Market Fund Reform; Proposed Rule
Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 /
Proposed Rules
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 270 and 274
[Release No. IC-28807; File No. S7-11-09]
RIN 3235-AK33
Money Market Fund Reform
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing amendments to certain rules that govern money
market funds under the Investment Company Act. The amendments would:
Tighten the risk-limiting conditions of rule 2a-7 by, among other
things, requiring funds to maintain a portion of their portfolios in
instruments that can be readily converted to cash, reducing the
weighted average maturity of portfolio holdings, and limiting funds to
investing in the highest quality portfolio securities; require money
market funds to report their portfolio holdings monthly to the
Commission; and permit a money market fund that has ``broken the buck''
(i.e., re-priced its securities below $1.00 per share) to suspend
redemptions to allow for the orderly liquidation of fund assets. In
addition, the Commission is seeking comment on other potential changes
in our regulation of money market funds, including whether money market
funds should, like other types of mutual funds, effect shareholder
transactions at the market-based net asset value, i.e., whether they
should have ``floating'' rather than stabilized net asset values. The
proposed amendments are designed to make money market funds more
resilient to certain short-term market risks, and to provide greater
protections for investors in a money market fund that is unable to
maintain a stable net asset value per share.
DATES: Comments should be received on or before September 8, 2009.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to [email protected]. Please include
File Number S7-11-09 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-11-09. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Office of Regulatory Policy, at (202)
551-6792, Division of Investment Management, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment amendments to rules 2a-7 [17 CFR 270.2a-7], 17a-9 [17 CFR
270.17a-9], and 30b1-5 [17 CFR 270.30b1-5], new rules 22e-3 [17 CFR
270.22e-3] and 30b1-6 [17 CFR 270.30b1-6], and new Form N-MFP under the
Investment Company Act of 1940 (``Investment Company Act'' or
``Act'').\1\
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\1\ 15 U.S.C. 80a. Unless otherwise noted, all references to
statutory sections are to the Investment Company Act, and all
references to rules under the Investment Company Act, including rule
2a-7, will be to Title 17, Part 270 of the Code of Federal
Regulations [17 CFR part 270].
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Table of Contents
I. Background
A. Money Market Funds
B. Market Significance
C. Regulation of Money Market Funds
D. Recent Developments
II. Discussion
A. Portfolio Quality
1. Second Tier Securities
2. Eligible Securities
3. Credit Reassessments
4. Asset Backed Securities
B. Portfolio Maturity
1. Weighted Average Maturity
2. Weighted Average Life
3. Maturity Limit for Government Securities
4. Maturity Limit for Other Portfolio Securities
C. Portfolio Liquidity
1. Limitation on Acquisition of Illiquid Securities
2. Cash and Securities That Can Be Readily Converted to Cash
3. Stress Testing
D. Diversification
E. Repurchase Agreements
F. Disclosure of Portfolio Information
1. Public Web site Posting
2. Reporting to The Commission
3. Amendment to Rule 30b1-5
G. Processing of Transactions
H. Exemption for Affiliate Purchases
1. Expanded Exemptive Relief
2. New Reporting Requirement
I. Fund Liquidation
1. Proposed Rule 22e-3
2. Request for Comment on Other Regulatory Changes
III. Request for Comment
A. Floating Net Asset Value
B. In-Kind Redemptions
IV. Paperwork Reduction Act Analysis
V. Cost Benefit Analysis
VI. Competition, Efficiency And Capital Formation
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority
Text of Proposed Rules and Form
I. Background
A. Money Market Funds
Money market funds are open-end management investment companies
that are registered under the Investment Company Act and regulated
under rule 2a-7 under the Act. They invest in high-quality, short-term
debt instruments such as commercial paper, Treasury bills and
repurchase agreements.\2\ Money market funds pay dividends that reflect
prevailing short-term interest rates and, unlike other investment
companies, seek to maintain a stable net asset value per share,
typically $1.00 per share.\3\
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\2\ Money market funds are also sometimes called ``money market
mutual funds'' or ``money funds.''
\3\ See generally Valuation of Debt Instruments and Computation
of Current Price Per Share by Certain Open-End Investment Companies
(Money Market Funds), Investment Company Act Release No. 13380 (July
11, 1983) [48 FR 32555 (July 18, 1983)] (``1983 Adopting Release'').
Most money market funds seek to maintain a stable net asset value
per share of $1.00, but a few seek to maintain a stable net asset
value per share of a different amount, e.g., $10.00. For
convenience, throughout this release, the discussion will simply
refer to the stable net asset value of $1.00 per share.
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This combination of stability of principal and payment of short-
term yields has made money market funds one of the most popular
investment vehicles for many different types of investors. Commonly
offered features, such as check-writing privileges, exchange
privileges, and near-immediate liquidity, have contributed to the
popularity of money market funds. More than 750 money market funds are
registered with the Commission, and collectively they hold
approximately
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$3.8 trillion of assets.\4\ Money market funds account for
approximately 39 percent of all investment company assets.\5\
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\4\ See Investment Company Institute, Trends in Mutual Fund
Investing, Apr. 2009, available at http://www.ici.org/highlights/trends_04_09 (``ICI Trends'').
\5\ See id.
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Individual (or ``retail'') investors use money market funds for a
variety of reasons. For example, they may invest in money market funds
to hold cash temporarily or to take a temporary ``defensive position''
in anticipation of declining equity markets. Money market funds also
play an important role in cash management accounts for banks, broker-
dealers, variable insurance products, and retirement accounts. As of
December 2008, about one-fifth of U.S. households' cash balances were
held in money market funds.\6\
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\6\ See Investment Company Institute, Report of the Money Market
Working Group, at 21 (Mar. 17, 2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (``ICI Report'').
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Different types of money market funds have been introduced to meet
the differing needs of retail money market fund investors.
Historically, most retail investors have invested in ``prime money
market funds,'' which hold a variety of taxable short-term obligations
issued by corporations and banks, as well as repurchase agreements and
asset backed commercial paper secured by pools of assets.\7\ Prime
money market funds typically have paid higher yields than other types
of money market funds available to retail investors.\8\ ``Government
money market funds'' principally hold obligations of the U.S.
Government, including obligations of the U.S. Treasury and federal
agencies and instrumentalities, as well as repurchase agreements
collateralized by Government securities. Some government money market
funds limit themselves to holding only Treasury obligations. Compared
to prime funds, government funds generally offer greater safety of
principal but historically have paid lower yields. ``Tax exempt money
market funds'' primarily hold obligations of state and local
governments and their instrumentalities, and pay interest that is
generally exempt from federal income taxes.
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\7\ See Investment Company Institute, 2009 Investment Company
Fact Book, at 147, Table 38 (May 2009), available at http://www.ici.org/pdf/2009_factbook.pdf (``2009 Fact Book'').
\8\ See, e.g., iMoneyNet Money Fund Report (Mar. 20, 2009),
available at http://www.imoneynet.com/files/Publication_News/mfr.pdf.
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Institutional investors account for a growing portion of
investments in money market funds. These investors include
corporations, bank trust departments, securities lending operations of
brokerage firms, state and local governments, hedge funds and other
private funds. Many corporate treasurers of large businesses have
essentially ``outsourced'' cash management operations to money market
funds, which may be able to manage cash more efficiently due both to
the scale of their operations and their expertise. As of January 2008,
approximately 80 percent of U.S. companies used money market funds to
manage at least a portion of their cash balances.\9\ At year-end 2008,
U.S. non-financial businesses held approximately 32 percent of their
cash balances in money market funds.\10\ According to the Investment
Company Institute, about 66 percent of money market fund assets are
held in money market funds or share classes intended to be sold to
institutional investors (``institutional money market funds'').\11\
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\9\ See ICI Report, supra note 6, at 28-29, Figure 3.7.
\10\ See id. at 28-29, Figure 3.6.
\11\ See Investment Company Institute, Money Market Mutual Fund
Assets, June 11, 2009, available at http://www.ici.org/highlights/mm_06_11_09.
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Institutional money market funds hold securities similar to those
held by prime funds and government funds. They typically have large
minimum investment amounts (e.g., $1 million), and offer lower expenses
and higher yields due to the large account balances, large transaction
values, and smaller number of accounts associated with these funds. As
we will discuss in more detail below, institutional money market funds
also tend to have greater investment inflows and outflows than retail
money market funds.
B. Market Significance
Due in large part to the growth of institutional funds, money
market funds have grown substantially over the last decade, from
approximately $1.4 trillion in assets under management at the end of
1998 to approximately $3.8 trillion in assets under management at the
end of 2008.\12\ During this same period, retail taxable money market
fund assets grew from approximately $835 billion to $1.36 trillion, or
63 percent, while institutional taxable money market fund assets grew
from approximately $516 billion to $2.48 trillion, or 380 percent.\13\
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\12\ See Investment Company Institute, 1999 Mutual Fund Fact
Book, at 4 (May 1999), available at http://www.ici.org/pdf/1999_factbook.pdf; Investment Company Institute, Trends in Mutual Fund
Investing, May 28, 2009, available at http://www.ici.org/highlights/trends_04_2009.
\13\ See Investment Company Institute, 2008 Investment Company
Fact Book, at 144, Table 35 (May 2008) (``2008 Fact Book''); 2009
Fact Book, supra note 7, at 147, Table 38.
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One implication of the growth of money market funds is the
increased role they play in the capital markets. They are by far the
largest holders of commercial paper, owning almost 40 percent of the
outstanding paper.\14\ The growth of the commercial paper market has
generally followed the growth of money market funds over the last three
decades.\15\ Today, money market funds provide a substantial portion of
short-term credit extended to U.S. businesses.
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\14\ Federal Reserve Board, Statistical Release Z.1: Flow of
Funds Accounts of the United States: Flows and Outstandings Fourth
Quarter 2008, at 86, Table L.208 (Mar. 12, 2009), available at
http://www.federalreserve.gov/releases/z1/Current/z1.pdf (``Fed.
Flow of Funds Report'').
\15\ See Instruments of the Money Market, at 121, Table 2
(Timothy Q. Cook & Robert K. Laroche eds., 1993), available at
http://www.richmondfed.org/publications/research/special_reports/instruments_of_the_money_market/pdf/full_publication.pdf; Fed.
Flow of Funds Report, supra note 14, at Tables L.206 and L.208. One
commenter has called the growth of these two markets ``inextricably
linked.'' See Leland Crabbe & Mitchell A. Post, The Effect of SEC
Amendments to Rule 2a-7 on the Commercial Paper Market, at 4
(Federal Reserve Board, Finance and Economics Discussion Series
199, May 1992) (``Crabbe & Post'').
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Money market funds also play a large role in other parts of the
short-term market. They hold approximately 23 percent of all repurchase
agreements, 65 percent of state and local government short-term debt,
24 percent of short-term Treasury securities, and 44 percent of short-
term agency securities.\16\ They serve as a substantial source of
financing in the broader capital markets, holding approximately 22
percent of all state and local government debt, approximately nine
percent of U.S. Treasury securities and 15 percent of agency
securities.\17\
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\16\ These securities include securities issued or guaranteed by
the Federal National Mortgage Association (``Fannie Mae''), the
Federal Home Loan Mortgage Corporation (``Freddie Mac'') and the
Federal Home Loan Banks. See ICI Report, supra note 6, at 19, Figure
2.3. See generally U.S. Treasury Department, FAQs on Fixed Income
Agency Securities, available at http://www.treas.gov/education/faq/markets/fixedfederal.shtml.
\17\ See Fed. Flow of Funds Report, supra note 14 (percentages
derived from flow of funds data). Foreign banks also have relied
substantially on U.S. money market funds for dollar-denominated
funding. See Naohiko Baba, Robert N. McCauley, & Srichander
Ramaswamy, U.S. Dollar Money Market Funds and non-U.S. Banks, BIS
Quarterly Review, Mar. 2009, available at http://www.bis.org/publ/qtrpdf/r_qt0903g.htm (``U.S. Dollar Money Market Funds'').
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As a consequence, the health of money market funds is important not
only to their investors, but also to a
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large number of businesses and state and local governments that finance
current operations through the issuance of short-term debt. A ``break
in the link [between borrowers and money market funds] can lead to
reduced business activity and pose risks to economic growth.'' \18\ The
regulation of money market funds, therefore, is important not only to
fund investors, but to a wide variety of operating companies as well as
state and local governments that rely on these funds to purchase their
short-term securities.
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\18\ See Mike Hammill & Andrew Flowers, MMMF, and AMLF, and
MMIFF, Macroblog (Federal Reserve Bank of Atlanta), Oct. 30, 2008,
available at http://www.macroblog.typepad.com/macroblog/2008/10/index.html.
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C. Regulation of Money Market Funds
The Commission regulates money market funds under the Investment
Company Act and pursuant to rule 2a-7 under the Act. We adopted rule
2a-7 as an exemptive rule in 1983 and amended it in 1986 to facilitate
the development of tax-exempt money market funds.\19\ We also amended
it substantially in 1991 (taxable funds) and 1996 (tax-exempt funds) to
provide for a more robust set of regulatory conditions and to expand
the rule to apply it to any investment company holding itself out as a
money market fund.\20\
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\19\ See 1983 Adopting Release, supra note 3; Acquisition and
Valuation of Certain Portfolio Instruments by Registered Investment
Companies, Investment Company Act Release No. 14983 (Mar. 12, 1986)
[51 FR 9773 (Mar. 21, 1986)] (``1986 Adopting Release'').
\20\ See Revisions to Rules Regulating Money Market Funds,
Investment Company Act Release No. 18005 (Feb. 20, 1991) [56 FR 8113
(Feb. 27, 1991)] (``1991 Adopting Release''); Revisions to Rules
Regulating Money Market Funds, Investment Company Act Release No.
21837 (Mar. 21, 1996) [61 FR 13956 (Mar. 28, 1996)] (``1996 Adopting
Release'').
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The Investment Company Act and applicable rules generally require
that mutual funds price their securities at the current net asset value
per share by valuing portfolio instruments at market value or, if
market quotations are not readily available, at fair value determined
in good faith by the board of directors.\21\ As a consequence, the
price at which funds will sell and redeem shares ordinarily fluctuates
daily with changes in the value of the fund's portfolio securities.
These valuation and pricing requirements are designed to prevent
investors' interests from being diluted or otherwise adversely affected
if fund shares are not priced fairly.\22\
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\21\ See section 2(a)(41) of the Act (defining ``value'' of fund
assets); rule 2a-4 (defining ``current net asset value'' for use in
computing the current price of a redeemable security); and rule 22c-
1 (generally requiring open-end funds to sell and redeem their
shares at a price based on the funds' current net asset value as
next computed after receipt of a redemption, purchase, or sale
order).
\22\ See Revisions to Rules Regulating Money Market Funds,
Investment Company Act Release No. 17589 at n.7 and accompanying
text (July 17, 1990) [55 FR 30239 (July 25, 1990)] (``1990 Proposing
Release'').
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Rule 2a-7, however, permits money market funds to use the amortized
cost method of valuation and penny-rounding method of pricing instead,
which facilitate money market funds' ability to maintain a stable net
asset value.\23\ Under the amortized cost method, portfolio securities
generally are valued at cost plus any amortization of premium or
accumulation of discount (``amortized cost'').\24\ The basic premise
underlying money market funds' use of the amortized cost method of
valuation is that high-quality, short-term debt securities held until
maturity will eventually return to the amortized cost value, regardless
of any current disparity between the amortized cost value and market
value, and would not ordinarily be expected to fluctuate significantly
in value.\25\ Therefore, the rule permits money market funds to value
portfolio securities at their amortized cost so long as the deviation
between the amortized cost and current market value remains minimal and
results in the computation of a share price that represents fairly the
current net asset value per share of the fund.\26\
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\23\ The penny-rounding method of pricing means the method of
computing a fund's price per share for purposes of distribution,
redemption and repurchase whereby the current net asset value per
share is rounded to the nearest one percent. See rule 2a-7(a)(18).
\24\ See rule 2a-7(a)(2) (defining the amortized cost method as
calculating an investment company's net asset value whereby
portfolio securities are valued at the fund's acquisition cost as
adjusted for amortization of premium or accretion of discount rather
than at their value based on current market factors).
\25\ See 1983 Adopting Release, supra note 3, at nn. 3-7 and
accompanying text; Valuation of Debt Instruments and Computation of
Current Price Per Share by Certain Open-End Investment Companies,
Investment Company Act Release No. 12206, at nn. 3-4 and
accompanying text (Feb. 1, 1982) [47 FR 5428 (Feb. 5, 1982)] (``1982
Proposing Release'').
\26\ See rule 2a-7(c)(1), (c)(7)(ii)(C).
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To reduce the likelihood of a material deviation occurring between
the amortized cost value of a portfolio and its market-based value, the
rule contains several conditions (which we refer to as ``risk-limiting
conditions'') that limit the fund's exposure to certain risks, such as
credit, currency, and interest rate risks.\27\ In addition, the rule
includes certain procedural requirements overseen by the fund's board
of directors. One of the most important is the requirement that the
fund periodically ``shadow price'' the amortized cost net asset value
of the fund's portfolio against the mark-to-market net asset value of
the portfolio.\28\ If there is a difference of more than \1/2\ of 1
percent (or $0.005 per share), the fund's board of directors must
consider promptly what action, if any, should be taken, including
whether the fund should discontinue the use of the amortized cost
method of valuation and re-price the securities of the fund below (or
above) $1.00 per share, an event colloquially known as ``breaking the
buck.'' \29\
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\27\ For example, the rule requires, among other things, that a
money market fund's portfolio securities meet certain credit quality
requirements, such as being rated in the top one or two rating
categories by nationally recognized statistical rating organizations
(``NRSROs''), and by limiting the portion of the fund's portfolio
that may be invested in securities rated in the second highest
rating category. See rule 2a-7(c)(3). The rule also places limits on
the remaining maturity of securities in the fund's portfolio. A fund
generally may not acquire, for example, any securities with a
remaining maturity greater than 397 days, and the dollar-weighted
average maturity of the securities owned by the fund may not exceed
90 days. See rule 2a-7(c)(2).
\28\ See rule 2a-7(c)(7); see also supra note 21 and
accompanying text.
\29\ See rule 2a-7(c)(7)(ii)(B). Regardless of the extent of the
deviation, rule 2a-7 imposes on the board of a money market fund a
duty to take appropriate action whenever the board believes the
extent of any deviation may result in material dilution or other
unfair results to investors or current shareholders. Rule 2a-
7(c)(7)(ii)(C). See 1983 Adopting Release, supra note 3, at nn. 51-
52 and accompanying text.
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D. Recent Developments
Money market funds have had a record of stability during their more
than 30 years of operation. Before last fall, only one money market
fund had ever broken the buck.\30\ This record appears to be due
primarily to three factors. First, the short-term debt markets
generally were relatively stable during this period. Second, many fund
advisers (and their portfolio managers and credit analysts) were
skillful in analyzing the risks of portfolio securities and thereby
largely avoiding significant losses that could force a fund to break
the buck.\31\ Finally, fund managers and their affiliated persons have
had significant sources of private capital that they were willing to
make available to support the stable net asset
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value of a money market fund when it experienced losses in one or more
of its portfolio securities.
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\30\ In September 1994, a series of a small institutional money
market fund re-priced its shares below $1.00 as a result of loss in
value of certain floating rate securities. The fund promptly
announced that it would liquidate and distribute its assets to its
shareholders. See 1996 Adopting Release, supra note 20, at n.162.
\31\ We made similar observations last year. See Temporary
Exemption for Liquidation of Certain Money Market Funds, Investment
Company Act Release No. 28487, at text accompanying nn. 6-7 (Nov.
20, 2008) [73 FR 71919 (Nov. 26, 2008)] (``Rule 22e-3T Adopting
Release'').
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Since the late 1980s, fund managers from time to time have sought
to prevent a money market fund from breaking the buck by voluntarily
purchasing distressed portfolio securities from the fund, directly or
through an affiliated person, at the higher of market price or
amortized cost.\32\ These events occurred irregularly and involved a
limited number of funds.\33\ In response to these events, the
Commission tightened the risk-limiting conditions of the rule for
taxable funds in 1991 and for tax exempt funds in 1996.\34\ Among other
things, we added diversification requirements to the rule, which
limited the exposure of a fund to any one issuer of securities, thus
reducing the consequences of a credit event affecting the value of a
portfolio holding.\35\ We repeatedly emphasized the responsibility of
fund managers to manage, and fund boards to oversee that the fund is
managed, in a manner consistent with the investment objective of
maintaining a stable net asset value.\36\
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\32\ These transactions implicate section 17(a) of the
Investment Company Act, which prohibits an affiliated person of a
fund or an affiliated person of such a person from knowingly
purchasing a security from the fund, except in limited
circumstances. Under section 17(b) of the Act, such persons can
apply to the Commission for an exemption from these prohibitions. In
1996, the Commission adopted rule 17a-9, which permits affiliated
persons of funds and affiliated persons of such persons to purchase
distressed securities in funds' portfolios subject to certain
conditions, without the need to first obtain an individual
exemption. We are proposing certain amendments to rule 17a-9 in this
release, as well as an amendment to rule 2a-7 that would require
money market funds to notify us of any transactions under rule 17a-
9. See infra Section II.H.
\33\ See 1990 Proposing Release, supra note 22, at nn.16-18 and
accompanying text; 1996 Adopting Release, supra note 20, at nn. 22-
23 and accompanying text.
\34\ See 1991 Adopting Release, supra note 20; 1996 Adopting
Release, supra note 20.
\35\ See rule 2a-7(c)(4).
\36\ See 1983 Adopting Release, supra note 3, at nn. 41-42 and
accompanying text; 1996 Adopting Release, supra note 20, at nn. 22-
29 and accompanying text.
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In 2007, however, losses in the subprime mortgage markets adversely
affected a significant number of money market funds. These money market
funds had invested in asset backed commercial paper issued by
structured investment vehicles (``SIVs''), which were off-balance sheet
conduits sponsored mostly by certain large banks and money
managers.\37\ Although we understand that most SIVs had little exposure
to sub-prime mortgages, they suffered severe liquidity problems and
significant losses when risk-averse short-term investors (including
money market funds), fearing increased exposure to liquidity risk and
residential mortgages, began to avoid the commercial paper the SIVs
issued.\38\ Unable to roll over their short-term debt, SIVs were forced
to liquidate assets to pay off maturing obligations and began to wind
down operations.\39\ In addition, NRSROs rapidly downgraded SIV
securities, increasing downward price pressures already generated by
these securities' lack of liquidity. The value of the commercial paper
fell, which threatened to force several money market funds to break the
buck.
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\37\ See Neil Shah, Money Market Funds Cut Exposure to Risky SIV
Debt--S&P, Reuters, Nov. 21, 2007, available at http://www.reuters.com/article/bondsNews/idUSN2146813220071121.
\38\ We know of at least 44 money market funds that were
supported by affiliates because of SIV investments. In many of these
cases the affiliate support was provided in reliance on no-action
assurances provided by Commission staff. Many of these no-action
letters are available on our Web site. See http://www.sec.gov/divisions/investment/im-noaction.shtml#money. Unlike other asset
backed commercial paper, SIV debt was not backed by an external
liquidity provider.
\39\ See, e.g., Alistair Barr, HSBC's Bailout Puts Pressure on
Citi, ``Superfund,'' MarketWatch, Nov. 26, 2007, available at http://www.marketwatch.com/story/hsbcs-35-bln-siv-bailout-puts-pressure-on-citi-superfund.
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Money market funds weathered this storm. In some cases, bank
sponsors of SIVs provided support for the SIVs.\40\ In other cases,
money market fund affiliates voluntarily provided support to the funds
by purchasing the SIV investments at their amortized cost or providing
some form of credit support.\41\ Money market funds also benefited from
strong cash flows into money market funds, as investors fled from
riskier markets. During the period from July 2007 to August 2008, more
than $800 billion in new cash was invested in money market funds,
increasing aggregate fund assets by one-third.\42\ Eighty percent of
these investments came from institutional investors.\43\
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\40\ See, e.g., id.
\41\ See, e.g., Shannon D. Harrington & Christopher Condon, Bank
of America, Legg Mason Prop Up Their Money Funds, Bloomberg, Nov.
13, 2007, available at http://www.bloomberg.com/apps/news?pid=20601087&sid=aWWjLp8m3J1I&refer=home. Under rule 17a-9,
funds are not required to report to us all such transactions. See
infra Section II.H.
\42\ See ICI Report, supra note 6, at 49.
\43\ Id.
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As financial markets continued to deteriorate in 2008, however,
money market funds came under renewed stress. This pressure culminated
the week of September 15, 2008 when the bankruptcy of Lehman Brothers
Holdings Inc. (``Lehman Brothers'') led to heavy redemptions from about
a dozen money market funds that held Lehman Brothers debt securities.
On September 15, 2008, The Reserve Fund, whose Primary Fund series held
a $785 million position in commercial paper issued by Lehman Brothers,
began experiencing a run on its Primary Fund, which spread to the other
Reserve funds. The Reserve funds rapidly depleted their cash to satisfy
redemptions, and began offering to sell the funds' portfolio securities
into the market, further depressing their valuations. Unlike the other
money market funds that held Lehman Brothers debt securities (and SIV
commercial paper), The Reserve Primary Fund ultimately had no affiliate
with sufficient resources to support the $1.00 net asset value. On
September 16, 2008, The Reserve Fund announced that as of that
afternoon, its Primary Fund would break the buck and price its
securities at $0.97 per share.\44\ On September 22, 2008, in response
to a request by The Reserve Fund, the Commission issued an order
permitting the suspension of redemptions in certain Reserve funds, to
permit their orderly liquidation.\45\
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\44\ See Press Release, The Reserve Fund, A Statement Regarding
The Primary Fund (Sept. 16, 2008). The Reserve Fund subsequently
stated that the fund had broken the buck earlier in the day on
September 16. See Press Release, The Reserve Fund, Important Notice
Regarding Reserve Primary Fund's Net Asset Value (Nov. 26, 2008)
(``The Fund is announcing today that, contrary to previous
statements to the public and to investors, the Fund's net asset
value per share was $0.99 from 11 a.m. Eastern time to 4 p.m.
Eastern time on September 16, 2008 and not $1.00.'').
\45\ See In the Matter of The Reserve Fund, Investment Company
Act Release No. 28386 (Sept. 22, 2008) [73 FR 55572 (Sept. 25,
2008)] (order). Several other Reserve funds also obtained an order
from the Commission on October 24, 2008 permitting them to suspend
redemptions to allow for their orderly liquidation. See Reserve
Municipal Money-Market Trust, et al., Investment Company Act Release
No. 28466 (Oct. 24, 2008) [73 FR 64993 (Oct. 31, 2008)] (order).
---------------------------------------------------------------------------
These events led many investors, especially institutional
investors, to redeem their holdings in other prime money market funds
and move assets to Treasury or government money market funds.\46\ This
trend was intensified by turbulence in the market for financial sector
securities as a result of the bankruptcy of Lehman Brothers and the
near failure of American International Group, whose commercial paper
was
[[Page 32692]]
held by many prime money market funds.
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\46\ See U.S. Dollar Money Market Funds, supra note 17, at 72;
BlackRock, The Credit Crisis: U.S. Government Actions and
Implications for Cash Investors (Nov. 2008), available at https://www2.blackrock.com/webcore/litService/search/getDocument.seam?venue=PUB_INS&ServiceName=PublicServiceView&ContentID=50824 (``The Credit
Crisis''); Standard & Poor's, Money Market Funds Tackle `Exuberant
Irrationality,' Ratings Direct, Sept. 30, 2008, available at http://www2.standardandpoors.com/spf/pdf/media/MoneyMarketFunds_Irrationality.pdf.
---------------------------------------------------------------------------
During the week of September 15, 2008, investors withdrew
approximately $300 billion from prime (taxable) money market funds, or
14 percent of the assets held in those funds.\47\ Most of the heaviest
redemptions were from institutional funds, which depleted cash
positions and threatened to force a fire sale of portfolio securities
that would have placed widespread pressure on fund share prices.\48\
Fearing further redemptions, money market fund (and other cash)
managers began to retain cash rather than invest in commercial paper,
certificates of deposit or other short-term instruments.\49\ In the
final two weeks of September 2008, money market funds reduced their
holdings of top-rated commercial paper by $200.3 billion, or 29
percent.\50\
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\47\ See ICI Report, supra note 6, at 62 (analyzing data from
iMoneyNet); see also Investment Company Institute, Money Market
Mutual Fund Assets Historical Data, Apr. 30, 2009, available at
http://www.ici.org/pdf/mm_data_2009.pdf (``ICI Mutual Fund
Historical Data'').
\48\ See ICI Mutual Fund Historical Data, supra note 47.
\49\ See Philip Swagel, ``The Financial Crisis: An Inside
View,'' Brookings Papers on Economic Activity, at 31 (Spring 2009)
(conference draft), available at http://www.brookings.edu/economics/
bpea/~/media/Files/Programs/ES/BPEA/2009--spring--bpea--papers/
2009--spring--bpea--swagel.pdf.
\50\ See Christopher Condon & Bryan Keogh, Funds' Flight from
Commercial Paper Forced Fed Move, Bloomberg, Oct. 7, 2008, available
at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5hvnKFCC_pQ.
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As a consequence, short-term markets seized up, impairing access to
credit in short-term private debt markets.\51\ Some commercial paper
issuers were only able to issue debt with overnight maturities.\52\ The
interest rate premium (spread) over three-month Treasury bills paid by
issuers of three-month commercial paper widened significantly from
approximately 25-100 basis points before the September 2008 market
events to approximately 200-350 basis points, and issuers were exposed
to the costs and risks of having to roll over increasingly large
amounts of commercial paper each day.\53\ Many money market fund
sponsors took extraordinary steps to protect funds' net assets and
preserve shareholder liquidity by purchasing large amounts of
securities at the higher of market value or amortized cost and by
providing capital support to the funds.\54\
---------------------------------------------------------------------------
\51\ See Minutes of the Federal Open Market Committee, Federal
Reserve Board, Oct. 28-29, 2008, at 5, available at http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20081029.pdf
(``FRB Open Market Committee Oct. 28-29 Minutes'') (stating that
following The Reserve Fund's announcement that the Primary Fund
would break the buck, ``risk spreads on commercial paper rose
considerably and were very volatile'' and ``[c]onditions in short-
term funding markets improved somewhat following the announcement of
* * * a number of mutual initiatives by the Federal Reserve and the
Treasury to address the pressures on money market funds and the
commercial paper market''). See also Press Release, Federal Reserve
Board Announces Creation of the Commercial Paper Funding Facility
(CPFF) to Help Provide Liquidity to Term Funding Markets (Oct. 7,
2008), available at http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm (``The commercial paper market has been under
considerable strain in recent weeks as money market mutual funds and
other investors, themselves often facing liquidity pressures, have
become increasingly reluctant to purchase commercial paper,
especially at longer-dated maturities. As a result, the volume of
outstanding commercial paper has shrunk, interest rates on longer
term commercial paper have increased significantly, and an
increasingly high percentage of outstanding paper must now be
refinanced each day. A large share of outstanding commercial paper
is issued or sponsored by financial intermediaries, and their
difficulties placing commercial paper have made it more difficult
for those intermediaries to play their vital role in meeting the
credit needs of businesses and households.'').
\52\ See Matthew Cowley, Burnt Money Market Funds Stymie Short-
Term Debt, Dow Jones International News, Oct. 1, 2008; Anusha
Shrivastava, Commercial-Paper Market Seizes Up, The Wall Street
Journal, Sept. 19, 2008, at C2.
\53\ See Federal Reserve Board data, available at http://www.frbatlanta.org/econ_rd/macroblog/102808b.jpg (charting three-
month commercial paper spreads over three-month Treasury bill); see
also Federal Reserve Board Chairman Ben S. Bernanke, Testimony
before the Committee on Financial Services, U.S. House of
Representatives (Nov. 18, 2008), available at http://www.federalreserve.gov/newsevents/testimony/bernanke20081118a.htm.
\54\ Commission staff provided no-action assurances allowing 100
money market funds in 18 different fund complexes to enter into such
arrangements during the period from September 16, 2008 to October 1,
2008. See, e.g., http://www.sec.gov/divisions/investment/im-noaction.shtml#money.
---------------------------------------------------------------------------
On September 19, 2008, the U.S. Department of the Treasury and the
Board of Governors of the Federal Reserve System (``Federal Reserve
Board'') announced an unprecedented market intervention by the federal
government in order to stabilize and provide liquidity to the short-
term markets. The Department of the Treasury announced its Temporary
Guarantee Program for Money Market Funds (``Guarantee Program''), which
temporarily guaranteed certain investments in money market funds that
decided to participate in the program.\55\ The Federal Reserve Board
announced the creation of its Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility (``AMLF''), through which it
extended credit to U.S. banks and bank holding companies to finance
their purchases of high-quality asset backed commercial paper from
money market funds.\56\ In addition, the Federal Reserve Board's
Commercial Paper Funding Facility (``CPFF'') provided support to
issuers of commercial paper through a conduit that purchased commercial
paper from eligible issuers, although the CPFF did not purchase
commercial paper from money market funds.\57\ The Commission and its
staff worked closely with the Treasury Department and the Federal
Reserve Board to help design these programs, most of which relied in
part on rule 2a-7 to tailor the program and/or condition the terms of a
fund's participation in the program, and we also assisted in
administering the Guarantee Program.\58\ Our staff also
[[Page 32693]]
worked with sponsors of money market funds to provide regulatory relief
they requested to participate fully in these programs.\59\
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\55\ See Press Release, U.S. Department of the Treasury,
Treasury Announces Guaranty Program for Money Market Funds (Sept.
19, 2008), available at http://www.treas.gov/press/releases/hp1147.htm. The Program insures investments in money market funds,
to the extent of their shareholdings as of September 19, 2008, if
the fund has chosen to participate in the Program. The Guarantee
Program is due to expire on September 18, 2009. We adopted, on an
interim final basis, a temporary rule, rule 22e-3T, to facilitate
the ability of money market funds to participate in the Guarantee
Program. The rule permits a participating fund to suspend
redemptions if it breaks a buck and liquidates under the terms of
the Program. See Rule 22e-3T Adopting Release, supra note 31. The
temporary rule will expire on October 18, 2009. We discuss this rule
in more detail in infra Section II.I.
\56\ See Press Release, Federal Reserve Board, Federal Reserve
Board Announces Two Enhancements to Its Programs to Provide
Liquidity to Markets (Sept. 19, 2008), available at http://www.federalreserve.gov/newsevents/press/monetary/20080919a.htm. The
AMLF will expire on February 1, 2010, unless extended. See Press
Release, Federal Reserve Board, Federal Reserve Announces Extensions
of and Modifications to a Number of Its Liquidity Programs (June 25,
2009), available at http://www.federalreserve.gov/newsevents/press/monetary/20090625a.htm (``2009 Federal Reserve Extension and
Modification Announcement'').
\57\ See Press Release, Federal Reserve Board, Board Announces
Creation of the Commercial Paper Funding Facility (CPFF) to Help
Provide Liquidity to Term Funding Markets (Oct. 7, 2008), available
at http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm. At one point the Federal Reserve had purchased about
one-fifth of all commercial paper outstanding in the U.S. market.
See Bryan Keogh, GE Leads Commercial Paper ``Test'' as Fed's Buying
Ebbs, Bloomberg, Jan. 27, 2009, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHWA87Aa2aQQ. The
CPFF will expire on February 1, 2010, unless extended. See 2009
Federal Reserve Extension and Modification Announcement, supra note
56. Although the CPFF did not directly benefit money market funds,
it did indirectly benefit them by stabilizing the commercial paper
market. See, e.g., Richard G. Anderson, The Success of the CPFF?
(Economic Synopses No. 18, Federal Reserve Bank of St. Louis, 2009),
at 2, available at http://www.research.stlouisfed.org/publications/es/09/ES0918.pdf.
\58\ See, e.g., Guarantee Agreement that money market funds
participating in the Treasury's Guarantee Program were required to
sign, at 2, 10, available at http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-docs/Guarantee-Agreement_form.pdf (under which money market funds were required to state that
they operated in compliance with rule 2a-7 to be eligible to
initially participate in the program and must continue to comply
with rule 2a-7 to continue to participate in the program); see also
http://www.sec.gov/divisions/investment/mmtempguarantee.htm.
\59\ See Investment Company Institute, SEC Staff No-Action
Letter (Sept. 25, 2008) (relating to the AMLF); Investment Company
Institute, SEC Staff No-Action Letter (Oct. 8, 2008) (relating to
the Guarantee Program). These no-action letters are available on our
Web site at http://www.sec.gov/divisions/investment/im-noaction.shtml#money.
---------------------------------------------------------------------------
These steps helped to stanch the tide of redemptions from
institutional prime money market funds,\60\ and provided liquidity to
money market funds that held asset backed commercial paper. Commercial
paper markets remained illiquid, however, and, as a result, money
market funds experienced significant problems pricing portfolio
securities. Institutional as well as retail money market funds with
little redemption activity and no distressed securities reported to our
staff that they nevertheless faced the prospect of breaking the buck as
a consequence of their reliance on independent pricing services that
reported prices based on models with few reliable inputs. The
Commission's Office of Chief Accountant and the Financial Accounting
Standards Board provided funds and others guidance on determining fair
value of securities in turbulent markets,\61\ but it appeared that fund
boards remained reluctant to deviate from the prices received from
their vendors. On October 10, 2008, our Division of Investment
Management issued a letter agreeing not to recommend enforcement action
if money market funds met the ``shadow pricing'' obligations of rule
2a-7 by pricing certain of their portfolio securities with a remaining
final maturity of less than 60 days by reference to their amortized
cost.\62\
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\60\ During the week ending September 18, 2008, taxable
institutional money market funds experienced net outflows of $165
billion. See Money Fund Assets Fell to $3.4T in Latest Week,
Associated Press, Sept. 18, 2008. Almost $80 billion was withdrawn
from prime money market funds even after the announcement of the
Guarantee Program on September 19, 2008. See Diana B. Henriques, As
Cash Leaves Money Funds, Financial Firms Sign Up for U.S.
Protection, N.Y. Times, Oct. 2, 2008, at C10. However, by the end of
the week following the announcement, net outflows from taxable
institutional money market funds had ceased. See Money Fund Assets
Fell to $3.398T in Latest Week, Associated Press, Sept. 25, 2008.
\61\ See Press Release No. 2008-234, Securities and Exchange
Commission, Office of the Chief Accountant and FASB Staff
Clarifications on Fair Value Accounting (Sept. 30, 2008), available
at http://www.sec.gov/news/press/2008/2008-234.htm.
\62\ Investment Company Institute, SEC Staff No-Action Letter
(Oct. 10, 2008). This letter is available on our Web site at http://www.sec.gov/divisions/investment/noaction/2008/ICI101008.htm. The
letter by its terms did not apply, however, to shadow pricing if
particular circumstances (such as the impairment of the
creditworthiness of the issuer) suggested that amortized cost was
not appropriate. The staff position also was limited to portfolio
securities that were ``first tier securities'' under rule 2a-7 and
that the fund reasonably expected to hold to maturity. The letter
applied to shadow pricing procedures through January 12, 2009.
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Over the four weeks after The Reserve Fund's announcement, assets
in institutional prime money market funds shrank by 30 percent, or
approximately $418 billion (from $1.38 trillion to $962 billion).\63\
No money market fund other than The Reserve Primary Fund broke the
buck, although money market fund sponsors or their affiliated persons
in many cases committed extraordinary amounts of capital to support the
$1.00 net asset value per share. Our staff estimates that during the
period from August 2007 to December 31, 2008, almost 20 percent of all
money market funds received some support from their money managers or
their affiliates.\64\
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\63\ On September 10, 2008, six days prior to The Reserve Fund's
announcement, approximately $1.38 trillion was invested in
institutional prime (taxable) money market funds. See ICI Mutual
Fund Historical Data, supra note 47. On October 8, 2008,
approximately $962 billion was invested in those funds. See id. In
addition, between September 10 and September 17, the assets of these
funds fell by approximately $193 billion. See id.
\64\ This estimate is based on no-action requests and other
conversations with our staff during this time period.
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During this time period, short-term credit markets became virtually
frozen as market participants hoarded cash and generally refused to
lend on more than an overnight basis.\65\ Interest rate spreads
increased dramatically.\66\ After shrinking to historically low levels
as credit markets boomed in the mid-2000s, interest rate spreads surged
upward in the summer of 2007 and peaked after the bankruptcy of Lehman
Brothers in September 2008.\67\ Money market funds shortened the
weighted average maturity of their portfolios to be better positioned
in light of increased liquidity risk to the funds.\68\
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\65\ The Credit Crisis, supra note 46, at 1 (``After
experiencing more than $400 billion in outflows over a short period
of time, money funds had little appetite for commercial paper; even
quality issuers discovered they could not access the commercial
paper market * * *.'').
\66\ An interest rate spread measures the difference in interest
rates of debt instruments with different risk. See Markus K.
Brunnermeier, Deciphering the Liquidity and Credit Crunch 2007-2008,
23 J. Econ. Perspectives 77, 85, Winter 2009 (``Brunnermeier'').
\67\ See id.; David Oakley, LIBOR Hits Record Low as Credit
Fears Ease, Fin. Times, May 5, 2009. For example, the ``TED'' spread
(the difference between the risk-free U.S. Treasury Bill rate and
the riskier London Interbank Offering Rate (``LIBOR'')), normally
around 50 basis points, reached a high of 463 basis points on
October 10, 2008. See David Serchuk, Banks Led by the TED, Forbes,
Jan. 12, 2009.
\68\ Taxable money market fund average weighted average
maturities shortened to 40-42 days during October 2008 from 45-46
days shortly prior to this period based on analysis of data from the
iMoneyNet Money Fund Analyzer database.
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Although the crisis money markets faced last fall has abated, the
problems have not disappeared. Today, while interest rate spreads have
recently declined considerably, they remain above levels prior to the
crisis,\69\ and short-term debt markets remain fragile.\70\ Although
the average weighted average maturity of taxable money market funds (as
a group) had risen to 53 days as of the week ended June 16, 2009,\71\
we understand that the long-term securities that account for the longer
weighted average maturity are not commercial paper and corporate medium
term notes (as they were before the crisis), but instead are
predominantly government securities, which suggests that money market
funds may still be concerned about credit risk.
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\69\ The TED spread was 52 basis points on May 29, 2009. The
LIBOR-OIS spread (the difference between three-month dollar London
Interbank Offered Rate and the overnight index swap rate) was 45
basis points. See Lukanyo Mnyanda, Libor Declines for Second Day on
Signs Economic Slump is Easing, Bloomberg, May 29, 2009, available
at http://www.bloomberg.com/apps/news?pid=20670001&sid=agpZArg2paJE.
Prior to the start of the financial turbulence in the summer of
2007, the TED spread averaged approximately 25-50 basis points and
the three-month LIBOR-OIS spread averaged 7-9 basis points. See
historical chart of TED spread available at http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND; Simon Kwan,
Behavior of LIBOR in the Current Financial Crisis, FRBSF Economic
Letter (Federal Reserve Bank of San Francisco), Jan. 23, 2009, at 2-
3, available at http://www.frbsf.org/publications/economics/letter/2009/el2009-04.pdf.
\70\ See Bryan Keogh, John Detrixhe & Gabrielle Coppola, Coca-
Cola Flees Commercial Paper for Safety in Bonds, Bloomberg, Mar. 17,
2009, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atxKQSJUp6RE (noting that certain companies
are issuing long-term debt to replace commercial paper to avoid the
risk of not being able to roll over their commercial paper, given
the instability in short-term credit markets); Michael McKee, Fed
Credit Has Stabilized Markets, Not Fixed Them, Study Says,
Bloomberg, Mar. 6, 2008, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRGBZuGYE78Y.
\71\ This information is based on analysis of data from the
iMoneyNet Money Fund Analyzer database.
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The Treasury Guarantee Program has been extended twice, but is set
to expire on September 18, 2009.\72\ Programs
[[Page 32694]]
established by the Federal Reserve Board to support liquidity in the
short-term market are set to expire early next year.\73\ Total money
market fund assets have continued to grow and now amount to
approximately $3.8 trillion.\74\ However, the composition of those
assets has changed dramatically. Between September 10 and October 8,
2008, government money market fund assets increased by about 47 percent
compared to a decrease of about 21 percent in taxable prime money
market fund assets.\75\ Since that time, prime money market fund assets
have begun to grow again, although they remain below pre-September 2008
levels and government money market fund assets remain elevated.\76\
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\72\ See Press Release, U.S. Department of the Treasury,
Treasury Announces Extension of Temporary Guarantee Program for
Money Market Funds (Nov. 24, 2008), available at http://www.treas.gov/press/releases/hp1290.htm; Press Release, U.S.
Department of the Treasury, Treasury Announces Extension of
Temporary Guarantee Program for Money Market Funds (Mar. 31, 2009),
available at http://www.treas.gov/press/releases/tg76.htm.
\73\ The AMLF and the CPFF will expire on February 1, 2010. See
Press Release, Federal Reserve (June 25, 2009), available at http://www.federalreserve.gov/newsevents/press/monetary/20090625a.htm. The
use of the AMLF peaked on October 1, 2008, with holdings of $152.1
billion. See Federal Reserve Board, Statistical Release H.4.1:
Factors Affecting Reserve Balances (Oct. 2, 2008), available at
http://www.federalreserve.gov/releases/h41/20081002. AMLF holdings
as of April 29, 2009 stood at $3.699 billion. See Federal Reserve
Board, Statistical Release H.4.1: Factors Affecting Reserve Balances
(Apr. 30, 2009), available at http://www.federalreserve.gov/releases/h41/20090430.
\74\ See ICI Trends, supra note 4.
\75\ See ICI Mutual Fund Historical Data, supra note 47.
\76\ See id.
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Finally, The Reserve Primary Fund has yet to distribute all of its
remaining assets to shareholders, many of whom were placed in financial
hardship as a result of losing access to their investments.\77\ The
dissolution of the fund has been affected by several factors, including
operational difficulties and lack of liquidity in the secondary
markets, and by legal uncertainties over the disposition of the
remaining assets. We recently instituted an action in federal court
seeking to ensure that the liquidation is effected on a fair and
equitable basis,\78\ and propose in this release regulatory changes
designed to protect investors in a fund that breaks a dollar in the
future.\79\
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\77\ The Reserve Primary Fund did not make an initial partial
pro rata distribution of assets until October 30, 2008. See Press
Release, The Reserve Fund, Reserve Primary Fund Makes Initial
Distribution of $26 Billion to Primary Fund Shareholders (Oct. 30,
2008). The fund has distributed approximately 90 percent of its
assets. See Press Release, The Reserve Fund, Court Issues Order
Setting Objection and Hearing Dates on Securities and Exchange
Commission's Proposed Plan for Distribution of Reserve Primary
Fund's Assets (June 15, 2009).
\78\ See SEC v. Reserve Management Co., Inc., et al., Litigation
Release No. 21025 (May 5, 2009), available at http://www.sec.gov/litigation/litreleases/2009/lr21025.htm. We note that we also have
filed fraud charges against several entities and individuals who
operate The Reserve Primary Fund alleging that they failed to
provide key material facts to investors and trustees about the
fund's vulnerability as Lehman Brothers sought bankruptcy
protection. See id.
\79\ See infra Section II.I.
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II. Discussion
The severe problems experienced by money market funds since the
fall of 2007 and culminating in the fall of 2008 have prompted us to
review our regulation of money market funds. Based on that review,
including our experience with The Reserve Fund, we today are proposing
for public comment a number of significant amendments to rule 2a-7
under the Investment Company Act.
In formulating these proposals, Commission staff has consulted
extensively with other members of the President's Working Group on
Financial Markets, and in particular the Department of Treasury and the
Federal Reserve Board, which provided support to money market funds and
the short-term debt markets last fall, and which continue to administer
programs from which money market funds and their shareholders benefit.
We have consulted with managers of money market funds and other experts
to develop a deeper understanding of the stresses experienced by funds
and the impact of our regulations on the readiness of money market
funds to cope with market turbulence and satisfy heavy demand for
redemptions. In March, we received an extensive report from a ``Money
Market Working Group'' assembled by the Investment Company Institute
(``ICI Report''), which recommended a number of changes to our rule 2a-
7 that it believes could improve the safety and oversight of money
market funds.\80\ We have also drawn from our experience as a regulator
of money market funds under rule 2a-7 for more than 25 years and
particularly since autumn 2007.
---------------------------------------------------------------------------
\80\ ICI Report, supra note 6.
---------------------------------------------------------------------------
Our proposals, which we discuss in more detail below, are designed
to increase the resilience of money market funds to market disruptions
such as those that occurred last fall. The proposed rules would reduce
the vulnerability of money market funds to breaking the buck by, among
other things, improving money market funds' ability to satisfy
significant demands for redemptions. If a particular fund does break
the buck and determines to liquidate, the proposed rules would
facilitate the orderly liquidation of the fund in order to protect the
interests of all fund shareholders. These changes together should make
money market funds (collectively) less susceptible to a run by
diminishing the chance that a money market fund will break a dollar
and, if one does, provide a means for the fund to orderly liquidate its
assets. Finally, our proposals would improve our ability to oversee
money market funds by requiring funds to submit to us current portfolio
information.
Our proposals represent the first step in addressing issues we
believe merit immediate attention.\81\ Throughout this release, we ask
comment on other possible regulatory changes aimed at further
strengthening the stability of money market funds. In addition, we ask
comment on some more far-reaching changes that could transform the
business and regulatory model on which money market funds have operated
for more than 30 years, including whether money market funds should
move to a floating net asset value.\82\ We expect to benefit from the
comments we receive before deciding whether to propose further changes.
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\81\ We note that we accomplished the reforms of money market
fund regulation we initiated in 1990 in two steps. See 1990
Proposing Release, supra note 22 (taxable money market funds);
Revisions to Rules Regulating Money Market Funds, Investment Company
Act Release No. 19959 (Dec. 17, 1993) [58 FR 68585 (Dec. 28, 1993)]
(tax exempt money market funds) (``1993 Proposing Release'').
\82\ See infra Section III.A.
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A. Portfolio Quality
To limit the amount of credit risk to which money market funds can
be exposed, rule 2a-7 limits them to investing in securities that a
fund's board of directors (or its delegate pursuant to written
guidelines) determines present minimal credit risks.\83\ In addition,
securities must at the time of acquisition be ``eligible securities,''
which means in part that they must have received the highest or second
highest short-term debt ratings from the ``requisite NRSROs.'' \84\
[[Page 32695]]
Because of the additional credit risk that generally is represented by
securities rated in the second highest, rather than the highest, NRSRO
rating category, a taxable money market fund may not invest more than
five percent of its total assets in ``second tier securities.'' \85\
Tax exempt money market funds are limited in the same manner only with
respect to second tier ``conduit securities,'' i.e., municipal
securities backed by a private issuer.\86\
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\83\ Rule 2a-7(c)(3)(i). Although rule 2a-7 refers to
determinations to be made by a fund or its board, many of these
determinations under the rule may be delegated to the investment
adviser or fund officers pursuant to written guidelines that the
board establishes and oversees to assure that the applicable
procedures are being followed. Rule 2a-7(e).
\84\ Rule 2a-7(a)(10)(i) (defining ``eligible security''). If
the securities are unrated, they must be of comparable quality. Rule
2a-7(a)(10)(ii). The term ``requisite NRSROs'' is defined in
paragraph (a)(21) of the rule to mean ``(i) Any two NRSROs that have
issued a rating with respect to a security or class of debt
obligations of an issuer; or (ii) If only one NRSRO has issued a
rating with respect to such security or class of debt obligations of
an issuer at the time the fund Acquires the security, that NRSRO.''
Thus, a security can satisfy the ratings requirement in one of four
ways: (1) It is rated in the same (top two) category by any two
NRSROs; (2) if it is rated by at least two NRSROs in either of the
top two categories, but no two NRSROs assign the same rating, the
lower rating is assigned; (3) it is rated by only one NRSRO, in one
of the top two categories; or (4) it is an unrated security that the
board or its delegate determines to be of comparable quality to
securities satisfying the rating criteria. The terms ``rated
security'' and ``unrated security'' are defined in paragraphs
(a)(19) and (a)(28) of rule 2a-7, respectively.
\85\ Rule 2a-7(c)(3)(ii)(A). See also rule 2a-7(a)(10) (defining
``eligible security''), (a)(22) (defining ``second tier security''
as any eligible security that is not a first tier security), and
(a)(12) (defining ``first tier security'' as, among other things,
any eligible security that, if rated, has received the highest
short-term term debt rating from the requisite NRSROs or, if
unrated, has been determined by the fund's board of directors to be
of comparable quality). See also 1990 Proposing Release, supra note
22, at Section II.1.b.
\86\ Rule 2a-7(c)(3)(ii)(B). See also rule 2a-7(a)(7) (defining
``conduit security'').
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We are also proposing a change to the provisions of rule 2a-7 that
limit money market funds to investing in high quality securities. We
propose to generally limit money market fund investments to securities
rated in the highest NRSRO ratings category. In addition, we are
seeking comment on whether to modify provisions of the rule that
incorporate minimum ratings by NRSROs to reflect changes made to the
federal securities laws by the Credit Rating Agency Reform Act of 2006
(``Rating Agency Reform Act'').\87\
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\87\ Credit Rating Agency Reform Act of 2006, Pub. L. 109-291,
120 Stat. 1327.
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1. Second Tier Securities
We propose to amend rule 2a-7 to allow money market funds to invest
only in first tier securities. Under the proposed amendments, money
market funds could ``acquire'' only ``eligible securities,'' which
would be re-defined to include securities receiving only the highest
(rather than the highest two) short-term debt ratings from the
``requisite NRSROs.'' \88\ Funds would not have to immediately dispose
of a security that was downgraded by the requisite NRSROs but, under
existing provisions of rule 2a-7, the fund would have to dispose of the
security ``as soon as practicable consistent with achieving an orderly
disposition of the security'' unless the fund's board of directors
finds that such disposal would not be in the best interest of the
fund.\89\
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\88\ See rule 2a-7(a)(1) (defining acquisition (or acquire) as
any purchase or subsequent rollover, but not including the failure
to exercise a demand feature); proposed rule 2a-7(a)(11)(iii)
(defining eligible security); proposed rule 2a-7(c)(3) (portfolio
quality). Because eligible securities would no longer be divided
into first tier and second tier securities, both of those terms
would be deleted from the rule, as would provisions relating
specifically to second tier securities. See rule 2a-7(a)(12),
(a)(22), (c)(3)(ii), (c)(4)(i)(C), (c)(4)(iii)(B), (c)(6)(i)(A), and
(c)(6)(i)(C). We would therefore amend the definition of eligible
security to require that securities receive ``the highest,'' as
opposed to ``one of the two highest'' short-term rating categories,
as the current definition provides, and delete other references in
the rule to the second highest rating category. See proposed rule
2a-7(a)(11)(iii). The definition of eligible security also would be
expanded to include two types of securities, securities issued by a
money market fund and ``Government securities,'' that were formerly
part of the definition of first tier securities. See proposed rule
2a-7(a)(11)(i) and (ii); see also rule 2a-7(a)(14) (defining
Government security). Unrated securities determined by the board of
directors of the fund or its delegate to be of comparable quality
also would still be eligible securities. See proposed rule 2a-
7(a)(11)(iv).
\89\ See rule 2a-7(c)(6)(ii); proposed rule 2a-7(c)(7)(ii).
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We have considered previously the extent to which money market
funds should be permitted to invest in second tier securities. In 1991,
following distress at several money market funds that held defaulted
commercial paper, the Commission, among other things, limited a taxable
money market fund's total investment in second tier securities to five
percent of the fund's portfolio assets and limited the investment in
any particular issuer of second tier securities to no more than the
greater of one percent of the fund's portfolio assets or $1
million.\90\ At that time, commenters in favor of eliminating money
market funds' investment in second tier securities argued that such
securities may undergo a rapid deterioration and thus may pose risks to
the fund holding such securities as well as to investor confidence in
money market funds in general.\91\ On the other hand, issuers of second
tier securities urged the Commission not to limit money market funds'
holdings of second tier securities, arguing that the Commission's
concerns regarding the creditworthiness of second tier securities were
misplaced and that restrictions would raise issuers' borrowing costs
and discourage money market funds from holding any second tier
securities.\92\ Based principally on the potential risk to money market
funds of holding second tier securities, we adopted the five percent
and one percent limitations to limit (but not eliminate) exposure of
money market funds to second tier securities and any one issuer of
second tier securities.\93\
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\90\ See rule 2a-7(c)(3)(ii)(A), (c)(4)(i)(C)(1). See also 1991
Adopting Release, supra note 20.
\91\ See 1991 Adopting Release, supra note 20, at n.36 and
accompanying text. Most commenters representing the mutual fund
industry supported or did not oppose the limitations we proposed.
Id. at n.35 and accompanying text.
\92\ See id. at text following n.35.
\93\ See id. at n.35-37 and accompanying text; 1990 Proposing
Release, supra note 22, at n.33 and accompanying text.
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Second tier securities were not directly implicated in the recent
strains on money market funds. The ICI's Money Market Working Group
expressed concern to us, however, that these securities may present an
``imprudent'' risk to the stable value of money market funds because
they present ``weaker credit profiles, smaller overall market share,
and smaller issuer program sizes * * *'' \94\ Our examination of the
data discussed below suggests support for their recommendation that
money market funds no longer be permitted to invest in these
securities.\95\
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\94\ ICI Report, supra note 6, at 101.
\95\ Id. at 100.
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Compared to the market for first tier securities, the market for
second tier securities is relatively small. As of June 24, 2009, there
was $1082.5 billion in rule 2a-7-eligible commercial paper outstanding,
consisting of $1035.8 billion (95.7 percent) of first tier and $46.7
billion (4.3 percent) of second tier.\96\ The size of the second tier
market has remained consistently small over time.\97\
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\96\ See Federal Reserve Board Commercial Paper Outstanding
Chart, available at http://www.federalreserve.gov/releases/cp/outstandings.htm (showing weekly levels of rule 2a-7-eligible
commercial paper outstanding).
\97\ See Federal Reserve Board Commercial Paper Data Download
Program, available at http://www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP (select year-end outstandings from the
preformatted data package menu and follow the instructions for
download). Over the last eight years, the market for second tier
securities on average has represented only 4.6 percent of the rule
2a-7-eligible commercial paper market.
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In addition, second tier securities present potentially
substantially more risk than first tier securities. As the following
chart shows, during the market disruptions of last fall, second tier
securities experienced significantly wider credit spreads than first
tier securities.\98\
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\98\ See Federal Reserve Board Commercial Paper Rates Chart,
available at http://www.federalreserve.gov/releases/cp/default.htm.
See also Frank J. Fabozzi, The Handbook of Fixed Income Securities,
at 4 (7th ed. 2005) (``Default risk or credit risk refers to the
risk that the issuer of a bond may be unable to make timely payment
of principal or interest payments * * *. The spread between Treasury
securities and non-Treasury securities that are identical in all
respects except for quality is referred to as a credit spread or
quality spread.'').
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[[Page 32696]]
[GRAPHIC] [TIFF OMITTED] TP08JY09.000
Second tier securities as an asset class also are of weaker credit
quality in terms of interest coverage ratios, debt coverage ratios, and
debt to equity ratios.\99\ These data strongly suggest that second tier
securities generally present additional risks to a money market fund.
This is a conclusion that may have been reached by money market fund
managers, most of which (as described below) do not invest in second
tier securities. In light of the risks that second tier securities
generally present to money market funds, and the consequences to funds
and fund investors of breaking a dollar, we are proposing to limit
funds to investing in first tier securities. We believe such a
limitation would make it less likely that a money market fund would
hold a problematic security, or a security that would lose significant
value as a result of market disruptions.
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\99\ See Standard & Poor's, CreditStats: 2007 Adjusted Key U.S.
Industrial and Utility Financial Ratios, at 6, Table 3 (Sept. 10,
2008), available at http://www2.standardandpoors.com/spf/pdf/fixedincome/CreditStats_2007_Adjusted_Key_Financial_Ratios.pdf
(showing A-2 rated commercial paper had EBIT interest coverage of
7.2x, free operating cash flow to debt of 16.7%, and debt to debt
plus equity of 45.1%, compared to A-1 averages of 11.5x, 31.3%, and
37.1%, respectively, represented as three-year (2005-2007)
averages).
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It does not appear that amending rule 2a-7 to eliminate money
market funds' ability to acquire second tier securities would be
materially disruptive to funds. Prior to our amendments to rule 2a-7 in
1991, non-government money market funds held more than eight percent of
their assets in second tier securities.\100\ After we restricted the
amount of second tier securities money market funds could buy, the
funds soon reduced their holdings to almost zero.\101\ Our staff's
review of money market fund portfolios in September 2008 found that
second tier securities represented only 0.4 percent of the $3.6
trillion held by the funds (approximately $14.6 billion).
---------------------------------------------------------------------------
\100\ See Crabbe & Post, supra note 15, at 11, Table 2.
\101\ See id. at 11-12.
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We request comment on our proposal to eliminate the ability of
money market funds to invest in second tier securities. What would be
the impact on funds? Would the benefit of reducing credit risk by
eliminating the ability of money market funds to invest in second tier
securities outweigh any potential diversification benefits that second
tier securities may otherwise provide to money market funds? What, if
any, diversification benefits do money market funds currently receive
from investing in second tier securities? Would this change have a
significant effect on yields?
Would there be a proportionately greater impact of eliminating
second tier securities on smaller or less established money market
funds or on particular types of funds (e.g., single-state tax exempt
funds)? If the proposal to eliminate funds' ability to hold second tier
securities is adopted, what transition period should we provide money
market funds to dispose of their existing second tier holdings in an
orderly manner? Should we allow funds that hold second tier securities
after the amended rule becomes effective to continue to hold such
securities until maturity?
Are there alternatives to eliminating entirely the ability of a
money market fund to invest in second tier securities? For example,
should money market funds instead be limited to investing in second
tier securities (i) with a maximum maturity of, for example, 45 days,
or (ii) as a smaller portion of fund assets, such as two percent of the
total assets, or (iii) a combination of both? A security with a shorter
maturity presents less credit risk to a fund (because the exposure is
shorter) and less liquidity risk (because cash will be available
sooner). Would such an approach address, or at least partly address,
the concerns raised by the ICI Report and in this Release? \102\ Could
additional credit risk analysis or other procedures be imposed with
respect to second tier securities to address these concerns?
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\102\ See ICI Report, supra note 6, at 100-101.
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[[Page 32697]]
2. Eligible Securities
a. Use of NRSROs
As discussed above, rule 2a-7 currently requires a money market
fund to limit its portfolio investments to eligible securities, i.e.,
short-term securities that at the time of acquisition have received
ratings from the ``requisite NRSROs'' in one of the two highest short-
term debt rating categories and securities that are comparable to rated
securities.\103\
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\103\ See supra note 84 and accompanying text. A ``rated
security'' generally means a security that (i) has received a short-
term rating from an NRSRO, or whose issuer has received a short-term
rating from an NRSRO with respect to a class of debt obligations
that is comparable in priority and security with the security; or
(ii) is subject to a guarantee that has received a short-term rating
from an NRSRO, or a guarantee whose issuer has received a short-term
rating from an NRSRO with respect to a class of debt obligations
that is comparable in priority and security with the guarantee. Rule
2a-7(a)(19).
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A determination that a security is an eligible security as a result
of its NRSRO ratings is a necessary but not sufficient finding in order
for a fund to acquire the security.\104\ References to NRSRO ratings in
rule 2a-7 and other regulations were designed to provide a clear
reference point to regulators and market participants. The reliability
of credit ratings, however, has been questioned, in particular in light
of developments during the recent financial crisis. As a result, there
have been calls to produce higher quality ratings. Last year, we
proposed to eliminate the use of NRSRO ratings in rules under the
Investment Company Act, including rule 2a-7, and instead to rely solely
on the fund manager's credit risk determination.\105\ In 2003, in a
concept release seeking comment on various issues relating to credit
rating agencies, we also asked whether credit ratings should be used as
a minimum objective standard in rule 2a-7. Most commenters who
addressed the specific question in 2003 supported retaining the ratings
requirement in rule 2a-7.\106\ One commenter asserted that ``[t]he
combination of this objective test with the `subjective test' (credit
analysis performed by the adviser to the money market fund) provides an
important complementary rating structure under Rule 2a-7.'' \107\
Similarly, in our proposal last year, a substantial majority of
commenters disagreed with the proposed elimination of the ratings
requirement.\108\ The ICI Report summed up the views of many of these
commenters, asserting that elimination of the NRSRO ratings' ``floor *
* * would remove an important investor protection from Rule 2a-7,
introduce new uncertainties and risks, and abandon a regulatory
framework that has proven to be highly successful.'' \109\ A few
commenters supported removing the ratings requirement in 2003 and as
proposed in 2008, however. One of these commenters noted that ``one of
the core causes of the sub-prime crisis was dependence on inaccurate
and unsupportable credit ratings.'' \110\
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\104\ The rule also requires fund boards (which typically rely
on the fund's adviser) to determine that the security presents
minimal credit risks, and specifically requires that determination
``be based on factors pertaining to credit quality in addition to
any ratings assigned to such securities by an NRSRO.'' Rule 2a-
7(c)(3)(i).
\105\ See, e.g., References to Ratings of Nationally Recognized
Statistical Rating Organizations, Investment Company Act Release No.
28327 (July 1, 2008) [73 FR 40124 (July 11, 2008)] (``NRSRO
References Proposal'').
\106\ See, e.g., Comment Letter of Fidelity Investments (July
25, 2003) (File No. S7-12-03). Comment letters on File No. S7-12-03
are available at http://www.sec.gov/rules/concept/s71203.shtml.
\107\ Comment Letter of Denise Voigt Crawford, Securities
Commissioner, Texas State Securities Board (July 28, 2003) (File No.
S7-12-03).
\108\ See, e.g., Comment Letter of T. Rowe Price Family of Funds
(Sept. 5, 2008) (File No. S7-19-08). Comment letters on File No. S7-
19-08 are available at http://www.sec.gov/comments/s7-19-08/s71908.shtml.
\109\ See ICI Report, supra note 6, at 81.
\110\ See Comment Letter of Professor Frank Partnoy (received
Sept. 5, 2008) (File No. S7-19-08).
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In light of recent market developments, we request that commenters
again address whether or not the approach we proposed last year would
provide safeguards with respect to credit risk that are comparable to
the continued inclusion of NRSRO references in the rule. What other
alternatives could we adopt to encourage more independent credit risk
analysis and meet the regulatory objectives of rule 2a-7's requirement
of NRSRO ratings? Are there additional factors that we should consider
with respect to last year's proposal? Should we consider establishing a
roadmap for phasing in the eventual removal of NRSRO references from
the rule? We are also considering an approach under which a money
market fund's board would designate three (or more) NRSROs that the
fund would look to for all purposes under rule 2a-7 in determining
whether a security is an eligible security.\111\ In addition, the board
would be required to determine at least annually that the NRSROs it has
designated issue credit ratings that are sufficiently reliable for that
use.\112\ We request comment on an approach in which the fund board
designates NRSROs. Would the inclusion of a number of ``designated
NRSROs'' improve rule 2a-7's use of NRSRO ratings as a threshold
investment criterion and be consistent with the goals of Congress in
passing the Rating Agency Reform Act? \113\ What are the advantages and
disadvantages of such an approach? Should funds be required to
designate a minimum number of NRSROs to use in determining thresholds
for Eligible Securities or in monitoring ratings? If so, would at least
three be the appropriate number, as some have suggested? \114\ Would
more be appropriate to address these purposes (e.g., four, five or
six)? Should we permit fund boards to designate different NRSROs with
respect to different types of issuers of securities in which the fund
invests? Should the funds be required to disclose these designated
NRSROs in their statements of additional information? \115\
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\111\ Commenters on our NRSRO References Proposal and the ICI
Report recommended similar approaches. See Comment Letter of
Federated Investors, Inc. (Sept. 5, 2008) (File No. S7-19-08)
(suggesting that rule 2a-7 require the board or its delegate to
select by security type at least three NRSROs on which the fund
would rely under the rule); Comment Letter of OppenheimerFunds, Inc.
(Sept. 4, 2008) (File No. S7-19-08) (suggesting the rule allow fund
boards to designate (presumably after considering any
recommendations of the investment manager) the identity and number
of NRSROs whose ratings will be used to determine eligible portfolio
securities); ICI Report, supra note 6, at 82 (recommending the fund
designate three or more NRSROs that the fund would use in
determining the eligibility of portfolio securities). See also
Comment Letter of Stephen A. Keen on behalf of Federated Investors,
Inc. (Mar. 12, 2007) (File No. S7-04-07) (in response to our 2007
proposal on oversight of NRSROs, asserting that investment advisers
should be free to choose which NRSROs they will rely upon and
monitor only their ratings).
\112\ The only time that funds would be required to look to all
NRSROs under this approach would be, as under the current rule, in
determining whether a long-term security with a remaining maturity
of 397 calendar days or less that does not, and whose issuer does
not, have a short-term rating is an eligible security. See infra
section II.A.2.b.
\113\ See Senate Committee on Banking, Housing, and Urban
Affairs, Credit Rating Agency Reform Act of 2006, S. Rep. No. 109-
326, at 2 (2006) (``Senate Report 109-326'') (purposes of the Act
include improving the quality of NRSRO credit ratings by fostering
accountability, transparency, and competition in the credit rating
industry).
\114\ See supra note 111.
\115\ See Part B of Form N-1A.
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What impact would a requirement that the fund board designate
NRSROs have on competition among NRSROs? Would NRSROs compete through
ratings to achieve designation by money market funds? Given that the
staff believes it is reasonable to assume that the three NRSROs that
issued almost 99 percent of all outstanding ratings across all
categories that were issued by the 10 registered NRSROs as of June
2008,\116\
[[Page 32698]]
also issued well over 90 percent of all outstanding ratings of short
term debt, and in light of concerns about enhancing competition among
NRSROs, should the minimum number of designated NRSROs be greater than
three, such as four, five, or six? \117\ What are the advantages and
disadvantages of requiring boards to monitor the ratings issued by all
NRSROs? Should rule 2a-7 specify certain minimum policies and
procedures for monitoring NRSROs? Should money market fund boards be
permitted to designate credit rating agencies or credit evaluation
providers that are not registered as NRSROs with the Commission under
the Securities Exchange Act of 1934 and the rules we have adopted under
those provisions? \118\ Should a board be solely responsible for
designating and annually reviewing a designated NRSRO or should we
permit delegation of this responsibility? How many NRSROs would money
market fund boards be likely to evaluate before making their
designations? After a fund board had designated NRSROs, what incentives
would the board have to change the designated NRSROs?
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\116\ The staff's belief is based on its report that three
NRSROs issued almost 99 percent of all the outstanding ratings
across all categories that were issued by the 10 registered NRSROs
as of June 2008. See SEC, Annual Report on Nationally Recognized
Statistical Rating Organizations at 35 (June 2008) (``2008 NRSRO
Report'').
\117\ According to the ICI Report, requiring money market funds
to designate at least three NRSROs whose ratings the fund would use
in determining eligible portfolio securities could encourage
competition among NRSROs to achieve designation by money market
funds. See ICI Report, supra note 6, at 82.
\118\ See 15 U.S.C. 78o-7; 17 CFR 240.17g-1 (rules governing the
registration of NRSROs).
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We request comment on the impact of any of these approaches on
funds and their ability to maintain a stable net asset value. Would any
particular requirement help funds to better determine whether a
security is an eligible security? We also request comment on the
potential impact on competition among NRSROs.
b. Long-Term Unrated Securities
Rule 2a-7 permits money market funds to invest in a long-term
security with a remaining maturity of 397 calendar days or less (``stub
security'') that is an unrated security (i.e., neither the security nor
its issuer or guarantor has a short-term rating) unless the security
has received a long-term rating from any NRSRO that is not within the
NRSRO's three highest categories of long-term ratings.\119\ Under rule
2a-7, the measure of quality is the rating given to the issuer's short-
term debt. In the absence of a short-term rating, the minimum long-term
rating is designed to provide an independent check on a fund's quality
determination.\120\ In light of the changes we are proposing above to
increase the portfolio quality standards of the rule, we propose to
permit money market funds to acquire such securities only if they have
received long-term ratings in the highest two ratings categories to
more narrowly limit the credit risk to which a money market fund may be
exposed.\121\ As under the current rule, fund boards would continue to
be required to determine that such a security is ``of comparable
quality'' to a rated security if it met these proposed conditions.\122\
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\119\ Rule 2a-7(a)(10)(ii)(A). Nonetheless, the security may be
an eligible security if it has received a long-term rating from the
requisite NRSROs in one of the three highest long-term rating
categories and (as with any unrated security that is an eligible
security) is of comparable quality to a rated security. Id.
\120\ See 1991 Adopting Release, supra note 20, at text
accompanying nn.65-68.
\121\ Proposed rule 2a-7(a)(11)(iv)(A). Similar to the provision
in the current rule, the security might be an eligible security even
if it received a long-term rating below the two highest long-term
rating categories if the requisite NRSROs rate the security in one
of the two highest long-term rating categories. Id.
\122\ Proposed rule 2a-7(a)(11)(iv).
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We request comment on this proposed change. Given our proposal to
increase the quality standards of the rule, is the proposed change
appropriate? Should we consider permitting funds to acquire these stub
securities only if they have received long-term ratings in the highest
rating category? What impact would the proposed amendment have on money
market funds' current portfolio holdings? We request commenters
expressing views on this change to provide us with data identifying the
relationship between the long-term ratings on these stub securities and
short-term ratings.
3. Credit Reassessments
Rule 2a-7 currently requires a money market fund's board of
directors to promptly reassess whether a portfolio security continues
to present minimal credit risks if, subsequent to its acquisition by
the fund, (i) the security has ceased to be a first tier security
(e.g., the security is downgraded to second tier by one of the
requisite NRSROs), or (ii) the fund's adviser becomes aware that an
unrated or second tier security has received a rating from any NRSRO
below the second highest short-term rating category.\123\ In light of
the proposed elimination of second tier securities from the definition
of eligible security, we propose to amend rule 2a-7 so the only
circumstance in which the fund's board of directors would be required
to reassess whether a security continues to present minimal credit
risks would be if, subsequent to its acquisition by the fund, the
fund's money market fund adviser becomes aware that an unrated security
has received a rating from any NRSRO below the highest short-term
rating category.\124\
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\123\ Rule 2a-7(c)(6)(i)(A)(1) and (2).
\124\ Proposed rule 2a-7(c)(7)(i)(A). As under the current rule,
the proposed rule amendment would not require, and we would not
expect, investment advisers to subscribe to every rating service
publication in order to comply with the requirement that the board
reassess when the fund's adviser becomes aware that any NRSRO has
rated an unrated security below its highest rating. We would expect
an investment adviser to become aware of a subsequent rating if it
is reported in the national financial press or in publications to
which the adviser subscribes. See 1991 Adopting Release, supra note
20, at n.71.
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We request comment on whether these are appropriate circumstances
under which to require a reassessment in light of our proposal to
eliminate the ability of money market funds to invest in second tier
securities.
4. Asset Backed Securities
Rule 2a-7 contains provisions that specifically address asset
backed securities (``ABSs''),\125\ including the circumstances under
which an ABS is an eligible security,\126\ the maturity of an ABS,\127\
and how a fund must treat such an investment under the diversification
provisions.\128\ The rule, however, does not specifically address how a
fund board (or its delegate) should determine that an investment in an
ABS (or other potential portfolio investment) presents minimal credit
risks, nor does it specifically address liquidity issues presented by a
money market fund's investment in an ABS.
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\125\ An asset backed security is defined very generally to mean
a fixed income security that entitles its holders to receive
payments that depend primarily on the cash flow from financial
assets underlying the asset backed security. See rule 2a-7(a)(3).
\126\ See rule 2a-7(a)(10)(ii)(B).
\127\ See rules 2a-7(a)(8)(ii) and 2a-7(d).
\128\ See rule 2a-7(c)(4)(ii)(D).
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Both such matters were raised in 2007 by money market funds'
investment in SIVs, which we discussed briefly above. SIVs issued
commercial paper to finance a portfolio of longer term, higher yielding
investments, including residential mortgages. Unlike other commercial
paper programs, SIVs typically did not have access to liquidity
facilities to protect commercial paper investors (including money
market funds) against the risk of the issuer's inability to reissue (or
``rollover'') commercial paper caused by either a credit event of the
issuer or a disruption in the commercial paper
[[Page 32699]]
market.\129\ When they could no longer rollover their debt beginning in
2007, those SIVs, unable to secure liquidity support from sponsoring
banks, were forced to begin selling the vehicles' assets into depressed
markets to pay maturing debt and to begin winding down their
operations. SIV credit ratings deteriorated rapidly as they
deleveraged, placing pressure on valuations of SIV securities held by
money market funds. We understand that eventually most funds holding
SIV securities not supported by a large bank entered into agreements
with affiliates of the fund to support the fund's stable net asset
value per share.
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\129\ For a discussion of the evolution of the asset backed
commercial paper market and SIV securities during this period, see
generally Jim Croke, New Developments in Asset-Backed Commercial
Paper (2008), at 2-4, available at http://www.orrick.com/fileupload/1485.pdf.
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We request comment on whether, and if so how, we should amend rule
2a-7 to address risks presented by SIVs or similar ABSs. As discussed
above, rule 2a-7 requires that money market funds only invest in
securities that the board of directors or its delegate determines
present minimal credit risks.\130\ The Commission has stated that
``[d]etermining that an ABS presents minimal credit risks requires an
examination of the criteria used to select the underlying assets, the
credit quality of the put providers, and the conditions of the
contractual relationships among the parties to the arrangement. When an
ABS consists of a large pool of financial assets, such as credit card
receivables or mortgages, it may not be susceptible to conventional
means of credit risk analysis because credit quality is based not on a
single issuer but on an actuarial analysis of a pool of financial
assets.'' \131\ We also said, however, that we were concerned that
``fund credit analysts may be unable to perform the thorough legal,
structural and credit analyses required to determine whether a
particular ABS involves inappropriate risks for money market funds''
and, as a result, required that any ABS in which a money market fund
invested be rated by an NRSRO because of NRSROs' role in assuring that
the underlying ABS assets are properly valued and provide adequate
asset coverage for the cash flows required to fund ABSs.\132\
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\130\ Rule 2a-7(c)(3)(i).
\131\ 1993 Proposing Release, supra note 81, at text
accompanying nn.108-109.
\132\ Id. at nn.110-112 and accompanying text.
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As discussed above, beginning in 2007, SIV securities were rapidly
downgraded by NRSROs revealing money market funds' varying minimal
credit risk determinations with respect to these securities. In light
of this experience, should we provide additional guidance to money
market funds on the required minimal credit risk evaluation with
respect to ABSs? We believe that part of this analysis, when evaluating
any security, should include an evaluation of the issuer's ability to
maintain its promised cash flows which, in the case of an asset backed
security, would entail an analysis of the underlying assets, their
behavior in various market conditions, and the terms of any liquidity
or other support provided by the sponsor of the security.\133\ Should
we amend rule 2a-7 to remove the requirement that any ABS be rated by
an NRSRO in order to be an eligible security for money market funds in
light of the NRSROs' recent rapid downgrading of these securities?
Under our proposed liquidity requirements (discussed below), the
liquidity features of an ABS would have to be considered in determining
whether the fund holds sufficiently liquid assets to meet shareholder
redemptions.\134\
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\133\ The ICI Report recommended that we amend rule 2a-7 to
require money market fund advisers to adopt a ``new products
committee.'' See ICI Report, supra note 6, at 79-80. Although such
committees may be useful, their usefulness would turn on what might
be a ``new product'' as well as the judgment of its members, whose
judgment is today required to be brought to bear on whether the
security presents minimal credit risks.
\134\ See infra Section II.C.
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We request comment on whether rule 2a-7 should explicitly require
fund boards of directors (or their delegates) to evaluate whether the
security includes any committed line of credit or other liquidity
support. Are there other factors that we should require money market
fund boards to evaluate when determining whether SIV investments or
other new financial products pose minimal credit risks? We note that
some money market funds invested more significantly in SIV securities
while other money market funds avoided such investments entirely. Are
there facets of the credit analysis that led certain money market funds
to avoid such investments that should be incorporated explicitly into
rule 2a-7? \135\ Should we limit money market funds to investing in
ABSs that the manager concludes can be paid upon maturity with existing
cash flow, i.e., the payment upon maturity is not dependent on the
ability of the special purpose entity to rollover debt? Alternatively,
should the rule itself require ABSs to be subject to unconditional
demand features to be eligible securities? \136\
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\135\ The staff's recent examinations of money market funds
indicate that credit analysts for money market funds that invested
in SIVs that subsequently defaulted appear to have had access to the
same basic set of information on SIVs as did analysts at money
market funds that did not and that the judgment of these credit
analysts regarding minimal creditworthiness of the SIVs that
subsequently defaulted appeared to have been different. The staff's
exams also appear to indicate that credit analysts for money market
funds that invested in SIVs that subsequently defaulted placed less
emphasis on the length of time that payment experience was available
on assets in the collateral pool and they were willing to accept
sub-prime mortgage credits as a seasoned asset class. In addition,
their decision, in part, may have been influenced by the greater
amount of over-collateralization of the collateral pools and the
high yields paid by notes supported by sub-prime credits.
\136\ Rule 2a-7(a)(26) defines an ``unconditional demand
feature'' as a ``demand feature'' that by its terms would be readily
exercisable in the event of a default in payment of principal or
interest on the underlying security or securities.
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B. Portfolio Maturity
Rule 2a-7 restricts the maximum remaining maturity of a security
that a money market fund may acquire, and the weighted average maturity
of the fund's portfolio, in order to limit the exposure of money market
fund investors to certain risks, including interest rate risk. The
Commission is proposing changes to the rule's maturity limits to
further reduce such risks, as discussed below. First, we propose to
reduce the maximum weighted average portfolio maturity permitted by the
rule. Second, we propose a new maturity test that would limit the
portion of a fund's portfolio that could be held in longer term
variable- or floating-rate securities. Third, we propose to delete a
provision in the rule that permits certain money market funds to
acquire Government securities with extended maturities of up to 762
calendar days. We are also requesting comment on other ways of
adjusting the rule's maturity provisions in order to accomplish our
goal of decreasing the risks associated with a money market fund
holding longer term investments.
1. Weighted Average Maturity
Rule 2a-7 requires a money market fund to maintain a dollar-
weighted average portfolio maturity appropriate to its objective of
maintaining a stable net asset value or price per share, but in no case
greater than 90 days.\137\ We adopted this provision because securities
that have shorter periods remaining until maturity (and are of higher
quality) generally exhibit a low level of volatility and thus provide a
greater assurance that the money market fund will continue to be able
to maintain a stable share price.\138\
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\137\ See rule 2a-7(c)(2)(iii).
\138\ See 1983 Adopting Release, supra note 3, at n.7 and
accompanying text.
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[[Page 32700]]
Having a portfolio weighted towards securities with longer
maturities poses several risks to a money market fund. First, as we
have noted in the past, a longer weighted average maturity increases a
fund's exposure to interest rate risk.\139\ Second, and as we discuss
in more detail below, longer maturities also amplify the effect of
widening credit and interest rate spreads on a fund.\140\ Finally, a
fund holding securities with longer maturities generally is exposed to
greater liquidity risk, because fewer securities mature on a daily or
weekly basis. Perhaps in recognition of these risks, few fund managers
maintain weighted average maturity at or near the maximum permissible
90 days.\141\
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\139\ See 1990 Proposing Release, supra note 22, at text
accompanying n.60. See also Standard & Poor's, Money Market Fund
Ratings Criteria, at 21 (2007) available at http://www2.standardandpoors.com/spf/pdf/events/MMX709.pdf (``S&P 2007
Ratings Criteria'') (``The portfolio's weighted average maturity
(WAM) is a key determinant of the tolerance of a fund's investments
to rising interest rates. In general, the longer the WAM, the more
susceptible the fund is to rising interest rates. A fund comprised
entirely of Treasury securities with a WAM of 45 days could
withstand approximately twice the interest rate increase than could
a fund with a 90-day WAM, leaving all other factors aside.'');
Fabozzi, supra note 98, at 4 (``[T]he volatility of a bond's price
is closely associated with maturity: Changes in the market level of
[interest] rates will wrest much larger changes in price from bonds
of long maturity than from otherwise similar debt of shorter
life.'').
\140\ See also supra notes 65-71 and accompanying text.
\141\ According to monthly statistics kept by the Investment
Company Institute, during the past 10 years, the weighted average
maturities of funds in the longest maturity categories (the 90th
percentile of all taxable prime money market funds) seldom have
exceeded 75 days. As of April 30, 2009, these funds maintained an
average weighted maturity of 67 days. These statistics are available
in File No. S7-11-09.
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In view of the extraordinary market conditions we have witnessed
recently, the Commission is concerned that the 90-day maximum weighted
average maturity under the rule may be too long. Particularly during
the market events of last fall, funds with shorter portfolio maturities
were much better positioned to withstand heavy redemptions, because a
greater portion of their portfolios matured each week and provided cash
to pay to redeeming investors. They also were better able to withstand
increased credit spreads in certain financial sector notes because of
the shorter period of exposure to such distressed securities. Finally,
interest rate spreads on longer maturity securities widened to a much
greater degree than interest rate spreads on shorter maturity
securities.\142\
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\142\ See, e.g., U.S. Department of the Treasury, Daily Treasury
Yield Curve Rates, available at http://www.treasury.gov/offices/domestic-finance/debt-management/interest-rate/yield_historical_main.shtml.
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The ICI Report recommended reducing the maximum weighted average
maturity to 75 days.\143\ Historically, however, most funds have
maintained shorter maturities. During the last 20 years, the average
weighted average maturity of taxable money market funds (as a group)
has never exceeded 58 days.\144\ As of June 16, 2009, it was 53
days.\145\ Some money market funds have, from time to time, extended
their maturities substantially longer than the average to gain a yield
advantage, anticipating declining or stable interest rates. By doing
so, these funds assumed greater risk and would be more likely to
experience losses that could result in their breaking the buck if
interest rates rise, credit markets do not behave as they expect, or
they receive substantial redemption requests.
---------------------------------------------------------------------------
\143\ See ICI Report, supra note 6, at 77.
\144\ 2008 Fact Book, supra note 13, at Table 38. In 2009, the
ICI Fact Book began presenting this information separately for
taxable government and taxable non-government money market funds,
which had average maturities of 49 days and 47 days, respectively,
in 2008. 2009 Fact Book, supra note 7, at 150-51, Tables 41 & 42.
\145\ See Money Fund Report, iMoneyNet, May 7, 2008. Average
maturity for tax exempt money market funds (as a group) is even
lower--24 days as of June 16, 2009. Id.
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Most European money market funds with stable share prices (many of
which are domiciled in Ireland) are limited to 60-day weighted average
maturities.\146\ So are money market funds rated highly by the
NRSROs.\147\ In light of these considerations, we believe that a
shorter period may be appropriate. Accordingly, we propose that rule
2a-7 be amended to impose a 60-day weighted average maturity
limit.\148\
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\146\ See Irish Financial Services Regulatory Authority,
Valuation of Assets of Money Market Funds, 2008 Guidance Note 1/08
(Aug. 2008), available at http://www.financialregulator.ie/industry-sectors/funds/Documents/Guidance%20Note%20108%20Valuation%20of%20Assets%20of%20Money%20Market%20Funds.pdf (``Financial Regulator Guidance Note 1/08''). As of
April 2009, money market funds registered in Ireland managed
approximately [euro]317 billion ($419 billion) in assets. See Irish
Financial Regulator statistics available at http://www.irishfunds.ie/money_marketfunds.htm. In addition, the
Institutional Money Market Funds Association (``IMMFA'') requires
the triple-A rated institutional money market funds sponsored by its
members to comply with a Code of Practice that generally limits
portfolio maturity to 60 days. See IMMFA, Code of Practice, Part
IV., ] 22 (2005), available at http://www.immfa.org/about/Codefinal.pdf. As of February 13, 2009, IMMFA-member constant net
asset value money market funds managed approximately $493 billion in
assets. See IMMFA statistics, available at http://www.immfa.org/stats/IMFR130209.pdf. See also ICI Report, supra note 6, at 184,
Appendix H.
\147\ See S&P 2007 Ratings Criteria, supra note 139, at 21;
Moody's Investors Service, Frequently Asked Questions about Moody's
Ratings of Managed Funds, at 4 (July 20, 2005), available at http://www.moodys.com/moodys/cust/research/MDCdocs/20/2003600000425726.pdf?search=5&searchQuery=Frequently+Asked+Questions+about+Moody; Fitch Ratings, U.S. Money Market Fund Ratings, at 4
(Mar. 3, 2006), available at http://www.fitchresearch.com/creditdesk/reports/report_frame.cfm?rpt_id=266376.
\148\ See proposed rule 2a-7(c)(2)(ii).
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We request comment on the proposed 60-day weighted average maturity
limit. Would it decrease portfolio volatility and increase fund
liquidity, as we suggest? What would be the anticipated effect on money
market fund yields? Would a negative effect on yields make money market
funds less attractive to investors? Should a different weighted average
maturity limit apply, such as 45 days or 75 days? We request that
commenters provide us with data demonstrating the effect that
alternative weighted average maturity limits would have had on
portfolios of money market funds during the recent economic turmoil.
2. Weighted Average Life
We propose to add to rule 2a-7 a new maturity test, which would
limit the weighted average life maturity of portfolio securities to 120
days.\149\ As explained further below, the weighted average life of a
portfolio would be measured without regard to a security's interest
rate reset dates, and thus would limit the extent to which a fund could
invest in longer term securities that may expose a fund to interest
rate spread risk and credit spread risk.\150\
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\149\ See proposed rule 2a-7(c)(2)(iii).
\150\ While the proposed rule would ignore interest rate resets
for purposes of calculating the fund's weighted average life to
maturity, a security's demand features could continue to be used in
this calculation. See, e.g., rule 2a-7(d)(3) and (d)(5).
---------------------------------------------------------------------------
Generally, under rule 2a-7 the maturity of a portfolio security is
the period remaining until the date on which the principal must
unconditionally be repaid according to its terms (its final ``legal''
maturity) or, in the case of a security called for redemption, the date
on which the redemption payment must be made.\151\ The rule contains
exceptions from this general approach for specific types of securities,
which are referred to as the ``maturity shortening'' provisions.\152\
Among these exceptions are three provisions that allow a fund to treat
a variable- or floating-rate security as having a maturity equal to the
time remaining to the next interest rate reset
[[Page 32701]]
date.\153\ First, a fund may treat a short-term variable-rate security
(i.e., one with a remaining maturity of 397 days or less), as having a
maturity equal to the earlier of the interest rate reset date or the
time it would take the fund to recover the principal by exercising a
demand feature.\154\ Second, a fund may treat a short-term floating-
rate security (i.e., one with a remaining maturity of 397 days or less)
as having a maturity of one day.\155\ Third, a variable- or floating-
rate Government security generally may be deemed to have a maturity
equal to the next reset date even if it is a long-term security.\156\
For purposes of calculating weighted average maturity, the rule
effectively treats short-term variable- and floating-rate securities
and all adjustable-rate Government securities as if they were a series
of short-term obligations that are continually ``rolled over'' on the
reset dates at the current short-term interest rates.
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\151\ See rule 2a-7(d).
\152\ Id. We added maturity shortening provisions to the rule in
1986; they are particularly important for tax exempt funds, which
invest in municipal obligations, most of which are issued with
longer maturities. See 1986 Adopting Release, supra note 19, at
nn.9-10 and accompanying text.
\153\ See rule 2a-7(a)(13) (defining ``floating rate security'')
and (a)(29) (defining ``variable rate security''). The interest rate
for a variable-rate security is established on set dates, whereas
the interest rate for a floating-rate security adjusts whenever a
specified interest rate changes. We also may refer to variable- and
floating-rate securities collectively in this Release as
``adjustable-rate'' securities.
\154\ See rule 2a-7(d)(2). See also rule 2a-7(a)(8) (definition
of ``demand feature'').
\155\ See rule 2a-7(d)(4).
\156\ See rule 2a-7(d)(1) (allowing a variable-rate Government
security where the variable rate is readjusted no less frequently
than every 762 days to be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate,
and a floating-rate Government security to be deemed to have a
remaining maturity of one day).
---------------------------------------------------------------------------
As the ICI Report explains, however, longer term adjustable-rate
securities are more sensitive to credit spreads (the amount of
additional yield demanded by purchasers above a risk-free rate of
return to compensate for the credit risk of the issuer) than short-term
securities with final maturities equal to the reset date of the longer
term security.\157\ Longer term adjustable-rate securities also are
subject for a longer period of time to risk from widening interest rate
spreads.\158\ As a result, prices of longer term adjustable-rate
securities could fall more than prices of comparable short-term
securities in times of market turbulence. The ICI Report also notes
that while adjustable-rate securities do protect a fund against changes
in interest rates, permitting maturity shortening based on interest
rate resets does not protect against liquidity risk to the
portfolio.\159\
---------------------------------------------------------------------------
\157\ See ICI Report, supra note 6, at 77.
\158\ Interest rate spreads can widen because a variable-rate
note has a fixed period of time to the next interest reset date and
during that time the benchmark interest rate will likely change.
Interest rate spreads can also widen because market conditions
change after the security is issued such that investors may demand a
greater margin to hold the security. See Fabozzi, supra note 98, at
196.
\159\ See ICI Report, supra note 6, at text accompanying n.140.
---------------------------------------------------------------------------
We are concerned that the traditional weighted average maturity
measurement of rule 2a-7 does not require that a manager of a money
market fund limit these risks. We understand that some money market
fund portfolio managers, to protect the fund, have already begun using
a weighted average maturity measurement that ignores interest rate
resets.
The ICI Report confirms our observations of the behavior of prices
for certain securities last fall, when money market funds found it
difficult to sell at amortized cost longer term adjustable-rate
securities, including securities issued by agencies of the federal
government. We believe that the use of the measurement the ICI
recommends, which we will call the ``weighted average life'' to
maturity of a money market fund portfolio, appears to be a prudent
limitation on the structure of a money market fund portfolio and would
limit credit and interest rate spread risks not encompassed by the
weighted average maturity restriction of rule 2a-7. As suggested by the
ICI Report, we are proposing that money market funds maintain a
weighted average life of no more than 120 days.\160\ The Commission
believes that a 120-day weighted average life requirement would provide
a reasonable balance between strengthening the resilience of money
market funds to market stress (e.g., interest rate increases, widening
spreads, and large redemptions) while not unduly restricting the funds'
ability to offer a diversified portfolio of short-term, high quality
debt securities.
---------------------------------------------------------------------------
\160\ The proposed rule would require a money market fund to
maintain a weighted average maturity not to exceed 120 days,
determined without reference to the exceptions in paragraph (d) of
the rule regarding interest rate resets. See proposed rule 2a-
7(c)(2)(iii).
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One of the effects of a limit on the weighted average life of a
portfolio would appear to be on funds that hold longer term floating-
rate Government securities, which are issued by federal agencies.
Consider a money market fund with a portfolio consisting 50 percent of
overnight repurchase agreements and 50 percent of two-year Government
agency floating-rate obligations that reset daily based on the federal
funds rate. Using the reset dates as permitted by the rule's maturity
shortening provisions, the portfolio would have a weighted average
maturity of one day. In contrast, by applying a measurement that does
not recognize resets, the portfolio would have a weighted average life
of 365.5 days (i.e., half of the portfolio has a one day maturity and
half has a two-year maturity), which would be considerably longer than
the 120-day limit we are proposing. The weighted average life
limitation would provide an extra layer of protection for funds and
their shareholders against spread risk, particularly in volatile
markets.
We request comment on all aspects of the proposed weighted average
life limitation. Is this new maturity test appropriate? Is 120 days an
appropriate limit? What would be the effect on yield? Does it place too
much of a constraint on the ability of money market fund advisers to
effectively manage fund portfolios? Does it permit funds to assume too
much risk? Would a different limit be more appropriate, such as 90 days
or 150 days? Would the proposed weighted average life limitation have a
material impact on the issuers of short-term debt and, if so, what
would it be?
We request comment on whether there are alternative approaches to
measuring these risks. We understand that some fund managers use an
alternative maturity test that focuses solely on credit spread risk.
Such a test not only disregards interest rate resets, but also excludes
Government securities from the weighted average maturity calculation.
Would this test provide a clearer indication of the overall credit
spread risk of the portfolio? Are there other advantages to such an
approach? If so, what would be an appropriate limit? Should it be the
same as proposed weighted average life limitation of 120 days, or
should it be different, such as 90 days or 150 days? We request that
commenters provide us with data demonstrating the effect of such
alternative credit limitations and/or weighted average life limitations
on their portfolios during the recent economic turmoil.
When the Commission first adopted rule 2a-7, we explained that we
were allowing Government securities to use resets for purposes of the
maturity limitations under the rule because we understood that the
volatility of such instruments would be no greater than the volatility
of fixed interest rate instruments having a maturity equal to the
period before the security's interest rate reset.\161\ The Commission
noted, however, that this position was based entirely upon experience
with Small Business Administration guaranteed debentures--at the time
the only
[[Page 32702]]
adjustable-rate Government securities of which the Commission was
aware.\162\ The Commission stated that it would consider amending this
provision if market experience indicates that such treatment is
inappropriate.\163\
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\161\ See 1983 Adopting Release, supra note 3, at n.16.
\162\ See id.
\163\ See id.
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Since 1983, the number and variety of adjustable-rate Government
securities have grown and, in particular, the issuance of such
securities by Freddie Mac and Fannie Mae increased significantly with
the growth in mortgage-backed securities. While adjustable-rate
securities historically have maintained market values similar to
equivalent short-term fixed-rate securities, last fall these Government
securities experienced increased credit and interest rate spreads and
greater volatility than Government securities with maturities similar
to the reset dates of the adjustable-rate securities.\164\ Further, as
noted above, other short-term adjustable-rate securities also
experienced increased credit and interest rate spreads and greater
volatility than securities with maturities similar to the reset dates.
---------------------------------------------------------------------------
\164\ See Jody Shenn, Fannie Mae Debt Spreads Hit Records as
GMAC Seeks Bank Status, Bloomberg, Nov. 20, 2008; Jody Shenn, Agency
Mortgage-Bond Spreads Head for Worst Month on Record, Bloomberg,
Oct. 31, 2008, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSc8k8D7ZMw0.
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Currently, rule 2a-7 permits funds to rely on these reset
provisions to shorten portfolio maturities only if boards or their
delegates can reasonably expect that the security's market value will
approximate its amortized cost on the reset date.\165\ However, recent
experience suggests that in times of market stress, this expected
performance may not hold true. Would the weighted average life to
maturity limitation adequately address this risk? Are there other
alternative limitations or tests that would have mitigated this risk
last fall? Should we restrict a fund's ability to use the maturity-
shortening provisions of the rule to those adjustable-rate securities,
including Government securities, with maximum final maturities of no
more than two years, three years, or four years? What would be the
impact of the weighted average life limitation on longer term
adjustable-rate Government securities issuers?
---------------------------------------------------------------------------
\165\ See rule 2a-7(a)(13) and (a)(29).
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3. Maturity Limit for Government Securities
The Commission is proposing to delete a provision of the rule that
permits a fund that relies exclusively on the penny-rounding method of
pricing to acquire Government securities with remaining maturities of
up to 762 days, rather than the 397-day limit otherwise provided by the
rule.\166\ We are unaware of money market funds today that rely solely
on the penny-rounding method of pricing, and none that hold fixed-rate
Government securities with remaining maturities of two years, which we
are concerned would involve the assumption of a substantial amount of
interest rate risk. We request comment on our proposal to delete the
provision. Are we correct that funds no longer use it? If not, are
there reasons why we should retain it?
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\166\ See rule 2a-7(c)(2)(ii). We added this provision in 1991.
See 1991 Adopting Release, supra note 20, at nn.53-57 and
accompanying text. In a conforming change, we also propose to revise
the maturity-shortening provision of the rule for variable-rate
Government securities to require that the variable rate of interest
is readjusted no less frequently than every 397 days, instead of 762
days as currently permitted. See rule 2a-7(d)(1); proposed rule 2a-
7(d)(1).
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4. Maturity Limit for Other Portfolio Securities
Currently, in order to qualify as an eligible security under rule
2a-7, an individual security generally cannot have a remaining maturity
that exceeds 397 days.\167\ We request comment on whether we should
consider reducing the maximum maturity for individual non-Government
securities acquired by a money market fund from 397 days to, for
example, 270 days.\168\
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\167\ See rule 2a-7(a)(10)(i) and (c)(2)(i).
\168\ A maturity limit of 270 days would be consistent with the
exemption for commercial paper under section 3(a)(3) of the
Securities Act of 1933 [15 U.S.C. 77c(a)(3)].
---------------------------------------------------------------------------
The length of time remaining before a security matures affects its
sensitivity to increases in interest rates. In addition, a shorter
maturity decreases the amount of time a fund is exposed to potential
investment losses for a particular security. On the other hand, it is
less clear that such a change would produce a significant increase in
the safety and stability of money market funds if we were to adopt it
in addition to adopting the proposed 60-day weighted average maturity
and 120-day weighted average life limitations. Moreover, unlike the
weighted average maturity and weighted average life limitations, a
stricter maturity limitation on individual securities could have a
substantially greater adverse impact on issuers of short-term
obligations other than commercial paper, including issuers of tax
exempt municipal securities.
What would be the effects on money market funds and the capital
markets of shortening the maturity limit on individual portfolio
securities to 270 days? Would there be benefits to funds from
shortening the maturities of individual securities beyond the benefits
that would be attained through the 60-day weighted average maturity and
120-day weighted average life limitations? What would be the likely
impact on money market fund yields? What effect, if any, would
shortening the maturity limit have on the supply of rule 2a-7-eligible
securities? Should Government securities be excluded from a 270-day
maturity limit?\169\ If we were to adopt a maximum 270-day maturity for
individual securities, should we include or exclude securities issued
by municipalities, which typically issue debt securities with
maturities of a year or more?
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\169\ We note that, while posing less credit risk, Government
securities are subject to much the same risks as corporate
securities from rising spreads between their market price and money
market benchmarks, whether due to liquidity concerns, changes in
interest rates, or other factors. For this reason some rating
agencies have imposed limitations on remaining maturities of
adjustable-rate Government securities held by money market funds.
See, e.g., S&P 2007 Ratings Criteria, supra note 139, at 30 (setting
a two-year limit for remaining maturities of floating- or variable-
rate Government securities held by money market funds for the fund
to maintain the highest rating).
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C. Portfolio Liquidity
Rule 2a-7 does not contain any provisions limiting the ability of a
money market fund to hold or acquire illiquid assets.\170\ Money market
funds are, however, subject to section 22(e) of the Act, which requires
registered investment companies to satisfy redemption requests in no
more than seven days--a requirement we have construed as restricting a
money market fund from investing more than 10 percent of its assets in
illiquid securities.\171\ Since rule 2a-7 was first adopted we have
emphasized the importance of a money market fund holding sufficiently
liquid securities. Money market funds often have a greater, and perhaps
less predictable, volume of redemptions than other open-end investment
companies.\172\ And because many promise to provide redemptions sooner
than other types of open-end funds--often on the same day that the
redemption request is received--money market funds need
[[Page 32703]]
sufficient liquidity to meet redemption requests on a more immediate
basis.\173\
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\170\ See 1983 Adopting Release, supra note 3 at n.37 and
accompanying text (``[Rule 2a-7] does not limit a money market
fund's portfolio investments solely to negotiable and marketable
instruments * * *.'').
\171\ See, e.g., id. at nn.37-38 and accompanying text; 1986
Adopting Release, supra note 19, at n.21 and accompanying text.
\172\ See, e.g., 1986 Adopting Release, supra note 19, at text
preceding and accompanying n.22; 1983 Adopting Release, supra note
3, at text following n.39.
\173\ See 1983 Adopting Release, supra note 3, at text following
n.39.
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By holding illiquid securities, a money market fund exposes itself
to a risk that it may be unable to satisfy redemption requests
promptly, without selling illiquid securities at a loss that could
impair its ability to maintain a stable net asset value per share.\174\
Illiquid securities also complicate the valuation of the fund's
portfolio.\175\ Moreover, illiquid securities are subject to greater
price volatility, exposing the fund to greater risk of breaking a buck
as a result of net asset values eroding in a declining market.\176\
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\174\ Id. at text preceding, accompanying and following nn.37-
39.
\175\ Id. at text preceding section titled ``Obligation of the
Board to Maintain Stable Price.''
\176\ S&P 2007 Ratings Criteria, supra note 139, at 21.
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We have not included a specific provision in rule 2a-7 regarding
liquidity because, until recently, money market funds had not
experienced a severe liquidity shortfall. As discussed above, in
September 2008, the markets for both traditional and asset-backed
commercial paper essentially seized up. Large portions of many money
market fund portfolios became illiquid when buyers of asset-backed and
traditional commercial paper fled the market.\177\ At the same time,
many money market funds--principally institutional money market funds--
received substantial redemption requests.\178\ The ability of these
funds to maintain a stable net asset value turned on their ability to
convert portfolio holdings to cash without selling them at ``fire
sale'' prices.
---------------------------------------------------------------------------
\177\ See Board of Governors of the Federal Reserve, Report
Pursuant to Section 129 of the Emergency Economic Stabilization Act
of 2008: Asset-Backed Commercial Paper Money Market Mutual Fund
Liquidity Facility (undated), available at http://www.federalreserve.gov/monetarypolicy/files/129amlf.pdf at 1-2 (``In
ordinary circumstances, MMMFs would have been able to meet these
redemption demands by selling assets. At the time of the
establishment of the AMLF, however, many money markets were
extremely illiquid, and the forced liquidation of assets by MMMFs
was placing increasing stress on already strained financial
markets.''); see generally Board of Governors of the Federal
Reserve, Monetary Policy Report to the Congress (Feb. 24, 2009),
Part 2, http://www.federalreserve.gov/monetarypolicy/mpr_20090224_part2.htm.
\178\ See ICI Mutual Fund Historical Data, supra note 47 (in the
week ending September 17, the day after the Reserve Primary Fund
announced that it would break a dollar, institutional money market
fund assets fell by more than $119 billion while retail money market
fund assets fell by $1.1 billion).
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These events suggest to us that rule 2a-7 should be amended to
address liquidity risks that money market funds face. We propose to
amend rule 2a-7 to add new risk-limiting conditions designed to improve
money market funds' ability to meet significant redemption demands.
1. Limitation on Acquisition of Illiquid Securities
We propose to prohibit money market funds from acquiring securities
unless, at the time acquired, they are liquid, i.e., securities that
can be sold or disposed of in the ordinary course of business within
seven days at approximately their amortized cost value.\179\ In light
of the risk to the fund of securities becoming illiquid as a result of
market events, such as those that occurred last fall, investing any
portion of the fund in securities that are already illiquid may be
imprudent and thus should be prohibited by rule 2a-7.
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\179\ Proposed rule 2a-7(c)(5). ``Liquid security'' would be
defined in proposed rule 2a-7(a)(19). Last year in the NRSRO
References Proposal, we proposed to define ``liquid security'' as a
security that can be sold or disposed of in the ordinary course of
business within seven days at approximately the cost ascribed to it
by the money market fund. See supra note 105, at n.28 and
accompanying text. See also 1986 Adopting Release, supra note 19, at
text following n.21 (``The term `illiquid security' generally
includes any security which cannot be disposed of promptly and in
the ordinary course of business without taking a reduced price.'').
The one comment we received on the proposed definition recommended
the definition refer to the ``shadow price'' rather than the
``value'' ascribed to the security by the money market fund. Most
funds that rely on rule 2a-7 value their securities using the
amortized cost method and thus would be required to acquire
securities that can be sold or disposed of in the ordinary course of
business within seven days at approximately amortized cost value.
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We request comment on our proposal to preclude funds from acquiring
illiquid securities. We understand that some funds make very limited
investments in securities that, at the time of acquisition, are
illiquid, such as insurance company funding agreements, loan
participations, and structured notes that have no demand features.
Would this proposed provision (which would not prohibit funds from
continuing to hold securities that become illiquid after their
purchase) have a significant impact on money market funds? What would
be the impact on funds of not being able to buy illiquid securities?
Would there be a material impact on yield?
2. Cash and Securities That Can Be Readily Converted to Cash
As discussed above, liquidity of a money market fund portfolio is
critical to the fund's ability to maintain a stable net asset value.
Our traditional notions of liquidity incorporated into our guidelines
(discussed above) appear to be inadequate to meet the needs of a money
market fund because the guidelines assume that a fund has time (up to
seven days) to sell securities and that there will be a market for the
securities. As noted above, money market funds typically undertake to
pay their investors more quickly (frequently the same or following
day). As the events of last fall demonstrated, money market funds may
be unable to rely on a secondary or dealer market ready to provide
immediate liquidity at amortized cost under all market conditions.
Therefore we are proposing new liquidity tests that would be based on
the fund's legal right to receive cash rather than its ability to find
a buyer of the security.
The amount of liquidity a fund will need will vary from fund to
fund and will turn on cash flows resulting from purchases and
redemptions of shares. As a general matter, a fund that has some large
shareholders, any one of which could redeem its entire position in a
single day, will have greater liquidity needs than a retail fund that
has thousands of relatively small shareholders. A fund that competes
for yield-sensitive shareholders (e.g., ``hot money'') through
electronic ``portals'' will have substantially greater liquidity needs
than a fund holding the cash of commercial enterprises that have
predictable needs (such as payrolls).\180\
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\180\ See Money Market Funds Tackle ``Exuberant Irrationality,''
Standard & Poor's, RatingsDirect (Sept. 30, 2008), available at
http://www2.standardandpoors.com/spf/pdf/media/MoneyMarketFunds_Irrationality.pdf (``It is likely that certain yield-sensitive
institutions commonly referred to as `hot money' accounts, moved
money from one investment to another to capture a higher yielding,
or seemingly safer, option. For example, after Lehman Bros. filed
for bankruptcy, corporations that issued commercial paper (CP) to
fund their business operations were forced to pay a significantly
higher premium to obtain funding because of investor concerns with
holding debt from any nongovernment issuer. The subsequent `flight
to quality' pushed some overnight and 30-day CP rates up by 0.5% (to
approximately 3.5%) for issuers whose credit or financial/risk
profile did not seem to change. As a result, these hot money
accounts moved their investments from money market funds yielding
less than 2.75%.'').
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Our proposed formulation of a new liquidity standard is designed to
take into consideration each of these factors. The proposed daily and
weekly standards, discussed immediately below, would be minimum
standards; the proposed general standard (which we discuss after the
minimum standards) may require a fund to maintain a higher portion of
its portfolios in cash or securities that can readily be converted into
cash.
[[Page 32704]]
a. Minimum Daily Liquidity Requirement
Taxable Retail Funds. We propose to require each taxable retail
money market fund to invest at least five percent of its assets in
cash, U.S. Treasury securities, or securities that can provide the fund
with daily liquidity, i.e., securities that the fund can reasonably
expect to convert to cash within a day.\181\ Unlike our liquidity
guidelines discussed above, which allow for a period during which a
fund would be expected to seek buyers in a secondary market, these
daily liquidity requirements would be significantly more demanding,
requiring a portion of the funds' assets be held in ``daily liquid
assets,'' which the rule would define as: (i) Cash (including demand
deposits); (ii) securities (including repurchase agreements) for which
the fund has a contractual right to receive cash within one business
day either because the security will mature or the fund can exercise a
demand feature; \182\ or (iii) U.S. Treasury securities, which have
historically traded in deep, liquid markets, even in times of market
distress.\183\
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\181\ Proposed rule 2a-7(c)(5)(iii).
\182\ A ``demand feature'' means a feature permitting (i) the
holder of a security to sell the security at an exercise price equal
to the approximate amortized cost of the security plus accrued
interest, if any, at the time of exercise, and (ii) the holder of an
asset backed security unconditionally to receive principal and
interest within 397 calendar days of making demand. Rule 2a-7(a)(8).
\183\ U.S. Treasury securities were highly liquid last fall.
See, e.g., FRB Open Market Committee Oct. 28-29 Minutes, supra note
51, at 5 (``Yields on short-term nominal Treasury coupon securities
declined over the intermeeting period, reportedly as a result of
substantial flight-to-quality flows and heightened demand for
liquidity. In contrast, higher term premiums and expectations of
increases in the supply of Treasury securities associated with the
Emergency Economic Stabilization Act and other initiatives seemed to
put upward pressure on longer term nominal Treasury yields. Yields
on longer term inflation-indexed Treasury securities, which are
relatively illiquid, rose more sharply than did those on nominal
securities.''); Minutes of the Federal Open Market Committee,
Federal Reserve Board, Dec. 15-16, 2008, at 5, available at http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20081029.pdf
(``FRB Open Market Committee Oct. 28-29 Minutes'') (Dec. 15-16,
2008), at 4, available at http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20081216.pdf (``Yields on nominal
Treasury coupon securities declined significantly over the
intermeeting period in response to safe-haven demands as well as the
downward revisions in the economic outlook and the expected policy
path. Meanwhile, yields on inflation-indexed Treasury securities
declined by smaller amounts, leaving inflation compensation lower.
Although the decline in inflation compensation occurred amid sharp
decreases in inflation measures and energy prices, it was likely
amplified by increased investor preference for the greater liquidity
of nominal Treasury securities relative to that of inflation-
protected Treasury securities.'').
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Under the proposed amendments, a money market fund that is a
``retail fund'' could not acquire any securities other than daily
liquid assets if, immediately after the acquisition, the fund would
have invested less than five percent of its total assets in those
assets (``minimum daily liquidity requirement'').\184\ Compliance with
the daily liquidity requirement would be determined at the time each
security is acquired, and thus a fund would not have to dispose of less
liquid securities (and potentially realize an immediate loss) if the
portion of the fund held in highly liquid securities fell below five
percent as a result of redemptions.
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\184\ The term ``daily liquid assets'' is defined in proposed
rule 2a-7(a)(8). A ``retail fund'' would be defined as any fund
other than an institutional fund. Proposed rule 2a-7(a)(24). For a
discussion of the definition of ``institutional fund,'' see infra
text preceding, accompanying and following note 196. ``Total
assets'' means with respect to a money market fund using the
amortized cost method, the total amortized cost of its assets and,
with respect to any other money market fund, the total market-based
value of its assets. Rule 2a-7(a)(27).
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Retail money market funds experienced relatively modest redemption
demands last fall, even in the midst of substantial market
turbulence.\185\ Thus we believe that a five percent requirement, which
was recommended in the ICI Report, may be sufficient.\186\ We request
comment on our analysis, and whether a five percent standard is
appropriate in light of the liquidity needs of retail money market
funds (which we distinguish from institutional money market funds in
the next section of this release). Should we consider a higher
percentage, such as 10 percent or 15 percent, or a lower percentage,
such as two percent or three percent? Do our proposed amendments strike
the right balance between reducing liquidity risk and limiting the
impact on yield? What would be the effect on yields of a lower or
higher minimum daily liquidity requirement? There may be a number of
factors that influence the lower redemption rates among retail
investors, including investment purposes and practices, size of
investments and possible differences in the information that retail as
opposed to institutional investors obtain and the time when they obtain
the information. We solicit comment on whether these factors did or
would in the future influence the level of retail redemptions. If so,
how should the proposed rule be revised to address such factors?
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\185\ See supra note 178. On September 17, 2008, approximately
4% of prime retail money market funds and 25% of prime institutional
money market funds had outflows greater than 5%; on September 18,
2008, approximately 5% of prime retail funds and 30% of prime
institutional funds had outflows greater than 5%; and on September
19, 2008, approximately 5% of prime retail funds and 22% of prime
institutional funds had outflows greater than 5%. This information
is based on analysis of data from the iMoneyNet Money Fund Analyzer
database.
\186\ See ICI Report, supra note 6, at 74.
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We also request comment on the definition of ``daily liquid
assets.'' Are there other securities that are sufficiently liquid that
should be included in the definition?
A fund's contractual rights to cash will be different if the fund
is relying on an unconditional demand feature rather than a conditional
demand feature, which the fund may not be able to exercise if there is
a default or other credit event with respect to the issuer of the
securities.\187\ Rule 2a-7 permits both to be used to shorten the
maturity of an instrument.\188\ For purposes of determining the daily
liquidity requirement, should the rule distinguish between securities
subject to conditional and unconditional demand features?
---------------------------------------------------------------------------
\187\ See rule 2a-7(a)(26) (defining ``unconditional demand
feature''); rule 2a-7(a)(6) (defining ``conditional demand
feature'').
\188\ See rule 2a-7(d)(3), (5).
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As discussed above, compliance with the daily liquidity requirement
would be determined at the time each security is acquired. A fund could
acquire only daily liquid assets until the portfolio investments met
the five percent daily liquidity test.\189\ Because the requirement
applies only at the time of acquisition, a money market fund would not
have to maintain a specified percentage of its assets in daily liquid
assets at all times (subject to the general liquidity requirement
discussed below), even though the fund is exposed to liquidity risk at
all times. We request comment on whether to impose a minimum liquidity
maintenance requirement, i.e., require that a money market fund
maintain five percent of its portfolio at all times in daily liquid
assets. What are the advantages and disadvantages of each approach?
---------------------------------------------------------------------------
\189\ This is also the approach rule 2a-7 takes with respect to
money market fund credit quality and diversification requirements.
See rule 2a-7(c)(3), (4).
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Taxable Institutional Funds. We propose to limit a taxable
institutional fund to acquiring daily liquid assets unless, immediately
after acquiring a security, the fund holds at least 10 percent of its
total assets in daily liquid assets.\190\ Institutional money market
funds typically maintain a greater portion of their assets in cash and
overnight repurchase agreements than retail funds, which reflects the
greater
[[Page 32705]]
liquidity needs of these funds.\191\ These greater needs were
demonstrated last fall, when (as discussed above) institutional funds
were subject to substantially greater redemption pressure than retail
funds.\192\ We understand that some of these institutional funds had
cash positions of almost 50 percent in their portfolios in anticipation
of substantial redemptions following the large amount of inflows during
2007 through August 2008.
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\190\ Proposed rule 2a-7(c)(5)(iii).
\191\ This information is based on analysis of data from the
iMoneyNet Money Fund Analyzer database.
\192\ See supra note 178.
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We request comment on whether institutional money market funds
should be subject to a higher daily liquidity requirement (10 percent)
than retail funds (five percent). Should we consider a higher
percentage, such as 15 or 20 percent? Ten percent daily liquidity could
seem high for a money market fund that reserved the right to delay
payment of redemptions for seven days. We are not proposing to adjust
the appropriate minimum daily liquidity requirement for institutional
or retail funds solely by reference to the seven day period, however,
because many money market funds undertake to pay redemption proceeds on
the same day or the next day, and an announcement by a fund of a delay
in payment of redemption could itself precipitate a run on funds. We
request comment on whether a five percent daily liquidity requirement
for retail funds or a 10 percent daily liquidity requirement for
institutional funds should turn on the representations the money market
fund has made to its investors regarding the timing of payments of
redemption proceeds.
We propose to add two new definitions to rule 2a-7 to distinguish
between retail and institutional money market funds. Although the ICI
and others who compile data about money market funds have traditionally
distinguished between retail and institutional money market funds, in
practice the distinctions are not always clear.\193\ An institutional
fund may have investors who invest on behalf of retail investors. For
example, institutional money market funds commonly have investors that
are bank sweep accounts or master funds in master-feeder
arrangements.\194\ Although these investors ordinarily provide cash
flows to the fund that are more similar to retail funds, a single
decision-maker may be in a position to redeem all of the shares of the
money market fund and move the sweep account to another money market
fund. In addition, some funds have a single portfolio but issue
separate classes of shares to retail and institutional investors that
bear different expenses. In these cases, the cost of managing the
institutional share class's relatively greater cash flow volatility is
shared with the retail investors.
---------------------------------------------------------------------------
\193\ See, e.g., ICI, Frequently Asked Questions About Money
Market Funds, http://www.ici.org/faqs/faqs_money_funds (describing
(i) institutional money market funds as ``held primarily by
businesses, governments, institutional investors, and high-net worth
households'' that as of July 2008, held 63 percent of all money
market fund assets and (ii) retail money market funds as ``offered
primarily to individuals with moderate-sized accounts'' that as of
July 2008, held around 37 percent of all money market fund assets);
iMoneyNet home page, http://imoneynet.com/(separates information and
analysis on money market funds into institutional and retail
categories); Crane Data, Money Fund Intelligence (June 2009) at 30,
http://www.cranedata.us/products/money-fund-intelligence/ (select
issue 2009-06-01 (Vol.4, 6)) (classifying money market
funds as institutional or individual based on expense ratio, minimum
investment and ``who they're sold to'').
\194\ A ``master-feeder fund'' is an arrangement in which one or
more funds with identical investment objectives (``feeder funds'')
invest all their assets in a single fund (``master fund'') with the
same investment objective. Investors purchase securities in the
feeder fund, which is an open-end fund and a conduit to the master
fund. See H.R. Rep. No. 622, 104th Cong., 2d Sess., at 41 (1996)
(``H.R. Rep. No. 622''); see generally Exemption for Open-End
Management Investment Companies Issuing Multiple Classes of Shares;
Disclosure by Multiple Class and Master Feeder Funds; Voting on
Distribution Plans; Final Rules and Proposed Rule, Investment
Company Act Release No. 20915 (Feb. 23, 1995) [60 FR 11876, 11876-77
(Mar. 2, 1995)].
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Our proposed amendments would require that a money market fund's
board determine, no less frequently than once each calendar year,
whether the fund is an institutional money market fund for purposes of
meeting the liquidity requirements.\195\ In particular, the fund's
board of directors would determine whether the money market fund is
intended to be offered to institutional investors or has the
characteristics of a fund that is intended to be offered to
institutional investors, based on the: (i) Nature of the record owners
of fund shares; (ii) minimum amount required to be invested to
establish an account; and (iii) historical cash flows, resulting or
expected cash flows that would result, from purchases and
redemptions.\196\ The provision is designed to permit fund directors to
evaluate the overall characteristics of the fund based on relevant
factors.\197\ Under the provision, a fund offered through two classes,
a majority of whose shares are held by retail investors, should
nonetheless be deemed to be an institutional fund by the fund board if
the cash flows from purchases and redemptions and the portfolio
management required to meet liquidity needs based on those cash flows
are more characteristic of an institutional money market fund.
---------------------------------------------------------------------------
\195\ Proposed rule 2a-7(c)(5)(v).
\196\ Proposed rule 2a-7(a)(18) (defining ``institutional
fund'').
\197\ Proposed rule 2a-7(a)(24) would define ``retail fund'' as
any money market fund that the board of directors has not determined
within the calendar year is an institutional fund.
---------------------------------------------------------------------------
We request comment on our proposed definitions. The differences
today in the liquidity management of institutional and retail money
market funds suggest to us that fund managers (and perhaps fund boards)
currently distinguish between retail and institutional funds. Would our
proposed definition permit them to continue to draw the distinctions
they draw today? Are there additional factors the board should consider
in determining whether a fund is an institutional fund? Would a
different approach result in better distinctions? If we cannot
distinguish between retail and institutional funds, should we amend
rule 2a-7 to apply the minimum daily liquidity requirements we propose
for institutional funds to all funds? Would setting the same minimum
daily liquidity requirement for institutional and retail funds impose
unnecessary costs (in terms of lower yields) on retail investors in
light of retail funds' reduced liquidity needs?
Might one effect of the proposed amendments be that funds currently
offering two classes of shares, one retail and one institutional, would
decide to divide the fund into two funds and manage them differently?
Would one of the advantages of such a result be that retail investors
would not bear the cost of maintaining liquidity for institutional
investors? Would a disadvantage be the loss to retail investors of the
economies of scale in these multi-class funds? What additional
advantages and disadvantages do commenters foresee? Retail investors
may not be aware of the higher redemption rates that institutional
funds experienced last fall. Should we consider requiring institutional
funds to provide additional disclosures regarding the risk to the fund
of large redemptions?
Tax Exempt Money Market Funds. We propose to exempt tax exempt
funds from the minimum daily liquidity requirements.\198\ We understand
that most of the portfolios of tax exempt funds consist of longer term
floating- and variable-rate securities with seven day demand features
from which the fund obtains much of its liquidity. We understand that
these funds are unlikely
[[Page 32706]]
to have investment alternatives that would permit them to meet a daily
liquidity requirement.\199\ We request comment on whether tax exempt
money market funds could meet a daily liquidity requirement, such as we
have proposed for taxable retail funds. Do tax exempt retail money
market funds nevertheless have similar liquidity requirements as
taxable retail funds? If so, should rule 2a-7 treat them differently
and how?
---------------------------------------------------------------------------
\198\ Proposed rule 2a-7(c)(5). Rule 2a-7 defines a ``tax exempt
fund'' as a money market fund that holds itself out as distributing
income exempt from regular federal income tax. Rule 2a-7(a)(24).
\199\ See ICI Report, supra note 6, at 74.
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b. Minimum Weekly Liquidity Requirement
We propose that all money market funds (including tax exempt funds)
also be subject to a minimum weekly liquidity requirement (``minimum
weekly liquidity requirement''). Specifically, retail and institutional
funds could not acquire any securities other than U.S. Treasury
securities or securities (including repurchase agreements) that mature
or are subject to a demand feature exercisable and payable in five
business days (together with cash, ``weekly liquid assets'') if,
immediately after the acquisition, (i) the retail fund would have
invested less than 15 percent of its total assets in weekly liquid
assets and (ii) the institutional fund would have invested less than 30
percent of its total assets in weekly liquid assets.\200\
---------------------------------------------------------------------------
\200\ Proposed rule 2a-7(c)(5)(iv). The term ``weekly liquid
assets'' would be defined in proposed rule 2a-7(a)(32).
---------------------------------------------------------------------------
The proposed minimum weekly liquidity requirement would supplement
the proposed minimum daily liquidity requirement (discussed above) and
give greater assurance that money market funds could meet their
statutory obligations to redeem shareholders in times of market
turbulence. We estimate that under our proposed minimum weekly
liquidity requirement, approximately 93 percent of retail funds and 91
percent of institutional funds would have been able to satisfy the
level of redemption demands during the periods of greatest redemption
pressure last fall without having to sell portfolio securities.\201\
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\201\ During the week of September 15-19, 2008, approximately 6%
of retail funds had net redemptions that exceeded 15%, and 9% of
institutional money market funds had redemptions that exceeded 30%
of assets. In addition, in the 52 weeks preceding September 17,
2008, roughly the same portion of redemption requests in
institutional and retail funds (less than 2%) would have exceeded
the weekly liquidity requirements. This information is based on
analysis of data from iMoneyNet Money Fund Analyzer database.
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We request comment on the minimum weekly liquidity requirements.
Would a minimum daily liquidity requirement alone be sufficient to
allow funds to adequately manage risk in the event of unexpected
shareholder redemptions in excess of the daily threshold and market
illiquidity? Are the proposed minimums of 15 percent of a retail fund's
total assets and 30 percent of an institutional fund's total assets
sufficient? \202\ Should we, as the ICI Report suggests, adopt the same
(20 percent of total assets) test for both retail and institutional
funds? As discussed above, we designed our minimum weekly liquidity
requirements so that more than 90 percent of retail and institutional
funds could have met redemption requests during the week of September
15-19, 2008 without selling portfolio securities. Should we set the
threshold lower, such as at 80 percent or 70 percent? Should we set the
threshold higher at 95 percent or 100 percent? The weekly liquidity
requirement would be essentially the same as the daily liquidity
requirement, except that the fund must be able to access cash on a
weekly rather than daily basis. Compliance with the test would be
determined upon the acquisition of a security, and demand features
could be used to determine the maturity of a portfolio security for
purposes of the test.
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\202\ We note that for most weeks during the past year, prime
institutional money market funds maintained over 30% of their assets
in securities maturing in seven days or less. This information is
based on analysis of data from iMoneyNet Money Fund Analyzer
database.
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We propose to treat as weekly liquid assets for purposes of the
weekly liquidity requirements, the same securities that would be daily
liquid assets except that the requirement for maturing securities or
demand features would be five business days rather than one.\203\ The
ICI Report suggests that we ought to treat as a weekly liquid asset a
security issued by an agency of the U.S. Government that, when
originally issued, had a maturity of 95 days or less.\204\ Is there a
basis on which to treat these agency securities as weekly liquid
assets? If so, why should the maturity of the security be 95 days based
on original issue rather than specifying a period remaining to
maturity? We urge commenters supporting such treatment to submit market
data to support their views.
---------------------------------------------------------------------------
\203\ Compare proposed rule 2a-7(a)(8) with proposed rule 2a-
7(a)(32).
\204\ See ICI Report, supra note 6, at 74.
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c. General Liquidity Requirement
As discussed above, the daily and weekly liquidity requirements
would be minimum requirements a fund would have to satisfy upon
acquisition of a security. A fund's liquidity needs, however, depending
upon the volatility of its cash flows, may be greater. Therefore, we
also propose to require that a money market fund at all times hold
highly liquid securities sufficient to meet reasonably foreseeable
redemptions in light of its obligations under section 22(e) of the Act
and any commitments the fund has made to shareholders, such as
undertaking to pay redemptions more quickly than seven days.\205\
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\205\ Proposed rule 2a-7(c)(5)(ii). Our proposal is similar to
the liquidity standard we proposed last year in the proposal on
NRSRO references. See NRSRO References Proposal, supra note 105, at
Section III.A.2. Among the commenters that specifically addressed
that proposed standard, two suggested that codification of the
standard was not needed because money market fund advisers already
understand and adhere to the current standards. See Comment Letter
of Fidelity Management & Research Company (Aug. 29, 2008) (File No.
S7-19-2008); Comment Letter of the Securities Industry and Financial
Markets Association Credit Rating Agency Task Force (Sept. 4, 2008)
(File No. S7-19-2008). A third suggested eliminating the standard
because it involves ``subjective, forward-looking estimates,'' while
retaining a proposed maximum level for illiquid securities holdings
to ``preserve a clearer bright-line test''). See Comment Letter of
Morrison & Foerster (Sept. 5, 2008) (File No. S7-19-2008).
---------------------------------------------------------------------------
To comply with this condition, we would expect money market funds
to consider a number of factors that could affect the fund's liquidity
needs. For example, a money market fund would have to understand the
characteristics of its investors and their likely liquidity needs. A
volatile investor base, e.g., one consisting of a few relatively larger
investors that are likely to make significant redemptions, would
require a fund to maintain greater liquidity than a stable investor
base, which is generally associated with a retail fund with many
hundreds or thousands of smaller investors. With this information, a
fund manager could take different steps to protect the fund from
greater liquidity risk. For example, the fund manager could increase
the amount of daily or weekly liquid assets above those required by the
daily and weekly requirements, or could decline to accept new
investments from investors whose liquidity needs are inconsistent with
the objectives of the management of the fund.\206\
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\206\ We do not mean to suggest that each money market fund
should minimize the volatility of cash flows, but rather should
limit its liquidity risks. Some money market funds with the most
volatile shareholder base manage liquidity risk by, for example,
investing exclusively in overnight repurchase agreements or Treasury
debt.
---------------------------------------------------------------------------
We request comment on this proposed requirement for liquidity.
Should we consider incorporating specific objective standards for
liquidity in this requirement? Should we provide
[[Page 32707]]
guidance regarding the steps fund advisers could take to evaluate the
fund's liquidity needs? If so, what should the guidance be?
Because the obligation would be ongoing, we believe a fund should
adopt policies and procedures to assure that appropriate efforts are
undertaken to identify risk characteristics of shareholders,
particularly those that hold their securities through omnibus accounts,
or access the fund through ``portals'' or through other arrangements
that provide the fund with little or no transparency with respect to
the beneficial shareholder. We are not proposing to amend rule 2a-7 to
require that funds adopt specific procedures because we believe those
procedures would be required by rule 38a-1, the ``compliance rule''
under the Investment Company Act, if we adopt the proposed general
liquidity requirement.\207\ Should the Commission provide guidance to
funds to assist them in determining the adequacy of their policies and
procedures? Should we consider specifying any particular aspects of the
policies and procedures?
---------------------------------------------------------------------------
\207\ See rule 38a-1(a)(1) (requiring funds to adopt and
implement written policies and procedures reasonably designed to
prevent violation of the federal securities laws by the fund).
---------------------------------------------------------------------------
In their consideration of these procedures and in their oversight
of their implementation, fund directors should understand that fund
managers' interest in increasing fund assets, and thus their advisory
fees, may lead them to accept investors who present greater risks to
the fund than they might otherwise have accepted. We urge directors to
consider the need for establishing guidelines for advisers to money
market funds that address this potential conflict. We are aware of more
than one occasion in which a fund adviser (or its affiliate that served
as the principal underwriter to the fund) has marketed the fund to
``hot money'' in order to increase fund assets, which has exposed the
fund to substantially higher risks.
3. Stress Testing
We are also proposing to amend rule 2a-7 to require the board of
directors of each money market fund using the amortized cost method to
adopt procedures providing for periodic stress testing of the money
market fund's portfolio.\208\ The procedures would require testing of
the fund's ability to maintain a stable net asset value per share based
upon certain hypothetical events, including an increase in short-term
interest rates, an increase in shareholder redemptions, a downgrade of
or default on a portfolio security, and widening or narrowing of
spreads between yields on an appropriate benchmark selected by the fund
for overnight interest rates and commercial paper and other types of
securities held by the fund.
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\208\ Proposed rule 2a-7(c)(8)(ii)(D)(1).
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Our proposal would require funds to test for certain hypothetical
events, but would not specify other details of the stress testing. The
proposal would require that stress tests be conducted at intervals that
the board of directors determines appropriate and reasonable in light
of current market conditions. This is the same approach that rule 2a-7
currently takes with respect to the frequency of shadow pricing.\209\
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\209\ Rule 2a-7(c)(7)(ii)(A)(1).
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The proposed amendments also would leave to the money market fund's
board of directors (and the fund manager) the specifics of the
scenarios or assumptions on which the tests are based. Boards should,
for example, consider procedures that require the fund to test for the
concurrence of multiple hypothetical events, e.g., where there is a
simultaneous increase in interest rates and substantial redemptions.
The proposed amendments also would require that the board receive a
report of the results of the testing at its next regularly scheduled
meeting, which report must include: (i) The date(s) on which the fund
portfolio was tested; and (ii) the magnitude of each hypothetical event
that would cause the money market fund to break the buck.\210\ Thus, a
fund must test each hypothetical event to a degree of severity that it
would result in the market-based per share net asset value of the fund
to fall below $0.995 (in the case of a fund that is maintaining a
stable net asset value at $1.00). The proposed amendment also would
require the written procedures to include the provision of an
assessment by the adviser of the fund's ability to withstand the events
(and concurrent occurrences of those events) that are reasonably likely
to occur within the following year.\211\ The adviser's assessment would
provide the fund board context within which to evaluate the magnitude
of the events that would cause the fund to break the buck. Finally,
funds would be required to maintain records of the stress testing for
six years, the first two years in an easily accessible place.\212\
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\210\ Proposed rule 2a-7(c)(8)(ii)(D)(2).
\211\ Proposed rule 2a-7(c)(8)(ii)(D)(3).
\212\ Proposed rule 2a-7(c)(11)(vii).
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We believe that the proposed stress testing procedures would
provide money market fund boards a better understanding of the risks to
which the fund is exposed and would give managers a tool to better
manage those risks. We understand that stress testing is already a best
practice followed by many money market funds. The ICI Report recommends
that rule 2a-7 require money market funds regularly to ``stress test''
their portfolios, although it does not suggest a particular means of
stress testing.\213\ The Institutional Money Market Funds Association
provides guidance for its members in stress testing money market fund
portfolios,\214\ and the ratings agencies stress test the portfolios of
money market funds they rate.\215\
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\213\ ICI Report, supra note 6, at 75.
\214\ See Institutional Money Market Funds Association, Stress
Testing for Money Market Funds (Feb. 2009).
\215\ See, e.g., Standard & Poor's, Fund Ratings Criteria, at 9
(2007), available at http://www2.standardandpoors.com/spf/pdf/events/FundRatingsCriteria.pdf. See also Financial Regulator
Guidance Note 1/08, supra note 146, at 5 (requirements of the Irish
Financial Services Authority for money market funds domiciled in
Ireland include stress testing: ``A money market fund is expected to
be subject to monthly portfolio analysis incorporating stress
testing to examine portfolio returns under various market scenarios
to determine if the portfolio constituents are appropriate to meet
pre-determined levels of credit risk, interest rate risk, market
risk and investor redemptions.'').
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We request comment on our proposed stress test requirement. Would
this requirement allow fund managers to better understand and manage
the risks to which the fund is exposed? Have we identified the correct
stress events? If not, what additional or alternative scenarios or
assumptions should we require the fund to test? Should we specify at
least one base-line stress test that would test the fund portfolio
against a combination of two or more events? For example, the rule
could require that the market value per share of the fund be tested
against an assumed 50 basis point increase in LIBOR and a redemption of
15 percent of fund shares. Are there alternative base-line tests we
should consider requiring?
We request comment on our proposal to require that the board
receive a report on these tests. Would the report help the board
identify when a fund adviser is exposing the fund to greater risks?
Should the board only receive a report when the tests indicate a
particular level of risk? If so, what particular level of risk should
the rule identify? Should we consider including additional information
in the report, and if so, what should it be? Should the rule provide
for a minimum frequency of testing? If so, what should be the frequency
(e.g., monthly, weekly, or a shorter period)? Should we consider
[[Page 32708]]
different intervals for different types of money market funds? If so,
what intervals would be appropriate for what types of money market
funds? Should the frequency depend upon the market-based value of the
fund portfolio or other criteria or events?
We note that certain of the hypothetical events we propose funds
include in their testing may not be meaningful for some money market
funds. For example, U.S. Treasury money market funds (i.e., funds that
invest solely in direct obligations of the U.S. government such as U.S.
Treasury bills and other short term securities backed by the full faith
and credit of the U.S. government) are not likely to experience
downgrades of or defaults on those securities. Should these money
market funds be exempted from testing certain hypothetical events, such
as a downgrade of or default on a portfolio security, that may not
present risks to the fund? Are there other money market funds that we
should exempt from testing for certain of the proposed hypothetical
events? If so, which funds should have exemptions and which events
should be exempted from their testing?
The ICI Report suggests that the results of stress testing could be
used to evaluate whether a money market fund's liquidity thresholds
need to be adjusted.\216\ Should we consider imposing minimum liquidity
requirements based on the results of a particular stress test? For
example, should we require that a fund invest 50 percent of its
portfolio in daily or weekly liquid assets if a five percent increase
in shareholder redemptions would cause the fund to break the buck? If
we considered imposing minimum liquidity requirements, should they be
different for retail and institutional funds?
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\216\ See ICI Report, supra note 6, at 75.
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D. Diversification
Rule 2a-7 requires a money market fund's portfolio to be
diversified, both as to the issuers of the securities it acquires and
to the guarantors of those securities.\217\ Generally, money market
funds must limit their investments in the securities of any one issuer
(other than Government securities), to no more than five percent of
fund assets.\218\ They must also generally limit their investments in
securities subject to a demand feature or a guarantee to no more than
ten percent of fund assets from any one provider.\219\ The Commission
adopted these requirements in order to limit the exposure of a money
market fund to any one issuer or guarantor.\220\
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\217\ Rule 2a-7(c)(4)(i). The diversification requirements of
rule 2a-7 differ in significant respects from the requirements for
diversified management investment companies under section 5(b)(1) of
the Act. A money market fund that satisfies the applicable
diversification requirements of the paragraphs (c)(4) and (c)(5) of
the rule is deemed to have satisfied the requirements of section
5(b)(1). Rule 2a-7(c)(4)(v). Subchapter M of the Internal Revenue
Code contains other diversification requirements for a money market
fund to be a ``regulated investment company'' for federal income tax
purposes. 26 U.S.C. 851 et seq. See also 1990 Proposing Release,
supra note 22, at n.25.
\218\ Rule 2a-7(c)(4)(i)(A). The rule contains a safe harbor
where a taxable and national tax exempt fund may invest up to 25
percent of its assets in the first tier securities of a single
issuer for a period of up to three business days after acquisition
(but a fund may use this exception for only one issuer at a time).
Rule 2a-7(c)(4)(i)(A).
\219\ Rule 2a-7(c)(4)(iii). With respect to 25 percent of total
assets, holdings of a demand feature or guarantee provider may
exceed the 10 percent limit subject to certain conditions. See rule
2a-7(c)(4)(iii)(A), (B), and (C). See also rule 2a-7(a)(8)
(definition of ``demand feature'') and (a)(15) (definition of
``guarantee'').
\220\ See 1990 Proposing Release, supra note 22, at II.1.
(``Diversification limits investment risk to a fund by spreading the
risk of loss among a number of securities.'').
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The issuer diversification provisions of the rule generally were
not implicated by the market turbulence last fall.\221\ The Reserve
Primary Fund, for example, held only 1.2 percent of its assets in
Lehman Brothers commercial paper, well below what rule 2a-7 permits.
The market turbulence did, however, implicate the guarantor and demand
feature diversification provisions--many funds (particularly tax exempt
funds) were heavily exposed to bond insurers, and some were heavily
exposed to a few major securities firms that served as liquidity
providers.\222\
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\221\ The positions held by funds in distressed securities were
in almost all cases well below the rule's diversification limits.
\222\ See, e.g., Brunnermeier, supra note 66, at 87.
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Should we propose to further restrict the diversification limits of
the rule? If so, by how much should we reduce them? Should the five
percent diversification limit for issuers be reduced to, for example,
three percent? Would it be possible to further reduce the guarantor
diversification limits without reducing the quality of portfolio
securities? Even a diversification limitation of one percent would not
preclude a fund from breaking a buck if the security should sustain
sufficient losses as did the securities issued by Lehman Brothers.
Moreover, such a diversification limit may force funds to invest in
relatively lower quality securities. If so, might lower diversification
limits increase the likelihood of a default or other credit event
affecting a money market fund while diminishing the impact of such an
event on the fund? We request that commenters address the tradeoffs of
lower diversification limits for different types of money market funds.
Last fall, money market funds did appear to be extensively exposed
to securities issued by participants in the financial sector, which
contributed significantly to the difficulties they experienced.\223\
Money market funds are not subject to any industry concentration
limitations under rule 2a-7. Should we consider proposing such a
limitation? If we did, what should the concentration limit be? Are
distinctions among industry sectors sufficiently clear that a
concentration limitation would be meaningful? \224\
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\223\ See, e.g., U.S. Dollar Money Market Funds, supra note 17,
at 67 (mid-2008 holdings of 15 largest prime money market funds
showed they had invested $1 trillion, or half of their portfolios,
with non-U.S. banks).
\224\ In 1992, our staff observed that ``the current [statutory]
treatment of `concentration' suffers from problems of industry
definition. There is no clear standard to determine what constitutes
an `industry,' much less `a group of industries.' Indeed, as the
boundaries between different industries erode and the trend toward
corporate diversification and conglomeration continues, it is often
difficult to fit companies into distinct industry categories * *
*.'' Division of Investment Management, U.S. Securities and Exchange
Commission, Protecting Investors: A Half Century of Investment
Company Regulation, at n.103 (May 1992).
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E. Repurchase Agreements
Money market funds typically invest a significant portion of their
assets in repurchase agreements, many of which mature the following day
and provide an immediate source of liquidity.\225\ In a typical
repurchase agreement, a fund purchases securities from a broker-dealer
or a bank (``counterparty''), upon an agreement that the counterparty
will repurchase the same securities at a specified price, at a later
date. The securities purchased serve as the collateral for the
agreement.
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\225\ In 2008, repurchase agreements accounted for 26.4% of
taxable Government money market funds' total net assets and 9.1% of
taxable non-Government money market funds' total net assets. See
2009 Fact Book, supra note 7, at 150-51, Tables 41 & 42.
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Money market funds may treat the acquisition of a repurchase
agreement as an acquisition of the collateral underlying the repurchase
agreement for purposes of meeting rule 2a-7's diversification
requirement, provided that the repurchase agreement is ``collateralized
fully.'' \226\ A repurchase
[[Page 32709]]
agreement collateralized fully must, among other things, qualify for an
exclusion from any automatic stay of creditors' rights against the
counterparty under applicable insolvency law.\227\ We propose two
amendments to rule 2a-7 affecting a money market fund's investment in
repurchase agreements.
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\226\ See rule 2a-7(c)(4)(ii)(A). We have allowed this ``look-
through'' treatment, for diversification purposes, based on the
notion that a money market fund looks to the collateral rather than
the counterparty as the ultimate source of repayment. See Treatment
of Repurchase Agreements and Refunded Securities as an Acquisition
of the Underlying Securities, Investment Company Act Release No.
25058 (July 5, 2001) [66 FR 36156 (July 11, 2001)] (``2001 Repo Rule
Adopting Release''), at Background. Rule 5b-3 allows the same
treatment for purposes of section 5 and section 12(d)(3) of the Act.
The rule 5b-3(c)(1) definition of collateralized fully, which is
cross-referenced by rule 2a-7(a)(5), sets forth the related
conditions. Money market funds may enter into repurchase agreements
that are not collateralized fully. Any agreement or portion of
agreement that is not collateralized fully would be deemed an
unsecured loan. As such the loan itself would have to meet the
quality requirements set forth in rule 2a-7, both with respect to
the minimal credit risk and the high quality rating, as well as the
five percent diversification test. See 1991 Adopting Release, supra
note 20, at n.31.
\227\ See rule 5b-3(c)(1)(v).
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First, we propose to limit money market funds to investing in
repurchase agreements collateralized by cash items or Government
securities in order to obtain special treatment under the
diversification provisions of rule 2a-7.\228\ Such a limitation would
make it less likely that, in the event of the default of a counterparty
during a period of market turmoil such as last fall, a money market
fund would experience losses upon the sale of collateral that had
become illiquid. Such a consequence is more likely in the case of a
default by a large counterparty when, as a result, many investors in
repurchase agreements seek to liquidate similar collateral at the same
time.\229\
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\228\ Proposed rule 2a-7(a)(5). Under the current definition of
collateralized fully, a money market fund may look through
repurchase agreements collateralized with cash items, Government
securities, securities with the highest rating or unrated securities
of comparable credit quality. Rule 5b-3(c)(1)(iv). Repurchase
agreements have traditionally been collateralized with U.S. Treasury
and agency securities, but over the years borrowers have
increasingly used investment grade corporate bonds, mortgage-backed
securities and other potentially illiquid securities. See Martin
Duffy et al., supra note 191, at 3. Our staff's examination of the
portfolio holdings in the 15 largest money market fund complexes
last spring indicated that approximately 75% of the collateral
supporting repurchase agreements held by the funds consisted of
Government securities (48.3% agencies and 26.4% U.S. Treasuries).
The exam further indicated that the remaining collateral consisted
of a variety of instruments, such as equities, commercial paper,
corporate notes, and mortgage loan obligations.
\229\ If the counterparty defaults, a money market fund might be
required to dispose of the collateral as soon as possible to the
extent that the collateral, now part of the fund's portfolio, does
not meet the fund's maturity or liquidity requirements. Such
requirements do not apply to the collateral when it is not part of
the fund's portfolio. See 1991 Adopting Release, supra note 20, at
n.33 and accompanying text.
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We request comment on this amendment. We understand that most money
market funds that take advantage of the diversification ``look-
through'' provision enter into repurchase agreements that are
collateralized by Government securities. Is our understanding correct?
If so, would this amendment have a significant impact on money market
funds? Would the amendment significantly reduce the risk of losses upon
the default of a repurchase agreement counterparty? Would it negatively
impact money market funds' yields? Should we apply this limitation to
repurchase agreements that are not collateralized fully, and thus do
not qualify for the special ``look-through'' treatment?
Second, we propose to require that the money market fund's board of
directors or its delegate evaluate the creditworthiness of the
counterparty, regardless of whether the repurchase agreement is
collateralized fully.\230\ We eliminated this requirement in 2001 in
light of amendments to relevant bankruptcy law that protected funds
from the automatic stay of creditors' rights under applicable
bankruptcy law.\231\ The events of last fall, which involved the
failure of a large investment bank holding company that served as a
counterparty, suggest we should revisit this determination.\232\ We are
concerned that in the midst of a crisis following the bankruptcy of a
counterparty, a money market fund may find it difficult to protect
fully its interests in the collateral without incurring losses.\233\ A
fund should seek to avoid such a crisis by limiting its counterparties
to those that are creditworthy. We request comment on this proposed
amendment.
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\230\ Proposed rule 2a-7(c)(4)(ii)(A). It appears that this
evaluation is already being made in many fund complexes. See ICI
Report, supra note 6, at n.90.
\231\ See 2001 Repo Rule Adopting Release, supra note 226, at
nn.18-20 and accompanying text.
\232\ We understand that a number of money market funds
discontinued entering into repurchase agreements with The Bear
Stearns Companies Inc. (``Bear Stearns'') when it was threatened
with collapse in March 2008. ICI Report, supra note 6, at 51.
\233\ See Stephen Morris & Hyun Song Shin, Financial Regulation
in a System Context, Brookings Papers on Economic Activity, Fall
2008, at 229, 239 (noting that ``if Bear Stearns had become
illiquid, and the assets pledged as collateral reverted to the money
market funds, they would have been forced to sell those assets
quickly, possibly at a large loss.''). Cf. Calyon N.Y. Branch v. Am.
Home Mortg. Corp. (In re Am. Home Mortg., Inc.), 379 B.R. 503, 520-
22 (Bankr. D. Del. 2008) (Holding that seller in bankruptcy was not
required to transfer to the buyer the right to service the
collateral of the repurchase agreement. The court found that the
servicing provisions of the agreement were severable from the
repurchase provisions, dismissing the buyer's argument that without
the servicing rights the buyer's ability to liquidate the collateral
would have been impaired.).
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F. Disclosure of Portfolio Information
1. Public Website Posting
The Commission is proposing to amend rule 2a-7 to require money
market funds to disclose information about their portfolio holdings
each month on their websites. Specifically, a fund would be required to
disclose the fund's schedule of investments, as prescribed by rules 12-
12 to 12-14 of Regulation S-X,\234\ identifying, among other things,
the issuer, the title of the issue, the principal amount of the
security, and its current amortized cost.\235\ The fund would be
required to post the information no later than the second business day
of the month, current as of the last business day of the previous
month, and would have to maintain the information on the website for at
least twelve months.\236\
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\234\ 17 CFR 210.12-12 to 12-14.
\235\ Proposed rule 2a-7(c)(12).
\236\ Id.
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Currently, money market funds must report portfolio holdings
information to us four times a year, no earlier than within 60 days of
the close of the covered period.\237\ Many funds today provide this
information to their investors much more frequently on their websites,
with some funds updating information each day.\238\
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\237\ Money market funds must provide a full schedule of their
portfolio holdings in quarterly filings to the Commission. See Form
N-CSR [17 CFR 274.128] (form used by registered management
investment companies to file shareholder reports); Form N-Q [17 CFR
274.130] (form used by registered management investment companies to
file quarterly reports of portfolio holdings after the first and
third quarters).
\238\ See Colleen Sullivan & Mike Schnitzel, Money Funds Move to
Update Holdings Faster, Fund Action, Sept. 29, 2008, available at
http://www.fundaction.com/pdf/FA092908.pdf.
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We understand that the greater transparency provided by many funds
today responds to demands from investors, particularly institutional
investors, who wish to have a better understanding of the current risks
to which the fund is exposed.\239\ Those investors find that the
quarterly reports are too infrequent in light of the rapid turnover of
money market fund portfolios. We believe that the greater transparency
of fund portfolios is a positive development by which investors can
exert influence on risk-taking by fund advisers, and thus reduce the
likelihood that a fund will break the buck.
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\239\ See id.
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We request comment on the proposed monthly portfolio disclosure
requirement. Should we require more information from funds than what we
have proposed? If so, what additional information should we require?
Should
[[Page 32710]]
we require that money market funds also post their market-based net
asset value per share and the market-based prices of their portfolio
securities? This information would enable investors to understand the
fund's exposure to distressed securities (the market value of which
would be less than the amortized cost). In addition, it could help
investors understand the risk that the fund may be unable to maintain a
$1.00 stable net asset value. Currently, only larger, more
sophisticated investors may be able to gauge this risk, by themselves
estimating the market value of portfolio securities disclosed on fund
websites. Thus, a requirement that funds disclose the market-based
values may help to level the playing field for all investors. On the
other hand, we acknowledge that disclosure of shadow pricing could
cause certain investors to redeem their holdings once the shadow price
drops below a certain threshold and thus potentially introduce greater
instability.
We request comment on how investors might react to the disclosure
of market-based values and the consequences to funds and shareholders
if such information were disclosed. Would investors seek to redeem
their shares when the fund's market-based net asset value falls below a
certain threshold because of concerns that other investors may seek to
redeem? Would market analysts follow and report this information and
thereby cause investors to redeem if the fund's market-based net asset
value falls below a certain threshold? Would the disclosure of market-
based values, in addition to amortized cost, confuse investors,
particularly retail investors? Are there costs to disclosing this
information, and, if so, what are they? Alternatively, would this
information provide shareholders with useful information regarding the
fund's risk characteristics? Would it enable investors to make better
informed investment decisions? Would this information benefit
investors, and, if so, how? If the market-based values were required to
be disclosed, how frequently should they be disclosed? Would monthly
disclosure be frequent enough for investors to understand how often and
to what extent a money market fund's market-based share price deviates
from the $1.00 stable share price?
Should we omit any of the proposed disclosure requirements? If so,
what information should be omitted from the proposed requirement, and
why?
Each money market fund would have to update its portfolio schedule
as of the end of each month and post the update no later than two
business days after the end of the month. Should we provide for a
longer delay to prevent cash investors other than shareholders from
trading along with the fund, to the possible detriment of the fund and
its shareholders? The ICI Report recommended monthly disclosure with a
two-day delay, asserting that ``front running'' concerns are less of a
risk for money market funds than other types of mutual funds.\240\ We
understand that funds that already post portfolio schedules frequently
have come to the same conclusion. Should funds be required to provide
more frequent disclosure of portfolio holdings (e.g., weekly or
biweekly)?
---------------------------------------------------------------------------
\240\ See ICI Report, supra note 6, at 93.
---------------------------------------------------------------------------
The amendments would require that a fund post the information on
its website for at least 12 months. Should the information be
accessible on the website for a longer or shorter time period? Should
we require this information somewhere other than on the fund's website?
Do all money market funds have websites?
2. Reporting to the Commission
We are also proposing a new rule requiring money market funds to
provide the Commission a monthly electronic filing of more detailed
portfolio holdings information.\241\ The information would enable the
Commission to create a central database of money market fund portfolio
holdings, which could enhance our oversight of money market funds and
our ability to respond to market events.\242\
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\241\ Proposed rule 30b1-6.
\242\ In 1995, the Commission proposed, but did not adopt, a
similar rule that would have required money market funds to file
quarterly reports of portfolio holdings. Money Market Fund Quarterly
Reporting, Investment Company Act Release No. 21217 (July 19, 1995)
[60 FR 38467 (July 26, 1995)]. See also Rulemaking Petition from
Fund Democracy, et al. (Jan. 16, 2008) (File No. 4-554)
(recommending that the Commission require money market funds to make
nonpublic monthly electronic filings of their portfolio holdings).
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Our current information on money market fund portfolios is limited
to quarterly reports filed with us which, as noted above, quickly
become stale. Moreover, the reports are not filed in a format that
allows us to search expeditiously across portfolios or within a
portfolio to identify securities that may raise concerns. In 2007, our
staff was not able to ascertain quickly which money market funds held
SIVs, and last fall we had to engage in lengthy and time-consuming
inquiries to determine which money market funds held commercial paper
issued by Lehman Brothers after it declared bankruptcy. Further, if we
had had such data immediately available to us, we could have provided
additional assistance to the Treasury Department or the Federal Reserve
Board in structuring the programs they put into place to protect
investors.\243\ In preparing this release we have relied in part on
data about money market funds available only through industry
associations and publications.\244\
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\243\ The Treasury's Guarantee Program requires a participating
money market fund to provide a schedule of its portfolio holdings if
its market-based net asset value falls below 99.75 percent of its
stable net asset value. See U.S. Department of the Treasury,
``Guarantee Agreement (Stable Value),'' ] 5(b), available at http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-docs/Guarantee_Agreement_Stable-Value.pdf.
\244\ See, e.g., supra note 68.
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Proposed rule 30b1-6 would provide us information that would assist
our staff in analyzing the portfolio holdings of money market funds,
and thus enhance our understanding of the risk characteristics of
individual money market funds and money market funds as a group and
industry trends. We would be able to identify quickly those funds that
are holding certain types of securities or specific securities, such as
distressed securities, and funds that have unusual portfolios that may
involve greater risks than are typical (e.g., funds that have higher
gross yields).
Although the portfolio reports to the Commission are not primarily
designed for individual investors, we would expect to make the
information available to the public two weeks after their filing. We
anticipate that academic researchers, financial analysts and economic
research firms would use this information to study money market fund
holdings and evaluate their risk information. Their analyses may
further help investors and regulators better understand risks in money
market funds. In addition, we believe that delaying the public
availability of this information would alleviate possible concerns
about the public disclosure of the detailed portfolio holdings
information contained in the filing, without compromising its
utility.\245\
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\245\ As discussed above, we understand the confidentiality of
certain portfolio holdings information is not of critical importance
to money market funds. Accordingly, the proposed amendments to rule
2a-7 would require money market funds to disclose certain monthly
portfolio holdings information on their websites within two days
after the end of month. See also ICI Report, supra note 6, at 93
(recommending that funds disclose monthly portfolio holdings
information after a two-day delay). Here, however, the more detailed
information included in the filing to the Commission may present
more significant concerns.
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Proposed rule 30b1-6 would require money market funds to file a
monthly portfolio holdings report on new Form
[[Page 32711]]
N-MFP (for ``money fund portfolio'' reporting) no later than the second
business day of each month, current as of the last business day of the
previous month.\246\ Proposed Form N-MFP would require the fund to
report, with respect to each portfolio security held on the last
business day of the prior month, among other things: (i) The name and
CIK number of the issuer; (ii) the title of the issue; (iii) the CUSIP
number or other unique identifier; (iv) the category of investment
(e.g., Treasury debt, government agency debt, corporate commercial
paper, structured investment vehicle notes, etc.); (v) the current
credit ratings of the issuer and the requisite NRSROs giving the
ratings; (vi) the maturity date as determined under rule 2a-7; (vii)
the final legal maturity date; (viii) whether the maturity date is
extendable; (ix) whether the instrument has certain enhancement
features; (x) the identity of any enhancement provider; (xi) the
current credit rating of the enhancement provider; (xii) the principal
amount; (xiii) the current amortized cost value; (xiv) certain
valuation information (i.e., whether the inputs used in determining the
value of the securities are Level 1, Level 2 or Level 3,\247\ if
applicable); and (xv) the percentage of the money market fund's assets
invested in the security.\248\ In addition, Form N-MFP would require
funds to report to us information about the fund's risk
characteristics, such as the fund's dollar weighted average maturity of
its portfolio and its 7-day gross yield.
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\246\ The portfolio securities information that money market
funds currently must report is more limited in scope, and includes
information about the issuer, the title of the issue, the balance
held at the close of the period, and the value of each item at the
close of the period. See Form N-Q, Item 1 [17 CFR 274.130]; Rules
12-12 to 12-14 of Regulation S-X [17 CFR 210.12-12 to 12.14].
\247\ See Financial Accounting Standards Board, Statement of
Financial Accounting Standards No. 157, ``Fair Value Measurement,''
available at http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175818754924&blobheader=application%2Fpdf.
\248\ In addition, proposed Form N-MFP would include an
``Explanatory Notes'' item to permit funds to add miscellaneous
information that may be material to other disclosure in the form.
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Given the rapidly changing composition of money market fund
portfolios, which is largely the result of securities maturing, we
believe that monthly reports would improve the timeliness and relevance
of portfolio information. Once a money market fund has established a
system for tagging and filing a Form N-MFP, we expect the marginal
costs of filing additional reports would be minimal.\249\
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\249\ See also infra Section V.
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Under the proposed rule, Form N-MFP would be filed electronically
through the Commission's EDGAR system in an eXtensible Markup Language
(``XML'') tagged data format.\250\ We understand that money market
funds already maintain the requested information, and therefore would
need only to tag the data and file the reports with the
Commission.\251\ We anticipate that, in the future, many funds may be
able to collect, tag, and file this information with the Commission
through even more efficient, automated processes, thereby minimizing
the related costs and potential for clerical error.
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\250\ We anticipate that the XML interactive data file would be
compatible with a wide range of open source and proprietary
information management software applications. Continued advances in
interactive data software, search engines, and other web-based tools
may further enhance the accessibility and usability of the data.
\251\ We understand that many funds often provide this type of
information in different formats to various information services and
third-parties, including NRSROs. Standardizing the data format in
proposed Form N-MFP may encourage standardization across the
industry, resulting in cost savings for money market funds.
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We request comment on the proposed monthly portfolio reporting
requirement. Should we require funds to file the portfolio holdings
report on a more frequent basis? As discussed above, we intend to make
this information publicly available two weeks after the report is filed
with the Commission. Would such a delay alleviate concerns about
possible front-running or other possible harms that might be caused by
making the information public? Should the lag time between the filing
of the form and its public availability be longer or shorter? Should
the information be immediately available to the public upon filing?
Should we instead provide that all or a portion of the requested
information be submitted in nonpublic reports to the Commission? If so,
please identify the specific items that should remain nonpublic and
explain why.
Proposed Form N-MFP requires money market funds to disclose certain
items that would be relevant to an evaluation of the risk
characteristics of the fund and its portfolio holdings. Should we
require additional or alternative information, such as the fund's
client concentration levels, the percentage of the issue held by the
fund, or last trade price and trade volume for each security? \252\
Should we require funds to disclose market-based values (including the
value of any credit support agreement), which would allow us to
identify funds that have market-based net asset values that
sufficiently deviate from their amortized cost that they present a risk
of breaking the buck? Would the two-week delay in making the
information publicly available mitigate any concerns about the
disclosure of this information? Alternatively, should we require funds
to provide the market-based values information to us on a nonpublic
basis? \253\ If funds were required to provide market-based values
information to us on a nonpublic basis, should we require funds to
provide this information more frequently once the fund's net asset
value per share falls below a certain threshold? If so, how frequently
should funds be required to provide this information (e.g., weekly or
daily) and what should be the threshold (e.g., $0.9975)?
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\252\ See Rulemaking Petition from Fund Democracy, supra note
242 (recommending that the Commission require money market funds to
disclose to the Commission, among other things, the percentage of an
issue owned by a fund and its affiliates and the last trade price
and trade volume for each portfolio security).
\253\ See supra discussion at paragraph following note 239 and
paragraph preceding note 240.
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Should we omit any proposed disclosure requirement? Are there
specific items that the proposed form would require that are
unnecessary or otherwise should not be required?
We request comment on feasible alternatives that would minimize the
reporting burdens on money market funds.\254\ We also request comment
on the utility of the reports to the Commission in relation to the
costs to money market funds of providing the reports.\255\ In addition,
we request comment on whether funds should be permitted to post a human
readable version of their Forms N-MFP on their Web sites to satisfy the
proposed monthly Web site disclosure requirement.
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\254\ See section 30(c)(2)(A) of the Investment Company Act
(requiring Commission to consider and seek public comment on
feasible alternatives to the required filing of information that
minimize reporting burdens on funds).
\255\ See section 30(c)(2)(B) of the Investment Company Act
(requiring Commission to consider and seek public comment on the
utility of information, documents and reports to the Commission in
relation to the associated costs).
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The Commission anticipates that the data to be required by proposed
Form N-MFP would be clearly defined and often repetitive from one month
to the next. Therefore, we believe the XML format would provide us with
the necessary information in the most timely and cost-effective manner.
Should the Commission allow or require the form to be provided in a
format other than XML, such as eXtensible Business Reporting Language
(``XBRL'')? Is there another format that is more widely used or would
be more
[[Page 32712]]
appropriate for the required data? Is there a need for more detailed
categories of data? What would be the costs to funds of providing data
in the XML format? Would there be a disproportionate cost burden on
smaller fund companies? Is there another format that would be less
costly but still allow investors and analysts easily to view (or
download) and analyze the data from a central database? Should the
Commission use the EDGAR database or should it create a new database?
Should the Commission consider the implementation of reporting on Form
N-MFP initially through a voluntary pilot program?
3. Amendment to Rule 30b1-5
To avoid unnecessarily duplicative disclosure obligations, we
propose to amend rule 30b1-5 to exempt money market funds from the
requirement to file their schedules of investments pursuant to Item 1
of Form N-Q, a quarterly schedule of portfolio holdings of management
investment companies.\256\ We request comment on this exemption. We are
not proposing to exempt money market funds from the controls and
procedures and certification requirements of Form N-Q. Should we also
exempt money market funds from Item 2 of Form N-Q, which requires
disclosure of certain information about a fund's controls and
procedures, and/or Item 3 of Form N-Q, which requires certain fund
officers to file a certification as an exhibit to the form? \257\
Should we exempt money market funds from the portions of Items 2 and 3
that pertain to the schedule of investments required by Form N-Q?
Alternatively, should we amend Form N-Q and/or rule 30b1-5 to apply
similar controls and procedures and certification requirements to the
proposed monthly reporting requirement? Should we exempt money market
funds from requirements to provide portfolio schedules in Form N-CSR?
\258\
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\256\ Item 1 of Form N-Q requires funds to file the schedule of
investments, as of the close of the reporting period, in accordance
with rules 12-12--12-14 of Regulation S-X.
\257\ 17 CFR 274.130.
\258\ See supra note 237.
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G. Processing of Transactions
We are proposing to require that each money market fund's board
determine in good faith, at least once each calendar year, that the
fund (or its transfer agent) has the capacity to redeem and sell its
securities at a price based on the current net asset value per
share.\259\ This proposed amendment would require money funds to have
the operational capacity to ``break a dollar'' and continue to process
investor transactions in an orderly manner.\260\
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\259\ Proposed rule 2a-7(c)(1) (new last two sentences).
\260\ Once a fund has broken the buck, the fund could no longer
use the amortized cost method of valuing portfolio securities, and
therefore would have to compute share price by reference to the
market values of the portfolio with the accuracy of at least a tenth
of a cent. See 1983 Adopting Release, supra note 3, at n.6 and
accompanying text. Thus, a fund whose market-based net asset value
was determined to be $0.994 would, upon ceasing to use the amortized
cost method of valuation, begin to redeem shares at $0.994 (rather
than at $0.990). See generally id.
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Money market funds that seek to maintain a stable net asset value
do not guarantee that they will be able to maintain the stable net
asset value. Indeed, each money market fund prospectus must disclose
that an investor may lose money by investing in the fund.\261\
Nonetheless, we understand that some money market funds do not have in
place systems to process purchases and redemptions at prices other than
the funds' stable net asset value. In other words, the systems of these
money market funds and their transfer agents are ``hardwired'' to
process shareholder transactions at only the stable net asset value.
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\261\ Item 2(c)(1)(ii) of Form N-1A [17 CFR 239.15A, 274.11A].
Similar disclosure is required in money market fund advertisements
and sales literature. See rule 482(b)(4) under the Securities Act of
1933 [17 CFR 230.482]; rule 34b-1(a).
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The consequences of such an operational limitation contributed to
the delays in redeeming shareholders of The Reserve Primary Fund after
that fund broke the buck in September 2008. We understand that all
transactions thereafter had to be processed manually, a time-consuming
and expensive process that extended the time that shareholders had to
wait for the proceeds from their shares.\262\
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\262\ See Press Release, The Reserve Fund, Timeframe for Initial
Distribution Payment of Reserve Primary Fund (Sept. 30, 2008)
(explaining that ``[m]oney market management systems * * * are
programmed to accommodate a constant $1.00 NAV [and that making] a
distribution to holders that have made redemption requests since
September 15, 2008 necessitated a series of system modifications
designed to ensure an accurate and equitable distribution of
funds''); Press Release, The Reserve Fund, Reserve Primary Fund
Disbursement Update (Oct. 15, 2008) (explaining that Reserve Fund
investors were ``supported by complex technology at The Reserve as
well as their own systems, which had to be adjusted due to the
decline of the net asset value below $1.00 on September 16 * * *
[and that The Reserve Fund was] working diligently to enhance * * *
existing software and add new programs to hasten the distribution
process''). See also Press Release, The Reserve Fund, Statement
About The Reserve Yield Plus Fund (Oct. 17, 2008) (``apologiz[ing]
for the delay in meeting redemption requests'' in a short-term bond
fund, and explaining that the fund's sponsor needed to ``first move
the Fund to a different computer platform that's able to account for
a share price below $1.00 * * * [which] wasn't anticipated when the
Fund was created'').
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We believe that money market funds that do not have the operational
capacity to price shares according to market values expose their
shareholders to unnecessary risks--risks that may render a money market
fund unable to meet its obligations under section 22(e) of the Act to
pay the proceeds of a redemption within seven days. Therefore, we
propose to amend rule 2a-7 to require that a money market fund's board
determine in good faith, no less frequently than once each calendar
year, that the fund (or its transfer agent) has the capacity to redeem
and sell fund shares at prices based on the current net asset value per
share. The proposed amendment also clarifies that this capacity
includes the capacity to sell and redeem shares at prices that do not
correspond to the stable net asset value or price per share.\263\
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\263\ Proposed 2a-7(c)(1) (new third sentence).
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We request comment on this proposed amendment. Is it appropriate?
Should the board play a role in this determination? Should we instead
revise the risk-limiting conditions of the rule to require that the
fund simply have the capacity to redeem and sell securities at market-
based prices? Alternatively, should the rule require that the board
determine that the fund has adopted procedures adequate to enable the
fund to redeem and sell securities at market-based prices? Or should
the rule require that the board approve such procedures? If the rule
requires a determination by the board, is an annual determination
appropriate? Should the determination be more frequent (e.g.,
quarterly) or less frequent (e.g., every three years)?
H. Exemption for Affiliate Purchases
The Commission is proposing to amend rule 17a-9, which provides an
exemption from section 17(a) of the Act to permit affiliated persons of
a money market fund to purchase distressed portfolio securities from
the fund.\264\ The amendment would expand the circumstances under which
affiliated persons can purchase money market
[[Page 32713]]
fund portfolio securities.\265\ The Commission is also proposing a
related amendment to rule 2a-7, which would require that funds report
all such transactions to the Commission.
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\264\ Absent a Commission exemption, section 17(a)(2) prohibits
any affiliated person or promoter of or principal underwriter for a
fund (or any affiliated person of such a person), acting as
principal, from knowingly purchasing securities from the fund. Rule
17a-9 exempts certain purchases of securities from a money market
fund from section 17(a). For convenience, in this Release, we refer
to all of the persons who would otherwise be prohibited by section
17(a)(2) from purchasing securities of a money market fund as
``affiliated persons.'' ``Affiliated person'' is defined in section
2(a)(3) of the Act.
\265\ The proposed expansion of the rule would not include
``capital support agreements'' supporting the net asset value per
share of money market funds, which support fund affiliates provided
in several instances in reliance on no-action assurances by our
staff. See supra note 38. Unlike direct purchases of securities by
affiliates, the nature and terms of these agreements are highly
customized and terminate after a limited period of time. As a
result, these situations do not readily lend themselves to being
addressed in a rule of general applicability.
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1. Expanded Exemptive Relief
In 1996, the Commission adopted rule 17a-9 under the Act to permit
affiliated persons to purchase a security from an affiliated money
market fund that is no longer an eligible security under rule 2a-7, as
long as the purchase price is paid in cash and is equal to the
amortized cost of the security or its market price, whichever is
greater.\266\ The rule codified a series of staff no-action letters in
which the staff agreed not to recommend enforcement action to the
Commission if affiliated persons of a money market fund purchased
portfolio securities from the fund in order prevent the fund from
realizing losses on the securities that may otherwise have caused it to
break the buck.\267\ When we adopted the rule we explained that
experience had shown that such transactions appeared to be fair,
reasonable, in the best interests of fund shareholders, and consistent
with the requirement that money market funds dispose of a defaulted
security in an orderly manner as soon as practicable.\268\
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\266\ Rule 17a-9(a) and (b). See 1996 Adopting Release, supra
note 20, at nn.190-94 and accompanying text.
\267\ See 1996 Adopting Release, supra note 20, at nn.190-92 and
accompanying text.
\268\ See id.
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The current rule exempts only purchases of securities that are no
longer ``eligible securities'' under rule 2a-7 because, for example,
their ratings have been downgraded. This limitation served as a proxy
indicating that the market value of the security was likely less than
its amortized cost value, and thus the resulting transaction was fair
to the fund and did not involve overreaching.\269\ Since rule 17a-9 was
adopted, our staff has responded to several emergency requests for no-
action relief for transactions involving portfolio securities that
remained eligible securities. In some cases, the fund's adviser
anticipated that the securities would be downgraded and sought to
arrange a purchase by an affiliate as a preventive measure before the
distressed security could impact the fund's market-based net asset
value.\270\ In other cases, markets for portfolio securities had become
illiquid and the affiliated person sought to provide the fund with cash
to satisfy redemptions by purchasing portfolio securities.\271\ In all
cases, the terms of the transactions met all the requirements of rule
17a-9 except that the securities were eligible securities.
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\269\ See id. at text following n.194 (``The rule, as adopted,
is available for transactions involving securities that are no
longer eligible securities because they no longer satisfy either the
credit quality or maturity limiting provisions (e.g., the securities
are long-term adjustable-rate securities whose market values no
longer approximate their par values on the interest rate
readjustment dates).'').
\270\ See, e.g., Fixed Income Shares--Allianz Dresdner Daily
Asset Fund, SEC Staff No-Action Letter (May 5, 2008); First American
Funds, Inc.--Prime Obligation Fund, SEC Staff No-Action Letter (Dec.
3, 2007); MainStay VP Series Fund--MainStay VP Cash Management
Portfolio, SEC Staff No-Action Letter (Oct. 22, 2008); Institutional
Liquidity Trust--Prime Master Series, SEC Staff No-Action Letter
(Apr. 30, 2008); Penn Series Funds, Inc.--Money Market Fund, SEC
Staff No-Action Letter (Oct. 22, 2008); Phoenix Opportunities
Trust--Phoenix Money Market Fund and Phoenix Edge Series Fund--
Phoenix Money Market Series, SEC Staff No-Action Letter (Oct. 22,
2008); USAA Mutual Funds Trust--USAA Money Market Fund, SEC Staff
No-Action Letter (Oct. 22, 2008). SEC staff no-action letters are
available on the SEC Web site at http://www.sec.gov/divisions/investment/im-noaction.shtml under the hyperlink for the relevant
letter.
\271\ See, e.g., Dreyfus Money Funds, SEC Staff No-Action Letter
(Oct. 20, 2008); Mount Vernon Securities Lending Trust, Inc.--Mount
Vernon Securities Lending Prime Portfolio, SEC Staff No-Action
Letter (Oct. 22, 2008); Morgan Stanley Money Market Funds, SEC Staff
No-Action Letter (Oct. 22, 2008); Reserve New York Municipal Money-
Market Trust--New York Municipal Money-Market Fund, SEC Staff No-
Action Letter (Nov. 18, 2008); Russell Investment Company--Russell
Money Market Fund, SEC Staff No-Action Letter (Oct. 20, 2008).
---------------------------------------------------------------------------
Our staff's experience is that these transactions appear to be
similarly fair and reasonable and in the best interest of shareholders.
We are therefore proposing to extend the exemption to additional types
of transactions, which will eliminate the need for affiliated persons
to seek no-action assurances from our staff for these transactions when
the delay would not be in the best interests of shareholders.
Currently, under rule 17a-9 a security must no longer be an
eligible security for an affiliated person of a money market fund to
purchase such security. Under the proposed amendment, a money market
fund could sell a portfolio security that has defaulted (other than an
immaterial default unrelated to the financial condition of the issuer),
to an affiliated person, even though the security continued to be an
eligible security.\272\ Any such transaction would have to satisfy the
existing requirements of rule 17a-9.\273\
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\272\ Proposed rule 17a-9(a). Other provisions of rule 2a-7
currently except immaterial defaults unrelated to the financial
condition of the issuer. See rule 2a-7(c)(6)(ii)(A). As we have
noted in the past, this exception is intended to exclude defaults
that are technical in nature, such as where the obligor has failed
to provide a required notice or information on a timely basis. See
1991 Adopting Release, supra note 20, at Section II.E.2.
\273\ Proposed rule 17a-9(a)(1) and (2).
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In addition, we propose to add a new provision to rule 17a-9 that
would permit affiliated persons, for any reason, to purchase other
portfolio securities (e.g., eligible securities that have not
defaulted) from an affiliated money market fund for cash at the greater
of its amortized cost value or market value, provided that such person
promptly remits to the fund any profit it realizes from the later sale
of the security.\274\ Because in these circumstances there may not be
an objective indication that the security is distressed (and thus that
the transaction is clearly in the interest of the fund), the proposed
``claw-back'' provision would eliminate incentives for fund advisers
and other affiliated persons to buy securities for reasons other than
protecting fund shareholders from potential future losses.
---------------------------------------------------------------------------
\274\ Proposed rule 17a-9(b)(2).
---------------------------------------------------------------------------
We request comment on all aspects of the proposed expansion of rule
17a-9. Should we instead expand the exemption to include only those
portfolio securities that fall within enumerated categories (e.g.,
securities have defaulted, have become illiquid, have been determined
by the board of directors to no longer present minimal credit risk)? If
so, what would those categories be and why? Would any additional
conditions be needed with respect to particular categories of purchases
to control for potential conflicts of interest on the part of the
adviser? Is so, what conditions should we include? Is it appropriate to
subject only eligible securities that have not defaulted to the
proposed claw-back provision? Is such a provision necessary and fair?
Should we provide a time limit after purchase when the required claw-
back provision would no longer apply? Should we exclude from the claw-
back requirement potential payments to money market funds that are
subsequently liquidated?
2. New Reporting Requirement
The Commission is also proposing an amendment to rule 2a-7 that
would require a money market fund whose securities have been purchased
by an affiliated person in reliance on rule 17a-9 to provide us with
prompt notice of
[[Page 32714]]
the transaction via electronic mail.\275\ We proposed a similar
amendment last summer in connection with the NRSRO References
Proposal.\276\ That proposal is superseded by the requirement we
propose here, which contains one change.\277\ Due to the nature of the
proposed amendments to rule 17a-9, which do not restrict the purchase
of a portfolio security from a fund to particular categories, we
propose to require not only notice of the fact of the purchase, but
also the reasons for the purchase. Such reasons might include, for
example, that the fund's adviser expected that the security would be
downgraded, that due to the decreased market value of the security the
fund was at risk of breaking the buck, or that the fund was
experiencing heightened redemption requests and wished to avoid a
``fire sale'' of assets to satisfy such requests.
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\275\ Proposed rule 2a-7(c)(7)(iii)(B). The electronic mail
notification would be directed to the Director of our Division of
Investment Management, or the Director's designee. Proposed rule 2a-
7(c)(7)(iii).
\276\ See NRSRO References Proposal, supra note 105, at n.35 and
accompanying text.
\277\ Proposed rule 2a-7(c)(7)(iii)(B).
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We continue to believe that the current notice requirement in rule
2a-7, which is triggered when a security over a threshold amount of the
fund's assets defaults, provides us with incomplete information about
money market fund holdings of distressed securities, particularly those
that have engaged in affiliated transactions.\278\ We also continue to
believe that this proposed notice requirement, which is a concept
supported by some commenters last summer,\279\ would impose little
burden on money market funds or their managers, and would enhance our
oversight of money market funds especially during times of economic
stress. We request comment on this proposed notice requirement. Is the
proposed requirement that the notice include the reasons for the
purchase by the affiliate sufficiently clear? Should we require that
any additional information be included in the notice and should the
notice take a particular form?
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\278\ See NRSRO References Proposal, supra note 105, at Section
III.A.4.
\279\ See, e.g., Comment Letters of the Investment Company
Institute (Sept. 5, 2008); Commenter Letter of the Mutual Fund
Directors Forum (Sept. 5, 2008); Comment Letter of OppenheimerFunds,
Inc. (Sept. 4, 2008); Comment Letter of Charles Schwab Co., Inc.
(Sept. 5, 2008). Comment letters may be accessed on the Commission's
Web site at http://www.sec.gov/comments/s7-19-08/s71908.shtml.
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I. Fund Liquidation
1. Proposed Rule 22e-3
The Commission is proposing a new rule 22e-3, which would exempt
money market funds from section 22(e) to permit them to suspend
redemptions in order to facilitate an orderly liquidation of the fund.
The new rule would replace rule 22e-3T, a temporary rule that provides
a similar exemption for money market funds participating in the
Treasury Department's Guarantee Program.\280\
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\280\ The Treasury's Guarantee Program guarantees that
shareholders of a participating money market fund will receive the
fund's stable share price for each share owned as of September 19,
2008, if the fund liquidates under the terms of the Program. See
supra note 55 and accompanying text.
---------------------------------------------------------------------------
Section 22(e) of the Act generally prohibits funds, including money
market funds, from suspending the right of redemption, and from
postponing the payment or satisfaction upon redemption of any
redeemable security for more than seven days. The provision was
designed to prevent funds and their investment advisers from
interfering with the redemption rights of shareholders for improper
purposes, such as the preservation of management fees.\281\ Although
section 22(e) permits funds to postpone the date of payment or
satisfaction upon redemption for up to seven days, it does not permit
funds to suspend the right of redemption, absent certain specified
circumstances or a Commission order.
---------------------------------------------------------------------------
\281\ See Investment Trusts and Investment Companies: Hearings
on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and
Currency, 76th Cong., 3d Sess. 291 (1940) (statement of David
Schenker, Chief Counsel, Investment Trust Study, SEC).
---------------------------------------------------------------------------
As discussed above, on September 22, 2008, we issued an order under
section 22(e) to permit two series of The Reserve Fund to suspend
redemptions and postpone payments in the midst of a run on the fund. In
November 2008, we adopted rule 22e-3T to permit money market funds
participating in the Treasury's Guarantee Program to suspend
redemptions and postpone the payment of redemption proceeds if a fund
breaks the buck and begins liquidation proceedings under the Guarantee
Program.\282\
---------------------------------------------------------------------------
\282\ See Rule 22e-3T Adopting Release, supra note 31.
---------------------------------------------------------------------------
The temporary rule was intended to facilitate the orderly disposal
of assets in a manner that would protect the interests of all
shareholders. Absent the exemption provided by rule 22e-3T, a fund
participating in the Guarantee Program that faces a run would be
compelled by section 22(e) to continue to redeem shares. In order to
raise the money to pay redemption proceeds to shareholders, a fund may
have to sell portfolio securities. Massive redemption requests could
thus force a fund to liquidate positions in a fire sale, further
depressing the fund's market value share price. Earlier redeeming
shareholders would receive higher share prices (at or near the
amortized cost) but, as a result of the fund's diminishing asset base,
later redeeming shareholders may receive lower prices.\283\ Moreover,
as demonstrated by the events of last fall, a run on a single fund can
quickly spread to other funds and, as multiple funds attempt to meet
redemption requests, seriously deplete the value of portfolio holdings
and drain the availability of cash and more liquid securities.
---------------------------------------------------------------------------
\283\ Id.
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We believe that rule 22e-3T, which will expire on October 18, 2009
in conjunction with the Guarantee Program, should be replaced with a
rule that would provide for a similar exemption independent of the
Guarantee Program.\284\ Proposed rule 22e-3 would permit all money
market funds to suspend redemptions upon breaking a buck, if the board,
including a majority of independent directors, approves liquidation of
the fund, in order to liquidate in an orderly manner. The proposed rule
is intended to reduce the vulnerability of investors to the harmful
effects of a run on a fund, and minimize the potential for disruption
to the securities markets.
---------------------------------------------------------------------------
\284\ One commenter on rule 22e-3T recommended that we make the
rule a permanent rule for any fund preparing to liquidate,
independent of the Guarantee Program. See Comment Letter of the
Investment Company Institute (Dec. 24, 2008). Two other comment
letters related to matters unique to the Guarantee Program. See
Comment Letter of the Coalition of Mutual Fund Investors (Dec. 14,
2008) (recommending that any fund that liquidates and relies on the
Guarantee Program be required to provide information obtained
pursuant to rule 22c-2 under the Investment Company Act); Comment
Letter of Michael F. Johnson (Nov. 20, 2008) (requesting information
concerning the applicability of the Guarantee Program to a
particular fund). The only other comment letter that the Commission
received concerning interim final rule 22e-3T was a letter from the
Committee of Annuity Insurers, discussed below. See infra note 288
and accompanying text. Comments on interim final rule 22e-3T, File
No. S7-32-08, are available at http://www.sec.gov/comments/s7-32-08/s73208.shtml. Once rule 22e-3T expires, the Commission would stand
ready to consider applications for exemptive relief under section
22(e).
---------------------------------------------------------------------------
Proposed rule 22e-3(a) would permit a money market fund to suspend
redemptions if: (i) The fund's current price per share, calculated
pursuant to rule 2a-7(c), is less than the fund's stable net asset
value per share; (ii) its board of directors, including a majority of
directors who are not interested
[[Page 32715]]
persons, approves the liquidation of the fund; and (iii) the fund,
prior to suspending redemptions, notifies the Commission of its
decision to liquidate and suspend redemptions, by electronic mail
directed to the attention of our Director of the Division of Investment
Management or the Director's designee.\285\ These proposed conditions
are intended to ensure that any suspension of redemptions will be
consistent with the underlying policies of section 22(e). We understand
that suspending redemptions may impose hardships on investors who rely
on their ability to redeem shares. Accordingly, our proposal is limited
to permitting suspension of this statutory protection only in
extraordinary circumstances. Thus, the proposed conditions, which are
similar to those of the temporary rule, are designed to limit the
availability of the rule to circumstances that present a significant
risk of a run on the fund. Moreover, the exemption would require action
of the fund board (including the independent directors), which would be
acting in its capacity as a fiduciary.\286\
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\285\ Proposed rule 22e-3(a).
\286\ We also note that the potential for abuse may be mitigated
because the impending liquidation of the fund would ultimately
eliminate a source of advisory fees for the adviser. See Rule 22e-3T
Adopting Release, supra note 31, at text accompanying nn.19-20.
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The proposed rule contains an additional provision that would
permit us to take steps to protect investors. Specifically, the
proposed rule would permit us to rescind or modify the relief provided
by the rule (and thus require the fund to resume honoring redemptions)
if, for example, a liquidating fund has not devised, or is not properly
executing, a plan of liquidation that protects fund shareholders.\287\
Under this provision, the Commission may modify the relief ``after
appropriate notice and opportunity for hearing,'' in accordance with
section 40 of the Act.
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\287\ Proposed rule 22e-3(c). We adopted a similar provision in
rule 22e-3T. Rule 22e-3T(b); see also Rule 22e-3T Adopting Release,
supra note 31.
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Paragraph (b) of the proposed rule would provide a limited
exemption from section 22(e) for certain conduit funds that invest,
pursuant to section 12(d)(1)(E) of the Act, all of their assets in a
money market fund that suspends redemption in reliance on paragraph (a)
of the proposed rule.\288\ Without this exemption, these conduit funds
may be placed in the position of having to honor redemption requests
while being unable to liquidate shares of money market funds held as
portfolio securities. We anticipate that this provision would be used
principally by insurance company separate accounts issuing variable
insurance contracts and by funds participating in master-feeder
arrangements.\289\
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\288\ Proposed rule 22e-3(b). This provision is based on a
suggestion we received in a comment letter submitted in connection
with rule 22e-3T. See Comment Letter of the Committee of Annuity
Insurers (Dec. 23, 2008) (requesting that the Commission extend the
application of rule 22e-3T to insurance company separate accounts).
Proposed rule 22e-3(b) also would require a fund to promptly notify
the Commission that it has suspended redemptions in reliance on the
rule.
\289\ For a discussion of master-feeder arrangements, see supra
note 194.
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We request comment generally on all aspects of proposed rule 22e-3.
Is it appropriate to permit money market funds that break the buck to
suspend redemptions during liquidation? Should the exemption be
available to other types of open-end investment companies? Should there
be additional or alternative conditions with regard to the exemption
(e.g., should the fund be required to disclose its liquidation plan to
shareholders)? Should there be a limit on the suspension period so that
shareholder assets are not ``locked up'' for an unduly lengthy period?
If so, what should be the maximum length of the suspension period
(e.g., 60 or 90 days)?
2. Request for Comment on Other Regulatory Changes
We also request comment on certain additional changes that we are
considering but are not currently proposing, relating to the suspension
of redemptions that may provide additional protections to money market
fund investors.
a. Temporary Suspensions for Exigent Circumstances
Should we include a provision in rule 22e-3 that would permit fund
directors to temporarily suspend redemptions during certain exigent
circumstances other than liquidation of the fund? The ICI Report
recommends that we permit a fund's directors to suspend temporarily the
right of redemption if the board, including a majority of its
independent directors, determines that the fund's net asset value is
``materially impaired.'' \290\ Under this approach, the fund could
suspend redemptions for up to five days, during which time the fund
could attempt to restore its net asset value (e.g., by securing credit
support agreements). In the event that the fund could not restore its
net asset value within that period, the fund would be required to begin
the liquidation process. A fund would be permitted to exercise this
option only once every five years. This ``time out'' could give money
market funds some time during turbulent periods to assess the viability
of the fund.\291\
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\290\ ICI Report, supra note 6, at 85-89.
\291\ Similarly, the Treasury's Guarantee Program and rule 22e-
3T effectively provide funds with the ability to temporarily suspend
redemptions. The Guarantee Program requires funds that break the
buck to commence liquidation proceedings within five days, unless
the fund restores its net asset value to a level equal to or above
$0.995 within that period. Meanwhile, rule 22e-3T permits funds to
suspend redemptions if a fund breaks the buck and has not yet
``cured'' the event.
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We request comment generally on whether we should provide this
additional relief. Would it make money market funds less appealing to
investors? Would it provide time for directors to find a solution? Or
might it accelerate redemptions from shareholders once the suspension
period ends, regardless of any action taken by the board of directors?
\292\ Could the accumulating redemptions ``hanging over the fund''
place pressure on the prices of fund portfolio securities? How could we
ensure that directors would use this authority only in exigent
circumstances? When is a money market fund's net asset value
``materially impaired''? Would this term include circumstances in which
the fund has overvalued securities, which, if sold to satisfy
redemptions, would have to be marked down?
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\292\ In other situations, temporary restrictions on redemptions
may have exacerbated the situation and increased the rate of
redemptions. See Svea Herbst-Bayliss, ``Gates'' May Have Hurt More
Than Helped Hedge Funds, Reuters, Mar. 26, 2009, available at http://www.reuters.com/article/PrivateEquityandHedgeFunds09/idUSTRE52P4JJ20090326.
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We also request comment on how a temporary suspension should
operate. What disclosures should a money market fund be required to
make, and when and where should the fund make them? Should a fund be
required to calculate its net asset value during the suspension period,
and, if so, should the net asset value be publicly disclosed? Should
the suspension period be longer or shorter than five days? What factors
should the board of directors take into consideration when deciding
whether to suspend redemptions temporarily? How would directors weigh
the various and possibly competing interests of shareholders?
b. Options for Shareholders in Liquidating Funds
If a fund suspends redemptions in order to liquidate, the directors
would likely distribute money to investors as it becomes available from
the sale of portfolio securities, while maintaining a reserve to cover
expenses and potential liabilities. As we have seen, this process
[[Page 32716]]
can be lengthy. Should we include conditions in any rule regarding the
treatment of shareholders in a liquidation? \293\ For example, should
we require that fund assets be distributed on a pro rata basis? Should
there be a limit on allowable reserves?
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\293\ The Investment Company Act does not contain any
provisions governing the liquidation of an investment company,
including a money market fund; rather, liquidations are primarily
effected in accordance with applicable state law. The Act does
include, however, a provision authorizing Federal district courts to
enjoin a plan of reorganization upon a proceeding initiated by the
Commission on behalf of security holders, if the court determines
that the plan of reorganization is not ``fair and equitable to all
security holders.'' Section 25(c) of the Act. A plan of
``reorganization'' includes a voluntary dissolution or liquidation
of a fund. Section 2(a)(33) of the Act.
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Alternatively, should we permit or require a fund board to
recognize that investors will have different preferences for liquidity
and capital preservation? For example, a fund that decides to liquidate
and suspend redemptions could be allowed to offer shareholders the
choice of redeeming their shares immediately at a reduced net asset
value per share that reflects the fair market value of fund assets,
i.e., at a price below the fund's stable net asset value. Remaining
shareholders would receive their redemption proceeds at the end of the
liquidation process and may receive the economic benefit of an orderly
disposal of assets. Would such an approach be fair to all fund
shareholders? What conditions would be necessary and appropriate to
ensure that shareholders are treated fairly? Specifically, how would
such a mechanism operate? Should funds be able to deduct an additional
discount or ``haircut'' from earlier redeeming shareholders to provide
additional protection for later redeeming shareholders? Should we
permit boards to decide the amount of the haircut? If so, what factors
should boards use to decide such haircuts? What disclosures and
information would be necessary to permit shareholders to make an
informed decision between the options?
Should investors be required to choose their preferences at the
time they purchase fund shares? Should investors be able to change
their preferences? If so, how and when? Should they be able to choose
their preferences when a fund announces its intention to liquidate and
suspend redemptions under the rule? If so, should we (or the fund
board) establish a default assumption for investors that fail to
respond to the inquiry?
III. Request for Comment
The Commission requests comment on the rules and amendments
proposed in this release. Commenters are requested to provide empirical
data to support their views. The Commission also requests suggestions
for additional changes to existing rules or forms, and comments on
other matters that might have an effect on the proposals contained in
this release.
We recognize that the events of the last two years raise the
question of whether further and perhaps more fundamental changes to the
regulatory structure governing money market funds may be warranted.
Therefore we are exploring other ways in which we could improve the
ability of money market funds to weather liquidity crises and other
shocks to the short-term financial markets. We invite interested
persons to submit comments on the advisability of pursuing any or all
of the following possible reforms, as well as to provide other
approaches that we might consider to achieve our goals. We expect to
benefit from the comments we receive before deciding whether to propose
these changes.\294\
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\294\ In addition, we note that the U.S. Department of the
Treasury's white paper on Financial Regulatory Reform calls for the
President's Working Group on Financial Markets to prepare a report
by September 15, 2009 assessing whether more fundamental changes are
necessary to further reduce the money market fund industry's
susceptibility to runs, such as eliminating the ability of a money
market fund to use a stable net asset value or requiring money
market funds to obtain access to reliable emergency liquidity
facilities from private sources. See Department of the Treasury,
Financial Regulatory Reform, A New Foundation: Rebuilding Financial
Supervision and Regulation, at 38-39 (June 2009).
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A. Floating Net Asset Value
When the Commission adopted rule 2a-7 in 1983,\295\ it facilitated
money market funds' maintenance of a stable net asset value by
permitting them to use the amortized cost method of valuing their
portfolio securities. As discussed above, section 2(a)(41) of the Act,
in conjunction with rules 2a-4 and 22c-1, normally require a registered
investment company to calculate its current net asset value per share
by valuing its portfolio securities for which market quotations are
readily available at current market value and its other securities at
their fair value as determined, in good faith, by the board of
directors. Therefore, using the amortized cost method of valuation is
an exception to the general requirement under the Act that investors in
investment companies should pay and receive market value or fair value
for their shares.\296\ The Commission did not take lightly its decision
to permit money market funds to use the amortized cost method of
valuation. Rule 2a-7 essentially codified several of the Commission's
exemptive orders relating to money market funds, and these orders were
issued only after an administrative hearing in the late 1970s at which
the use of the amortized cost method of valuation was a matter of
considerable debate.\297\
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\295\ See 1983 Adopting Release, supra note 3.
\296\ Rule 2a-7 is not the only exception permitting open-end
investment companies to value short-term debt securities in their
portfolios on an amortized cost basis. Subject to certain
conditions, the amortized cost method of valuation may be used by
open-end investment companies to value investments with a remaining
maturity of 60 days or less in accordance with the Commission's
interpretation set forth in Valuation of Debt Instruments by Money
Market Funds and Certain Other Open-End Investment Companies,
Investment Company Act Release No. 9786 (May 31, 1977) [42 FR 28999
(June 7, 1977)].
\297\ See 1982 Proposing Release, supra note 25, at text
preceding, accompanying, and following nn.2-4.
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The balance the Commission struck was that, in exchange for
permitting this valuation method, it would impose certain conditions on
money-market funds designed to ensure that these funds invested only in
instruments that would tend to promote a stable net asset value per
share and would impose on the funds' boards of directors an ongoing
obligation to determine that it remains in the best interest of the
funds and their shareholders to maintain a stable net asset value.
Further, money market funds are permitted to use the amortized cost
method of valuation only so long as their boards believe that it fairly
reflects the funds' market-based net asset value per share.\298\
---------------------------------------------------------------------------
\298\ See rule 2a-7(c)(1).
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The $1.00 stable net asset value per share has been one of the
trademark features of money market funds. It facilitates the funds'
role as a cash management vehicle, provides tax and administrative
convenience to both money market funds and their shareholders,\299\ and
promotes money market funds' role as a low-risk investment option. Many
investors may hold shares in money market funds in large part because
of these features.\300\ We are mindful that if we were to require a
floating net asset value, a substantial number of investors might
[[Page 32717]]
move their investments from money market funds to other investment
vehicles.
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\299\ A $1.00 stable net asset value per share relieves
shareholders of the administrative task of tracking the timing and
price of purchase and sale transactions for capital gain and wash
sale purposes under tax laws.
\300\ Some institutional investors are prohibited by board-
approved guidelines or firm policies from investing certain assets
in money market funds unless they have a stable net asset value per
share. See ICI Report, supra note 6, at 109. One survey also
reported that 55% of institutional cash managers would substantially
decrease their investments in money market funds if the funds had a
floating value. See id. at 110 (citing a January 2009 survey by
Treasury Strategies, Inc.).
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However, a stable $1.00 net asset value per share also creates
certain risks for a money market fund and its investors. These risks
are a consequence of the amortized cost method of valuation and the
resulting insensitivity of the $1.00 net asset value per share to
market valuation changes. It may create an incentive for investors to
redeem their shares when a fund's market-based net asset value per
share falls between $0.995 and $1.00 because they will obtain $1.00 in
exchange for their right to fund assets worth less than $1.00 per
share. Regardless of the motivation underlying the redemptions, the
unrealized losses attributable to redeeming shareholders are now borne
by the remaining money market fund shareholders.
Further, particularly in times of market turbulence and
illiquidity, regardless of the motivation behind the redemptions,
redemptions at $1.00 in a money market fund whose market-based net
asset value is below $1.00 can further depress the fund's market-based
net asset value, exacerbating the impact on remaining shareholders. It
can create a level of unfairness in permitting the remaining fund
shareholders to pay for the liquidity needs and unrealized losses of
redeeming fund shareholders. Because there is a limited window where
only so many shareholders can redeem at $1.00 in a fund with a
portfolio under threat (because of holding distressed securities or
facing significant shareholder redemptions) before the board of the
fund must consider whether to re-price the fund's shares or take other
action, there can be an incentive to be the first shareholder to place
a redemption request upon any hint of stress at a money market fund.
Generalized market dislocations or illiquidity can create this stress
on a number of money market funds simultaneously, leading to runs on
money market funds similar to those we witnessed in September 2008.
Even further, a run may result in fire sales of securities, placing
pressure on market prices and transmitting problems that may be
originally associated with a single money market fund to other money
market funds. Finally, larger, institutional money market fund
investors, especially those with fiduciary responsibilities for
managing their clients' assets, are more likely to recognize negative
events potentially affecting the money market fund and to be in a
position to quickly redeem shares of the money market fund and thus
protect their money market investments and those of their clients,
leaving other smaller, more passive money market investors to bear
their losses.
When we determined to permit money market funds to use amortized
cost valuation in 1983, money market funds held only about $180 billion
in assets \301\ and played a minor role in the short-term credit
markets. Their principal benefit was to provide retail investors with a
cash investment alternative to bank deposits, which at the time paid
fixed rates substantially below short-term money market rates. Since
that time, money market funds have grown tremendously and have
developed into an industry driven in large part by institutional
investors, who hold approximately 67 percent of the over $3.7 trillion
in money market fund assets.\302\ As noted earlier, with the ability of
institutional investors today to make hourly redemption requests to
money market funds, these investors have the ability to move
substantial amounts of money in and out of money market funds (or
between money market funds), with potentially detrimental effects on
the funds, their remaining shareholders, and the marketplace.
---------------------------------------------------------------------------
\301\ See ICI Report, supra note 6, at 1.
\302\ See ICI Mutual Fund Historical Data, supra note 47 (data
for week ended June 10, 2009).
---------------------------------------------------------------------------
The influx of institutional investments in money market funds, the
increased transparency of fund holdings, and the speed with which large
shareholders can buy and redeem shares may have increased the
possibility that the value of some fund investors' shares will be
diluted as a result of the fund's use of the amortized cost valuation
method.\303\ When short-term interest rates decrease, the fund's
portfolio holdings (with their now above-market yields) become more
valuable. Institutional investors may pay $1.00 per share to purchase
fund shares whose market value is, for example, $1.002 per share. Such
institutional inflows would be invested by the fund in securities
offering the new, reduced market yields, diluting the yield advantage
that existing fund shareholders would otherwise enjoy. These
institutional investors, in effect, are able to earn a yield through a
money market fund above the market rate they could earn on a direct
investment. They achieve this yield advantage by capturing a portion of
the benefit from declining interest rates that otherwise would benefit
existing money market fund investors.\304\ Similarly, when interest
rates increase, institutional investors could sell shares of money
market funds, obtaining $1.00 per share for a fund that all things
being equal likely will be worth less, e.g., $0.997 per share.\305\ If
instead the institutional investor sells commercial paper in the market
under the same conditions, it could only sell such securities at a
discount.
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\303\ We have considered the impact of dilution in money market
funds using the amortized cost method of valuation in the past. See,
e.g., 1982 Proposing Release, supra note 25, at n.6 and accompanying
text.
\304\ This benefit would otherwise be paid out to money market
fund shareholders in the form of greater dividend payments from the
increased yield.
\305\ See S&P 2007 Ratings Criteria, supra note 139, at 27.
Standard and Poor's gives the example of an investor holding $1
million in 90-day U.S. Treasury bills yielding 5%. If interest rates
increased 150 basis points, the value of the investment would drop
by approximately $3700 and the investor's yield would remain at 5%.
Compare this to an investor holding one million shares of a money
market fund holding exclusively Treasury bills yielding 5% (setting
aside fund expenses). If interest rates rose 150 basis points, the
investor could sell the fund investment for $1.00 per share and not
experience any loss. The investor could then purchase 90-day
Treasury bills yielding 6.5%, instantaneously increasing its return
by 1.5%. If the fund is forced to sell these securities to meet
redemption requests, the $3700 unrealized loss would be borne by the
fund and its remaining shareholders.
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In stable markets and with small shareholdings, amortized cost
pricing at most results in shareholders who purchase or redeem shares
receiving slightly more or less (in shares or in redemption proceeds)
than they otherwise would if the fund's net asset value were to
fluctuate according to market-based pricing. Net redemptions generally
are funded by cash on hand. Any deviation between the market-based net
asset value per share of the fund and its amortized cost value is small
enough to have an immaterial effect on the fund, and no effect on
investors. It could be compared to a rounding convention in a billing
system.
In a market under significant stress and with institutions holding
billions of dollars of money market fund shares, however, a real
arbitrage opportunity can arise, and a race or threat of a potential
race for redemptions may become a real possibility. For example, during
last fall's market turbulence, as credit spreads on many money market
fund portfolio securities widened and the market value of these
securities fell, we understand that the market-based net asset value of
some money market funds dropped low enough that redemptions by a few
large shareholders in the fund at $1.00 per share alone could have
caused the fund to break the buck.
We recognize that a floating net asset value would not necessarily
eliminate the incentive to redeem shares during a liquidity crisis--
shareholders still
[[Page 32718]]
would have an incentive to redeem before the portfolio quality
deteriorated further from the fund selling securities into an illiquid
market to meet redemption demands. But a floating net asset value may
lessen the impact of any portfolio deterioration by eliminating the
ability of shareholders to redeem their shares for more than the
current market value per share of the fund's portfolio. It also might
better align investors' expectations of risk with the actual risks
posed by money market fund investments. We expect that, at least under
stable market conditions, the other risk-limiting conditions of rule
2a-7 would tend to promote a relatively stable net asset value per
share even if we eliminated the ability of money market funds to rely
on the amortized cost method of valuation.
We request comment on the possibility of eliminating the ability of
money market funds to use the amortized cost method of valuation. Would
such a change render money market funds a more stable investment
vehicle? Would it lessen systemic risk by making money market funds
less susceptible to runs? Would it make the risks inherent in money
market funds more transparent? Many money market funds' stable net
asset value was supported voluntarily by fund affiliates over the last
two years, and shareholders may not have understood that this support
was provided on a voluntary basis and may not be provided in the
future.
On the other hand, would such a change make money market funds more
susceptible to runs because investors might respond quickly to small
changes in net asset value? As discussed above, a stable net asset
value per share creates certain administrative, tax, and cash
management conveniences for fund investors. Accordingly, would
prohibiting the use of the amortized cost method of valuation in money
market funds encourage investors to shift assets from money market
funds to unregulated offshore funds, bank accounts, or other
investments? Would it result in some institutional money market funds
deregistering with the Commission (in reliance on section 3(c)(7) of
the Act) in order to continue to maintain a stable net asset value? Is
this a result with which the Commission should be concerned?
What impact would this have on investors' cash management
activities? What impact might such a change have on the short-term
credit markets and issuers of short-term debt securities? How would
money market funds whose share prices were based on market-based net
asset values differ from current short-term bond funds? Should any rule
amendment eliminating the ability of money market funds to rely on the
amortized cost method of valuation to create a stable net asset value
be limited to institutional money market funds? As discussed above,
institutional money market funds are at greater risk of instability,
runs and the dilutive effect of large redemptions.
B. In-Kind Redemptions
As noted above, one of our concerns relates to the ability of large
institutional shareholders to rapidly redeem substantial amounts of
fund assets, which can pose a threat to the stable net asset value of
the fund and can advantage one group of shareholders over another by
requiring remaining shareholders to pay for the liquidity needs of
large redeeming shareholders.\306\ While the liquidity requirements we
are proposing today may ameliorate pressures created by redeeming
shareholders, during severe market dislocations even more steps may be
necessary to help ensure the stability of a stable net asset value
money market fund. Accordingly, if we retain a stable net asset value
for money market funds, we are interested in exploring other methods of
reducing the risks and unfairness posed by significant sudden
redemptions.
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\306\ This situation to some extent could be analogized to the
situation that can be created by market timing in which selling
shareholders receive benefits to the detriment of remaining mutual
fund shareholders.
---------------------------------------------------------------------------
One possible way of addressing these issues would be to require
that funds satisfy redemption requests in excess of a certain size
through in-kind redemptions.\307\ Money market funds currently are
permitted to and many money market funds disclose in their prospectuses
that they may satisfy redemption requests through in-kind
redemptions.\308\ In the wake of last fall's redemption pressures on
money market funds, however, only one announced that it would do
so.\309\ In-kind redemptions would lessen the impact of large
redemptions on remaining money market fund shareholders and would
require the redeeming investor to bear part of the cost of its
liquidity needs. If shareholders did not immediately sell these
securities, requiring in-kind redemptions in such circumstances may
mitigate the impact of large redemptions on short-term credit markets
by reducing the likelihood of large fire sales of short-term securities
into the market. Finally, it also may encourage large investors to
diversify their money market fund holdings among a variety of funds,
perhaps lessening the risk that any individual fund would be threatened
by a few redemptions.\310\ If proposed, we would expect to set a
threshold for requiring in-kind redemptions sufficiently high that we
could reasonably assume that such an investor would be in the position
to assume ownership of such securities.
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\307\ An in-kind redemption occurs when a shareholder's
redemption request to a fund is satisfied by distributing to that
shareholder portfolio assets of that fund instead of cash.
\308\ See section 2(a)(32) of the Act (defining a redeemable
security as a security where the holder ``is entitled * * * to
receive approximately his proportionate share of the issuer's
current net assets, or the cash equivalent thereof'' (italics
added)). See also rule 18f-1, which provides an exemption from
certain prohibitions of section 18(f)(1) of the Act with regard to
redemptions in kind and in cash.
\309\ On September 19, 2008, the American Beacon Money Market
Portfolio announced it would honor redemption requests exceeding
$250,000 in a 90-day period through pro rata payments of cash and
``in-kind'' distributions of securities held by the fund, to prevent
redemptions from ``forcing'' the sale of fund assets. See American
Beacon Funds, Prospectus Supplement for BBH ComSet Class,
Institutional Class, Cash Management Class, and PlanAhead Class
(Sept. 30, 2008), available at http://www.sec.gov/Archives/edgar/data/809593/000080959308000045/sep3008_prosuppbeacon.txt.
\310\ Large investors that did not wish to receive in-kind
redemptions could avoid this risk by spreading their investments
among several money market funds such that no single money market
fund investment was large enough to possibly trigger the in-kind
redemption requirement.
---------------------------------------------------------------------------
We request comment on requiring money market funds to satisfy
redemption requests in excess of a certain size through in-kind
redemptions. What would be the advantages and disadvantages of this
approach? What type of threshold redemption request should trigger this
requirement? Should there be a different threshold for third-party
shareholders versus affiliated shareholders of a money market fund?
Should there be other restrictions on affiliate redemptions (e.g.,
prioritizing non-affiliate redemptions over affiliate redemption
requests that are submitted on the same day)? How should the fund
determine the value of the securities to be distributed as a result of
such a redemption request? The securities' amortized cost value? The
securities' fair value, as determined based on current market
quotations or, if no such quotations are readily available, as
determined in good faith by the fund's board of directors? Would these
shareholders be able to assume ownership of such securities?
We note that a board of directors alternatively could cause a money
market fund to impose a redemption fee under rule 22c-2 to impose some
of the fund's costs from shareholders' liquidity
[[Page 32719]]
needs on the redeeming shareholders.\311\ What would be the advantages
and disadvantages of this alternative approach to addressing our
concerns regarding significant shareholder redemptions?
---------------------------------------------------------------------------
\311\ The redemption fee cannot exceed two percent of the value
of the shares redeemed.
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IV. Paperwork Reduction Act Analysis
Certain provisions of the proposed amendments to rules 2a-7 and
30b1-5 and proposed new rules 22e-3 and 30b1-6 and Form N-MFP under the
Investment Company Act contain ``collections of information'' within
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\312\ The
titles for the existing collections of information are: (1) ``Rule 2a-7
under the Investment Company Act of 1940, Money market funds'' (OMB
Control No. 3235-0268); (2) ``Rule 30b1-5 under the Investment Company
Act of 1940, Quarterly filing of schedule of portfolio holdings of
registered management investment companies'' (OMB Control No. 3235-
0577); and (3) ``Form N-Q under the Investment Company Act of 1940,
Quarterly Schedule of Portfolio Holdings of Registered Management
Investment Company'' (OMB Control No. 3235-0578). The titles for the
new collections of information are: (1) ``Rule 22e-3 under the
Investment Company Act of 1940, Exemption for liquidation of money
market funds;'' (2) ``Rule 30b1-6 under the Investment Company Act of
1940, Monthly report for money market funds;'' and (3) ``Form N-MFP
under the Investment Company Act of 1940, Portfolio Holdings of Money
Market Funds.'' The Commission is submitting these collections of
information to the Office of Management and Budget (``OMB'') for review
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. Our proposed
amendments and new rules are designed to make money market funds more
resilient to risks in the short-term debt markets, and to provide
greater protections for investors in a money market fund that is unable
to maintain a stable net asset value per share. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number.
---------------------------------------------------------------------------
\312\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------
A. Rule 2a-7
Rule 2a-7 under the Investment Company Act exempts money market
funds from the Act's valuation requirements, permitting money market
funds to maintain stable share pricing, subject to certain risk-
limiting conditions. As discussed above, we are proposing to amend rule
2a-7 in several respects. Our proposal would amend the rule by:
Revising portfolio quality and maturity requirements; introducing
liquidity requirements; requiring money market fund boards to adopt
procedures providing for periodic stress testing of the fund's
portfolio; requiring funds to disclose monthly on their websites
information on portfolio securities; and finally, requiring money
market fund boards to determine, at least once each calendar year, that
the fund has the capability to redeem and issue its securities at
prices other than the fund's stable net asset value per share.\313\
Three of the proposed amendments would create new collection of
information requirements. The respondents to these collections of
information would be money market funds or their advisers, as noted
below.
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\313\ See supra Section II.A-G.
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1. Stress Testing
The proposed amendments would require money market fund boards to
adopt written procedures that provide for the periodic testing of the
fund's ability to maintain a stable net asset value per share based on
certain hypothetical events.\314\ These procedures also would have to
provide for a report of the testing results to be submitted to the
board of directors at its next regularly scheduled meeting, and an
assessment by the fund's adviser of the fund's ability to withstand the
events (and concurrent occurrences of those events) that are reasonably
likely to occur within the following year.\315\ Compliance with this
proposed disclosure requirement would be mandatory for any fund that
holds itself out as a money market fund in reliance on rule 2a-7. The
information when provided to the Commission in connection with staff
examinations or investigations would be kept confidential to the extent
permitted by law.
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\314\ Proposed rule 2a-7(c)(8)(ii)(D). These events would
include, but would not be limited to, a change in short-term
interest rates, an increase in shareholder redemptions, a downgrade
of or default on portfolio securities, and the widening or narrowing
of spreads between yields on an appropriate benchmark the fund has
selected for overnight interest rates and commercial paper and other
types of securities held by the fund.
\315\ Proposed rule 2a-7(c)(8)(ii)(D)(2), (3). The report to the
board would include the dates on which the testing was performed and
the magnitude of each hypothetical event that would cause the
deviation of the money market fund's net asset value calculated
using available market quotations (or appropriate substitutes that
reflect current market conditions) from its net asset value per
share calculated using amortized cost to exceed \1/2\ of 1 percent.
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We anticipate that stress testing would give fund advisers a better
understanding of the effect of potential market events and shareholder
redemptions on their funds' ability to maintain a stable net asset
value, the fund's exposure to that risk, and actions the adviser may
need to take to mitigate the possibility of the fund breaking the buck.
Commission staff believes that in light of the events of last fall
most, if not all, money market funds currently conduct some stress
testing of their portfolios as a matter of routine fund management and
business practice.\316\ These procedures likely vary depending on the
fund's investments. For example, a prime money market fund that is
offered to institutional investors may test for hypothetical events
such as potential downgrades or defaults in portfolio securities while
a U.S. Treasury money market fund may not. Some funds that currently
conduct testing may be required to include additional hypothetical
events under our proposed amendments. These funds likely provide
regular reports of the test results to senior management. We expect,
however, that most funds do not have written procedures documenting the
stress testing, do not report the results of testing to their boards of
directors, and do not provide an assessment from the fund's adviser
regarding the fund's ability to withstand the hypothetical events
reasonably likely to occur in the next year.
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\316\ The estimates of hour burdens and costs provided in the
PRA and cost benefit analyses are based on staff discussions with
representatives of money market funds and on the experience of
Commission staff. We expect that the board of directors would be the
same for all the money market funds in a complex, and thus could
adopt the stress test procedures for all money market funds in the
complex at the same meeting.
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Commission staff believes that the stress testing procedures are or
would be developed for all the money market funds in a fund complex by
the fund adviser, and would address appropriate variations for
individual money market funds within the complex. Staff estimates that
it would take a fund adviser an average of 21 hours for a portfolio
risk analyst initially to draft procedures documenting the complex's
stress testing, and 3 hours for the board of directors to consider and
adopt the written procedures. We estimate that 171 fund complexes with
money market funds are subject to rule 2a-7. We therefore estimate that
the total burden to draft these procedures initially would
[[Page 32720]]
be 4104 hours.\317\ Amortized over a three-year period, this would
result in an average annual burden of 8 hours for an individual fund
complex and a total of 1368 hours for all fund complexes.\318\ Staff
estimates that a risk analyst also may spend an average of 6 hours per
year revising the written procedures to reflect changes in the type or
nature of hypothetical events appropriate to stress tests and the board
would spend 1 hour to consider and adopt the revisions, for a total
annual burden of 1197 hours.\319\ Commission staff estimates further
that it would take an average of 10 hours of portfolio management time
to draft each report to the board of directors, 2 hours of an
administrative assistant's time to compile and copy the report and 15
hours of the fund adviser's time to provide an assessment of the funds'
ability to withstand reasonably likely hypothetical events in the
coming year. The report must be provided at the next scheduled board
meeting, and we estimate that the report would cover all money market
funds in a complex. We also believe that the fund adviser would provide
an assessment each time it provided a report. Finally, we assume that
funds would conduct stress tests no less than monthly. With an average
of 6 board meetings each year, we estimate that the annual burden would
be 162 hours for an individual fund complex with a total annual burden
for all fund complexes of 27,702 hours.\320\
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\317\ This estimate is based on the following calculation: (21
hours + 3 hours) x 171 fund complexes = 4104 hours.
\318\ These estimates are based on the following calculations:
(21 + 3) / 3 = 8 hours; 8 x 171 fund complexes = 1368 hours. PRA
submissions for approval are made every three years. To estimate an
annual burden for a collection of information that occurs one time,
the total burden is amortized over the three year period.
\319\ This estimate is based on the following calculation: (6
hours (analyst) + 1 hour (board)) x 171 fund complexes = 1197 hours.
\320\ These estimates are based on the following calculations:
(10 hours + 2 hours + 15 hours) x 6 meetings = 162 hours; 162 hours
x 171 fund complexes = 27,702 hours.
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The proposed amendment would require the fund to retain records of
the reports on stress tests and the assessments for at least 6 years
(the first two in an easily accessible place).\321\ The retention of
these records would be necessary to allow the staff during examinations
of funds to determine whether a fund is in compliance with the stress
test requirements. We estimate that the burden would be 10 minutes per
fund complex per meeting to retain these records for a total annual
burden of 171 hours for all fund complexes.\322\
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\321\ Proposed rule 2a-7(c)(11)(vii).
\322\ This estimate is based on the following calculation:
0.1667 hours x 6 meetings x 171 fund complexes = 171 hours.
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Thus, we estimate that for the three years following adoption, the
average annual burden resulting from the stress testing requirements
would be 178 hours for each fund complex with a total of 30,438 hours
for all fund complexes.\323\
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\323\ These estimates are based on the following calculations: 8
hours (draft procedures) + 7 hours (revise procedures) + 72 hours (6
reports) + 90 hours (assessments) + 1 hour (record retention) = 178
hours; 1368 hours (draft procedures) + 1197 hours (revise
procedures) + 12,312 hours (6 reports) + 15,390 (6 assessments) +
171 hours (record retention) = 30,438 hours.
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We request comment on these estimates of hourly burdens. Would
funds develop stress tests on a complex-wide basis for money market
funds? Would the adviser prepare one report regarding stress tests for
all the money market funds in a complex, or prepare a separate report
for each money market fund?
2. Public Web site Posting
The proposed amendments would require money market funds to post
monthly portfolio information on their Web sites.\324\ We believe that
greater transparency of fund portfolios may allow investors to exert
influence on risk-taking by fund advisers, and thus reduce the
likelihood that a fund will break the buck. Information will be posted
on a public Web site, and compliance with this requirement would be
mandatory for any fund that holds itself out as a money market fund in
reliance on rule 2a-7. We estimate that there are approximately 750
money market funds that would be affected by this proposal. We
understand, based on interviews with industry representatives, that
most money market funds already post portfolio information on their
webpages at least quarterly.\325\ To be conservative, the staff
estimates that 20 percent of money market funds, or 150 funds, do not
currently post this information at least quarterly, and therefore would
need to develop a webpage to comply with the proposed rule. We estimate
that a money market fund would spend approximately 24 hours of internal
money market fund staff time initially to develop the webpage. We
further estimate that a money market fund would spend approximately 4
hours of professional time to maintain and update the relevant webpage
with the required information on a monthly basis. Based on an estimate
of 750 money market funds posting their portfolio holdings on their
webpages, including 150 funds incurring start-up costs to develop a
webpage, we estimate that, in the aggregate, the proposed amendment
would result in a total of 37,200 average burden hours for all money
market funds for each of the first three years.\326\
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\324\ Proposed rule 2a-7(c)(12).
\325\ Certain of the required information is currently
maintained by money market funds for regulatory reasons, such as in
connection with accounting, tax and disclosure requirements. We
understand that the remaining information is retained by funds in
the ordinary course of business. Accordingly, for the purposes of
our analysis, we do not ascribe any time to producing the required
information.
\326\ The estimate is based on the following calculations. The
staff estimates that 150 funds would require a total of 3600 hours
initially to develop a webpage (150 funds x 24 hours per fund = 3600
hours). In addition, each of the 750 funds would require 48 hours
per year to update and maintain the webpage, for a total of 36,000
hours per year (4 hours per month x 12 months = 48 hours per year;
48 hours per year x 750 funds = 36,000). The average annual hour
burden for each of the first three years would thus equal 37,200
hours ([3600 + (36,000 x 3)] / 3).
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3. Reporting of Rule 17a-9 Transactions
We are proposing to amend rule 2a-7 to require a money market fund
to promptly notify the Commission by electronic mail of the purchase of
a money market fund's portfolio security by an affiliated person in
reliance on the rule and to explain the reasons for such purchase.\327\
The proposed reporting requirement is designed to assist Commission
staff in monitoring money market funds' affiliated transactions that
otherwise would be prohibited. The new collection of information would
be mandatory for money market funds that rely on rule 2a-7 and that
rely on rule 17a-9 for an affiliated person to purchase a money market
fund's portfolio security. Information submitted to the Commission
related to a rule 17a-9 transaction would not be kept
confidential.\328\
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\327\ See proposed rule 2a-7(c)(7)(iii).
\328\ Commission rules provide, however, for a procedure under
which persons submitting notices under the proposed amendment would
be able to request that the information not be disclosed under a
Freedom of Information Act request. See 17 CFR 200.83.
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We estimate that fund complexes will provide one notice for all
money market funds in a particular fund complex holding a distressed
security purchased in a transaction under rule 17a-9. As noted above,
Commission staff estimates that there are 171 fund complexes with money
market funds subject to rule 2a-7. Of these fund complexes, Commission
staff estimates that an average of 25 per year would be required to
provide notice to the Commission of a rule 17a-9 transaction, with the
total annual response per fund
[[Page 32721]]
complex, on average, requiring 1 hour of an in-house attorney's time.
Given these estimates, the total annual burden of this proposed
amendment to rule 2a-7 for all money market funds would be
approximately 25 hours.\329\
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\329\ The estimate is based on the following calculation: (25
fund complexes x 1 hour) = 25 hours.
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4. Total Burden
The currently approved burden for rule 2a-7 is 1,348,000 hours. In
a recent renewal submission to OMB, we estimated the collection of
information burden for the rule is 310,983 hours. The additional burden
hours associated with the proposed amendments to rule 2a-7 would
increase the renewal estimate to 378,646 hours annually.\330\
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\330\ This estimate is based on the following calculation:
310,983 (estimated in 2a-7 renewal submission) + 30,438 (stress
testing) + 37,200 (website posting) + 25 hours (reporting 17a-9
transactions) = 378,646 hours.
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B. Rule 22e-3
Proposed rule 22e-3 would permit a money market fund to suspend
redemptions and postpone the payment of proceeds pending board-approved
liquidation proceedings, provided that the fund notifies the Commission
by electronic mail of its decision to do so.\331\ The proposed rule is
intended to reduce the vulnerability of investors to the harmful
effects of a run on a fund, and minimize the potential for disruption
to the securities markets. The proposed notification requirement is a
collection of information under the PRA, and is designed to assist
Commission staff in monitoring a money market fund's suspension of
redemptions, which would otherwise be prohibited. Only money market
funds that break the buck and begin board-approved liquidation
proceedings would be able to rely on the rule. The respondents to this
information collection therefore would be money market funds that break
the buck and elect to rely on the exemption afforded by the rule.
Compliance with the notification requirements of rule 22e-3 would be
necessary for money market funds that seek to rely on rule 22e-3 to
suspend redemptions and postpone payment of proceeds pending a
liquidation, and would not be kept confidential.
---------------------------------------------------------------------------
\331\ See proposed rule 22e-3(c).
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We estimate that, on average, one money market fund would break the
buck and liquidate every six years.\332\ Staff estimates that a fund
providing the required electronic mail notice under proposed rule 22e-3
would spend approximately 1 hour of an in-house attorney's time to
prepare and submit the notice. Given these estimates, the total annual
burden of proposed rule 22e-3 for all money market funds would be
approximately 10 minutes.\333\
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\332\ As discussed above, since the adoption of rule 2a-7 in
1983, only two money market funds have broken the buck.
\333\ These estimates are based on the following calculations:
(1 hour / 6 years) = 10 minutes per year.
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C. Monthly Reporting of Portfolio Holdings
1. Rule 30b1-6 and Form N-MFP
Proposed rule 30b1-6 would require money market funds to file an
electronic monthly report on proposed Form N-MFP within two business
days after the end of each month. The proposed rule is intended to
improve transparency of information about money market funds' portfolio
holdings and facilitate oversight of money market funds. The
information required by the proposed form would be data-tagged in XML
format and filed through EDGAR. The respondents to rule 30b1-6 would be
investment companies that are regulated as money market funds under
rule 2a-7. Compliance with proposed rule 30b1-6 would be mandatory for
any fund that holds itself out as a money market fund in reliance on
rule 2a-7. Responses to the disclosure requirements would not be kept
confidential.
We estimate that 750 money market funds would be required by rule
30b1-6 to file, on a monthly basis, a complete Form N-MFP disclosing
certain information regarding the fund and its portfolio holdings. For
purposes of this PRA analysis, the burden associated with the
requirements of proposed rule 30b1-6 has been included in the
collection of information requirements of proposed Form N-MFP.
Based on our experience with other interactive data filings, we
estimate that money market funds would require an average of
approximately 40 burden hours to compile, tag and electronically file
the required portfolio holdings information for the first time and an
average of approximately 8 burden hours in subsequent filings.\334\
Based on these estimates, we estimate the average annual burden over a
three-year period would be 107 hours per money market fund.\335\ Based
on an estimate of 750 money market funds submitting Form N-MFP in
interactive data format, each incurring 107 hours per year on average,
we estimate that, in the aggregate, Form N-MFP would result in 80,250
burden hours, on average, for all money market funds for each of the
first three years.
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\334\ We understand that the required information is currently
maintained by money market funds pursuant to other regulatory
requirements or in the ordinary course of business. Accordingly, for
the purposes of our analysis, we do not ascribe any time to
producing the required information.
\335\ The staff estimates that a fund would make 36 filings in
three years. The first filing would require 40 hours and subsequent
filings would require 8 hours each, for an average annual burden of
107 hours (1 filing x 40 hours = 40 hours; 35 filings x 8 hours =
280 hours; 40 hours + 280 hours = 320 hours; 320 hours / 3 years =
107 hours). Thereafter, filers generally would not incur the start-
up burdens applicable to the first filing.
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2. Rule 30b1-5 and Form N-Q
Our proposed amendments to rule 30b1-5 would exempt money market
funds from the requirement to file a schedule of investments pursuant
to Item 1 of Form N-Q. The proposed amendment is intended to eliminate
unnecessarily duplicative disclosure requirements. The proposed
amendment would only affect investment companies that are regulated as
money market funds under rule 2a-7.
We estimate that 750 money market funds would be affected by the
proposed amendment to rule 30b1-5. For the purposes of this PRA
analysis, the decrease in burden hours resulting from the proposed
amendment is reflected in the collection of information requirements
for Form N-Q.
We estimate that money market funds would require an average of
approximately 4 hours to prepare the schedule of investments required
pursuant to Item 1 of Form N-Q. Based on these estimates, we estimate
that the average annual burden avoided would be 8 hours per fund.\336\
Based on an estimate of 750 money market funds filing Form N-Q, each
incurring 8 burden hours per year on average, we estimate that, in the
aggregate, our proposed exemption would result in a decrease of 6000
burden hours associated with Form N-Q.\337\
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\336\ Funds are required to file a quarterly report on Form N-Q
after the close of the first and third quarters of each fiscal year.
\337\ The estimate is based on the following calculation: 750
money market funds x 8 hours per money market fund = 6000 hours.
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D. Request for Comments
We request comment on whether these estimates are reasonable.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
in order to: (i) Evaluate whether the proposed collections of
information are necessary for the proper performance of the functions
of the Commission, including whether the information will have
practical utility; (ii) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collections of information;
(iii)
[[Page 32722]]
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; and (iv) determine whether
there are ways to minimize the burden of the collections of information
on those who are to respond, including through the use of automated
collection techniques or other forms of information technology.
Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the
Office of Management and Budget, Attention Desk Officer for the
Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Room 10102, New Executive Office Building,
Washington, DC 20503, and should send a copy to Elizabeth Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-11-09. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication of this Release; therefore a
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days after publication of this Release. Requests
for materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. S7-
11-09, and be submitted to the Securities and Exchange Commission,
Office of Investor Education and Advocacy, 100 F Street, NE.,
Washington, DC 20549-0213.
V. Cost Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by
its rules. We have identified certain costs and benefits of the
proposed amendments and new rules, and we request comment on all
aspects of this cost benefit analysis, including identification and
assessment of any costs and benefits not discussed in this analysis. We
seek comment and data on the value of the benefits identified. We also
welcome comments on the accuracy of the cost estimates in each section
of this analysis, and request that commenters provide data that may be
relevant to these cost estimates. In addition, we seek estimates and
views regarding these costs and benefits for particular covered
institutions, including small institutions, as well as any other costs
or benefits that may result from the adoption of these proposed
amendments and new rules.
A. Rule 2a-7
1. Second Tier Securities, Portfolio Maturity and Liquidity
Requirements
We are proposing several changes to the risk-limiting conditions of
rule 2a-7. While we believe that these changes would impart substantial
benefits to money market funds, we recognize that they also may impose
certain costs.
First, we would limit money market fund investments to first tier
securities, i.e., securities receiving the highest short-term debt
ratings from the requisite NRSROs or securities that the fund's board
of directors or its delegate determines are of comparable quality.\338\
We also are proposing to limit money market funds to acquiring long-
term securities that have received long-term ratings in the highest two
ratings categories.\339\
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\338\ See proposed rule 2a-7(a)(11)(iii); proposed rule 2a-
7(a)(11)(iv); proposed rule 2a-7(c)(3).
\339\ See proposed rule 2a-7(a)(11)(iv)(A).
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Second, we are proposing certain changes to rule 2a-7's portfolio
maturity limits. We are proposing to reduce the maximum weighted
average maturity of a money market fund permitted by rule 2a-7 from 90
days to 60 days.\340\ We also are proposing a new maturity limitation
based on the ``weighted average life'' of fund securities that would
limit the portion of a fund's portfolio that could be held in longer
term floating- or variable-rate securities. This restriction would
require a fund to calculate the weighted average maturity of its
portfolio without regard to interest rate reset dates. The weighted
average life of a fund's portfolio would be limited to 120 days.\341\
Finally, we are proposing to delete a provision in rule 2a-7 that
permits money market funds not relying on the amortized cost method of
valuation to acquire Government securities with a remaining maturity of
up to 762 calendar days. Under the amended rule, money market funds
could not acquire any security with a remaining maturity of more than
397 days, subject to the maturity shortening provisions for floating-
and variable-rate securities and securities with a Demand Feature.\342\
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\340\ See proposed rule 2a-7(c)(2)(ii).
\341\ See proposed rule 2a-7(c)(2)(iii).
\342\ See proposed rule 2a-7(c)(2)(i); rule 2a-7(d)(1)-(5).
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Third, we are proposing new liquidity requirements on money market
funds. Under the proposed amendments, money market funds would be
prohibited from acquiring securities unless, at the time acquired, they
are liquid, i.e., securities that can be sold or disposed of in the
ordinary course of business within seven days at approximately the
value ascribed to it by the money market fund.\343\ We also propose to
limit taxable retail money market funds and taxable institutional money
market funds to acquiring Daily Liquid Assets unless five percent of a
retail fund's and 10 percent of an institutional fund's assets are
Daily Liquid Assets.\344\
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\343\ See proposed rule 2a-7(c)(5)(i).
\344\ See proposed rule 2a-7(c)(5)(iii). This restriction would
not apply to tax exempt money market funds.
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In addition, our proposed amendments to rule 2a-7 would impose
weekly liquidity requirements on money market funds. Specifically,
retail and institutional money market funds would not be permitted to
acquire any securities other than weekly liquid assets if, after the
acquisition, (i) the retail fund would hold less than 15 percent of its
total assets in weekly liquid assets and (ii) the institutional fund
would hold less than 30 percent of its total assets in weekly liquid
assets.\345\ Finally, we are proposing to require that a money market
fund at all times hold daily and weekly liquid assets sufficient to
meet reasonably foreseeable redemptions in light of its obligations
under section 22(e) of the Act and any commitments the fund has made to
shareholders.\346\
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\345\ See proposed rule 2a-7(c)(5)(iv).
\346\ See proposed rule 2a-7(c)(5)(ii).
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Our proposed amendments would rely on a money market fund's board
of directors to determine, no less frequently than once each calendar
year, whether the money market fund is intended to be offered to
institutional investors or has the characteristics of a fund that is
intended to be offered to institutional investors, based on the: (i)
Nature of the record owners of fund shares; (ii) minimum amount
required to be invested to establish an account; and (iii) historical
cash flows resulting, or expected cash flows that would result, from
purchases and redemptions.\347\
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\347\ See proposed rule 2a-7(a)(18) (defining ``Institutional
Fund'').
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a. Benefits
We believe that the proposed amendments to rule 2a-7's risk-
limiting conditions would be likely to produce broad benefits for money
market fund investors. First, they should reduce money market funds'
exposure to certain credit, interest rate, and spread risks. For
example, precluding money market funds from investing in second tier
securities would decrease money market funds' exposure to credit risk.
Reducing the maximum weighted average maturity of money market
[[Page 32723]]
funds' portfolios would further decrease their interest rate
sensitivity, as well as reduce their exposure to credit risk.
Introducing the weighted average life limitation on money market funds'
portfolios would limit credit spread risk and interest rate spread risk
to funds from longer term floating- or variable-rate securities.
We expect that the proposed amendments also would bolster the
ability of money market funds to maintain a stable net asset value
during times when the level of shareholder redemption demand is high.
Fund portfolios with a lower weighted average maturity that include a
limited amount of longer term floating- or variable-rate securities
would turn over more quickly and the fund would be better able to
increase its holdings of highly liquid securities in the face of
illiquid markets than funds that satisfy current maturity requirements.
The proposed liquidity requirements are designed to increase a money
market fund's ability to withstand illiquid markets by ensuring that
the fund acquires only liquid securities and that a certain percent of
its assets are held in daily and weekly liquid assets. These
requirements also should decrease the likelihood that a fund would have
to realize losses from selling portfolio securities into an illiquid
market to satisfy redemption requests. Because the proposed amendments
would require a fund to have a contractual right to receive cash for
the daily and weekly liquid assets, rather than the current standard,
which assumes that a fund would be able to find a buyer for its
securities within seven days, we believe that the proposed required
liquidity requirements would allow money market fund advisers to more
easily adjust the funds' portfolios to increase liquidity when needed.
We believe that a reduction of these credit, interest rate, spread,
and liquidity risks would better enable money market funds to weather
market turbulence and maintain a stable net asset value per share. The
proposed amendments are designed to reduce the risk that a money market
fund will break the buck and therefore prevent losses to fund
investors. To the extent that money market funds are more stable, they
also would reduce systemic risk to the capital markets and provide a
more stable source of financing for issuers of short-term credit
instruments, thus promoting capital formation. If money market funds
become more stable investments as a result of the proposed rule
amendments, they may attract further investment, increasing their role
as a source of capital formation.
b. Costs
We recognize that there are potential costs that would result if we
adopted our proposed changes regarding second tier securities,
portfolio maturity, and liquidity. Second tier securities, less liquid
securities, and longer term credit instruments typically pay a higher
interest rate and, therefore, the proposed amendments may decrease
money market funds' yields.
Precluding ownership of second tier securities also may deprive
money market funds of some benefits of reduced risk through
diversification. We invite comment on whether the benefits of reducing
credit risk through precluding purchases of second tier securities
justifies the costs of the lost diversification benefits that second
tier securities may provide.
If, as a result of the proposed amendments, there is a smaller set
of Eligible Securities for a money market fund to choose from, that may
increase the cost of those securities if their supply is limited. In
particular, to the extent that the proposed liquidity requirements
increase demand for highly liquid securities that is not countered by
increased supply, the cost of those securities may rise as well.
Increased costs of portfolio securities will have a negative impact on
money market fund yield. Finally, to the extent that actual investor
redemptions are significantly lower than our proposed liquidity
requirements, money market funds may achieve lower yields as a result
of complying with these liquidity requirements.
Although the impact on individual funds would vary significantly,
we estimate that the proposed changes to rule 2a-7's requirements
regarding portfolio quality, portfolio maturity, and liquidity would
decrease the yield that a money market fund is able to achieve in the
range of 2 to 4 basis points. We understand that the majority of money
market funds are already in compliance with these proposed requirements
due either to their own risk-limiting actions or to their voluntary
compliance with the recommendations contained in the ICI Report.
Accordingly, we expect that the decrease in yield from these changes to
rule 2a-7's risk-limiting conditions would have a relatively minor
impact on current money market fund yields.
However, this decreased yield may limit the range of choices that
individual money market fund investors currently have to select their
desired level of investment risk. This might cause some investors to
shift their assets to, among other places, offshore or other enhanced
cash funds unregulated by rule 2a-7 that are able to offer a higher
yield. Alternatively, some investors may choose to shift their assets
to bank deposits. When markets come under stress, investors may be more
likely to withdraw their money from these offshore or private funds due
to their perceived higher risk \348\ and substantial redemptions from
those funds and accompanying sales of their portfolio securities could
increase systemic risk to short-term credit markets, which would impact
money market funds. In addition, the proposed stricter portfolio
quality, maturity, and liquidity requirements may result in some money
market funds having fewer issuers from which to select securities if
some issuers only offer second tier securities, less liquid securities
or a larger percentage of longer term securities.
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\348\ During the recent financial crisis, investors redeemed
substantial amounts of assets from ultra-short bond funds and
certain offshore money market funds. See ICI Report, supra note 6,
at 106-07.
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Our proposed portfolio quality, maturity, and liquidity
restrictions also may impact issuers. Issuers may experience increased
financing costs to the extent that they are unable to find alternative
purchasers of their second tier securities, less liquid securities,
longer term securities, or floating- and variable-rate securities at
previous market rates. As noted earlier in the release, we do not
believe that money market funds currently hold a significant amount of
second tier securities, or securities that are illiquid at
acquisition.\349\ Thus, we expect that the proposed amendment's impact
on issuers of these securities would be minimal. If the proposed
amendments result in companies or governments issuing shorter maturity
securities, those issuers may be exposed to an increased risk of
insufficient demand for their securities and adverse credit market
conditions because they must roll over their short-term financing more
frequently. We note that this impact could be mitigated if money market
funds sufficiently staggered or ``laddered'' the maturity of the
securities in their portfolios. The markets for longer term or
floating- and variable-rate securities may become less liquid if the
proposed rule amendments cause issuance of these instruments to
decline. We generally expect that issuers of floating- or variable-rate
securities would respond to the proposed amendments by issuing a
greater
[[Page 32724]]
proportion of their securities with shorter final maturities.
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\349\ See supra note 101 and accompanying and following text,
and Section II.C.1.
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Our proposed requirement that fund boards distinguish between
retail and institutional money market funds would require boards to
make a determination based on an understanding of the investors in the
fund and their behavior. Our proposed liquidity requirements also would
require money market funds to ``know their customers,'' including their
expected redemption behavior. We expect that most money market funds
already have methods to understand their customers and their redemption
needs because ``knowing your customer'' is already a best practice. As
a result, we also do not expect that these requirements would impose
any material costs on funds.
We do not believe that eliminating the provision in rule 2a-7 that
allowed money market funds relying solely on the penny-rounding method
of pricing to hold Government securities with remaining maturities of
up to 762 days would have a material impact on money market funds,
investors, or issuers of longer term Government securities because we
believe that substantially all money market funds rely on the amortized
cost method of valuation, and not exclusively on the penny-rounding
method of pricing, and thus are not eligible to rely on this exception.
We request comment on these costs and benefits. Would money market
fund investors benefit from the proposed portfolio quality, maturity
and liquidity requirements? Would money market funds experience a
significant yield and diversification impact from the proposed changes
to rule 2a-7's second tier security, portfolio maturity, and liquidity
requirements? We note that the highest rated money market funds
currently must have a weighted average maturity of 60 days or less, the
average weighted average maturity for taxable money market funds as of
June 16, 2009 was 53 days, and very few money market funds hold second
tier securities.\350\ What other impacts would these changes have on
money market funds? What effect would such changes have on the short-
term credit market and issuers of longer term or debt instruments held
to satisfy the daily or weekly liquidity requirements? How would the
proposed amendments impact issuers of, and the market for, longer term
variable- or floating-rate debt securities? We encourage commenters to
provide empirical data to support their analysis.
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\350\ See supra text accompanying note 101, note 145 and
accompanying text, and note 147.
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2. Use of NRSROs
As discussed above, we are considering an approach that would
require a money market fund's board of directors to designate NRSROs
whose credit ratings the fund would use in determining the eligibility
of portfolio securities under rule 2a-7 and that the board would
annually determine issue credit ratings that are sufficiently reliable
for that use. As we also noted above, we proposed eliminating
references to NRSROs in rule 2a-7 last year.\351\ For a discussion of
the costs and benefits of that proposal, please see Section VI of the
NRSRO References Release.\352\ Are there additional factors we should
consider since that release was published?
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\351\ See NRSRO References Proposal, supra note 105.
\352\ See id.
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We request comment on the approach we are considering. We
specifically request comment regarding the standard we are considering
for the board's annual determination, i.e., that the designated NRSROs
issue ratings that are sufficiently reliable for use in determining the
eligibility of portfolio securities. Is this standard appropriate, and
if not, what would be a more appropriate standard? We expect that in
making their initial designation and their annual determination, fund
boards would review a presentation by the fund's adviser regarding the
relative strength of relevant NRSROs' ratings and ratings criteria.
What kind of guidance, if any, should the Commission provide with
respect to such a standard?
According to the ICI Report, a requirement that funds designate
three or more NRSROs to use in determining the eligibility of portfolio
securities could encourage competition among NRSROs to achieve
designation by money market funds.\353\ We anticipate that the approach
we are considering, which would require fund boards annually to
determine that the designated NRSROs issue credit ratings sufficiently
reliable to use in determining the eligibility of portfolio securities,
may promote competition among NRSROs to produce the most reliable
ratings in order to obtain designation by money market funds. In
addition to the potential for competition among existing NRSROs, the
proposed amendment might encourage new NRSROs that issue ratings
specifically for money market fund instruments to enter the market. As
we noted above, however, the staff believes it is reasonable to assume
that the three NRSROs that issued almost 99 percent of all outstanding
ratings across all categories that were issued by the 10 registered
NRSROs as of June 2008, also issued well over 90 percent of all
outstanding ratings of short term debt.\354\ If fund boards were
required to designate a minimum of three NRSROs and all money market
fund boards chose to designate these three NRSROs, the requirement
could result in decreased competition among NRSROs. We request comment
on the impact that the approach we are considering, particularly the
minimum number of NRSROs, might have on competition among NRSROs. We
also request comment on the impact, if any, of this approach with
respect to the efficiency of fund managers. Finally, we request comment
on any potential benefits this approach might have with respect to
money market funds or NRSROs.
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\353\ See ICI Report, supra note 6, at 82.
\354\ See supra note 116 and accompanying text.
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We recognize that there could be costs associated with the approach
we are considering. Staff estimates that the costs of this approach
would include: Initial costs for the board to designate NRSROs, as well
as an annual cost to determine that designated NRSROs continue to issue
ratings that are sufficiently reliable for use in determining the
eligibility of portfolio securities. We expect that fund advisers
currently evaluate the strength of NRSRO ratings and ratings criteria
as part of the analysis they perform (under delegated authority from
the board) in determining the eligibility of portfolio securities, and
that this evaluation includes consideration of whether an NRSRO's
rating is sufficient for that use. Accordingly, we anticipate that fund
advisers would not incur additional time to perform an evaluation that
would be the basis for their recommendations to the board when it makes
its initial designation and annual determination, but the adviser would
incur costs to draft those recommendations in a presentation or report
for board review.
Under the current rule, if a money market fund invests in unrated
or second tier securities, the adviser must monitor all NRSROs in case
an unrated or second tier security has received a rating from any NRSRO
below the second highest short-term rating category.\355\ Because fund
advisers currently monitor NRSROs, we do not expect that limiting the
number of NRSROs that a fund would have to monitor to a number
designated by the fund board would result in increased
[[Page 32725]]
costs to fund advisers to monitor NRSROs.
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\355\ See rule 2a-7(c)(6)(i)(A)(2).
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We request comment on our analysis of the potential costs and
benefits of a requirement to designate NRSROs. Do funds currently
evaluate NRSRO ratings for reliability? Would there be benefits to
funds and their advisers if the board designates three or more NRSROs?
Would fund advisers benefit from having fewer NRSROs to monitor? Would
fund advisers incur significant costs to make presentations to the
board recommending which NRSROs to designate? What would be involved,
including specific costs, for fund management to evaluate whether an
NRSRO ``issues credit ratings that are sufficiently reliable'' for the
fund's determination of whether a security is an eligible security?
Would funds incur costs if we required them to disclose designated
NRSROs in the statement of additional information?
We do not anticipate that the designation of NRSROs would have an
adverse impact on capital formation. We request comment on whether
requiring fund boards to designate NRSROs would have an impact on
capital formation.
3. Stress Testing
We are proposing to require that money market fund boards of
directors adopt written procedures that provide for the periodic stress
testing of each money market fund's portfolio.\356\ The procedures
would require testing of the fund's ability to maintain a stable net
asset value per share based upon certain hypothetical events.\357\ The
procedures also would have to provide for a report to be delivered to
the fund's board of directors at its next regularly scheduled meeting
on the results of the testing and an assessment by the fund's adviser
of the fund's ability to withstand the events (and concurrent
occurrences of those events) that are reasonably likely to occur within
the following year.\358\
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\356\ Proposed rule 2a-7(c)(8)(ii)(D).
\357\ The proposed provision includes as hypothetical events a
change in short-term interest rates, an increase in shareholder
redemptions, a downgrade of or default on a portfolio security, and
widening or narrowing of spreads between yields on a benchmark
selected by the fund and securities held by the fund. See proposed
rule 2a-7(c)(8)(ii)(D)(1).
\358\ Proposed rule 2a-7(c)(8)(ii)(D)(2), (3). The report must
include dates on which the testing was performed and the magnitude
of each hypothetical event that would cause the deviation of the
money market fund's net asset value calculated using available
market quotations (or appropriate substitutes that reflect current
market conditions) from its net asset value per share, calculated
using amortized cost, to exceed \1/2\ of 1%.
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We anticipate that stress testing would give fund advisers a better
understanding of the effect of potential market events and shareholder
redemptions on their funds' ability to maintain a stable net asset
value, the fund's exposure to the risk that it would break the buck,
and actions the adviser may need to take to mitigate the possibility of
the fund breaking the buck. We believe that many funds currently
conduct stress testing as a matter of routine fund management and
business practice. We anticipate, however, that funds that do not
currently perform stress testing and funds that may revise their
procedures in light of the proposed rule amendments would give their
managers a tool to better manage those risks. For fund boards of
directors that do not currently receive stress test results, we believe
that the regular reports and assessments would provide money market
fund boards a better understanding of the risks to which the fund is
exposed.
We understand that today rigorous stress testing is a best practice
followed by many money market funds.\359\ We understand that the fund
complexes that conduct stress tests include smaller complexes that
offer money market funds externally managed by advisers experienced in
this area of management.\360\ Accordingly, staff estimates that as a
result of the proposed amendments to adopt stress testing procedures,
(i) funds that currently conduct rigorous stress testing, including
tests for hypothetical events listed in the proposed amendment (and
concurrent occurrences of those events) would incur some cost to
evaluate whether their current test procedures would comply with the
proposed rule amendment, but would be likely to incur relatively few
costs to revise those procedures or continue the stress testing they
currently perform, (ii) funds that conduct less rigorous stress
testing, or that do not test for all the hypothetical events listed in
the proposed rule amendment, would incur somewhat greater expenses to
revise those procedures in light of the proposed amendments and
maintain the revised testing, and (iii) funds that do not conduct
stress testing would incur costs to develop and adopt stress test
procedures and conduct stress tests. As noted above, we believe that
there is a range in the extent and rigor of stress testing currently
performed by money market funds. We also expect that stress test
procedures are or would be developed by the adviser to a fund complex
for all money market funds in the complex while specific stress tests
are performed for each individual money market fund. We estimate that a
fund complex that currently does not conduct stress testing would
require approximately 1 month for 2 risk management analysts and 2
systems analysts to develop stress test procedures at a cost of
approximately $155,000, 21 hours for a risk management analyst to draft
the procedures, and 3 hours of board of directors' time to adopt the
procedures for a total of approximately $173,000.\361\ Costs for fund
complexes that would have to revise or fine-tune their stress test
procedures would be less. For purposes of this cost benefit analysis,
we estimate that these funds would incur half the costs of development,
for a total of approximately $95,000.\362\ Funds that would not have to
change their test procedures would incur approximately $20,000 to
determine compliance with the proposed amendment, and to draft and
adopt the procedures.\363\ We also would anticipate that if there is a
demand to develop stress testing procedures, third parties may develop
programs that funds could purchase for less than our estimated cost to
develop the programs themselves.
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\359\ As noted above, the ratings agencies stress test the
portfolios of money market funds they rate. In addition, the Irish
Financial Services Authority requires stress testing of money market
funds domiciled in Ireland, and the Institutional Money Market Funds
Association provides guidance for its members in stress testing
money market fund portfolios. See supra notes 214-215 and
accompanying text.
\360\ These complexes do not, however, meet the definition of
``small entities'' under the Investment Company Act for purposes of
the Regulatory Flexibility Act of 1980. 5 U.S.C. 603(a). See infra
note 417.
\361\ This estimate is based on the following calculations:
$275/hour x 280 hours (2 senior risk management specialists) +
($244/hour x 320 hours (2 senior systems analysts) = $155,080; $275/
hour (1 senior risk management specialist) x 21 hours = $5775;
$4000/hour x 3 hours = $12,000; $155,080 + $5775 + $12,000 =
$172,855.
\362\ This estimate is based on the following calculation:
(155,080 x 0.5) (revise procedures) + $5775 (draft procedures) +
$12,000 (board approval) = $93,315.
\363\ This estimate is based on the following calculation: $275/
hour (senior risk management specialist) x 8 hours = $2200; $2200 +
$5775 + $12,000 = $19,975.
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As with the development of stress test procedures, the costs funds
would incur each year as a result of the proposed amendments to update
test procedures, conduct stress tests and provide reports on the tests
and assessments to the board of directors would vary. Funds that
currently conduct stress tests already incur costs to perform the
tests. In addition, some of those funds may currently provide reports
to senior management (if not the board) of their
[[Page 32726]]
test results. We assume, however, that few, if any, fund advisers
provide a regular assessment to the board of the fund's ability to
withstand the events reasonably likely to occur in the following year.
For that reason, we estimate that all fund complexes would incur costs
of $3000 to provide a written report on the test results to the board,
$4000 to provide an assessment to the board and $10 to retain records
of the reports and assessments for a total annual cost to a fund
complex of approximately $42,000.\364\ We estimate that a portion of
funds would incur additional costs each year to perform stress tests
and update their procedures each year, up to a maximum of approximately
$113,000.\365\
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\364\ This estimate is based on the following calculation:
Report: $275/hour x 10 hours (senior risk management specialist) +
$62 x 2 hours (administrative assistant) = $2874; Assessment: $275/
hour x 15 hours (senior risk management specialist) = $4125; Record
retention: $62/hour x 0.1667 hours (administrative assistant) =
$10.33; ($2874 + $4125 + $10) x 6 (board meetings per year) =
$42,054.
\365\ This estimate is based on the following calculations:
Tests: $275/hour x 15 hours (senior risk management specialist) +
$244/hour x 20 hours (senior systems analyst) = $9,005; $9,005 x 12
(monthly testing) = $108,060; Update procedures: $275/hour x 5 hours
(senior risk management specialist) + $4000/hour x 1 hour = $5375;
$108,060 + $5375 = $113,435.
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For purposes of this cost benefit analysis, Commission staff has
estimated that 25 percent of fund complexes (or 43 complexes) would
have to develop stress test procedures, 50 percent (or 85) would have
stress test procedures, but have to revise those procedures, and 25
percent of complexes (or 43 complexes) would review the procedures
without having to change them. Based on these estimates, staff further
estimates that the total one time costs for fund complexes to develop
or refine existing stress test procedures would be approximately $19
million.\366\ In addition, staff estimates that the annual costs to all
funds to conduct stress tests, update test procedures, provide reports
and assessments to fund boards and retain records of the reports and
assessments would be approximately $17 million.\367\
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\366\ This estimate is based on the following calculation: (43 x
$173,000) + (85 x $95,000) + (43 x $20,000) + (171 x $5775) + (171 x
$12,000) = $19,413,525.
\367\ This estimate is based on the following calculation: (43 x
$113,000) + (85 x $113,000 x 0.5) + (171 x $42,054 (reports and
assessments)) = $16,852,734.
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We request comment on our estimates. We are particularly interested
in comments regarding how many funds currently conduct stress testing,
the extent and nature of that testing, including whether the procedures
can be adopted on a complex wide basis, and the costs to develop
rigorous stress testing procedures. For those money market funds that
have stress test procedures, how significantly would they have to
change those procedures in light of the proposed rule amendment? What
costs would they incur, including specific costs for personnel that
would be involved in changes?
4. Repurchase Agreements
We are proposing to modify the conditions under which a money
market fund may treat the acquisition of a repurchase agreement
collateralized fully to be an acquisition of the repurchase agreement's
collateral for purposes of rule 2a-7's diversification
requirement.\368\ Money market funds would be able to adopt this
``look-through'' treatment only with respect to repurchase agreements
collateralized by cash items or Government securities \369\ and as to
which the board of directors or its delegate has evaluated the
creditworthiness of the counterparty.\370\
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\368\ See rule 2a-7(c)(4)(ii)(A). The rule 5b-3(c)(1) definition
of collateralized fully, which is cross-referenced by rule 2a-
7(a)(5), sets forth the related conditions. Under the current
definition, a money market fund may look through repurchase
agreements collateralized with cash items, Government securities,
securities with the highest rating or unrated securities of
comparable credit quality.
\369\ Proposed rule 2a-7(a)(5).
\370\ Proposed rule 2a-7(c)(4)(ii)(A).
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We believe that the proposed changes would limit money market
funds' exposure to credit risk. Collateral other than cash items and
Government securities might not adequately protect money market funds
because the funds may be unable to liquidate the collateral without
incurring a loss if the counterparty defaults. The creditworthiness
evaluation, moreover, would make it less likely that a money market
fund enters into repurchase agreements with counterparties that will
default and be exposed to risks related to the collateral. As discussed
above, we believe that the reduction of credit risk would better enable
money market funds to weather market turbulence and maintain a stable
net asset value per share.
We recognize that these proposed changes could result in costs to
money market funds. The limitation on money market funds' ability to
invest in repurchase agreements collateralized with securities other
than cash items and Government securities may result in lower yields
for money market funds to the extent that other investment
opportunities do not provide the same returns as those agreements. The
limitation also could lead to an increase in the counterparties' short-
term financing costs. Counterparties may have to substitute such
repurchase agreements with other sources of financing linked to the
same type of collateral. If counterparties limited their own
investments in securities that are no longer permissible collateral,
the issuers of such securities could also be indirectly affected by our
proposed change. The restrictions on repurchase agreements held by
money market funds might potentially affect the functioning of these
important markets. We invite comment on what effects, if any, these
restrictions might have on the markets for repurchase agreements.
The creditworthiness evaluation would also impose additional costs.
A credit risk evaluation, however, is required with respect to other
portfolio securities and to repurchase agreements for which money
market funds do not adopt a look-through treatment.\371\ We understand,
moreover, that many money market fund complexes already perform a
creditworthiness evaluation for all repurchase agreement
counterparties. Accordingly, we believe that the additional cost
imposed on money market funds, if any, would be minimal.
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\371\ See rule 2a-7(c)(3)(i).
---------------------------------------------------------------------------
We request comment on any potential costs and benefits. Would the
proposed amendments significantly reduce the risk that money market
funds incur losses upon the default of their repurchase agreement
counterparties? What effect would the limitation on permissible
collateral have on counterparties' ability to obtain short-term
financing? How would the proposed change impact issuers of securities
that would no longer be permissible collateral? Would the required
creditworthiness evaluation impose any material cost on money market
funds? We encourage commenters to provide empirical data to support
their analysis.
5. Public Web site Posting
The proposed amendments to rule 2a-7 would require money market
funds to post monthly portfolio information on their Web sites.\372\
The rule is intended to provide shareholders with timely information
about the securities held by the money market fund.
---------------------------------------------------------------------------
\372\ Proposed rule 2a-7(c)(12).
---------------------------------------------------------------------------
We anticipate that the proposal to require funds to post monthly
portfolio information on their Web sites would benefit investors by
providing them a better understanding of their own risk exposure and
thus enabling them to make better informed investment decisions. The
proposed rule may thus
[[Page 32727]]
instill more discipline into portfolio management and reduce the
likelihood of a money market fund breaking the buck. Finally, any
increased costs to money market funds from monthly reporting may be
offset to a degree by the proposal to exclude them from current
requirements to file quarterly portfolio holdings information on Form
N-Q. For the purposes of the PRA analysis, we estimate that money
market funds would realize, in the aggregate, a decrease of 6,000
burden hours, or $470,880, from this exclusion.\373\
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\373\ This estimate is based on our experience with other
filings and an estimated hourly wage rate of $78.48 (6000 hours x
$78.48 = $470,880).
---------------------------------------------------------------------------
The proposed website posting requirement would also impose certain
costs on funds. We estimate that, for the purposes of the PRA, money
market funds would be required to spend 24 hours of internal money
market fund staff time initially to develop a webpage, at a cost of
$4944 per fund.\374\ We also estimate that all money market funds would
be required to spend 4 hours of professional time to maintain and
update the webpage each month, at a total annual cost of $9888 per
fund.\375\ We believe, however, that our estimates may overstate the
actual costs that would be incurred to comply with the website posting
requirement because many funds currently post their portfolio holdings
on a monthly, or more frequent, basis.\376\ For purposes of this cost
benefit analysis, Commission staff estimates that 20 percent of money
market portfolios (150 portfolios) do not currently post portfolio
holdings information on their websites. Based on these estimates, we
estimate that the total initial costs for the proposed website
disclosure would be $741,600.\377\ In addition, we estimate that the
annual costs for all money market funds to maintain and update their
webpages would be $7.4 million.\378\
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\374\ The staff estimates that a webmaster at a money market
fund would require 24 hours (at $206 per hour) to develop and review
the webpage (24 hours x $206 = $4944).
\375\ The staff estimates that a webmaster would require 4 hours
(at $206 per hour) to maintain and update the relevant webpages on a
monthly basis (4 hours x $206 x 12 months = $9888).
\376\ See supra note 325 and accompanying text.
\377\ This calculation is based on the following estimate:
($4944 x 150 portfolios) = $741,600.
\378\ This calculation is based on the following estimate:
($9888 x 750 portfolios) = $7,416,000.
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In addition, monthly website disclosure may impose other costs on
funds and their shareholders. For example, more frequent disclosure of
portfolio holdings may arguably expand the opportunities for
professional traders to exploit this information by engaging in
predatory trading practices, such as front-running. However, given the
short-term nature of money market fund investments and the restricted
universe of eligible portfolio securities, we believe that the risk of
trading ahead is severely curtailed in the context of money market
funds.\379\ For similar reasons, we believe that the potential for
``free riding'' on a money market fund's investment strategies, i.e.,
obtaining for free the benefits of fund research and investment
strategies, is minimal. Given that shares of money market funds are
ordinarily purchased and redeemed at the stable price per share, we
believe that there would be relatively few opportunities for profitable
arbitrage. Thus, we estimate that the costs of predatory trading
practices under this proposal would be minimal. We request comment on
the analysis above, and on any other potential costs and benefits of
the proposed website disclosure requirement.
---------------------------------------------------------------------------
\379\ See ICI Report, supra note 6, at 93.
---------------------------------------------------------------------------
6. Processing of Transactions
Our proposal would require that a money market fund's board
determine in good faith, on an annual basis, that the fund (or its
transfer agent) has the capacity to redeem and sell securities at
prices that do not correspond to the fund's stable net asset value per
share.\380\ As discussed above, the aftermath of 2008 market events
revealed that some funds had not implemented systems to calculate
redemptions at prices other than the funds' stable net asset value per
share.\381\ Because of this failure, transactions were processed
manually, which extended the time that investors had to wait for the
proceeds from their redeemed shares.
---------------------------------------------------------------------------
\380\ Proposed rule 2a-7(c)(1).
\381\ See supra note 262 and accompanying text.
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As noted in Section II.G above, money market funds may be required
to process transactions at a price other than the fund's stable share
price and pay the proceeds of redemptions within seven days (or a
shorter time that the fund has represented). We believe that funds that
do not have the operational capacity to price shares at other than the
stable share price risk being unable to meet their obligations under
the Act. We expect that the proposed amendments would help eliminate
the risk that money market funds would not be able to meet these
obligations in the event the fund breaks a buck. Shareholders would
benefit from the proposed amendments because they would be more likely
to receive the proceeds from their investments in the event of a
liquidation.
Because funds are obligated to redeem at other than stable net
asset value per share, there should be no new cost associated with the
requirement for the funds (or their transfer agents) to have the
systems that can meet these requirements. To the extent that funds and
transfer agents have to change their systems, however, these changes
will likely entail costs. If a fund complex were to require one month
of a senior systems analyst's time in assuring that the required
systems are in place, the total cost for the fund complex would be
$39,040.\382\ Based on this estimate we estimate that, if one-third of
the fund complexes are not currently able to redeem at prices other
than stable net asset value, the total cost to all money market funds
would be $2,225,280.\383\ We also anticipate that the board's
determination would result in costs. We anticipate that the board's
determination would be based on a review at a regularly scheduled board
meeting of the fund adviser's or the transfer agent's certification
that the operational systems have the requisite capacity. Commission
staff estimates that this review would take about 15 minutes of board
time at a cost of $1000.\384\ Based on this estimate we estimate that
the total cost to all money market funds of board determinations would
be $171,000.\385\ We request comment on the analysis above, and on any
other potential costs and benefits of this proposed rule amendment.
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\382\ This estimate is based on the following calculation: $244/
hour x 160 hours (senior systems analyst) = $39,040.
\383\ This is based on the following calculation: (171 (fund
complexes) / 3) x $39,040 = $2,225,280.
\384\ This is based on the following calculation: $4000/hour
(board time) x 0.25 hours = $1000.
\385\ This is based on the following calculation: $1000 x 171
(fund complexes) = $171,000.
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B. Rule 17a-9
The Commission is proposing to amend rule 17a-9 to expand the
circumstances under which affiliated persons can purchase money market
fund portfolio securities. Under the proposed amendment, a money market
fund could sell a portfolio security that has defaulted (other than an
immaterial default unrelated to the financial condition of the issuer)
to an affiliated person for the greater of the security's amortized
cost value or market value (plus accrued and unpaid interest), even
though the security continued to be an eligible security.\386\
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\386\ See proposed rule 17a-9(a).
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The proposed amendment essentially would codify past Commission
staff no-
[[Page 32728]]
action letters \387\ and should benefit investors by enabling money
market funds to dispose of troubled securities (e.g., securities
depressed in value as a result of market conditions) from their
portfolios quickly without any loss to fund shareholders. It also would
benefit money market funds by eliminating the cost and delay of
requesting no-action assurances in these scenarios and the uncertainty
whether such assurances will be granted.\388\ We do not believe that
there are any costs associated with this amendment, but we request
comment on this analysis.
---------------------------------------------------------------------------
\387\ See supra Section II.H.1.
\388\ Commission staff estimates that the costs to obtain staff
no-action assurances range from $50,000 to $100,000.
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In addition, we are proposing to permit affiliated persons to
purchase other portfolio securities from an affiliated money market
fund, for any reason, provided that such person would be required to
promptly remit to the fund any profit it realizes from the later sale
of the security.\389\ Our staff provided temporary no-action assurances
last fall to certain funds facing extraordinary levels of redemption
requests for affiliated persons of such funds to purchase eligible
securities from the funds at the greater of amortized cost or market
value (plus accrued and unpaid interest).\390\ In these circumstances,
money market funds may need to obtain cash quickly to avoid selling
securities into the market at fire sale prices to meet shareholder
redemption requests, to the detriment of remaining shareholders. The
staff also provided no-action assurances to money market funds last
fall for affiliated persons of the fund to purchase at the greater of
amortized cost or market value (plus accrued and unpaid interest)
certain distressed securities that were depressed in value due to
market conditions potentially threatening the stable share price of the
fund, but that remained eligible securities and had not defaulted.\391\
Money market funds and their shareholders would benefit if affiliated
persons were able to purchase securities from the fund at the greater
of amortized cost or market value (plus accrued and unpaid interest) in
such circumstances without the time, expense, and uncertainty of
applying to Commission staff for no-action assurances.
---------------------------------------------------------------------------
\389\ See proposed rule 17a-9(b)(2).
\390\ Many of the no-action letters can be found on our website.
See http://www.sec.gov/divisions/investment/im-noaction.shtml#money.
\391\ Id.
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Affiliated persons purchasing such securities would have costs in
creating and implementing a system for tracking the purchased
securities and remitting to the money market fund any profit ultimately
received as a result. We estimate that creating such a system on
average would require 5 hours of a senior programmer's time, at a cost
of $1460 for each of the 171 fund complexes with money market funds and
a total cost of $249,660.\392\ After the initial creation of this
system, we expect that the time spent noting in this system that a
security was purchased under rule 17a-9 would require a negligible
amount of compliance personnel's time. Based on our experience, we do
not anticipate that there would be many instances, if any, in which an
affiliated person would be required to repay profits in excess of the
purchase price paid to the fund. However, if there is a payment, it
would be made to the fund. If the payment is sufficiently large, we
believe that funds are likely to include it with the next distribution
to shareholders, which would not result in any additional costs to the
fund. We request comment on this analysis. Are our cost estimates
accurate? Are there other costs in allowing an affiliated person of a
money market fund to purchase portfolio securities from the fund? Are
there incentives that might encourage an affiliated person to purchase
securities that are not distressed in any way? If so, would such
purchases result in any cost to the fund and its investors?
---------------------------------------------------------------------------
\392\ This estimate is based on the following calculation: $292/
hour x 5 hours x 171 fund complexes = $249,660.
---------------------------------------------------------------------------
The Commission also is proposing a related amendment to rule 2a-7,
which would require that funds report all transactions under rule 17a-9
to the Commission. We believe that this reporting requirement would
benefit fund investors by allowing the Commission to monitor the
purchases for possible abuses and conflicts of interest on the part of
the affiliates. It also would allow the Commission to observe what
types of securities are distressed and which money market funds are
holding distressed securities or are subject to significant redemption
pressures. This information would better enable the Commission to
monitor emerging risks at money market funds. For purposes of the
Paperwork Reduction Act analysis, we estimate this amendment would
impose relatively small reporting costs on money market funds of $7625
per year.\393\ We request comment on whether these cost estimates are
reasonable. We also request comment on our analysis of the costs and
benefits of this proposed rule amendment.
---------------------------------------------------------------------------
\393\ This estimate is based on the following calculations: 25
(notices) + $305/hour (attorney) x 1 hour = $7625. See supra note
329 and accompanying text.
---------------------------------------------------------------------------
C. Rule 22e-3
Proposed rule 22e-3 would permit money market funds that break the
buck to suspend redemptions and postpone payment of proceeds pending
board-approved liquidations. The rule would thus facilitate orderly
liquidations, which would protect value for fund shareholders and
minimize disruption to financial markets. The rule would also enable
funds to avoid the expense and delay of obtaining an exemptive order
from the Commission, which we estimate would otherwise cost about
$75,000,\394\ and would provide legal certainty to funds that wish to
suspend redemptions during a liquidation in the interest of fairness to
all shareholders.
---------------------------------------------------------------------------
\394\ See Exchange Traded Funds, Investment Company Act Release
No. 28913 (Mar. 11, 2008) [73 FR 14618 (Mar. 18, 2008)] at n.301
(estimating a cost range between $75,000 and $350,000 to submit an
application for relief to operate an ETF). We assume that the costs
associated with an application for exemptive relief from section
22(e) would be on the low end of this range because section 22(e)
exemptive applications are often less involved than ETF exemptive
applications.
---------------------------------------------------------------------------
Proposed rule 22e-3 would impose certain minimal costs on funds
relying on the rule by requiring them to provide prior notice to the
Commission of their decision to suspend redemptions in connection with
a liquidation. We estimate that, for the purposes of the PRA, the
annual burden of the notification requirement would be 10 minutes for a
cost of $51.\395\ The proposed rule may also impose costs on
shareholders who seek to redeem their shares, but are unable to do so.
In those circumstances, shareholders might have to borrow funds from
another source, and thereby incur interest charges and other
transactional fees. We believe the potential costs associated with
proposed rule 22e-3 would be minimal, however, because the proposed
rule would provide a limited exemption that is only triggered in the
event of a fund breaking the buck and liquidating. We request comment
on this analysis, and on any other potential costs and benefits of
proposed rule 22e-3.
---------------------------------------------------------------------------
\395\ This estimate is based on the following calculation: $305/
hour x 1 / 6 hour = $51.
---------------------------------------------------------------------------
D. Rule 30b1-6 and Form N-MFP: Monthly Reporting of Portfolio Holdings
Proposed rule 30b1-6 and Form N-MFP would require money market
funds to file with the Commission interactive data-formatted portfolio
holdings information on a monthly basis. We expect that the proposed
rule would
[[Page 32729]]
improve the efficiency and effectiveness of the Commission's oversight
of money market funds by enabling Commission staff to manage and
analyze money market fund portfolio information more quickly and at a
lower cost than is currently possible. The interactive data would also
facilitate the flow of information between money market funds and other
users of this information, such as information services, academics, and
investors. As the development of software products to analyze the data
continues to grow, we expect these benefits would increase.
Money market funds may also realize cost savings from the proposed
rule. Currently, money market funds provide portfolio holdings
information in a variety of formats to different third-parties, such as
information services and NRSROs. The proposed rule may encourage the
industry to adopt a standardized format, thereby reducing the burdens
on money market funds of having to produce this information in multiple
formats. In addition, money market funds may also benefit from cost
savings to the extent that we exempt them from filing certain
information required to be disclosed in existing quarterly portfolio
holdings reports.
The proposed reporting requirement would also impose certain costs.
We estimate that, for the purposes of the PRA, these filing
requirements (including collecting, tagging, and electronically filing
the report) would impose 128 burden hours at a cost of $35,968 \396\
per money market fund for the first year, and 96 burden hours at a cost
of $26,976 \397\ per money market fund in subsequent years.\398\
---------------------------------------------------------------------------
\396\ This estimate is based on the following calculation: $281/
hour x 128 hours (senior database administrator) = $35,968.
\397\ This estimate is based on the following calculation: $281/
hour x 96 hours (senior database administrator) = $26,976.
\398\ We understand that some money market funds may outsource
all or a portion of these responsibilities to a filing agent,
software consultant, or other third-party service provider. We
believe, however, that a fund would engage third-party service
providers only if the external costs were comparable, or less than,
the estimated internal costs of compiling, tagging, and filing the
Form N-MFP.
---------------------------------------------------------------------------
For the reasons outlined in the discussion on the monthly website
posting requirement, we estimate that there would be minimal additional
costs incurred in connection with the proposed reporting requirement.
We request comment on our estimates, including whether our assumptions
about the costs and benefits are correct. We also request comment on
other potential costs and benefits of the proposed reporting
requirement.
E. Request for Comments
The Commission requests comment on the potential costs and benefits
of the proposed rules and rule amendments. We also request comment on
the potential costs and benefits of any alternatives suggested by
commenters. We encourage commenters to identify, discuss, analyze, and
supply relevant data regarding any additional costs and benefits. For
purposes of the Small Business Regulatory Enforcement Act of 1996,\399\
the Commission also requests information regarding the potential annual
effect of the proposals on the U.S. economy. Commenters are requested
to provide empirical data to support their views.
---------------------------------------------------------------------------
\399\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------
VI. Competition, Efficiency and Capital Formation
Section 2(c) of the Investment Company Act requires the Commission,
when engaging in rulemaking that requires it to consider or determine
whether an action is consistent with the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.\400\
---------------------------------------------------------------------------
\400\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------
A. Rule 2a-7
1. Second Tier Securities, Portfolio Maturity, and Liquidity Limits
We are proposing several amendments to rule 2a-7 to tighten the
risk-limiting conditions of the rule. We are proposing to limit money
market fund investments to only first tier securities, i.e., securities
receiving the highest short-term ratings from the requisite NRSROs or
unrated securities that the fund's board of directors or its delegate
determines are of comparable quality.\401\ We also are proposing to
limit money market funds to acquiring long-term securities that have
received long-term ratings in the highest two ratings categories.\402\
---------------------------------------------------------------------------
\401\ See proposed rule 2a-7(a)(11)(iii); proposed rule 2a-
7(a)(11)(iv).
\402\ See proposed rule 2a-7(a)(11)(iv)(A).
---------------------------------------------------------------------------
The proposed amendments would reduce the maximum weighted average
maturity of a money market fund permitted by rule 2a-7 from 90 days to
60 days.\403\ They also would impose a new maturity limitation based on
the weighted average ``life'' of fund securities that would limit the
portion of a fund's portfolio that could be held in longer term
floating- or variable-rate securities.\404\ We are proposing to delete
a provision in rule 2a-7 that permits money market funds not relying on
the amortized cost method of valuation to acquire Government securities
with a remaining maturity of up to 762 calendar days.
---------------------------------------------------------------------------
\403\ See proposed rule 2a-7(c)(2)(ii).
\404\ See proposed rule 2a-7(c)(2)(iii).
---------------------------------------------------------------------------
Finally, we are proposing new liquidity requirements on money
market funds. Under the proposed amendments, money market funds would
be prohibited from acquiring illiquid securities\405\ and money market
funds would be required to comply with certain minimum daily and weekly
liquidity requirements.\406\ The amended rule also would require that a
money market fund at all times hold highly liquid securities sufficient
to meet reasonably foreseeable redemptions in light of its obligations
under section 22(e) of the Act and any commitments the fund has made to
shareholders.\407\
---------------------------------------------------------------------------
\405\ See proposed rule 2a-7(c)(5)(i).
\406\ See proposed rule 2a-7(c)(5).
\407\ See proposed rule 2a-7(c)(5)(ii).
---------------------------------------------------------------------------
We believe that these changes would reduce money market funds'
sensitivity to interest rate, credit, and liquidity risks. These
changes also would limit the credit spread risk and interest rate
spread risk produced by longer term securities. A reduction of these
risks would better enable money market funds to weather market
turbulence and maintain a stable net asset value per share. We believe
that the changes would reduce the risk that a money market fund will
break the buck and therefore prevent losses to fund investors. To the
extent that money market funds are more stable, the changes also would
reduce systemic risk to the capital markets and ensure a stable source
of financing for issuers of short-term credit instruments. We believe
that these effects would encourage capital formation by encouraging
investment in money market funds, thereby allowing them to expand as a
source of short-term financing in the capital markets.
These changes also may reduce maturities of short-term credit
securities that issuers offer, which may increase financing costs for
these issuers who might have to go back more frequently to the market
for financing. To the extent that some issuers are unwilling or unable
to issue securities that match money market fund demand given these
proposed restrictions, the amendments could have a negative impact on
capital formation.
If the proposed amendments reduce yields that money market funds
are able to offer, some investors may move their money to, among other
places, offshore unregulated money market funds that do not follow rule
2a-7's strictures and
[[Page 32730]]
thus are able to offer a higher yield. Beyond the competitive impact,
such a change could increase systemic risks to short-term credit
markets and capital formation by increasing investment in less stable
short-term instruments.
Precluding ownership of second tier securities also may have
anticompetitive effects on some relatively small money market funds
that may compete with larger funds on the basis of yield. The proposed
elimination of the ability of money market funds to invest in second
tier securities may affect the capital raising ability and strategies
of the issuers of second tier securities or otherwise affect their
financing arrangements, and may affect the flexibility of investing
options for funds. As noted above, however, second tier securities
represent only a very small percentage of money market fund portfolios
today, which suggests that our proposed amendments would not have a
material effect on capital formation. We solicit specific comment on
whether the proposed amendments regarding second tier securities would
promote efficiency, competition and capital formation.
2. Stress Testing
We are proposing to amend rule 2a-7 to require the board of
directors of each money market fund to adopt procedures providing for
periodic stress testing of the money market fund's portfolio, reporting
the results of the testing to fund boards, and providing an assessment
to the board.\408\ We believe that stress testing could increase the
efficiency of money market funds by enhancing their risk management and
thus making it more likely that the fund will be better prepared for
potential stress on the fund due to market events or shareholder
behavior. Money market funds may become more stable as a result of the
risk management benefits provided by stress testing, allowing them to
expand and attract further investment. If so, this result will promote
capital formation. We do not believe that stress testing would have an
adverse impact on competition or capital formation. What effect would
the proposed requirement have on competition, efficiency and capital
formation?
---------------------------------------------------------------------------
\408\ Proposed rule 2a-7(c)(8)(ii)(D).
---------------------------------------------------------------------------
3. Repurchase Agreements
We are proposing to allow money market funds to treat the
acquisition of a repurchase agreement to be an acquisition of the
collateral for purposes of rule 2a-7's diversification requirement only
if the repurchase agreement is collateralized by cash items or
Government securities \409\ and after the board of directors or its
delegate has evaluated the creditworthiness of the counterparty.\410\
---------------------------------------------------------------------------
\409\ Proposed rule 2a-7(a)(5).
\410\ Proposed rule 2a-7(c)(4)(ii)(A).
---------------------------------------------------------------------------
We believe that these changes would limit money market funds'
exposure to credit risk. The reduction of credit risk would increase
money market funds' ability to maintain a stable net asset value per
share, thereby preventing losses to fund investors, reducing systemic
risk to the capital markets and ensuring a stable source of financing
for issuers of short-term credit instruments. More stable money market
funds may attract greater investments, thus promoting capital formation
and providing a greater source of short-term financing in the capital
markets.
The limitation on money market funds' ability to invest in
repurchase agreements collateralized with securities other than cash
items and Government securities may result in an increase in the short-
term financing costs of the counterparties in such agreements, thereby
reducing their willingness to invest in those securities. As a result,
issuers of such securities could also be indirectly affected by our
proposed change, which therefore could have a negative impact on
capital formation. We request comment on what effect the proposed
amendments would have on competition, efficiency, and capital
formation.
4. Public Web Site Disclosure
We are proposing to require money market funds to disclose certain
portfolio holdings information on their Web sites on a monthly
basis.\411\ The proposed rule amendment would provide greater
transparency of the fund's investments for current and prospective
shareholders, and may thus promote more efficient allocation of
investments by investors. We believe the proposed rule amendment may
also improve competition, as better-informed investors may prompt funds
managers to provide better services and products. We do not anticipate
that funds would be disadvantaged, with respect to competition, because
so many already have chosen to provide the information more frequently
than monthly. In addition, the investments selected by money market
funds are less likely than, for example, equity funds, to be
investments from which competing funds would obtain benefit by
scrutinizing on a monthly basis. The proposed rule may also promote
capital formation by making portfolio holdings information readily
accessible to investors, who may thus be more inclined to allocate
their investments in a particular fund or in money market funds instead
of an alternative product. Alternatively, the proposed rule could have
the reverse effect if the portfolio holdings information makes
investors less confident regarding the risks associated with money
market funds, including the risk that market participants may use the
information obtained through the disclosures to the detriment of the
fund and its investors, such as by trading along with the fund or ahead
of the fund by anticipating future transactions based on past
transactions. We request comment on what effect this proposed rule
would have on competition, efficiency, and capital formation.
---------------------------------------------------------------------------
\411\ See supra Section II.F.1.
---------------------------------------------------------------------------
5. Processing of Transactions
We are proposing to require that each money market fund's board
determine, at least once each calendar year, that the fund has the
capability to redeem and sell its securities at prices other than the
fund's stable net asset value per share.\412\ This amendment would
require money funds to have the operational capacity if they break the
buck to continue to process investor transactions in an orderly manner.
This amendment would increase efficiency at money market funds that
break the buck by increasing the speed and minimizing the operational
difficulties in satisfying shareholder redemption requests in such
circumstances. It may also reduce investors' concerns that redemption
would be unduly delayed if a money market fund were to break the buck.
We do not believe that this amendment would have a material impact on
competition or capital formation. We request comment on what effect
this proposed amendment would have on competition, efficiency, and
capital formation.
---------------------------------------------------------------------------
\412\ Proposed rule 2a-7(c)(1).
---------------------------------------------------------------------------
B. Rule 17a-9
The Commission is proposing to amend rule 17a-9 to expand the
circumstances under which affiliated persons can purchase money market
fund securities. Under the proposed amendments, a money market fund
could sell a portfolio security that has defaulted (other than an
immaterial default unrelated to the financial condition of the issuer)
to an affiliated person for the greater of the security's amortized
cost value or market value (plus accrued and unpaid interest), even
though the security continued to be an
[[Page 32731]]
eligible security.\413\ In addition, the proposed amendment would
permit affiliated persons, for any reason, to purchase other portfolio
securities from an affiliated money market fund on the same terms
provided that such person is required to promptly remit to the fund any
profit it realizes from the later sale of the security.\414\ These
amendments would increase the efficiency of both the Commission and
money market funds by allowing affiliated persons to purchase portfolio
securities from money market funds under distress without having to
seek no-action assurances from Commission staff. We do not believe that
the proposed amendments will have any material impact on competition or
capital formation. We request comment on our analysis. What effect
would the proposed amendment to rule 17a-9 have on efficiency,
competition and capital formation?
---------------------------------------------------------------------------
\413\ See proposed rule 17a-9(a).
\414\ See proposed rule 17a-9(b).
---------------------------------------------------------------------------
C. Rule 22e-3
Proposed rule 22e-3 would permit money market funds that break the
buck to suspend redemptions and postpone the payment of proceeds
pending board-approved liquidation proceedings. We anticipate that the
rule would promote efficiency in the financial markets by facilitating
orderly disposal of assets during liquidation. To the extent that
investors choose money market funds over alternative investments
because the proposed rule would provide reassurance as to the
protection of their assets in the event the fund breaks the buck and
minimize disruption in the financial markets, the rule also may promote
capital formation. If, however, the possibility that redemptions can be
suspended during a liquidation makes money market funds less appealing
to investors, the rule may have a negative effect on capital formation.
The proposed rule also could help make investors more confident that
they would be able to receive the proceeds from their investment in the
event of a liquidation of the fund. We do not believe that the proposed
rule would have an adverse effect on competition. We request comment on
what effect the proposed rule would have on competition, efficiency,
and capital formation.
D. Rule 30b1-6 and Form N-MFP: Monthly Reporting of Portfolio Holdings
Proposed new rule 30b1-6 and Form N-MFP would mandate the monthly
electronic filing of each money market fund's portfolio holdings
information in XML-tagged format. As discussed above, we believe the
new reporting requirement would improve the efficiency and
effectiveness of the Commission's oversight of money market funds. The
availability, and usability, of this data would also promote efficiency
for other third-parties that may be interested in collecting and
analyzing money market funds' portfolio holdings information. Money
market funds currently are often required to provide this information
to various third parties in different formats. To the extent that the
proposal may encourage a standardized format for disclosure or
transmission of portfolio holdings information, the proposal may
promote efficiency for money market funds. We do not believe that the
proposed rule would have an adverse effect on competition or capital
formation. We request comment on what effect the proposed rule would
have on competition, efficiency, and capital formation.
VII. Regulatory Flexibility Act Certification
Section 3(a) of the Regulatory Flexibility Act of 1980 \415\
(``RFA'') requires the Commission to undertake an initial regulatory
flexibility analysis (``IRFA'') of the proposed rule amendments on
small entities unless the Commission certifies that the rule, if
adopted, would not have a significant economic impact on a substantial
number of small entities.\416\ Pursuant to 5 U.S.C. section 605(b), the
Commission hereby certifies that the proposed amendments to rules 2a-7,
17a-9, and 30b1-5, and proposed rules 30b1-6 and 22e-3 under the
Investment Company Act, would not, if adopted, have a significant
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\415\ 5 U.S.C. 603(a).
\416\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
The proposal would amend rule 2a-7 under the Investment Company Act
to:
(i) Limit money market fund investments to first tier securities
(i.e., securities that received the highest short-term ratings
categories from the requisite NRSROs or unrated securities that the
board of directors (or its delegate) determines are of comparable
quality);
(ii) Limit money market funds to acquiring long-term securities
that have received long-term ratings in the highest two ratings
categories from the requisite NRSROs;
(iii) Reduce the maximum weighted average maturity of money market
funds' portfolio securities from 90 to 60 days;
(iv) Require money market funds to maintain a maximum weighted
average life to maturity of portfolio securities of no more than 120
days;
(v) Eliminate a provision of the rule that permits a fund that
relies exclusively on the penny-rounding method of pricing to acquire
Government securities with remaining maturities of up to 762 days,
rather than the 397-day limit otherwise provided by the rule;
(vi) Prohibit money market funds from acquiring securities unless,
at the time acquired, they are liquid, i.e., can be sold or disposed of
in the ordinary course of business within seven days at approximately
the value ascribed to it by the money market fund;
(vii) Require that immediately after the acquisition of a security,
a taxable ``retail fund'' hold no less than 5 percent of its total
assets in cash, U.S. Treasury securities, or other securities
(including repurchase agreements) that mature, or are subject to a
demand feature exercisable in one business day, and (ii) an
``institutional fund'' hold no less than 10 percent of those
instruments;
(viii) Require that immediately after the acquisition of a security
(i) a ``retail fund'' holds no less than 15 percent of its total assets
in cash, U.S. Treasury securities, or other securities (including
repurchase agreements) that are convertible to cash within five
business days, and (ii) an ``institutional fund'' holds no less than 30
percent of those instruments;
(ix) Require that a money market fund at all times hold cash, U.S.
Treasury securities, or securities readily convertible to cash on a
daily or weekly basis sufficient to meet reasonably foreseeable
redemptions in light of its obligations under section 22(e) of the Act
and any commitments the fund has made to shareholders;
(x) Require the board of directors of each money market fund to
adopt procedures providing for periodic stress testing of the money
market fund's ability to maintain a stable net asset value per share
based on certain hypothetical events, a report of the testing results
to the board, and an assessment by the fund's adviser of the fund's
ability to withstand the events that are reasonably likely to occur
within the following year;
(xi) Limit money market funds to investing in repurchase agreements
collateralized by cash items or Government securities in order to
obtain special treatment under the diversification provisions of rule
2a-7;
(xii) Require that the money market fund's board of directors or
its delegate evaluate the creditworthiness of the
[[Page 32732]]
counterparty, regardless of whether the repurchase agreement is
collateralized fully;
(xiii) Require money market funds to post monthly portfolio
information on their Web sites; and
(xiv) Require that a money market fund's board determine, on an
annual basis, that the fund (or its transfer agent) has the capacity to
redeem and sell securities at prices that do not correspond to the
fund's stable net asset value.
We also are proposing to amend rule 17a-9 to permit a money market
fund to sell a portfolio security that has defaulted (other than an
immaterial default unrelated to the financial condition of the issuer)
to an affiliated person for the greater of the security's amortized
cost value or market value (plus accrued and unpaid interest), even
though the security continues to be an eligible security. In addition,
we are proposing to permit an affiliated person, for any reason, to
purchase any other portfolio security (e.g., an eligible security that
has not defaulted) from an affiliated money market fund for cash at the
greater of the security's amortized cost value or market value,
provided that such person promptly remits to the fund any profit it
realizes from the later sale of the security. Under the proposal, a
money market fund whose portfolio securities are purchased in reliance
on rule 17a-9 would be required to provide notice of the transaction to
the Commission by e-mail.
We are also proposing to amend rule 30b1-5 to exempt money market
funds from the requirement to file their schedules of investments
pursuant to Item 1 of Form N-Q, a quarterly schedule of portfolio
holdings of management investment companies. The proposed amendment is
intended to avoid unnecessarily duplicative disclosure obligations.
Finally, we are proposing two new rules. Proposed rule 22e-3 would
exempt money market funds from section 22(e) to permit them to suspend
redemptions in order to facilitate an orderly liquidation of fund
assets. Rule 30b1-6 would mandate the monthly electronic filing in XML-
tagged format of valuation and other information about the risk
characteristics of the money market fund and each security in its
portfolio.
Based on information in filings submitted to the Commission, we
believe that there are no money market funds that are small
entities.\417\ For this reason, the Commission believes the proposed
amendments to rules 2a-7, 17a-9, and 30b1-5, and proposed rules 22e-3
and 30b1-6 under the Investment Company Act would not, if adopted, have
a significant economic impact on a substantial number of small
entities.
---------------------------------------------------------------------------
\417\ Under rule 0-10 under the Investment Company Act, an
investment company is considered a small entity if it, together with
other investment companies in the same group of related investment
companies, has net assets of $50 million or less as of the end of
its most recent fiscal year.
---------------------------------------------------------------------------
We encourage written comments regarding this certification. The
Commission solicits comment as to whether the proposed amendments to
rules 2a-7, 17a-9, and 30b1-5, and proposed rules 22e-3 and 30b1-6
could have an effect on small entities that has not been considered. We
request that commenters describe the nature of any impact on small
entities and provide empirical data to support the extent of such
impact.
VIII. Statutory Authority
The Commission is proposing amendments to rule 2a-7 under the
exemptive and rulemaking authority set forth in sections 6(c), 8(b),
22(c), and 38(a) of the Investment Company Act of 1940 [15 U.S.C. 80a-
6(c), 80a-8(b), 80a-22(c), 80a-37(a)]. The Commission is proposing
amendments to rule 17a-9 pursuant to the authority set forth in
sections 6(c) and 38(a) of the Investment Company Act [15 U.S.C. 80a-
6(c), 80a-37(a)]. The Commission is proposing rule 22e-3 pursuant to
the authority set forth in sections 6(c), 22(e) and 38(a) of the
Investment Company Act [15 U.S.C. 80a-6(c), 80a-22(e), and 80a-37(a)].
The Commission is proposing amendments to rule 30b1-5 and new rule
30b1-6 and Form N-MFP pursuant to authority set forth in Sections 8(b),
30(b), 31(a), and 38(a) of the Investment Company Act [15 U.S.C. 80a-
8(b), 80a-29(b), 80a-30(a), and 80a-37(a)].
List of Subjects in 17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Proposed Rules and Form
For reasons set out in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is proposed to be amended as follows:
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for part 270 continues to read, in part,
as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *
2. Section 270.2a-7 is revised to read as follows:
Sec. 270.2a-7 Money market funds.
(a) Definitions. (1) Acquisition (or Acquire) means any purchase or
subsequent rollover (but does not include the failure to exercise a
Demand Feature).
(2) Amortized Cost Method of valuation means the method of
calculating an investment company's net asset value whereby portfolio
securities are valued at the fund's Acquisition cost as adjusted for
amortization of premium or accretion of discount rather than at their
value based on current market factors.
(3) Asset Backed Security means a fixed income security (other than
a Government security) issued by a Special Purpose Entity (as defined
in this paragraph), substantially all of the assets which consist of
Qualifying Assets (as defined in this paragraph). Special Purpose
Entity means a trust, corporation, partnership or other entity
organized for the sole purpose of issuing securities that entitle their
holders to receive payments that depend primarily on the cash flow from
Qualifying Assets, but does not include a registered investment
company. Qualifying Assets means financial assets, either fixed or
revolving, that by their terms convert into cash within a finite time
period, plus any rights or other assets designed to assure the
servicing or timely distribution of proceeds to security holders.
(4) Business Day means any day, other than Saturday, Sunday, or any
customary business holiday.
(5) Collateralized Fully means ``Collateralized Fully'' as defined
in Sec. 270.5b-3(c)(1) except that Sec. 270.5b-3(c)(1)(iv)(C) and (D)
shall not apply.
(6) Conditional Demand Feature means a Demand Feature that is not
an Unconditional Demand Feature. A Conditional Demand Feature is not a
Guarantee.
(7) Conduit Security means a security issued by a Municipal Issuer
(as defined in this paragraph) involving an arrangement or agreement
entered into, directly or indirectly, with a person other than a
Municipal Issuer, which arrangement or agreement provides for or
secures repayment of the security. Municipal Issuer means a state or
territory of the United States (including the District of Columbia), or
any political subdivision or public instrumentality of a state or
territory of the United States. A Conduit Security does not include a
security that is:
(i) Fully and unconditionally guaranteed by a Municipal Issuer;
[[Page 32733]]
(ii) Payable from the general revenues of the Municipal Issuer or
other Municipal Issuers (other than those revenues derived from an
agreement or arrangement with a person who is not a Municipal Issuer
that provides for or secures repayment of the security issued by the
Municipal Issuer);
(iii) Related to a project owned and operated by a Municipal
Issuer; or
(iv) Related to a facility leased to and under the control of an
industrial or commercial enterprise that is part of a public project
which, as a whole, is owned and under the control of a Municipal
Issuer.
(8) Daily Liquid Assets means:
(i) Cash;
(ii) Direct obligations of the U.S. Government; or
(iii) Securities that will mature or are subject to a Demand
Feature that is exercisable and payable within one Business Day.
(9) Demand Feature means:
(i) A feature permitting the holder of a security to sell the
security at an exercise price equal to the approximate amortized cost
of the security plus accrued interest, if any, at the time of exercise.
A Demand Feature must be exercisable either:
(A) At any time on no more than 30 calendar days' notice;
(B) At specified intervals not exceeding 397 calendar days and upon
no more than 30 calendar days' notice; or
(ii) A feature permitting the holder of an Asset Backed Security
unconditionally to receive principal and interest within 397 calendar
days of making demand.
(10) Demand Feature Issued By A Non-Controlled Person means a
Demand Feature issued by:
(i) A person that, directly or indirectly, does not control, and is
not controlled by or under common control with the issuer of the
security subject to the Demand Feature (control means ``control'' as
defined in section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)); or
(ii) A sponsor of a Special Purpose Entity with respect to an Asset
Backed Security.
(11) Eligible Security means:
(i) A security issued by a registered investment company that is a
money market fund;
(ii) A Government Security;
(iii) A Rated Security with a remaining maturity of 397 calendar
days or less that has received a rating from the Requisite NRSROs in
the highest short-term rating category (within which there may be sub-
categories or gradations indicating relative standing); or
(iv) An Unrated Security that is of comparable quality to a
security meeting the requirements for a Rated Security in paragraph
(a)(11)(iii) of this section, as determined by the money market fund's
board of directors; provided, however, that:
(A) A security that at the time of issuance had a remaining
maturity of more than 397 calendar days but that has a remaining
maturity of 397 calendar days or less and that is an Unrated Security
is not an Eligible Security if the security has received a long-term
rating from any NRSRO that is not within the NRSRO's two highest long-
term ratings categories (within which there may be sub-categories or
gradations indicating relative standing), unless the security has
received a long-term rating from the Requisite NRSROs in one of the two
highest rating categories;
(B) An Asset Backed Security (other than an Asset Backed Security
substantially all of whose Qualifying Assets consist of obligations of
one or more Municipal Issuers, as that term is defined in paragraph
(a)(7) of this section) shall not be an Eligible Security unless it has
received a rating from an NRSRO.
(v) In addition, in the case of a security that is subject to a
Demand Feature or Guarantee:
(A) The Guarantee has received a rating from an NRSRO or the
Guarantee is issued by a guarantor that has received a rating from an
NRSRO with respect to a class of debt obligations (or any debt
obligation within that class) that is comparable in priority and
security to the Guarantee, unless:
(1) The Guarantee is issued by a person that, directly or
indirectly, controls, is controlled by or is under common control with
the issuer of the security subject to the Guarantee (other than a
sponsor of a Special Purpose Entity with respect to an Asset Backed
Security);
(2) The security subject to the Guarantee is a repurchase agreement
that is Collateralized Fully; or
(3) The Guarantee is itself a Government Security; and
(B) The issuer of the Demand Feature or Guarantee, or another
institution, has undertaken promptly to notify the holder of the
security in the event the Demand Feature or Guarantee is substituted
with another Demand Feature or Guarantee (if such substitution is
permissible under the terms of the Demand Feature or Guarantee).
(12) Event of Insolvency means ``Event of Insolvency'' as defined
in Sec. 270.5b-3(c)(2).
(13) Floating Rate Security means a security the terms of which
provide for the adjustment of its interest rate whenever a specified
interest rate changes and that, at any time until the final maturity of
the instrument or the period remaining until the principal amount can
be recovered through demand, can reasonably be expected to have a
market value that approximates its amortized cost.
(14) Government Security means any ``Government security'' as
defined in section 2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16)).
(15) Guarantee means an unconditional obligation of a person other
than the issuer of the security to undertake to pay, upon presentment
by the holder of the Guarantee (if required), the principal amount of
the underlying security plus accrued interest when due or upon default,
or, in the case of an Unconditional Demand Feature, an obligation that
entitles the holder to receive upon exercise the approximate amortized
cost of the underlying security or securities, plus accrued interest,
if any. A Guarantee includes a letter of credit, financial guaranty
(bond) insurance, and an Unconditional Demand Feature (other than an
Unconditional Demand Feature provided by the issuer of the security).
(16) Guarantee Issued By A Non-Controlled Person means a Guarantee
issued by:
(i) A person that, directly or indirectly, does not control, and is
not controlled by or under common control with the issuer of the
security subject to the Guarantee (control means ``control'' as defined
in section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)); or
(ii) A sponsor of a Special Purpose Entity with respect to an Asset
Backed Security.
(17) Institutional Fund means a money market fund whose board of
directors determines, no less frequently than once each calendar year,
is intended to be offered primarily to institutional investors or has
the characteristics of such a fund, based on the:
(i) Nature of the record owners of the fund's shares;
(ii) Minimum initial investment requirements; and
(iii) Historical cash flows that have resulted or expected cash
flows that would result from purchases and redemptions.
(18) Liquid Security means a security that can be sold or disposed
of in the ordinary course of business within seven calendar days at
approximately its amortized cost.
[[Page 32734]]
(19) NRSRO means any nationally recognized statistical rating
organization, as that term is defined in section 3(a)(62) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(62)), that is not an
``affiliated person,'' as defined in section 2(a)(3)(C) of the Act (15
U.S.C. 80a-2(a)(3)(C)), of the issuer of, or any insurer or provider of
credit support for, the security.
(20) Penny-Rounding Method of pricing means the method of computing
an investment company's price per share for purposes of distribution,
redemption and repurchase whereby the current net asset value per share
is rounded to the nearest one percent.
(21) Rated Security means a security that meets the requirements of
paragraphs (a)(21)(i) or (ii) of this section, in each case subject to
paragraph (a)(21)(iii) of this section:
(i) The security has received a short-term rating from an NRSRO, or
has been issued by an issuer that has received a short-term rating from
an NRSRO with respect to a class of debt obligations (or any debt
obligation within that class) that is comparable in priority and
security with the security; or
(ii) The security is subject to a Guarantee that has received a
short-term rating from an NRSRO, or a Guarantee issued by a guarantor
that has received a short-term rating from an NRSRO with respect to a
class of debt obligations (or any debt obligation within that class)
that is comparable in priority and security with the Guarantee; but
(iii) A security is not a Rated Security if it is subject to an
external credit support agreement (including an arrangement by which
the security has become a Refunded Security) that was not in effect
when the security was assigned its rating, unless the security has
received a short-term rating reflecting the existence of the credit
support agreement as provided in paragraph (a)(21)(i) of this section,
or the credit support agreement with respect to the security has
received a short-term rating as provided in paragraph (a)(21)(ii) of
this section.
(22) Refunded Security means ``Refunded Security'' as defined in
Sec. 270.5b-3(c)(4).
(23) Requisite NRSROs means:
(i) Any two NRSROs that have issued a rating with respect to a
security or class of debt obligations of an issuer; or
(ii) If only one NRSRO has issued a rating with respect to such
security or class of debt obligations of an issuer at the time the fund
acquires the security, that NRSRO.
(24) Retail Fund means any money market fund that the board of
directors has not determined within the calendar year is an
Institutional Fund under paragraph (c)(5)(v) of this section.
(25) Single State Fund means a Tax Exempt Fund that holds itself
out as seeking to maximize the amount of its distributed income that is
exempt from the income taxes or other taxes on investments of a
particular state and, where applicable, subdivisions thereof.
(26) Tax Exempt Fund means any money market fund that holds itself
out as distributing income exempt from regular federal income tax.
(27) Total Assets means, with respect to a money market fund using
the Amortized Cost Method, the total amortized cost of its assets and,
with respect to any other money market fund, the total market-based
value of its assets.
(28) Unconditional Demand Feature means a Demand Feature that by
its terms would be readily exercisable in the event of a default in
payment of principal or interest on the underlying security or
securities.
(29) United States Dollar-Denominated means, with reference to a
security, that all principal and interest payments on such security are
payable to security holders in United States dollars under all
circumstances and that the interest rate of, the principal amount to be
repaid, and the timing of payments related to such security do not vary
or float with the value of a foreign currency, the rate of interest
payable on foreign currency borrowings, or with any other interest rate
or index expressed in a currency other than United States dollars.
(30) Unrated Security means a security that is not a Rated
Security.
(31) Variable Rate Security means a security the terms of which
provide for the adjustment of its interest rate on set dates (such as
the last day of a month or calendar quarter) and that, upon each
adjustment until the final maturity of the instrument or the period
remaining until the principal amount can be recovered through demand,
can reasonably be expected to have a market value that approximates its
amortized cost.
(32) Weekly Liquid Assets means:
(i) Cash;
(ii) Direct obligations of the U.S. Government; or
(iii) Securities that will mature or are subject to a Demand
Feature that is exercisable and payable within five Business Days.
(b) Holding Out and Use of Names and Titles. (1) It shall be an
untrue statement of material fact within the meaning of section 34(b)
of the Act (15 U.S.C. 80a-33(b)) for a registered investment company,
in any registration statement, application, report, account, record, or
other document filed or transmitted pursuant to the Act, including any
advertisement, pamphlet, circular, form letter, or other sales
literature addressed to or intended for distribution to prospective
investors that is required to be filed with the Commission by section
24(b) of the Act (15 U.S.C. 80a-24(b)), to hold itself out to investors
as a money market fund or the equivalent of a money market fund, unless
such registered investment company meets the conditions of paragraphs
(c)(2), (c)(3), (c)(4) and (c)(5) of this section.
(2) It shall constitute the use of a materially deceptive or
misleading name or title within the meaning of section 35(d) of the Act
(15 U.S.C. 80a-34(d)) for a registered investment company to adopt the
term ``money market'' as part of its name or title or the name or title
of any redeemable securities of which it is the issuer, or to adopt a
name that suggests that it is a money market fund or the equivalent of
a money market fund, unless such registered investment company meets
the conditions of paragraphs (c)(2), (c)(3), (c)(4), and (c)(5) of this
section.
(3) For purposes of this paragraph, a name that suggests that a
registered investment company is a money market fund or the equivalent
thereof shall include one that uses such terms as ``cash,'' ``liquid,''
``money,'' ``ready assets'' or similar terms.
(c) Share Price Calculations. The current price per share, for
purposes of distribution, redemption and repurchase, of any redeemable
security issued by any registered investment company (``money market
fund'' or ``fund''), notwithstanding the requirements of section
2(a)(41) of the Act (15 U.S.C. 80a-2(a)(41)) and of Sec. Sec. 270.2a-4
and 270.22c-1 thereunder, may be computed by use of the Amortized Cost
Method or the Penny-Rounding Method; provided, however, that:
(1) Board Findings. The board of directors of the money market fund
shall determine, in good faith, that it is in the best interests of the
fund and its shareholders to maintain a stable net asset value per
share or stable price per share, by virtue of either the Amortized Cost
Method or the Penny-Rounding Method, and that the money market fund
will continue to use such method only so long as the board of directors
believes that it fairly reflects the market-based net asset value per
share. The board shall annually determine in good faith that the fund
(or its transfer agent) has the capacity to redeem and sell securities
issued by the fund at a price
[[Page 32735]]
based on the current net asset value per share pursuant to Sec.
270.22c-1. Such capacity shall include the ability to redeem and sell
securities at prices that do not correspond to a stable net asset value
or price per share.
(2) Portfolio Maturity. The money market fund shall maintain a
dollar-weighted average portfolio maturity appropriate to its objective
of maintaining a stable net asset value per share or price per share;
provided, however, that the money market fund will not:
(i) Acquire any instrument with a remaining maturity of greater
than 397 calendar days;
(ii) Maintain a dollar-weighted average portfolio maturity that
exceeds 60 calendar days; or
(iii) Maintain a dollar-weighted average portfolio maturity that
exceeds 120 calendar days, determined without reference to the
exceptions in paragraph (d) of this section regarding interest rate
readjustments.
(3) Portfolio Quality. (i) General. The money market fund shall
limit its portfolio investments to those United States Dollar-
Denominated securities that the fund's board of directors determines
present minimal credit risks (which determination must be based on
factors pertaining to credit quality in addition to any rating assigned
to such securities by an NRSRO) and that are at the time of Acquisition
Eligible Securities.
(ii) Securities Subject to Guarantees. A security that is subject
to a Guarantee may be determined to be an Eligible Security based
solely on whether the Guarantee is an Eligible Security.
(iii) Securities Subject to Conditional Demand Features. A security
that is subject to a Conditional Demand Feature (``Underlying
Security'') may be determined to be an Eligible Security only if:
(A) The Conditional Demand Feature is an Eligible Security;
(B) At the time of the Acquisition of the Underlying Security, the
money market fund's board of directors has determined that there is
minimal risk that the circumstances that would result in the
Conditional Demand Feature not being exercisable will occur; and
(1) The conditions limiting exercise either can be monitored
readily by the fund, or relate to the taxability, under federal, state
or local law, of the interest payments on the security; or
(2) The terms of the Conditional Demand Feature require that the
fund will receive notice of the occurrence of the condition and the
opportunity to exercise the Demand Feature in accordance with its
terms; and
(C) The Underlying Security or any Guarantee of such security (or
the debt securities of the issuer of the Underlying Security or
Guarantee that are comparable in priority and security with the
Underlying Security or Guarantee) has received either a short-term
rating or a long-term rating, as the case may be, from the Requisite
NRSROs within the NRSROs' highest short-term or long-term rating
categories (within which there may be sub-categories or gradations
indicating relative standing) or, if unrated, is determined to be of
comparable quality by the money market fund's board of directors to a
security that has received a rating from the Requisite NRSROs within
the NRSROs' highest short-term or long-term rating categories, as the
case may be.
(4) Portfolio Diversification. (i) Issuer Diversification. The
money market fund shall be diversified with respect to issuers of
securities Acquired by the fund as provided in paragraphs (c)(4)(i) and
(c)(4)(ii) of this section, other than with respect to Government
Securities and securities subject to a Guarantee Issued By A Non-
Controlled Person.
(A) Taxable and National Funds. Immediately after the Acquisition
of any security, a money market fund other than a Single State Fund
shall not have invested more than five percent of its Total Assets in
securities issued by the issuer of the security; provided, however,
that such a fund may invest up to twenty-five percent of its Total
Assets in the securities of a single issuer for a period of up to three
Business Days after the Acquisition thereof; Provided, further, that
the fund may not invest in the securities of more than one issuer in
accordance with the foregoing proviso in this paragraph at any time.
(B) Single State Funds. With respect to seventy-five percent of its
Total Assets, immediately after the Acquisition of any security, a
Single State Fund shall not have invested more than five percent of its
Total Assets in securities issued by the issuer of the security.
(ii) Issuer Diversification Calculations. For purposes of making
calculations under paragraph (c)(4)(i) of this section:
(A) Repurchase Agreements. The Acquisition of a repurchase
agreement may be deemed to be an Acquisition of the underlying
securities, provided the obligation of the seller to repurchase the
securities from the money market fund is Collateralized Fully and the
fund's board of directors has evaluated the seller's creditworthiness.
(B) Refunded Securities. The Acquisition of a Refunded Security
shall be deemed to be an Acquisition of the escrowed Government
Securities.
(C) Conduit Securities. A Conduit Security shall be deemed to be
issued by the person (other than the Municipal Issuer) ultimately
responsible for payments of interest and principal on the security.
(D) Asset Backed Securities. (1) General. An Asset Backed Security
Acquired by a fund (``Primary ABS'') shall be deemed to be issued by
the Special Purpose Entity that issued the Asset Backed Security;
provided, however:
(i) Holdings of Primary ABS. Any person whose obligations
constitute ten percent or more of the principal amount of the
Qualifying Assets of the Primary ABS (``Ten Percent Obligor'') shall be
deemed to be an issuer of the portion of the Primary ABS such
obligations represent; and
(ii) Holdings of Secondary ABS. If a Ten Percent Obligor of a
Primary ABS is itself a Special Purpose Entity issuing Asset Backed
Securities (``Secondary ABS''), any Ten Percent Obligor of such
Secondary ABS also shall be deemed to be an issuer of the portion of
the Primary ABS that such Ten Percent Obligor represents.
(2) Restricted Special Purpose Entities. A Ten Percent Obligor with
respect to a Primary or Secondary ABS shall not be deemed to have
issued any portion of the assets of a Primary ABS as provided in
paragraph (c)(4)(ii)(D)(1) of this section if that Ten Percent Obligor
is itself a Special Purpose Entity issuing Asset Backed Securities
(``Restricted Special Purpose Entity''), and the securities that it
issues (other than securities issued to a company that controls, or is
controlled by or under common control with, the Restricted Special
Purpose Entity and which is not itself a Special Purpose Entity issuing
Asset Backed Securities) are held by only one other Special Purpose
Entity.
(3) Demand Features and Guarantees. In the case of a Ten Percent
Obligor deemed to be an issuer, the fund shall satisfy the
diversification requirements of paragraph (c)(4)(iii) of this section
with respect to any Demand Feature or Guarantee to which the Ten
Percent Obligor's obligations are subject.
(E) Shares of Other Money Market Funds. A money market fund that
Acquires shares issued by another money market fund in an amount that
would otherwise be prohibited by paragraph (c)(4)(i) of this section
shall nonetheless be deemed in compliance with this section if the
board of directors of the Acquiring money market fund reasonably
believes that the fund
[[Page 32736]]
in which it has invested is in compliance with this section.
(iii) Diversification Rules for Demand Features and Guarantees. The
money market fund shall be diversified with respect to Demand Features
and Guarantees Acquired by the fund as provided in paragraphs
(c)(4)(iii) and (c)(4)(iv) of this section, other than with respect to
a Demand Feature issued by the same institution that issued the
underlying security, or with respect to a Guarantee or Demand Feature
that is itself a Government Security.
(A) General. Immediately after the Acquisition of any Demand
Feature or Guarantee or security subject to a Demand Feature or
Guarantee, a money market fund, with respect to seventy-five percent of
its Total Assets, shall not have invested more than ten percent of its
Total Assets in securities issued by or subject to Demand Features or
Guarantees from the institution that issued the Demand Feature or
Guarantee, subject to paragraph (c)(4)(iii)(B) of this section.
(B) Demand Features or Guarantees Issued by Non-Controlled Persons.
Immediately after the Acquisition of any security subject to a Demand
Feature or Guarantee, a money market fund shall not have invested more
than ten percent of its Total Assets in securities issued by, or
subject to Demand Features or Guarantees from the institution that
issued the Demand Feature or Guarantee, unless, with respect to any
security subject to Demand Features or Guarantees from that institution
(other than securities issued by such institution), the Demand Feature
or Guarantee is a Demand Feature or Guarantee Issued By A Non-
Controlled Person.
(iv) Demand Feature and Guarantee Diversification Calculations. (A)
Fractional Demand Features or Guarantees. In the case of a security
subject to a Demand Feature or Guarantee from an institution by which
the institution guarantees a specified portion of the value of the
security, the institution shall be deemed to guarantee the specified
portion thereof.
(B) Layered Demand Features or Guarantees. In the case of a
security subject to Demand Features or Guarantees from multiple
institutions that have not limited the extent of their obligations as
described in paragraph (c)(4)(iv)(A) of this section, each institution
shall be deemed to have provided the Demand Feature or Guarantee with
respect to the entire principal amount of the security.
(v) Diversification Safe Harbor. A money market fund that satisfies
the applicable diversification requirements of paragraphs (c)(4) and
(c)(6) of this section shall be deemed to have satisfied the
diversification requirements of section 5(b)(1) of the Act (15 U.S.C.
80a-5(b)(1)) and the rules adopted thereunder.
(5) Portfolio Liquidity. (i) Liquid Securities. The money market
fund shall limit its portfolio investments to cash and securities that
at the time of Acquisition are Liquid Securities.
(ii) General Liquidity Requirement. The money market fund shall
hold Daily Liquid Assets and Weekly Liquid Assets sufficient to meet
reasonably foreseeable shareholder redemptions in light of the fund's
obligations under section 22(e) of the Act (15 U.S.C. 80a-22(e)) and
any commitments the fund has made to shareholders.
(iii) Minimum Daily Liquidity Requirement. A money market fund
shall not Acquire any security other than a Daily Liquid Asset if,
immediately after the Acquisition, a Retail Fund would have invested
less than five percent of its Total Assets, and an Institutional Fund
would have invested less than ten percent of its Total Assets, in Daily
Liquid Assets. This provision shall not apply to Tax Exempt Funds.
(iv) Minimum Weekly Liquidity Requirement. A money market fund
shall not Acquire any security if, immediately after the Acquisition, a
Retail Fund would have invested less than fifteen percent of its Total
Assets, and an Institutional Fund would have invested less than thirty
percent of its Total Assets, in Weekly Liquid Assets.
(v) Annual Board Determination. The board of directors of each
money market fund shall determine no less than once each calendar year
whether the fund is an Institutional Fund for purposes of meeting the
minimum liquidity requirements set forth in paragraphs (c)(5)(iii) and
(iv) of this section.
(6) Demand Features and Guarantees Not Relied Upon. If the fund's
board of directors has determined that the fund is not relying on a
Demand Feature or Guarantee to determine the quality (pursuant to
paragraph (c)(3) of this section), or maturity (pursuant to paragraph
(d) of this section), or liquidity of a portfolio security, and
maintains a record of this determination (pursuant to paragraphs
(c)(10)(ii) and (c)(11)(vi) of this section), then the fund may
disregard such Demand Feature or Guarantee for all purposes of this
section.
(7) Downgrades, Defaults and Other Events. (i) Downgrades. (A)
General. In the event that the money market fund's investment adviser
(or any person to whom the fund's board of directors has delegated
portfolio management responsibilities) becomes aware that any Unrated
Security held by the money market fund has, since the security was
Acquired by the fund, been given a rating by any NRSRO below the
NRSRO's highest short-term rating category, the board of directors of
the money market fund shall reassess promptly whether such security
continues to present minimal credit risks and shall cause the fund to
take such action as the board of directors determines is in the best
interests of the money market fund and its shareholders.
(B) The reassessment required by paragraph (c)(7)(i)(A) of this
section shall not be required if the fund disposes of the security (or
it matures) within five Business Days.
(ii) Defaults and Other Events. Upon the occurrence of any of the
events specified in paragraphs (c)(7)(ii)(A) through (D) of this
section with respect to a portfolio security, the money market fund
shall dispose of such security as soon as practicable consistent with
achieving an orderly disposition of the security, by sale, exercise of
any Demand Feature or otherwise, absent a finding by the board of
directors that disposal of the portfolio security would not be in the
best interests of the money market fund (which determination may take
into account, among other factors, market conditions that could affect
the orderly disposition of the portfolio security):
(A) The default with respect to a portfolio security (other than an
immaterial default unrelated to the financial condition of the issuer);
(B) A portfolio security ceases to be an Eligible Security;
(C) A portfolio security has been determined to no longer present
minimal credit risks; or
(D) An Event of Insolvency occurs with respect to the issuer of a
portfolio security or the provider of any Demand Feature or Guarantee.
(iii) Notice to the Commission. The money market fund shall
promptly notify the Commission by electronic mail directed to the
Director of Investment Management or the Director's designee, of any:
(A) Default with respect to one or more portfolio securities (other
than an immaterial default unrelated to the financial condition of the
issuer) or an Event of Insolvency with respect to the issuer of the
security or any Demand Feature or Guarantee to which it is subject,
where immediately before default the securities (or the securities
subject to the Demand Feature or Guarantee) accounted for \1/2\ of 1
percent
[[Page 32737]]
or more of a money market fund's Total Assets, the money market fund
shall promptly notify the Commission of such fact and the actions the
money market fund intends to take in response to such situation; or
(B) Purchase of a security from the fund by an affiliated person in
reliance on Sec. 270.17a-9 of this section, and the reasons for such
purchase.
(iv) Defaults for Purposes of Paragraphs (c)(7)(ii) and (iii). For
purposes of paragraphs (c)(7)(ii) and (iii) of this section, an
instrument subject to a Demand Feature or Guarantee shall not be deemed
to be in default (and an Event of Insolvency with respect to the
security shall not be deemed to have occurred) if:
(A) In the case of an instrument subject to a Demand Feature, the
Demand Feature has been exercised and the fund has recovered either the
principal amount or the amortized cost of the instrument, plus accrued
interest; or
(B) The provider of the Guarantee is continuing, without protest,
to make payments as due on the instrument.
(8) Required Procedures: Amortized Cost Method. In the case of a
money market fund using the Amortized Cost Method:
(i) General. In supervising the money market fund's operations and
delegating special responsibilities involving portfolio management to
the money market fund's investment adviser, the money market fund's
board of directors, as a particular responsibility within the overall
duty of care owed to its shareholders, shall establish written
procedures reasonably designed, taking into account current market
conditions and the money market fund's investment objectives, to
stabilize the money market fund's net asset value per share, as
computed for the purpose of distribution, redemption and repurchase, at
a single value.
(ii) Specific Procedures. Included within the procedures adopted by
the board of directors shall be the following:
(A) Shadow Pricing. Written procedures shall provide:
(1) That the extent of deviation, if any, of the current net asset
value per share calculated using available market quotations (or an
appropriate substitute that reflects current market conditions) from
the money market fund's amortized cost price per share, shall be
calculated at such intervals as the board of directors determines
appropriate and reasonable in light of current market conditions;
(2) For the periodic review by the board of directors of the amount
of the deviation as well as the methods used to calculate the
deviation; and
(3) For the maintenance of records of the determination of
deviation and the board's review thereof.
(B) Prompt Consideration of Deviation. In the event such deviation
from the money market fund's amortized cost price per share exceeds \1/
2\ of 1 percent, the board of directors shall promptly consider what
action, if any, should be initiated by the board of directors.
(C) Material Dilution or Unfair Results. Where the board of
directors believes the extent of any deviation from the money market
fund's amortized cost price per share may result in material dilution
or other unfair results to investors or existing shareholders, it shall
cause the fund to take such action as it deems appropriate to eliminate
or reduce to the extent reasonably practicable such dilution or unfair
results.
(D) Stress Testing. Written procedures shall provide for:
(1) The periodic testing, at such intervals as the board of
directors determines appropriate and reasonable in light of current
market conditions, of the money market fund's ability to maintain a
stable net asset value per share based upon specified hypothetical
events, that include, but are not limited to, a change in short-term
interest rates, an increase in shareholder redemptions, a downgrade of
or default on portfolio securities, and the widening or narrowing of
spreads between yields on an appropriate benchmark the fund has
selected for overnight interest rates and commercial paper and other
types of securities held by the fund;
(2) A report on the results of such testing to be provided to the
board of directors at its next regularly scheduled meeting, which
report shall include the date(s) on which the testing was performed and
the magnitude of each hypothetical event that would cause the deviation
of the money market fund's net asset value calculated using available
market quotations (or appropriate substitutes which reflect current
market conditions) from its net asset value per share calculated using
amortized cost to exceed \1/2\ of 1 percent; and
(3) An assessment by the fund's adviser of the fund's ability to
withstand the events (and concurrent occurrences of those events) that
are reasonably likely to occur within the following year.
(9) Required Procedures: Penny-Rounding Method. In the case of a
money market fund using the Penny-Rounding Method, in supervising the
money market fund's operations and delegating special responsibilities
involving portfolio management to the money market fund's investment
adviser, the money market fund's board of directors undertakes, as a
particular responsibility within the overall duty of care owed to its
shareholders, to assure to the extent reasonably practicable, taking
into account current market conditions affecting the money market
fund's investment objectives, that the money market fund's price per
share as computed for the purpose of distribution, redemption and
repurchase, rounded to the nearest one percent, will not deviate from
the single price established by the board of directors.
(10) Specific Procedures: Amortized Cost and Penny-Rounding
Methods. Included within the procedures adopted by the board of
directors for money market funds using either the Amortized Cost or
Penny-Rounding Methods shall be the following:
(i) Securities for Which Maturity Is Determined by Reference to
Demand Features. In the case of a security for which maturity is
determined by reference to a Demand Feature, written procedures shall
require ongoing review of the security's continued minimal credit
risks, and that review must be based on, among other things, financial
data for the most recent fiscal year of the issuer of the Demand
Feature and, in the case of a security subject to a Conditional Demand
Feature, the issuer of the security whose financial condition must be
monitored under paragraph (c)(3)(iv) of this section, whether such data
is publicly available or provided under the terms of the security's
governing documentation.
(ii) Securities Subject to Demand Features or Guarantees. In the
case of a security subject to one or more Demand Features or Guarantees
that the fund's board of directors has determined that the fund is not
relying on to determine the quality (pursuant to paragraph (c)(3) of
this section), maturity (pursuant to paragraph (d) of this section) or
liquidity of the security subject to the Demand Feature or Guarantee,
written procedures shall require periodic evaluation of such
determination.
(iii) Adjustable Rate Securities Without Demand Features. In the
case of a Variable Rate or Floating Rate Security that is not subject
to a Demand Feature and for which maturity is determined pursuant to
paragraphs (d)(1), (d)(2) or (d)(4) of this section, written procedures
shall require periodic review of whether the interest rate formula,
upon readjustment of its interest rate, can reasonably be expected to
cause the
[[Page 32738]]
security to have a market value that approximates its amortized cost
value.
(iv) Asset Backed Securities. In the case of an Asset Backed
Security, written procedures shall require the fund to periodically
determine the number of Ten Percent Obligors (as that term is used in
paragraph (c)(4)(ii)(D) of this section) deemed to be the issuers of
all or a portion of the Asset Backed Security for purposes of paragraph
(c)(4)(ii)(D) of this section; Provided, however, written procedures
need not require periodic determinations with respect to any Asset
Backed Security that a fund's board of directors has determined, at the
time of Acquisition, will not have, or is unlikely to have, Ten Percent
Obligors that are deemed to be issuers of all or a portion of that
Asset Backed Security for purposes of paragraph (c)(4)(ii)(D) of this
section, and maintains a record of this determination.
(11) Record Keeping and Reporting. (i) Written Procedures. For a
period of not less than six years following the replacement of such
procedures with new procedures (the first two years in an easily
accessible place), a written copy of the procedures (and any
modifications thereto) described in paragraphs (c)(7) through (c)(10)
and (e) of this section shall be maintained and preserved.
(ii) Board Considerations and Actions. For a period of not less
than six years (the first two years in an easily accessible place) a
written record shall be maintained and preserved of the board of
directors' considerations and actions taken in connection with the
discharge of its responsibilities, as set forth in this section, to be
included in the minutes of the board of directors' meetings.
(iii) Credit Risk Analysis. For a period of not less than three
years from the date that the credit risks of a portfolio security were
most recently reviewed, a written record of the determination that a
portfolio security presents minimal credit risks and the NRSRO ratings
(if any) used to determine the status of the security as an Eligible
Security shall be maintained and preserved in an easily accessible
place.
(iv) Determinations With Respect to Adjustable Rate Securities. For
a period of not less than three years from the date when the
determination was most recently made, a written record shall be
preserved and maintained, in an easily accessible place, of the
determination required by paragraph (c)(10)(iii) of this section (that
a Variable Rate or Floating Rate Security that is not subject to a
Demand Feature and for which maturity is determined pursuant to
paragraphs (d)(1), (d)(2) or (d)(4) of this section can reasonably be
expected, upon readjustment of its interest rate at all times during
the life of the instrument, to have a market value that approximates
its amortized cost).
(v) Determinations with Respect to Asset Backed Securities. For a
period of not less than three years from the date when the
determination was most recently made, a written record shall be
preserved and maintained, in an easily accessible place, of the
determinations required by paragraph (c)(10)(iv) of this section (the
number of Ten Percent Obligors (as that term is used in paragraph
(c)(4)(ii)(D) of this section) deemed to be the issuers of all or a
portion of the Asset Backed Security for purposes of paragraph
(c)(4)(ii)(D) of this section). The written record shall include:
(A) The identities of the Ten Percent Obligors (as that term is
used in paragraph (c)(4)(ii)(D) of this section), the percentage of the
Qualifying Assets constituted by the securities of each Ten Percent
Obligor and the percentage of the fund's Total Assets that are invested
in securities of each Ten Percent Obligor; and
(B) Any determination that an Asset Backed Security will not have,
or is unlikely to have, Ten Percent Obligors deemed to be issuers of
all or a portion of that Asset Backed Security for purposes of
paragraph (c)(4)(ii)(D) of this section.
(vi) Evaluations With Respect to Securities Subject to Demand
Features or Guarantees. For a period of not less than three years from
the date when the evaluation was most recently made, a written record
shall be preserved and maintained, in an easily accessible place, of
the evaluation required by paragraph (c)(10)(ii) (regarding securities
subject to one or more Demand Features or Guarantees) of this section.
(vii) Reports and Assessments with Respect to Stress Testing. For a
period of not less than six years (the first two years in an easily
accessible place), a written copy of the report required under
paragraph (c)(8)(ii)(D)(2) of this section and a written record of the
assessment required under paragraph (c)(8)(ii)(D)(3) of this section
shall be maintained and preserved.
(viii) Inspection of Records. The documents preserved pursuant to
this paragraph (c)(11) shall be subject to inspection by the Commission
in accordance with section 31(b) of the Act (15 U.S.C. 80a-30(b)) as if
such documents were records required to be maintained pursuant to rules
adopted under section 31(a) of the Act (15 U.S.C. 80a-30(a)). If any
action was taken under paragraphs (c)(7)(ii) (with respect to defaulted
securities and events of insolvency) or (c)(8)(ii) (with respect to a
deviation from the fund's share price of more than \1/2\ of 1 percent)
of this section, the money market fund will file an exhibit to the Form
N-SAR (17 CFR 274.101) filed for the period in which the action was
taken describing with specificity the nature and circumstances of such
action. The money market fund will report in an exhibit to such Form
any securities it holds on the final day of the reporting period that
are not Eligible Securities.
(12) Public Disclosure of Valuations. The money market fund shall
post on its Web site, for a period of not less than twelve months,
beginning no later than the second business day of the month, the
fund's schedule of investments, as prescribed by rules 12-12 through
12-14 of Regulation S-X [17 CFR 210.12.-12 through 210.12-14], as of
the last business day of the prior month.
(d) Maturity of Portfolio Securities. For purposes of this section,
the maturity of a portfolio security shall be deemed to be the period
remaining (calculated from the trade date or such other date on which
the fund's interest in the security is subject to market action) until
the date on which, in accordance with the terms of the security, the
principal amount must unconditionally be paid, or in the case of a
security called for redemption, the date on which the redemption
payment must be made, except as provided in paragraphs (d)(1) through
(d)(8) of this section:
(1) Adjustable Rate Government Securities. A Government Security
that is a Variable Rate Security where the variable rate of interest is
readjusted no less frequently than every 397 calendar days shall be
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate. A Government Security that is a
Floating Rate Security shall be deemed to have a remaining maturity of
one day.
(2) Short-Term Variable Rate Securities. A Variable Rate Security,
the principal amount of which, in accordance with the terms of the
security, must unconditionally be paid in 397 calendar days or less
shall be deemed to have a maturity equal to the earlier of the period
remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through
demand.
(3) Long-Term Variable Rate Securities. A Variable Rate Security,
the principal amount of which is scheduled to be paid in more than 397
calendar
[[Page 32739]]
days, that is subject to a Demand Feature, shall be deemed to have a
maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
(4) Short-Term Floating Rate Securities. A Floating Rate Security,
the principal amount of which, in accordance with the terms of the
security, must unconditionally be paid in 397 calendar days or less
shall be deemed to have a maturity of one day.
(5) Long-Term Floating Rate Securities. A Floating Rate Security,
the principal amount of which is scheduled to be paid in more than 397
calendar days, that is subject to a Demand Feature, shall be deemed to
have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
(6) Repurchase Agreements. A repurchase agreement shall be deemed
to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to
occur, or, where the agreement is subject to demand, the notice period
applicable to a demand for the repurchase of the securities.
(7) Portfolio Lending Agreements. A portfolio lending agreement
shall be treated as having a maturity equal to the period remaining
until the date on which the loaned securities are scheduled to be
returned, or where the agreement is subject to demand, the notice
period applicable to a demand for the return of the loaned securities.
(8) Money Market Fund Securities. An investment in a money market
fund shall be treated as having a maturity equal to the period of time
within which the Acquired money market fund is required to make payment
upon redemption, unless the Acquired money market fund has agreed in
writing to provide redemption proceeds to the investing money market
fund within a shorter time period, in which case the maturity of such
investment shall be deemed to be the shorter period.
(e) Delegation. The money market fund's board of directors may
delegate to the fund's investment adviser or officers the
responsibility to make any determination required to be made by the
board of directors under this section (other than the determinations
required by paragraphs (c)(1) (board findings); (c)(7)(ii) (defaults
and other events); (c)(8)(i) (general required procedures: Amortized
Cost Method); (c)(8)(ii)(A) (shadow pricing), (B) (prompt consideration
of deviation), and (C) (material dilution or unfair results); and
(c)(9) (required procedures: Penny-Rounding Method) of this section)
provided:
(1) Written Guidelines. The Board shall establish and periodically
review written guidelines (including guidelines for determining whether
securities present minimal credit risks as required in paragraph (c)(3)
of this section) and procedures under which the delegate makes such
determinations:
(2) Oversight. The Board shall take any measures reasonably
necessary (through periodic reviews of fund investments and the
delegate's procedures in connection with investment decisions and
prompt review of the adviser's actions in the event of the default of a
security or Event of Insolvency with respect to the issuer of the
security or any Guarantee to which it is subject that requires
notification of the Commission under paragraph (c)(7)(iii) of this
section) to assure that the guidelines and procedures are being
followed.
3. Section 270.17a-9 is revised to read as follows:
Sec. 270.17a-9 Purchase of certain securities from a money market
fund by an affiliate, or an affiliate of an affiliate.
The purchase of a security from the portfolio of an open-end
investment company holding itself out as a money market fund by any
affiliated person or promoter of or principal underwriter for the money
market fund or any affiliated person of such person shall be exempt
from Section 17(a) of the Act (15 U.S.C. 80a-17(a)); provided that:
(a) In the case of a portfolio security that has ceased to be an
Eligible Security (as defined in Sec. 270.2a-7 (a)(11), or has
defaulted (other than an immaterial default unrelated to the financial
condition of the issuer):
(1) The purchase price is paid in cash; and
(2) The purchase price is equal to the greater of the amortized
cost of the security or its market price (in each case, including
accrued interest).
(b) In the case of any other portfolio security:
(1) The purchase price meets the requirements of paragraphs (a)(1)
and (2) of this section; and
(2) In the event that the purchaser thereafter sells the security
for a higher price than the purchase price paid to the money market
fund, the purchaser shall promptly pay to the fund the amount by which
the subsequent sale price exceeds the purchase price paid to the fund.
4. Section 270.22e-3 is added to read as follows:
Sec. 270.22e-3 Exemption for liquidation of money market funds.
(a) A registered open-end management investment company or series
thereof (``fund'') that is regulated as a money market fund under Sec.
270.2a-7 is exempt from the requirements of section 22(e) of the Act
(15 U.S.C. 80a-22(e)) if:
(1) The fund's current price per share calculated pursuant to Sec.
270.2a-7(c) is less than the fund's stable net asset value or price per
share;
(2) The fund's board of directors, including a majority of
directors who are not interested persons of the fund, has approved the
liquidation of the fund; and
(3) The fund, prior to suspending redemptions, notifies the
Commission of its decision to liquidate and suspend redemptions, by
electronic mail directed to the attention of the Director of the
Division of Investment Management or his designee.
(b) Any fund that owns, pursuant to section 12(d)(1)(E) of the Act
(15 U.S.C. 80a-12(d)(1)(E)), shares of a money market fund that has
suspended redemptions of shares pursuant to paragraph (a) of this
section also is exempt from the requirements of section 22(e) of the
Act. A fund relying on the exemption provided in this paragraph must
promptly notify the Commission that it has suspended redemptions in
reliance on this section. Notification under this paragraph shall be
made by electronic mail directed to the attention of the Director of
the Division of Investment Management or his designee.
(c) For the protection of fund shareholders, the Commission may
issue an order to rescind or modify the exemption provided by this
section as to that fund, after appropriate notice and opportunity for
hearing in accordance with section 40 of the Act (15 U.S.C. 80a-39).
5. Section 270.30b1-5 is revised to read as follows:
Sec. 270.30b1-5 Quarterly report.
Every registered management investment company, other than a small
business investment company registered on Form N-5 (Sec. Sec. 239.24
and 274.5 of this chapter), shall file a quarterly report on Form N-Q
(Sec. Sec. 249.332 and 274.130 of this chapter) not more than 60 days
after the close of the first and third quarters of each fiscal year. A
registered management investment company that has filed a registration
statement with the Commission registering its securities for the first
time under the Securities Act of 1933 is relieved of this reporting
obligation with respect to any reporting
[[Page 32740]]
period or portion thereof prior to the date on which that registration
statement becomes effective or is withdrawn. A registered management
investment company regulated as a money market fund under Sec. 270.2a-
7 is relieved of the reporting obligation required pursuant to Item 1
of Form N-Q.
6. Section 270.30b1-6 is added to read as follows:
Sec. 270.30b1-6 Monthly report for money market funds.
Every registered open-end management investment company, or series
thereof, that is regulated as a money market fund under Sec. 270.2a-7
must file with the Commission a monthly report of portfolio holdings on
Form N-MFP no later than the second business day of each month.
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
7. The authority citation for Part 274 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise
noted.
8. Section 274.201 and Form N-MFP are added to read as follows:
Sec. 274.201 Form N-MFP, Portfolio Holdings of Money Market Funds.
This form shall be used by registered management investment
companies that are regulated as money market funds under Sec. 270.2a-7
of this chapter to file reports pursuant to Sec. 270.30b1-6 of this
chapter not later than two business days after the end of each month.
Note: The text of Form N-MFP will not appear in the Code of
Federal Regulations.
Form N-MFP--Monthly Schedule of Portfolio Holdings of Money Market
Funds
Form N-MFP is to be used by open-end management investment
companies, or series thereof, that are regulated as money market funds
under Sec. 270.2a-7 (``money market funds''), to file reports with the
Commission, not later than the second business day of each month,
pursuant to rule 30b1-6 under the Investment Company Act of 1940 (17
CFR 270.30b1-6). The Commission may use the information provided on
Form N-MFP in its regulatory, disclosure review, inspection, and
policymaking roles.
General Instructions
A. Rule as to Use of Form N-MFP
Form N-MFP is the public reporting form that is to be used for
monthly reports of money market funds under section 30(b) of the
Investment Company Act of 1940 (the ``Act'') and rule 30b1-6 of the Act
(17 CFR 270.30b1-6). Form N-MFP must be filed no later than the second
business day of each month, and will contain certain information about
the money market fund and its portfolio holdings as of the last
business day of the preceding month.
B. Application of General Rules and Regulations
The General Rules and Regulations under the Act contain certain
general requirements that are applicable to reporting on any form under
the Act. These general requirements should be carefully read and
observed in the preparation and filing of reports on this form, except
that any provision in the form or in these instructions shall be
controlling.
C. Filing of Form N-MFP
A money market fund must file Form N-MFP no later than the second
business day of each month, in accordance with rule 232.13 of
Regulation S-T. Form N-MFP must be filed electronically using the
Commission's EDGAR system.
D. Paperwork Reduction Act Information
A registrant is not required to respond to the collection of
information contained in Form N-MFP unless the Form displays a
currently valid Office of Management and Budget (``OMB'') control
number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing
the burden to the Secretary, Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090. The OMB has reviewed this
collection of information under the clearance requirements of 44 U.S.C.
3507.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-MFP--MONTHLY SCHEDULE OF PORTFOLIO HOLDINGS OF MONEY MARKET
FUNDS
Date of Filing:
Report for [Month, Day, Year]
Name and Address of Fund or Portfolio Filing This Report:
CIK Number:
SEC File Number:
EDGAR Series Identifier:
Number of share classes offered:
Check here if Amendment [ ]
Amendment Number:
Is this an Initial Filing? [Y/N]
Is this a Final Filing? [Y/N]
Is the fund liquidating? [Y/N]
Is the fund merging with another fund? [Y/N]
If so, please identify the other fund by name, SEC File Number, and
EDGAR Series Identifier.
Is the fund being acquired by another fund? [Y/N]
If so, please identify the acquiring fund by name, SEC File Number, and
EDGAR Series Identifier.
Part I: Information about the Fund
Item 1. Name of Investment Adviser.
a. SEC file number of Investment Adviser.
Item 2. Name of Sub-Adviser. If a fund has multiple sub-advisers,
disclose the name of all sub-advisers to the fund.
a. SEC file number of Sub-Adviser. Disclose the SEC file number of
each sub-adviser to the fund.
Item 3. Independent Auditor.
Item 4. Administrator.
Item 5. Transfer Agent.
a. SEC file number of Transfer Agent.
Item 6. Minimum initial investment.
Item 7. Is this a feeder fund? [Y/N]
a. If this is a feeder fund, identify the master fund.
b. SEC File Number of the master fund.
Item 8. Is this a master fund? [Y/N]
a. If this is a master fund, identify all feeder funds.
b. SEC File Number of each feeder fund.
Item 9. Is this portfolio primarily used to invest cash collateral? [Y/
N]
Item 10. Is this portfolio primarily used to fund variable accounts?
[Y/N]
Item 11. Category. Indicate whether the money market fund is a
Treasury, Government/Agency, Prime, Tax-Free National, or Tax-Free
State Fund.
Item 12. Total value of the portfolio at cost, to the nearest hundredth
of a cent.
Item 13. Net value of other assets and liabilities, to the nearest
hundredth of a cent.
Item 14. Net asset value per share for purposes of distributions,
redemptions, and repurchase, to the nearest hundredth of a cent.
Item 15. Net shareholder flow activity for the month ended
(subscriptions less redemptions).
Item 16. Dollar weighted average maturity. Calculate the dollar
[[Page 32741]]
weighted average maturity of portfolio securities, based on the time
remaining until the next interest rate re-set.
Item 17. Dollar weighted average life maturity. Calculate the dollar
weighted average maturity of portfolio securities based on final legal
maturity or demand feature.
Item 18. 7-day gross yield. Based on the 7 days ended on the last day
of the prior month, calculate the Fund's yield by determining the net
change, exclusive of capital changes and income other than investment
income, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period and dividing the
difference by the value of the account at the beginning of the base
period to obtain the base period return, and then multiplying the base
period return by (365/7) with the resulting yield figure carried to at
least the nearest hundredth of one percent. The 7-day gross yield
should not reflect a deduction of shareholders fees and fund operating
expenses.
Part 2: Schedule of Portfolio Securities. For each security held by the
money market fund, please disclose the following:
Item 19. The name of the issuer.
Item 20. CIK number of the issuer.
Item 21. The title of the issue.
Item 22. The CUSIP.
Item 23. Other unique identifier (if the instrument does not have a
CUSIP).
Item 24. The category of investment. Please indicate the category that
most closely identifies the instrument from among the following:
Treasury Debt; Government Agency Debt; Variable Rate Demand Notes;
Other Municipal Debt; Financial Company Commercial Paper; Asset Backed
Commercial Paper; Certificate of Deposit; Structured Investment Vehicle
Notes; Other Notes; Treasury Repurchase Agreements; Government Agency
Repurchase Agreements; Other Repurchase Agreements; Insurance Company
Funding Agreements; Investment Company; Other Instrument.
Item 25. Rating. Please indicate whether the security is a 1st tier
security, unrated, or no longer eligible.
Item 26. Requisite NRSROs.
a. Identify each Requisite NRSRO.
b. For each Requisite NRSRO, disclose the credit rating given by
the Requisite NRSRO.
Item 27. The maturity date as determined under rule 2a-7. Disclose the
maturity date, taking into account the maturity shortening provisions
of rule 2a-7.
Item 28. The final legal maturity date.
Item 29. Is the maturity date extendable? [Y/N]
Item 30. Does the security have a credit enhancement? [Y/N]
Item 31. For each credit enhancement, disclose:
a. The type of credit enhancement.
b. The identity of the credit enhancement provider.
c. The credit rating of the credit enhancement provider.
Item 32. Does the security have an insurance guarantee? [Y/N]
Item 33. For each insurance guarantee provider, disclose:
a. The identity of the insurance guarantee provider.
b. The credit rating of the insurance guarantee provider.
Item 34. Does the security have a liquidity provider? [Y/N]
Item 35. For each liquidity provider, disclose:
a. The identity of the liquidity provider.
b. The credit rating of the liquidity provider.
Item 36. The principal amount of the security.
Item 37. The current amortized cost, to the nearest hundredth of a
cent.
Item 38. Is this a Level 1, Level 2, or Level 3 security, or Other?
Please explain how the security was valued. Level 1 securities are
valued based on quoted prices in active markets for identical
securities. Level 2 securities are valued based on other significant
observable inputs (including quoted prices for similar securities,
interest rates, prepayment speeds, credit risks, etc.). Level 3
securities are valued based on significant unobservable inputs
(including the fund's own assumptions in determining the fair value of
investments). See Statement of Financial Accounting Standards Board No.
157, ``Fair Value Measurement.''
Item 39. The percentage of the money market fund's gross assets
invested in the security, to the nearest hundredth of one percent.
Item 40. Explanatory notes. Please disclose any other information that
may be material to other disclosure in the Form.
Dated: June 30, 2009.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-15906 Filed 7-7-09; 8:45 am]
BILLING CODE 8010-01-P