Money Market Fund Reform, 32688-32741 [E9-15906]
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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules
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.
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:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–11–09 on the subject line;
or
• Use the Federal eRulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
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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
(https://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
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 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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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 highquality, 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
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 nearimmediate 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
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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$3.8 trillion of assets.4 Money market
funds account for approximately 39
percent of all investment company
assets.5
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
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.
Institutional investors account for a
growing portion of investments in
money market funds. These investors
4 See Investment Company Institute, Trends in
Mutual Fund Investing, Apr. 2009, available at
https://www.ici.org/highlights/trends_04_09 (‘‘ICI
Trends’’).
5 See id.
6 See Investment Company Institute, Report of the
Money Market Working Group, at 21 (Mar. 17,
2009), available at https://www.ici.org/pdf/
ppr_09_mmwg.pdf (‘‘ICI Report’’).
7 See Investment Company Institute, 2009
Investment Company Fact Book, at 147, Table 38
(May 2009), available at https://www.ici.org/pdf/
2009_factbook.pdf (‘‘2009 Fact Book’’).
8 See, e.g., iMoneyNet Money Fund Report (Mar.
20, 2009), available at https://www.imoneynet.com/
files/Publication_News/mfr.pdf.
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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. nonfinancial 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
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
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 https://www.ici.org/highlights/
mm_06_11_09.
12 See Investment Company Institute, 1999
Mutual Fund Fact Book, at 4 (May 1999), available
at https://www.ici.org/pdf/1999_factbook.pdf;
Investment Company Institute, Trends in Mutual
Fund Investing, May 28, 2009, available at https://
www.ici.org/highlights/trends_04_2009.
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billion to $2.48 trillion, or 380
percent.13
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 shortterm credit extended to U.S. businesses.
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
As a consequence, the health of
money market funds is important not
only to their investors, but also to a
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.
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 https://
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 https://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’’).
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 https://
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 https://www.bis.org/publ/
qtrpdf/r_qt0903g.htm (‘‘U.S. Dollar Money Market
Funds’’).
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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 shortterm securities.
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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
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
18 See Mike Hammill & Andrew Flowers, MMMF,
and AMLF, and MMIFF, Macroblog (Federal
Reserve Bank of Atlanta), Oct. 30, 2008, available
at https://www.macroblog.typepad.com/macroblog/
2008/10/.
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’’).
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).
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from being diluted or otherwise
adversely affected if fund shares are not
priced fairly.22
Rule 2a–7, however, permits money
market funds to use the amortized cost
method of valuation and pennyrounding 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
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
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’’).
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).
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
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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-tomarket 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
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
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 dollarweighted 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.
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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value of a money market fund when it
experienced losses in one or more of its
portfolio securities.
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
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
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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.
37 See Neil Shah, Money Market Funds Cut
Exposure to Risky SIV Debt—S&P, Reuters, Nov. 21,
2007, available at https://www.reuters.com/article/
bondsNews/idUSN2146813220071121.
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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.
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 onethird.42 Eighty percent of these
investments came from institutional
investors.43
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
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 https://www.sec.gov/divisions/investment/imnoaction.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 https://
www.marketwatch.com/story/hsbcs-35-bln-sivbailout-puts-pressure-on-citi-superfund.
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 https://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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32691
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
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
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).
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 https://
www2.standardandpoors.com/spf/pdf/media/
MoneyMarketFunds_Irrationality.pdf.
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held by many prime money market
funds.
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
As a consequence, short-term markets
seized up, impairing access to credit in
short-term private debt markets.51 Some
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
https://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 https://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 https://
www.bloomberg.com/apps/
news?pid=newsarchive&sid=a5hvnKFCC_pQ.
51 See Minutes of the Federal Open Market
Committee, Federal Reserve Board, Oct. 28–29,
2008, at 5, available at https://
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 https://
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 longerdated 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
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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
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
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
https://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 https://
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., https://
www.sec.gov/divisions/investment/imnoaction.shtml#money.
55 See Press Release, U.S. Department of the
Treasury, Treasury Announces Guaranty Program
for Money Market Funds (Sept. 19, 2008), available
at https://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
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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
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 https://
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 https://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 https://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 https://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 https://
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 https://www.treas.gov/offices/domesticfinance/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
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worked with sponsors of money market
funds to provide regulatory relief they
requested to participate fully in these
programs.59
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
participate in the program); see also https://
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 https://www.sec.gov/
divisions/investment/im-noaction.shtml#money.
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
https://www.sec.gov/news/press/2008/2008-234.htm.
62 Investment Company Institute, SEC Staff NoAction Letter (Oct. 10, 2008). This letter is available
on our Web site at https://www.sec.gov/divisions/
investment/noaction/2008/ICI101008.htm. The
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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
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 mid2000s, 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
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.
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.
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.
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better positioned in light of increased
liquidity risk to the funds.68
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 longterm 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.
The Treasury Guarantee Program has
been extended twice, but is set to expire
on September 18, 2009.72 Programs
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.
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
https://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 https://
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
https://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 https://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 https://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.
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 https://
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),
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established by the Federal Reserve
Board to support liquidity in the shortterm 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
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
available at https://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 https://
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 https://
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 https://
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.
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 https://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
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in this release regulatory changes
designed to protect investors in a fund
that breaks a dollar in the future.79
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 shortterm 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.
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
vulnerability as Lehman Brothers sought
bankruptcy protection. See id.
79 See infra Section II.I.
80 ICI Report, supra note 6.
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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.
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
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.
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
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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
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
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
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
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
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’’).
87 Credit Rating Agency Reform Act of 2006, Pub.
L. 109–291, 120 Stat. 1327.
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).
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.
94 ICI Report, supra note 6, at 101.
95 Id. at 100.
96 See Federal Reserve Board Commercial Paper
Outstanding Chart, available at https://
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 https://
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.
98 See Federal Reserve Board Commercial Paper
Rates Chart, available at https://www.federal
reserve.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.’’).
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
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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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.
It does not appear that amending rule
2a–7 to eliminate money market funds’
ability to acquire second tier securities
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
https://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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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).
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
100 See
Crabbe & Post, supra note 15, at 11, Table
101 See
id. at 11–12.
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?
2.
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2. Eligible Securities
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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
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
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).
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 https://www.sec.gov/rules/concept/s71203.shtml.
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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
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
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 https://www.sec.gov/comments/s7-1908/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).
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
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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
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
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.
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
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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?
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
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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,
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).
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
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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
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
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 longterm 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).
123 Rule 2a–7(c)(6)(i)(A)(1) and (2).
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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
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.
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
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.
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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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.
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
As discussed above, beginning in
2007, SIV securities were rapidly
downgraded by NRSROs revealing
money market funds’ varying minimal
credit risk determinations with respect
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 https://www.orrick.com/
fileupload/1485.pdf.
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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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
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
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.
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
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32699
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
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
mortgage credits as a seasoned asset class. In
addition, their decision, in part, may have been
influenced by the greater amount of overcollateralization 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.
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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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
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
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 https://
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.
142 See, e.g., U.S. Department of the Treasury,
Daily Treasury Yield Curve Rates, available at
https://www.treasury.gov/offices/domestic-finance/
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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.
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
debt-management/interest-rate/yield_historical_
main.shtml.
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.
146 See Irish Financial Services Regulatory
Authority, Valuation of Assets of Money Market
Funds, 2008 Guidance Note 1/08 (Aug. 2008),
available at https://www.financialregulator.ie/
industry-sectors/funds/Documents/
Guidance%20Note%20108%20
Valuation%20of%20Assets%20of%20Money%20
Market%20Funds.pdf (‘‘Financial Regulator
Guidance Note 1/08’’). As of April 2009, money
market funds registered in Ireland managed
approximately Ö317 billion ($419 billion) in assets.
See Irish Financial Regulator statistics available at
https://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 https://www.immfa.org/about/
Codefinal.pdf. As of February 13, 2009, IMMFAmember constant net asset value money market
funds managed approximately $493 billion in
assets. See IMMFA statistics, available at https://
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 https://
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 https://www.fitchresearch.com/
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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
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
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
creditdesk/reports/report_frame.cfm?rpt_
id=266376.
148 See proposed rule 2a–7(c)(2)(ii).
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).
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.
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date.153 First, a fund may treat a shortterm 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 floatingrate 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.
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 shortterm securities in times of market
turbulence. The ICI Report also notes
that while adjustable-rate securities do
protect a fund against changes in
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).
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.
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interest rates, permitting maturity
shortening based on interest rate resets
does not protect against liquidity risk to
the portfolio.159
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 shortterm, high quality debt securities.
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
159 See ICI Report, supra note 6, at text
accompanying n.140.
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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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
161 See
1983 Adopting Release, supra note 3, at
n.16.
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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
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 shortterm adjustable-rate securities also
experienced increased credit and
interest rate spreads and greater
volatility than securities with maturities
similar to the reset dates.
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?
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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
162 See
id.
id.
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 https://
www.bloomberg.com/apps/
news?pid=newsarchive&sid=aSc8k8D7ZMw0.
165 See rule 2a–7(a)(13) and (a)(29).
163 See
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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?
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
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
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).
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)].
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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?
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 openend 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
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 adjustablerate 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).
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.
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sufficient liquidity to meet redemption
requests on a more immediate basis.173
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
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.
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
173 See 1983 Adopting Release, supra note 3, at
text following n.39.
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.
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 https://
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, https://
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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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.
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
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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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
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.
180 See Money Market Funds Tackle ‘‘Exuberant
Irrationality,’’ Standard & Poor’s, RatingsDirect
(Sept. 30, 2008), available at https://
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 30day 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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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
181 Proposed
rule 2a–7(c)(5)(iii).
‘‘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 https://
www.federalreserve.gov/monetarypolicy/files/
fomcminutes20081029.pdf (‘‘FRB Open Market
Committee Oct. 28–29 Minutes’’) (Dec. 15–16,
2008), at 4, available at https://
www.federalreserve.gov/monetarypolicy/files/
fomcminutes20081216.pdf (‘‘Yields on nominal
Treasury coupon securities declined significantly
over the intermeeting period in response to safehaven 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 inflationprotected 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.
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.
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 marketbased value of its assets. Rule 2a–7(a)(27).
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 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?
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?
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?
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
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).
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).
190 Proposed rule 2a–7(c)(5)(iii).
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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.
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
191 This information is based on analysis of data
from the iMoneyNet Money Fund Analyzer
database.
192 See supra note 178.
193 See, e.g., ICI, Frequently Asked Questions
About Money Market Funds, https://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, https://imoneynet.com/
(separates information and analysis on money
market funds into institutional and retail
categories); Crane Data, Money Fund Intelligence
(June 2009) at 30, https://www.cranedata.us/
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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.
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,
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)].
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.
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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.
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 floatingand variable-rate securities with seven
day demand features from which the
fund obtains much of its liquidity. We
understand that these funds are unlikely
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).
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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?
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
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
We request comment on the minimum
weekly liquidity requirements. Would a
minimum daily liquidity requirement
199 See
ICI Report, supra note 6, at 74.
rule 2a–7(c)(5)(iv). The term
‘‘weekly liquid assets’’ would be defined in
proposed rule 2a–7(a)(32).
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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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.
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.
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
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.
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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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
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
We request comment on this proposed
requirement for liquidity. Should we
consider incorporating specific objective
standards for liquidity in this
requirement? Should we provide
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).
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.
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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?
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 shortterm 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.
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
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
We believe that the proposed stress
testing procedures would provide
money market fund boards a better
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).
208 Proposed rule 2a–7(c)(8)(ii)(D)(1).
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209 Rule
2a–7(c)(7)(ii)(A)(1).
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).
210 Proposed
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32707
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
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
213 ICI
Report, supra note 6, at 75.
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 https://
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.’’).
214 See
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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 marketbased 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?
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
216 See
ICI Report, supra note 6, at 75.
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.
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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
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
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
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.’’).
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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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
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 brokerdealer 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.
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
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).
225 In 2008, repurchase agreements accounted for
26.4% of taxable Government money market funds’
total net assets and 9.1% of taxable nonGovernment money market funds’ total net assets.
See 2009 Fact Book, supra note 7, at 150–51, Tables
41 & 42.
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
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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.
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
We request comment on this
amendment. We understand that most
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).
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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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 ‘‘lookthrough’’ 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.
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
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
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 risktaking by fund advisers, and thus reduce
the likelihood that a fund will break the
buck.
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
234 17
CFR 210.12–12 to 12–14.
rule 2a–7(c)(12).
235 Proposed
236 Id.
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 https://
www.fundaction.com/pdf/FA092908.pdf.
239 See id.
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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
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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)?
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
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
ICI Report, supra note 6, at 93.
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).
PO 00000
240 See
241 Proposed
Frm 00024
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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
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
Proposed rule 30b1–6 would require
money market funds to file a monthly
portfolio holdings report on new Form
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 https://www.treas.gov/offices/
domestic-finance/key-initiatives/money-marketdocs/Guarantee_Agreement_Stable-Value.pdf.
244 See, e.g., supra note 68.
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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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.
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
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.
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 frontrunning 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
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
https://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.
249 See also infra Section V.
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.
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).
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funds to disclose market-based values
(including the value of any credit
support agreement), which would allow
us to identify funds that have marketbased 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)?
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.
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
253 See supra discussion at paragraph following
note 239 and paragraph preceding note 240.
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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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?
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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
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
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.
259 Proposed rule 2a–7(c)(1) (new last two
sentences).
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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
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.
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
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.
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).
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 shortterm 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
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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
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
for a share price below $1.00 * * * [which] wasn’t
anticipated when the Fund was created’’).
263 Proposed 2a–7(c)(1) (new third sentence).
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.
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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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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 noaction 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
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
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.
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.
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).’’).
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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.
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
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 NoAction 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 https://www.sec.gov/divisions/investment/imnoaction.shtml under the hyperlink for the relevant
letter.
271 See, e.g., Dreyfus Money Funds, SEC Staff NoAction Letter (Oct. 20, 2008); Mount Vernon
Securities Lending Trust, Inc.—Mount Vernon
Securities Lending Prime Portfolio, SEC Staff NoAction 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 MoneyMarket Fund, SEC Staff No-Action Letter (Nov. 18,
2008); Russell Investment Company—Russell
Money Market Fund, SEC Staff No-Action Letter
(Oct. 20, 2008).
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32713
eligible security.272 Any such
transaction would have to satisfy the
existing requirements of rule 17a–9.273
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.
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 clawback 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
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).
274 Proposed rule 17a–9(b)(2).
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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.
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?
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).
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
https://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
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.
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
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
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.
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).
282 See Rule 22e–3T Adopting Release, supra note
31.
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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.
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.
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
283 Id.
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 https://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).
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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
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.
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
285 Proposed
rule 22e–3(a).
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.
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.
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
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286 We
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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
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
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.
290 ICI Report, supra note 6, at 85–89.
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32715
years. This ‘‘time out’’ could give money
market funds some time during
turbulent periods to assess the viability
of the fund.291
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?
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
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.
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 https://www.reuters.com/article/
PrivateEquityandHedgeFunds09/
idUSTRE52P4JJ20090326.
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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?
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?
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III. Request for Comment
The Commission requests comment
on the rules and amendments proposed
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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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
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
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).
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
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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
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
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
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.
298 See rule 2a–7(c)(1).
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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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules
move their investments from money
market funds to other investment
vehicles.
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
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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.
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 shortterm 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
ICI Report, supra note 6, at 1.
ICI Mutual Fund Historical Data, supra
note 47 (data for week ended June 10, 2009).
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.
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301 See
302 See
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32717
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.
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 marketbased 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
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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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules
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 marketbased net asset values differ from
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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.
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
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.
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 90day period through pro rata payments of cash and
‘‘in-kind’’ distributions of securities held by the
fund, to prevent redemptions from ‘‘forcing’’ the
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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.
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 nonaffiliate 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
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
https://www.sec.gov/Archives/edgar/data/809593/
000080959308000045/sep3008_prosuppbeacon.txt.
310 Large investors that did not wish to receive inkind 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.
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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?
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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.
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,
311 The redemption fee cannot exceed two percent
of the value of the shares redeemed.
312 44 U.S.C. 3501–3521.
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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.
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
supra Section II.A–G.
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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314 Proposed
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32719
confidential to the extent permitted by
law.
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.
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
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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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
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
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317 This
estimate is based on the following
calculation: (21 hours + 3 hours) × 171 fund
complexes = 4104 hours.
318 These estimates are based on the following
calculations: (21 + 3) ÷ 3 = 8 hours; 8 × 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)) ×
171 fund complexes = 1197 hours.
320 These estimates are based on the following
calculations: (10 hours + 2 hours + 15 hours) × 6
meetings = 162 hours; 162 hours × 171 fund
complexes = 27,702 hours.
321 Proposed rule 2a–7(c)(11)(vii).
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these records for a total annual burden
of 171 hours for all fund complexes.322
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
We request comment on these
estimates of hourly burdens. Would
funds develop stress tests on a complexwide 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
322 This estimate is based on the following
calculation: 0.1667 hours × 6 meetings × 171 fund
complexes = 171 hours.
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.
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.
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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
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
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
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 × 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 × 12 months = 48 hours
per year; 48 hours per year × 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 × 3)] ÷ 3).
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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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
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
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
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.
C. Monthly Reporting of Portfolio
Holdings
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
1. Rule 30b1–6 and Form N–MFP
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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 boardapproved 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.
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 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
329 The estimate is based on the following
calculation: (25 fund complexes × 1 hour) = 25
hours.
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.
331 See proposed rule 22e–3(c).
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.
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
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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)
hours each, for an average annual burden of 107
hours (1 filing × 40 hours = 40 hours; 35 filings ×
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.
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 × 8 hours per
money market fund = 6000 hours.
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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.
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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.
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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
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
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
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
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
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
343 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).
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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proposed rule 2a–7(c)(5)(i).
proposed rule 2a–7(c)(5)(iii). This
restriction would not apply to tax exempt money
market funds.
345 See proposed rule 2a–7(c)(5)(iv).
346 See proposed rule 2a–7(c)(5)(ii).
347 See proposed rule 2a–7(a)(18) (defining
‘‘Institutional Fund’’).
344 See
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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 variablerate 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
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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
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32723
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.
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
348 During the recent financial crisis, investors
redeemed substantial amounts of assets from ultrashort bond funds and certain offshore money
market funds. See ICI Report, supra note 6, at 106–
07.
349 See supra note 101 and accompanying and
following text, and Section II.C.1.
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proportion of their securities with
shorter final maturities.
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.
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?
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
351 See
NRSRO References Proposal, supra note
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.
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
105.
350 See supra text accompanying note 101, note
145 and accompanying text, and note 147.
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353 See
id.
ICI Report, supra note 6, at 82.
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355 See
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costs to fund advisers to monitor
NRSROs.
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
We anticipate that stress testing
would give fund advisers a better
356 Proposed
rule 2a–7(c)(8)(ii)(D).
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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357 The
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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
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.
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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.
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
361 This estimate is based on the following
calculations: $275/hour × 280 hours (2 senior risk
management specialists) + ($244/hour × 320 hours
(2 senior systems analysts) = $155,080; $275/hour
(1 senior risk management specialist) × 21 hours =
$5775; $4000/hour × 3 hours = $12,000; $155,080
+ $5775 + $12,000 = $172,855.
362 This estimate is based on the following
calculation: (155,080 × 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) × 8 hours = $2200; $2200 + $5775 +
$12,000 = $19,975.
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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
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
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
364 This estimate is based on the following
calculation: Report: $275/hour × 10 hours (senior
risk management specialist) + $62 × 2 hours
(administrative assistant) = $2874; Assessment:
$275/hour × 15 hours (senior risk management
specialist) = $4125; Record retention: $62/hour ×
0.1667 hours (administrative assistant) = $10.33;
($2874 + $4125 + $10) × 6 (board meetings per year)
= $42,054.
365 This estimate is based on the following
calculations: Tests: $275/hour × 15 hours (senior
risk management specialist) + $244/hour × 20 hours
(senior systems analyst) = $9,005; $9,005 × 12
(monthly testing) = $108,060; Update procedures:
$275/hour × 5 hours (senior risk management
specialist) + $4000/hour × 1 hour = $5375; $108,060
+ $5375 = $113,435.
366 This estimate is based on the following
calculation: (43 × $173,000) + (85 × $95,000) + (43
× $20,000) + (171 × $5775) + (171 × $12,000) =
$19,413,525.
367 This estimate is based on the following
calculation: (43 × $113,000) + (85 × $113,000 × 0.5)
+ (171 × $42,054 (reports and assessments)) =
$16,852,734.
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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 ‘‘lookthrough’’ 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
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
368 See rule 2a–7(c)(4)(ii)(A). The rule 5b–3(c)(1)
definition of collateralized fully, which is crossreferenced 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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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.
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 shortterm 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.
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
371 See
rule 2a–7(c)(3)(i).
rule 2a–7(c)(12).
372 Proposed
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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
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
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
373 This estimate is based on our experience with
other filings and an estimated hourly wage rate of
$78.48 (6000 hours × $78.48 = $470,880).
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 × $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 × $206 × 12 months = $9888).
376 See supra note 325 and accompanying text.
377 This calculation is based on the following
estimate: ($4944 × 150 portfolios) = $741,600.
378 This calculation is based on the following
estimate: ($9888 × 750 portfolios) = $7,416,000.
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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.
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.
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
PO 00000
379 See
ICI Report, supra note 6, at 93.
rule 2a–7(c)(1).
381 See supra note 262 and accompanying text.
380 Proposed
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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.
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
The proposed amendment essentially
would codify past Commission staff no382 This estimate is based on the following
calculation: $244/hour × 160 hours (senior systems
analyst) = $39,040.
383 This is based on the following calculation:
(171 (fund complexes) ÷ 3) × $39,040 = $2,225,280.
384 This is based on the following calculation:
$4000/hour (board time) × 0.25 hours = $1000.
385 This is based on the following calculation:
$1000 × 171 (fund complexes) = $171,000.
386 See proposed rule 17a–9(a).
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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.
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.
Affiliated persons purchasing such
securities would have costs in creating
387 See
supra Section II.H.1.
staff estimates that the costs to
obtain staff no-action assurances range from
$50,000 to $100,000.
389 See proposed rule 17a–9(b)(2).
390 Many of the no-action letters can be found on
our website. See https://www.sec.gov/divisions/
investment/im-noaction.shtml#money.
391 Id.
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?
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
388 Commission
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392 This estimate is based on the following
calculation: $292/hour × 5 hours × 171 fund
complexes = $249,660.
393 This estimate is based on the following
calculations: 25 (notices) + $305/hour (attorney) ×
1 hour = $7625. See supra note 329 and
accompanying text.
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estimates are reasonable. We also
request comment on our analysis of the
costs and benefits of this proposed rule
amendment.
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 boardapproved 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.
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.
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
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.
395 This estimate is based on the following
calculation: $305/hour × 1 ÷ 6 hour = $51.
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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 thirdparties, 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
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.
396 This estimate is based on the following
calculation: $281/hour × 128 hours (senior database
administrator) = $35,968.
397 This estimate is based on the following
calculation: $281/hour × 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.
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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.
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
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
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
L. 104–121, Title II, 110 Stat. 857 (1996).
U.S.C. 80a–2(c).
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).
403 See proposed rule 2a–7(c)(2)(ii).
404 See proposed rule 2a–7(c)(2)(iii).
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400 15
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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.
Finally, we are proposing new
liquidity requirements on money market
funds. Under the proposed
amendments, money market funds
would be prohibited from acquiring
illiquid securities405 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
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
405 See
proposed rule 2a–7(c)(5)(i).
proposed rule 2a–7(c)(5).
407 See proposed rule 2a–7(c)(5)(ii).
406 See
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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.
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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?
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
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
409 Proposed
rule 2a–7(a)(5).
rule 2a–7(c)(4)(ii)(A).
411 See supra Section II.F.1.
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.
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.
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
410 Proposed
408 Proposed
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412 Proposed
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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?
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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 boardapproved 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
413 See
414 See
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 thirdparties 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.
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;
proposed rule 17a–9(a).
proposed rule 17a–9(b).
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415 5
416 5
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U.S.C. 603(a).
U.S.C. 605(b).
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(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
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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
417 Under rule 0–10 under the Investment
Company Act, an investment company is
considered a small entity if it, together with other
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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.
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.
*
*
*
*
*
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.
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2. Section 270.2a–7 is revised to read
as follows:
§ 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
§ 270.5b–3(c)(1) except that § 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;
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(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
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(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 longterm 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 § 270.5b–
3(c)(2).
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(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 NonControlled 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.
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(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 shortterm 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
§ 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
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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 DollarDenominated 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
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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
§§ 270.2a–4 and 270.22c–1 thereunder,
may be computed by use of the
Amortized Cost Method or the PennyRounding 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 marketbased 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
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based on the current net asset value per
share pursuant to § 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 dollarweighted 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
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(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 longterm 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 longterm 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
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32735
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
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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 seventyfive 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
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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
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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
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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 § 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
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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: PennyRounding Method. In the case of a
money market fund using the PennyRounding Method, in supervising the
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32737
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
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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
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(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.
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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
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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
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(c)(9) (required procedures: PennyRounding 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:
§ 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 § 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:
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32739
§ 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 § 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 § 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:
§ 270.30b1–5
Quarterly report.
Every registered management
investment company, other than a small
business investment company registered
on Form N–5 (§§ 239.24 and 274.5 of
this chapter), shall file a quarterly report
on Form N–Q (§§ 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
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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 § 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:
§ 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 § 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:
§ 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 § 270.2a–7 of this chapter to file
reports pursuant to § 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.
mstockstill on DSKH9S0YB1PROD with PROPOSALS2
Form N–MFP—Monthly Schedule of
Portfolio Holdings of Money Market
Funds
Form N–MFP is to be used by openend management investment
companies, or series thereof, that are
regulated as money market funds under
§ 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.
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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:
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Frm 00054
Fmt 4701
Sfmt 4702
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, TaxFree 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
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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 7day gross yield should not reflect a
deduction of shareholders fees and
fund operating expenses.
mstockstill on DSKH9S0YB1PROD with PROPOSALS2
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
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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]
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32741
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
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]]>Agencies
[Federal Register Volume 74, Number 129 (Wednesday, July 8, 2009)]
[Proposed Rules]
[Pages 32688-32741]
From the Federal Register Online via the Government Printing 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
[[Page 32688]]
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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 (https://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-11-09 on the subject line; or
Use the Federal eRulemaking Portal (https://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 (https://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\
---------------------------------------------------------------------------
\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
[[Page 32689]]
$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 https://www.ici.org/highlights/trends_04_09 (``ICI Trends'').
\5\ See id.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\6\ See Investment Company Institute, Report of the Money Market
Working Group, at 21 (Mar. 17, 2009), available at https://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.
---------------------------------------------------------------------------
\7\ See Investment Company Institute, 2009 Investment Company
Fact Book, at 147, Table 38 (May 2009), available at https://www.ici.org/pdf/2009_factbook.pdf (``2009 Fact Book'').
\8\ See, e.g., iMoneyNet Money Fund Report (Mar. 20, 2009),
available at https://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 https://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 https://www.ici.org/pdf/1999_factbook.pdf; Investment Company Institute, Trends in Mutual Fund
Investing, May 28, 2009, available at https://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.
---------------------------------------------------------------------------
\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
https://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
https://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 https://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 https://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
[[Page 32690]]
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 https://www.macroblog.typepad.com/macroblog/2008/10/.
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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'').
---------------------------------------------------------------------------
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
[[Page 32691]]
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 https://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 https://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 https://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 https://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.
---------------------------------------------------------------------------
\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 https://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\
---------------------------------------------------------------------------
\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
https://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 https://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 https://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5hvnKFCC_pQ.
---------------------------------------------------------------------------
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 https://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 https://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 https://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 https://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., https://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 https://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 https://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 https://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 https://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 https://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 https://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 https://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
https://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 https://www.sec.gov/divisions/investment/im-noaction.shtml#money.
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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 https://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 https://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 https://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 https://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 https://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 https://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 https://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 https://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 https://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 https://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
https://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 https://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 https://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 wi
