Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule, 47985-48014 [2014-17746]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 157 (Thursday, August 14, 2014)]
[Proposed Rules]
[Pages 47985-48014]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17746]



[[Page 47985]]

Vol. 79

Thursday,

No. 157

August 14, 2014

Part III





Securities and Exchange Commission





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17 CFR Parts 270 and 274





 Removal of Certain References to Credit Ratings and Amendment to the 
Issuer Diversification Requirement in the Money Market Fund Rule; 
Proposed Rule

Federal Register / Vol. 79 , No. 157 / Thursday, August 14, 2014 / 
Proposed Rules

[[Page 47986]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 270 and 274

[Release No. IC-31184; File No. S7-07-11]
RIN 3235-AK61


Removal of Certain References to Credit Ratings and Amendment to 
the Issuer Diversification Requirement in the Money Market Fund Rule

AGENCY: Securities and Exchange Commission.

ACTION: Re-proposed rule; proposed rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is re-proposing certain amendments, initially proposed 
in March 2011, related to the removal of credit rating references in 
rule 2a-7, the principal rule that governs money market funds, and Form 
N-MFP, the form that money market funds use to report information to 
the Commission each month about their portfolio holdings, under the 
Investment Company Act of 1940 (``Investment Company Act'' or ``Act''). 
The re-proposed amendments would implement provisions of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act''). We 
are issuing this re-proposal in consideration of comments received on 
our March 2011 proposal. In addition, we are proposing to amend rule 
2a-7's issuer diversification provisions to eliminate an exclusion from 
these provisions that is currently available for securities subject to 
a guarantee issued by a non-controlled person.

DATES: Comments should be received on or before October 14, 2014.

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 email to rule-comments@sec.gov. Please include 
File Number S7-07-11 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 to Kevin M. O'Neill, Deputy Secretary, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-1090.

All submissions should refer to File Number S7-07-11. This file number 
should be included on the subject line if email is used. To help the 
Commission 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 also are available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make publicly available.

FOR FURTHER INFORMATION CONTACT: Erin C. Loomis, Senior Counsel; Amanda 
Hollander Wagner, Senior Counsel; Penelope W. Saltzman, Senior Special 
Counsel; Investment Company Rulemaking Office, at (202) 551-6792, 
Division of Investment Management, Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: We are proposing for public comment 
amendments to rule 2a-7 [17 CFR 270.2a-7] and Form N-MFP [17 CFR 
274.201] under the Investment Company Act.\1\
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    \1\ 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 270].
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Table of Contents

I. Background
    A. Credit Rating References
    B. Exclusion from the Issuer Diversification Requirement
II. Discussion
    A. Rule 2a-7
    1. Eligible Securities
    2. Conditional Demand Features
    3. Monitoring Minimal Credit Risks
    4. Stress Testing
    B. Form N-MFP
    C. Exclusion from the Issuer Diversification Requirement
III. Compliance Period for the Proposed Rule and Form Amendments
IV. Paperwork Reduction Act Analysis
V. Economic Analysis
VI. Regulatory Flexibility Act Certification Statutory Authority 
Text of Rule and Form Amendments

I. Background

A. Credit Rating References

    Section 939A of the Dodd-Frank Act requires each Federal agency, 
including the Commission, to ``review any regulation issued by such 
agency that requires the use of an assessment of the credit-worthiness 
of a security or money market instrument and any references to or 
requirements in such regulations regarding credit ratings.'' \2\ That 
section further provides that each such agency shall ``modify any such 
regulations identified by the review . . . to remove any reference to 
or requirement of reliance on credit ratings and to substitute in such 
regulations such standard of credit-worthiness as each respective 
agency shall determine as appropriate for such regulations.'' \3\
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    \2\ Public Law 111-203, section 939A(a)(1)-(2). Section 939A of 
the Dodd-Frank Act applies to all Federal agencies.
    \3\ Public Law 111-203, section 939A(b). Section 939A of the 
Dodd Frank Act provides that agencies shall seek to establish, to 
the extent feasible, uniform standards of creditworthiness, taking 
into account the entities the agencies regulate and the purposes for 
which those entities would rely on such standards.
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    As a step toward implementing these mandates, in March 2011 we 
proposed to replace references to credit ratings issued by nationally 
recognized statistical rating agencies (``NRSROs'') in two rules and 
four forms under the Securities Act of 1933 (``Securities Act'') and 
the Investment Company Act, including rule 2a-7 and Form N-MFP under 
the Investment Company Act.\4\ The 2011 proposal preceded other 
amendments to rule 2a-7 and Form N-

[[Page 47987]]

MFP that we proposed last year as part of our broader efforts to reform 
money market funds.\5\ At that time, we noted that we were not 
rescinding our 2011 proposal to remove ratings references from certain 
rules and forms under the Investment Company Act, but that we intended 
to address the matter at another time.\6\
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    \4\ See References to Credit Ratings in Certain Investment 
Company Act Rules and Forms, Investment Company Act Release No. 
29592 (Mar. 3, 2011) [76 FR 12896 (Mar. 9, 2011)] (``2011 Proposing 
Release''). Specifically, we proposed to: (i) Remove references to 
credit ratings in rules 2a-7 and 5b-3 under the Investment Company 
Act and replace them with alternative standards of creditworthiness; 
(ii) adopt new rule 6a-5 under the Investment Company Act that would 
establish a creditworthiness standard to replace the credit rating 
reference in section 6(a)(5) removed by the Dodd-Frank Act; (iii) 
eliminate required disclosures of credit ratings in Form N-MFP under 
the Investment Company Act; and (iv) remove the requirement that 
credit ratings be used when portraying credit quality in shareholder 
reports from Forms N-1A, N-2, and N-3 under the Securities Act and 
the Investment Company Act. In December 2013, we adopted amendments 
removing references to credit ratings in rule 5b-3 and eliminating 
the required use of credit ratings in Forms N-1A, N-2, and N-3. See 
Removal of Certain References to Credit Ratings under the Investment 
Company Act, Investment Company Act Release No. 30847 (Dec. 27, 
2013) [79 FR 1316 (Jan. 8, 2014)] (``2013 Ratings Removal Adopting 
Release''). We adopted new rule 6a-5 on November 19, 2012. See 
Purchase of Certain Debt Securities by Business and Industrial 
Development Companies Relying on an Investment Company Act 
Exemption, Investment Company Act Release No. 30268 (Nov. 19, 2012) 
[77 FR 70117 (Nov. 23, 2012)].
     Rule 3a-7 under the Investment Company Act also contains a 
reference to ratings. In August 2011, in a concept release 
soliciting comment on the treatment of asset-backed issuers under 
the Investment Company Act, we sought comment on the role, if any, 
that credit ratings should continue to play in the context of rule 
3a-7. See Treatment of Asset-Backed Issuers under the Investment 
Company Act, Investment Company Act Release No. 29779 (Aug. 31, 
2011) [76 FR 55308 (Sept. 7, 2011)] at section III.A.1.
    \5\ See Money Market Fund Reform; Amendments to Form PF, 
Investment Company Act Release No. 30551 (June 5, 2013) [78 FR 36834 
(June 19, 2013)] (``2013 Money Market Fund Proposing Release''). The 
2013 rule proposals were designed to address money market funds' 
susceptibility to heavy redemptions, improve their ability to manage 
and mitigate potential contagion from such redemptions, and increase 
the transparency of their risks, while preserving, as much as 
possible, the benefits of money market funds.
    \6\ Id. at text accompanying n.130.
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    We received several comments on the 2013 Money Market Fund 
Proposing Release suggesting that we act on credit ratings as part of 
our broader money market fund reforms.\7\ And today in another release, 
we have adopted certain amendments to rule 2a-7 and Form N-MFP that we 
proposed last year.\8\ We also received comments on the 2011 Proposing 
Release that raised a number of concerns with respect to the proposed 
amendments and suggested alternative rule text for some provisions. We 
have determined to re-propose amendments to replace references to 
credit ratings in rule 2a-7 and to modify provisions in Form N-MFP that 
reference credit ratings, in consideration of the mandate of Dodd-Frank 
Act section 939A, the comments on the 2011 Proposing Release, and the 
broader money market fund reforms we have adopted today.\9\
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    \7\ See Comment Letter of Wells Fargo Funds Management, LLC 
(Sept. 16, 2013); Comment Letter of Hester Pierce & Robert Greene, 
Mercatus Center, George Mason University (Sept. 17, 2013); Comment 
Letter of The Dreyfus Corporation (Sept. 17, 2013). Comments on the 
2013 Money Market Fund Proposing Release are available at: https://www.sec.gov/comments/s7-03-13/s70313.shtml.
    \8\ See Money Market Fund Reform; Amendments to Form PF, 
Investment Company Act Release No. 31166, (July 23, 2014) (``2014 
Money Market Fund Adopting Release''), which is published elsewhere 
in this issue of the Federal Register. With this re-proposal, the 
Commission is not re-opening comment on the amendments adopted in 
the 2014 Money Market Fund Adopting Release.
     Unless otherwise noted, all references to rule 2a-7 and Form N-
MFP in this release refer to rule 2a-7 and Form N-MFP as amended by 
the 2014 Money Market Fund Adopting Release. References to 
provisions of rule 2a-7 and Form N-MFP as they would be modified by 
the amendments we re-propose in this release are preceded by the 
term ``re-proposed'' (i.e., ``re-proposed rule 2a-7'').
    \9\ As discussed above, the Commission is not re-opening comment 
on amendments to rule 2a-7 that were adopted in the 2014 Money 
Market Fund Adopting Release. See supra note 8.
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    A number of other Federal agencies have also taken action to 
implement section 939A of the Dodd-Frank Act, including regulations 
proposed or adopted by the Commodity Futures Trading Commission, the 
Office of the Comptroller of the Currency (``OCC''), the National 
Credit Union Administration, the Federal Housing Finance Agency, the 
Department of Labor, and jointly by the OCC and Board of Governors of 
the Federal Reserve.\10\ In some of these initiatives, the references 
to ratings were or would be replaced with an alternative standard 
designed to retain the same degree of credit quality as reflected by 
the use of credit ratings. We have considered the actions taken by 
these other regulators in re-proposing the amendments discussed in this 
release.
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    \10\ See OCC and Board of Governors of the Federal Reserve 
System, Regulatory Capital Rules: Regulatory Capital, Implementation 
of Basel III, Capital Adequacy, Transition Provisions, Prompt 
Corrective Action, Standardized Approach for Risk-weighted Assets, 
Market Discipline and Disclosure Requirements, Advanced Approaches 
Risk-Based Capital Rule, and Market Risk Capital Rule [78 FR 62018 
(Oct. 11, 2013)]; Department of Labor, Proposed Amendments to Class 
Prohibited Transaction Exemptions to Remove Credit Ratings Pursuant 
to the Dodd-Frank Wall Street Reform and Consumer Protection Act [78 
FR 37572 (June 21, 2013)]; Federal Housing Finance Agency, Removal 
of References to Credit Ratings in Certain Regulations Governing the 
Federal Home Loan Banks [78 FR 30784 (May 23, 2013)]; National 
Credit Union Administration, Alternatives to the Use of Credit 
Ratings [77 FR 74103 (Dec. 13, 2012)]; OCC, Alternatives to the Use 
of External Credit Ratings in the Regulations of the OCC [77 FR 
35253 (June 13, 2012)]; Commodity Futures Trading Commission, 
Removing Any Reference to or Reliance on Credit Ratings in 
Commission Regulations; Proposing Alternatives to the Use of Credit 
Ratings [76 FR 44262 (July 25, 2011)].
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B. Exclusion From the Issuer Diversification Requirement

    As noted above, today we adopted amendments to rule 2a-7 as part of 
our broader money market fund reforms. These included amendments 
relating to the rule's diversification provisions, which require a 
money market fund to diversify its investments with respect to issuers 
of the securities it acquires, as well as providers of demand features 
and guarantees related to those securities. As discussed in the 2014 
Money Market Fund Adopting Release,\11\ we sought comment on specific 
amendments we proposed as well as more broadly on the issuer and 
guarantor diversification requirements. Some of the comments we 
received in response prompted us to re-evaluate the exclusion to the 
issuer diversification requirement for securities subject to a 
guarantee issued by a non-controlled person. After careful 
consideration, and consistent with our reform goal of limiting 
concentrated exposure of money market funds to particular economic 
enterprises, we are proposing amendments that would eliminate this 
exclusion from the issuer diversification requirement of rule 2a-7.
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    \11\ See 2014 Money Market Fund Adopting Release, supra note 7, 
at section III.I.1.d.
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II. Discussion

A. Rule 2a-7

    The Investment Company Act and applicable rules generally require 
investment companies (``funds'') to calculate current net asset value 
per share by valuing their portfolio instruments at market value or, if 
market quotations are not readily available, at fair value as 
determined in good faith by the board of directors.\12\ These valuation 
requirements are designed to prevent unfair share pricing from diluting 
or otherwise adversely affecting the interests of investors.\13\ Rule 
2a-7 under the Investment Company Act, which governs the operation of 
money market funds, exempts certain money market funds from these 
valuation requirements. Until today, all money market funds have been 
permitted to value their portfolio securities using the amortized cost 
method of valuation (``amortized cost method'') and to use the penny-
rounding method of pricing (``penny-rounding method'') to maintain a 
stable share price, typically $1.00 per share.\14\

[[Page 47988]]

After the amendments adopted today go into effect, however, 
institutional prime and institutional municipal money market funds 
(collectively, ``institutional prime funds'' \15\) will be required to 
sell and redeem shares at their net asset value calculated on the 
current market-based value of the securities in their underlying 
portfolios, rounded to the fourth decimal place (e.g., $1.0000 \16\), 
i.e., transact at a ``floating'' net asset value per share 
(``NAV'').\17\
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    \12\ See section 2(a)(41) of the Investment Company Act 
(defining value), rule 2a-4 (defining current net asset value), 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).
    \13\ If shares are sold or redeemed based on a net asset value 
that has been either understated or overstated compared to the 
amount at which portfolio instruments could have been sold, then the 
interests of either existing shareholders or new investors will have 
been diluted. See Compliance Programs of Investment Companies and 
Investment Advisers, Investment Company Act Release No. 26299 (Dec. 
17, 2003) [68 FR 74714 (Dec. 24, 2003)] at text accompanying and 
following nn. 39-40; see also 2014 Money Market Fund Adopting 
Release, supra note 8, at section III.D (providing valuation 
guidance aimed at, among other things, promoting stronger valuation 
practices that may lessen a money market fund's susceptibility to 
heavy redemptions by decreasing the likelihood of sudden portfolio 
write-downs that could encourage financially sophisticated investors 
to redeem early).
    \14\ Under the amortized cost method, portfolio instruments are 
valued by reference to their acquisition cost as adjusted for 
amortization of premium or accretion of discount. See rule 2a-
7(a)(2). Share price is determined under the penny-rounding method 
by valuing securities at market value, fair value or amortized cost 
and rounding the per share net asset value to the nearest cent on a 
share value of a dollar, as opposed to the nearest one tenth of one 
cent as otherwise would be required. See 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''), at n.6 (``Release 9786 sets the 
amount of less than 1/10 of one cent on a share value of one dollar 
as the benchmark for materiality.''); 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)] at text accompanying n.11; rule 2a-
7(a)(20) (defining penny-rounding method).
     While most money market funds maintain a stable net asset value 
(``NAV''), some fund sponsors have established floating NAV money 
market funds in past years. See Northern Trust Files to Launch 
Investors Variable NAV Money Funds, Crane Data (Dec. 31, 2012), 
https://cranedata.com/archives/all-articles/4314/.
    \15\ As part of these amendments, the Commission has amended 
rule 2a-7 to rescind the exemptions that previously permitted 
institutional prime funds (i.e., money market funds other than 
government and retail money market funds, including municipal money 
market funds that fall under the definition of ``retail money market 
fund'' under rule 2a-7 as amended) to maintain a stable share price 
by use of amortized cost valuation and/or penny rounding. See 2014 
Money Market Fund Adopting Release, supra note 8, at section III.B.
    \16\ A money market fund could also price its shares at an 
equivalent or more precise level of accuracy for funds with a 
different share price. For example, a money market fund with a $10 
target share price could price its shares at $10.000. See rule 2a-
7(c)(1)(ii).
    \17\ See 2014 Money Market Fund Adopting Release, supra note 8, 
at section III.B. We note that the compliance date for the floating 
NAV amendments adopted in the 2014 Money Market Fund Adopting 
Release is three years after the amendments' effective date.
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    Rule 2a-7 contains ``risk limiting'' provisions designed to 
minimize the amount of risk a money market fund may assume.\18\ For 
those funds that are permitted to maintain a stable share price, these 
conditions help reduce the deviation between a money market fund's 
stabilized share price and the market value of its portfolio. For 
floating NAV funds, these conditions help to limit the risk of loss by, 
among other things, reducing principal volatility. Any fund that holds 
itself out to investors as a money market fund or the equivalent of a 
money market fund also must comply with these conditions.\19\ Among 
these conditions, rule 2a-7 limits a money market fund's portfolio 
investments to ``eligible securities,'' or securities that have 
received credit ratings from the ``requisite NRSROs'' in one of the two 
highest short-term rating categories or comparable unrated 
securities.\20\ A requisite NRSRO is an NRSRO that a money market 
fund's board of directors has designated for use (a ``designated 
NRSRO'') and that issues credit ratings that the board determines, at 
least annually, are sufficiently reliable for the fund to use in 
determining the eligibility of portfolio securities.\21\ Rule 2a-7 
further restricts money market funds to securities that the fund's 
board of directors (or the board's delegate \22\) determines present 
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.'' \23\ A money market 
fund is required to invest at least 97 percent of its total assets in 
eligible securities that have received a rating from the requisite 
NRSROs in the highest short-term rating category for debt securities 
(``first tier securities'' \24\) or unrated securities of comparable 
quality.\25\
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    \18\ Rule 2a-7 contains conditions that apply to each investment 
a money market fund proposes to make, as well as conditions that 
apply to a money market fund's entire portfolio. Although 
institutional prime funds are no longer permitted to maintain a 
stable share price by use of amortized cost valuation and/or penny 
rounding, these funds remain subject to the ``risk limiting'' 
provisions of rule 2a-7.
    \19\ See rule 2a-7(b) (prohibiting a fund from holding itself 
out as a money market fund unless it complies with the provisions of 
rule 2a-7, including the risk limiting conditions of rule 2a-7(d)).
    \20\ See rule 2a-7(d)(2)(i). The term ``eligible security'' is 
defined in rule 2a-7(a)(12).
    \21\ See rule 2a-7(a)(11) (defining ``designated NRSRO''); rule 
2a-7(a)(24) (defining ``requisite NRSRO'').
    \22\ A money market fund board may delegate minimal credit risk 
determinations, and typically does to the fund's adviser, provided 
that the board retains sufficient oversight. See rule 2a-7(j); 
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'') (permitting a money market fund's board 
of directors to delegate the responsibility to make such 
determinations). See also Investment Company Institute, Report of 
the Money Market Working Group (Mar. 17, 2009) (``ICI Working Group 
Report''), available at https://www.ici.org/pdf/ppr_09_mmwg.pdf, at 
Appendix I (``In our experience, Boards uniformly delegate the 
determination of minimal credit risks to their fund's adviser.''); 
Comment Letter of Mutual Fund Directors Forum (Apr. 25, 2011) 
(``MFDF Comment Letter'') (``as we have consistently commented in 
the past, . . . money fund boards will not themselves determine the 
creditworthiness of individual money market securities. Rather 
consistent with the provisions of rule 2a-7, boards will delegate 
this task in virtually all circumstances to the fund's adviser.''). 
When discussing or requesting comment on policies, procedures or 
practices regarding minimal credit risk determinations, this release 
identifies fund advisers as making the determinations. Comments on 
the 2011 Proposing Release are available at: https://www.sec.gov/comments/s7-07-11/s70711.shtm.
    \23\ Rule 2a-7(d)(2)(i). Thus, under the current rule, if the 
security is rated, having the requisite NRSRO rating is a necessary 
but not sufficient condition for investing in the security and 
cannot be the sole factor considered in determining whether a 
security presents minimal credit risks. See 1991 Adopting Release, 
supra note 22, at text preceding n.18.
    \24\ See rule 2a-7(a)(14) (defining ``first tier security'').
    \25\ See rule 2a-7(d)(2)(ii) (prohibiting a fund immediately 
after the acquisition of any second tier security from holding more 
than 3% of its total assets in second tier securities).
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    To implement the mandate of Dodd-Frank Act section 939A, we are re-
proposing amendments to remove references to credit ratings in rule 2a-
7. The re-proposed amendments would affect five elements of the rule: 
(i) Determination of whether a security is an eligible security; (ii) 
determination of whether a security is a first tier security; (iii) 
credit quality standards for securities with a conditional demand 
feature; (iv) requirements for monitoring securities for ratings 
downgrades and other credit events; and (v) stress testing.\26\ The re-
proposed amendments to rule 2a-7 reflect our consideration of 
commenters' concerns and suggested modifications to our 2011 proposal, 
as well as the broader money market fund reforms we have adopted today. 
These re-proposed amendments are designed to remove references to, or 
requirement of reliance on, credit ratings in rule 2a-7 and to 
substitute standards of creditworthiness that we believe are 
appropriate.\27\
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    \26\ The re-proposed amendments also would make conforming 
amendments to rule 2a-7's recordkeeping and reporting requirements. 
See re-proposed rule 2a-7(h)(3).
    \27\ In addition, we are re-proposing a technical revision that 
would update a cross-reference in rule 2a-7(a)(5) to reflect 
amendments to rule 5b-3 adopted last year. See supra note 4.
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1. Eligible Securities
    In 2011, we proposed to eliminate the requirement that eligible 
securities be rated.\28\ Instead, the Commission would have required 
that fund boards: First, determine whether securities are eligible 
securities based on minimal credit risks; and second, distinguish 
between first and second tier securities based on subjective standards 
similar to those the ratings agencies have developed to describe their 
ratings.\29\ We requested comments on this proposal, including comments 
on whether the Commission should limit money market funds to investing 
in securities solely based on a minimal credit risk determination, 
i.e., establish a single test for determining whether a fund could 
invest in a security.
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    \28\ See 2011 Proposing Release, supra note 4.
    \29\ See id. at section II.A.1.
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    A number of commenters objected to our proposal to retain the 
distinction between first and second tier

[[Page 47989]]

securities.\30\ They asserted that these proposed amendments were (i) 
unworkable because of the difficulty in differentiating between first 
and second tier securities and (ii) redundant because the amendments 
would require fund boards and their advisers to apply almost 
indistinguishable subjective judgments in determining whether 
securities were both eligible securities and first tier securities.\31\ 
Instead, they urged that we combine the two criteria and require a 
single, uniform, very high standard of quality.\32\ Specifically, 
several commenters suggested that the rule define an ``eligible 
security'' to mean a security with a remaining maturity of 397 calendar 
days or less that the fund's board of directors (or the board's 
delegate) determines presents minimal credit risks and include a 
determination that the security's issuer has ``the highest capacity'' 
or ``a strong capacity'' to meet its short-term obligations.\33\ These 
commenters noted that securities meeting this uniform standard would be 
generally comparable to securities rated in the highest short-term 
rating category, which are first tier securities under current rule 2a-
7.\34\
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    \30\ See, e.g., Comment Letter of Calvert Group, Ltd. (Apr. 25, 
2011); Comment Letter of The Dreyfus Corporation (Apr. 25, 2011) 
(``Dreyfus Comment Letter''); Comment Letter of Investment Company 
Institute (Apr. 25, 2011) (``ICI Comment Letter''); Comment Letter 
of the Independent Directors' Council (Apr. 25, 2011) (``IDC Comment 
Letter''); Comment Letter of Charles Schwab Investment Management 
Inc. (Apr. 25, 2011) (``Schwab Comment Letter''); Comment Letter of 
T. Rowe Price Associates, Inc. (Apr. 25, 2011) (``T. Rowe Price 
Comment Letter''); Comment Letter of Vanguard (Apr. 26, 2011) 
(``Vanguard Comment Letter''). But see Comment Letter of Federated 
Investors, Inc. (Apr. 25, 2011) (``Federated Comment Letter'') 
(supporting a distinction between first and second tier securities); 
Comment Letter of Invesco Advisers, Inc. (Apr. 25, 2011) (``Invesco 
Comment Letter'') (also supporting this distinction).
    \31\ See, e.g., Comment Letter of Fidelity Investments (Apr. 28, 
2011) (``Fidelity Comment Letter'') (``Under the [p]roposed [r]ule, 
tier categorizations will no longer be determined by a clear, 
objective standard based on published credit rating agency ratings; 
rather, that determination will be put in the hands of myriad money 
market mutual funds, and a fund's standards for the first and second 
tiers could change from month to month, or even week to week . . . 
result[ing] in less predictability and more confusion for investors 
seeking a stable and consistent product . . . .''); Schwab Comment 
Letter, supra note 30 (``[the retention of first tier and second 
tier securities,] given the elimination of credit ratings, is 
redundant with the investment adviser's ongoing obligation to 
monitor for minimal credit risks.'').
    \32\ See ICI Comment Letter, supra note 30; Schwab Comment 
Letter, supra note 30; T. Rowe Price Comment Letter, supra note 30. 
But see MFDF Comment Letter, supra note 22 (advocating maintaining 
the distinction between first and second tier securities as a risk-
limiting condition in rule 2a-7, but questioning the usefulness of 
the distinction between first and second tier securities when the 
proposed description of the difference ``comes dangerously close to 
establishing a distinction that is more semantic than 
substantive'').
    \33\ See ICI Comment Letter, supra note 30 (recommending that 
the Commission adopt a ``strong capacity'' standard as an 
appropriate substitute for the credit rating references in rule 2a-
7, noting that this standard reflects certain NRSROs' highest short-
term rating category, but also recommending that the Commission 
adopt an ``exceptionally strong capacity'' standard, which would be 
consistent with the definitions used by many NRSROs to define their 
highest long-term category, as an alternative substitute for the 
credit rating references in rule 5b-3); Vanguard Comment Letter, 
supra note 30 (advocating a determination that the issuer have the 
``highest capacity'' to meet those obligations).
    \34\ See id.
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    After consideration of the comments and the statutory directive to 
eliminate references to ratings in our rules, and to seek consistent 
standards of creditworthiness to the extent feasible, we are re-
proposing amendments to rule 2a-7. The re-proposal would combine the 
two risk criteria into a single standard, which would be included as 
part of rule 2a-7's definition of eligible security.\35\ As re-
proposed, an eligible security would be a security with a remaining 
maturity of 397 calendar days or less that the fund's board of 
directors (or its delegate) determines presents minimal credit risks, 
which determination includes a finding that the security's issuer has 
an exceptionally strong capacity to meet its short-term 
obligations.\36\ Thus, under our re-proposal, a money market fund would 
be limited to investing in securities that the fund's board (or its 
delegate) has determined present minimal credit risks, notwithstanding 
any rating the security may have received. In addition, fund boards 
would no longer be required to designate NRSROs.\37\ The re-proposed 
determination is designed to retain a degree of credit risk similar to 
that in the current rule by allowing for gradations in credit quality 
among securities that meet a very high standard of credit quality,\38\ 
while limiting a money market fund's investments in second tier 
securities to those the fund determines do not diminish the overall 
high quality of the fund's portfolio.\39\
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    \35\ Currently, the requirement that the fund board (or its 
delegate) determine that a security presents minimal credit risks is 
set forth in rule 2a-7(d)(2)(i) (requiring that the determination of 
minimal credit risk be based on factors pertaining to credit quality 
in addition to any rating assigned by a designated NRSRO). Under our 
re-proposal, the definition of eligible security in the rule would 
be restructured to include the minimal credit risk determination, 
and would include government securities and securities issued by 
money market funds, which are currently included in the definition 
of first tier security. See rule 2a-7(a)(14).
    \36\ Re-proposed rule 2a-7(a)(11). The re-proposal would make a 
conforming change to the recordkeeping requirements under the rule 
to reflect that funds must retain a written record of the 
determination that a portfolio security is an eligible security, 
including the determination that it presents minimal credit risks. 
See re-proposed rule 2a-7(h)(3).
     The re-proposal also would eliminate the following defined 
terms from the rule: ``designated NRSRO,'' ``first tier security,'' 
``rated security,'' ``requisite NRSROs,'' ``second tier security,'' 
and ``unrated security.'' It also would revise a number of 
provisions in the rule that currently reference these terms. See 
rule 2a-7(a)(12) (eligible security); rule 2a-7(d)(2) (portfolio 
quality); rule 2a-7(d)(3)(i)(A)(1) and (C) (portfolio 
diversification); rule 2a-7(d)(3)(iii)(C) (portfolio 
diversification); rule 2a-7(f)(1) (downgrades); rule 2a-7(h)(3) 
(record keeping and reporting); rule 2a-7(j) (delegation).
    \37\ Nor would fund boards have to disclose designated NRSROs in 
the statement of additional information (``SAI''). We note that 
after enactment of the Dodd-Frank Act, our staff issued a no-action 
letter assuring money market funds and their managers that, in light 
of section 939A, the staff would not recommend enforcement action 
under section 2(a)(41) of the Act and rules 2a-4 and 22c-1 
thereunder if a money market fund board did not designate NRSROs and 
did not make related disclosures in the fund's SAI before the 
Commission had completed its review of rule 2a-7 required by the 
Dodd-Frank Act and made any modifications to the rule. See SEC Staff 
No-Action Letter to the Investment Company Institute (Aug. 19, 
2010).
    \38\ See Fitch Ratings, Definitions of Ratings and Other Forms 
of Opinion, Jan. 2014, https://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pdf (``Fitch 
Ratings Scales''), at 18 (stating that a rating of F1 ``[i]ndicates 
the strongest intrinsic capacity for timely payments of financial 
commitments''); Moody's Investor Service, Rating Symbols and 
Definitions, Apr. 2014, https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 (``Moody's Rating 
Definitions''), at 6 (stating that Prime-1 issuers ``have a superior 
ability to repay short-term debt obligations''); Standard & Poor's, 
Standard & Poor's Ratings Definitions, Apr. 27, 2011, https://img.en25.com/Web/StandardandPoors/Ratings_Definitions.pdf (``S&P 
Ratings Definitions''), at 5 (stating that for a rating of A-1, 
``[t]he obligor's capacity to meet its financial commitment on the 
obligation is strong'').
    \39\ A number of commenters expressed concern that the standards 
proposed in 2011 would simultaneously raise the standards for first 
tier securities and weaken the standards for second tier securities. 
See ICI Comment Letter, supra note 30; T. Rowe Price Comment Letter, 
supra note 30; Dreyfus Comment Letter, supra note 30. Each of these 
comments notes that the proposed standard that a first tier security 
issuer or guarantor have the ``highest'' capacity to meet its short-
term obligations could raise the standard above that in the current 
rule because this standard, if taken literally, does not contemplate 
any variation in creditworthiness among issuers of first tier 
securities. In contrast, the current definition of first tier 
security refers to issuers and guarantors falling within a certain 
range of capacities to repay their short-term obligations. These 
comments also maintain that the proposed standard for second tier 
securities, which was not tied to minimum rating requirements, could 
permit a fund to invest in securities that would not be eligible 
securities under the current rule.
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    As a result of the single standard and elimination of the 
distinction between first and second tier securities we are re-
proposing, we also are re-proposing to remove the current prohibition 
on funds investing more than 3 percent of their portfolios in second 
tier securities.\40\ In

[[Page 47990]]

2010, we imposed greater limits on investments in second tier 
securities because they may experience greater price volatility and 
illiquidity than first tier securities in times of market stress, which 
could adversely affect a money market fund's ability to maintain a 
stable net asset value.\41\ Nevertheless, as we acknowledged in 2010, 
investors could benefit from these investments to the extent that a 
money market fund could conclude, after a thorough risk analysis, that 
second tier securities provide a higher yield than first tier 
securities while maintaining a risk profile consistent with the fund's 
investment objectives.\42\ By eliminating the rule's current 
limitations on investments in second tier securities, funds 
theoretically could invest in second tier securities to a greater 
extent than permitted today.\43\ The re-proposed standard, however, is 
designed to preserve the current degree of risk limitation in rule 2a-7 
without reference to credit ratings by requiring a fund's board (or its 
delegate) to determine that the issuer of a portfolio security has an 
exceptionally strong capacity to meet its short-term obligations, a 
finding that some boards or fund advisers may determine can be met by 
second tier rated securities (but only of the highest quality).\44\
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    \40\ See rule 2a-7(d)(2)(ii). In conforming changes, we re-
propose to move the requirement currently in the definition of 
eligible security that the issuer of a demand feature or guarantee 
promptly 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) to the paragraphs of 
the rule that address securities subject to guarantees and 
conditional demand features. Compare rule 2a-7(a)(12)(iii)(B) with 
re-proposed rules 2a-7(d)(2)(ii) and 2a-7(d)(2)(iii)(D).
    \41\ See Money Market Fund Reform, Investment Company Act 
Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)] 
(``2010 Money Market Fund Adopting Release''), at nn.52-53 and 
accompanying text (explaining that second tier securities are 
subject to greater spread risk and trade in thinner markets than 
first tier securities and noting that second tier securities are 
more likely to be downgraded than first tier securities).
    \42\ See id. at text accompanying and following n.54.
    \43\ See rule 2a-7(c)(3)(ii). Money market funds also are 
limited from investing more than \1/2\% of their assets in second 
tier securities of a single issuer and 2.5% of their portfolios in 
second tier securities issued, guaranteed or subject to a demand 
feature issued by the same entity. See rule 2a-7(d)(3)(i)(C) and 
rule 2a-7(d)(3)(iii)(C). These limits also would be eliminated under 
our re-proposal.
    \44\ See ICI Comment Letter, supra note 30 (stating that the 
Dodd-Frank Act ``does not leave any means of explicitly limiting 
acquisitions of securities rated below the highest category [but a 
single, uniform, very high standard] would at least require money 
market funds to determine that such securities do not diminish the 
overall credit quality of their portfolios'').
---------------------------------------------------------------------------

    We do not believe that securities that are rated in the third-
highest category for short-term ratings (or comparable unrated 
securities), whose issuers need only have an acceptable or adequate 
ability to repay short-term obligations under rating agency standards, 
would satisfy the re-proposed ``exceptionally strong capacity'' 
standard.\45\ We therefore believe, as a practical matter, that the re-
proposed standard would generally preclude funds from determining that 
securities rated ``third tier'' (or comparable unrated securities) 
would be eligible securities under rule 2a-7.
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    \45\ See Fitch Ratings Scales, supra note 38, at 18 (a rating of 
F3 indicates the ``intrinsic capacity for timely payment of 
financial commitments is adequate.''); Moody's Rating Definitions, 
supra note 38, at 6 (``Issuers (or supporting institutions) rated 
Prime-3 have an acceptable ability to repay short-term debt 
obligations.''); S&P Ratings Definitions, supra note 38, at 5 (``A 
short-term obligation rated `A-3' exhibits adequate protection 
parameters.'').
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    In determining whether a security presents minimal credit risks, a 
fund adviser could take into account credit quality determinations 
prepared by outside sources, including NRSRO ratings, that the adviser 
considers are reliable in assessing credit risk. In considering such 
sources, an adviser should understand the particular NRSRO's 
methodology for determining the rating at issue and make an independent 
judgment of credit risks, and it should consider any outside source's 
record with respect to evaluating the types of securities in which the 
fund invests.
    We request comment on consolidating the credit quality standard and 
eliminating the distinction between first and second tier securities. 
Do commenters believe that the re-proposed standard is an appropriate 
standard of creditworthiness for rule 2a-7? Is the re-proposed 
``exceptionally strong capacity'' standard an appropriate substitute 
for credit ratings in rule 2a-7? Is there another standard that would 
be a more appropriate substitute for credit ratings in rule 2a-7? Would 
the re-proposed consolidated standard, which requires a minimum credit 
risk determination and includes a finding that the issuer has an 
``exceptionally strong capacity'' to meet its short-term obligations, 
provide sufficient clarity for money market fund boards and advisers 
making credit quality determinations? Would such a standard impact 
investors' understanding of credit quality? Would it promote greater or 
less uniformity in credit quality determinations among funds than the 
standard we proposed in 2011? Would the 2011 proposal establish risk 
limitations more in line with those provided under the current rule? Is 
there an alternative standard for making credit quality determinations 
that is more objective than the re-proposed standard? We note that no 
commenters provided suggestions when we sought comment in the 2011 
proposal on alternatives that would provide a more objective evaluation 
of credit quality; have commenters' positions on this issue evolved 
since 2011?
    We also request specific comment on the finding, required as part 
of the minimal credit risk determination, that the security's issuer 
has an exceptionally strong capacity to meet its short-term financial 
obligations. What impact is this proposed standard likely to have on 
the overall risk of money market fund portfolios? What impact is this 
re-proposed ``exceptionally strong capacity'' standard likely to have 
on money market fund acquisitions of first tier securities? Does it 
permit sufficient variation among the most creditworthy issuers? 
Similarly, what impact is the re-proposed ``exceptionally strong 
capacity'' standard likely to have on money market fund acquisitions of 
second tier securities? Will this re-proposed standard, and the 
elimination of the distinction between first and second tier securities 
in rule 2a-7, lead money market funds to acquire more second tier 
securities than they do currently? Would a finding that a security's 
issuer instead has a ``superior,'' ``very strong,'' or ``strong'' 
capacity to meet its short-term financial obligations better reflect 
the current risk limitation in rule 2a-7, or would it result in a 
standard that is less stringent than under the current rule? Our goal 
is to preserve a similar degree of risk limitation as in the current 
rule, and we note that the phrase ``strong capacity'' reflects the 
standard that one NRSRO articulates for securities with a second tier 
rating.\46\
---------------------------------------------------------------------------

    \46\ See Moody's Rating Definitions, supra note 38, at 6 
(``Issuers (or supporting institutions) rated Prime-2 have a strong 
ability to repay short-term debt obligations.'').
---------------------------------------------------------------------------

    As discussed above, we believe that the re-proposed standard would 
preclude funds from investing in securities rated third tier (or 
comparable unrated securities).\47\ Do funds agree? We do not believe 
that the re-proposed standard should significantly affect money market 
funds' investment in unrated securities because we understand that 
money market funds hold few unrated securities.\48\ We

[[Page 47991]]

request comment about the potential reasons for this current practice. 
Specifically, is there currently a limited supply of unrated securities 
that qualify as eligible securities, or do money market funds hold few 
unrated securities for other reasons (e.g., investor or board of 
directors' requirements for ratings)? Would money market funds invest 
in more unrated securities under our re-proposed amendments?
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    \47\ See supra note 45 and accompanying text.
    \48\ Based on Form N-MFP filings from February 28, 2014, we 
estimate that 0.005% of money market fund assets under management 
were invested in unrated securities. Many securities that funds list 
as unrated in Form N-MFP filings actually are issued as part of a 
rated program or have an issuer or guarantor that is rated. See rule 
2a-7(a)(22)(i), (ii) (defining ``rated security'' to include a 
security that has received the requisite short-term rating from a 
designated NRSRO, or that is issued by an issuer or has a guarantee 
with such a rating).
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    As discussed in the 2014 Money Market Fund Adopting Release, we 
recognize that certain of the amendments to rule 2a-7 adopted today 
could affect money market fund managers' investment decisions. Under 
the newly adopted amendments to rule 2a-7, certain money market funds 
would be required to transact using a floating NAV. Managers of 
floating NAV funds, in an effort to limit volatility, might further 
limit their investments in relatively riskier portfolio securities, or 
conversely, in an effort to increase yield, might increase their 
investments in such securities. As described in more detail below, we 
request comment on the extent to which the re-proposed standard may 
affect the potential incentive for certain funds to invest in riskier 
securities (i.e., those securities that would be second tier under 
current rule 2a-7). Would a finding that issuers have an 
``exceptionally strong capacity'' to meet their short-term obligations 
mitigate any risks associated with floating NAV funds' potential 
incentives to invest in riskier securities? Would a finding that 
issuers have a ``superior,'' ``very strong,'' or ``strong'' repayment 
ability be a sufficient risk mitigant?
    Also under the amendments to rule 2a-7 we adopted today, all money 
market funds (including those still able to transact at a stable NAV) 
will be required to disclose daily the market value of their portfolios 
generally to the fourth decimal place.\49\ If a money market fund were 
to invest to a greater extent than its peer funds in riskier second 
tier securities, then that fund would have greater volatility in price 
or market value of its shares, as compared to the volatility and price 
of its peer funds' shares. We request comment on whether potential 
incentives for increased investments in riskier second tier securities 
would be reduced by market discipline resulting from these newly 
required disclosures.
---------------------------------------------------------------------------

    \49\ See rule 2a-7(h)(10)(iii); 2014 Money Market Fund Adopting 
Release, supra note 8, at section III.E.9.c. To the extent a money 
market fund prices its shares using a share price other than 
$1.0000, it would be required to disclose its share price at an 
equivalent level of accuracy. See rule 2a-7(h)(10)(iii). See also 
supra note 16 and accompanying text.
---------------------------------------------------------------------------

    Rule 2a-7 does not set forth any specific factors that a board (or 
its delegate) should consider in determining minimal credit risks. In 
response to our 2011 proposal to replace an objective standard of an 
NRSRO rating for eligible securities with a subjective standard, some 
commenters advocated that we develop specific guidance in connection 
with assessments of credit quality.\50\ We have provided guidance 
before regarding certain factors to be considered in minimal credit 
risk determinations for asset-backed securities under rule 2a-7 and in 
our release removing references to credit ratings from the net capital 
rule under the Securities Exchange Act of 1934.\51\ Commission staff 
also has provided guidance in the past on factors that a board could 
consider in performing credit assessments under rule 2a-7.\52\
---------------------------------------------------------------------------

    \50\ See Comment Letter of Better Markets (Apr. 25, 2011); 
Comment Letter of Americans for Financial Reform (Apr. 25, 2011).
    \51\ See 2010 Money Market Fund Adopting Release, supra note 41, 
at section II.3; Removal of Certain References to Credit Ratings 
Under the Securities Exchange Act of 1934, Securities Exchange Act 
Release No. 71194 (Dec. 27, 2013) [79 FR 26550 (Jan. 8, 2014)] 
(``2013 Net Capital Rule Amendments'') at section II.B.1.a.iii 
(listing certain factors a broker-dealer could consider, as 
appropriate, under policies and procedures it establishes to assess 
whether a security or money market instrument has only a minimal 
amount of credit risk for purposes of rule 15c3-1 under the 
Securities Exchange Act of 1934). See also Comment Letter of 
Consumer Federation of America (Apr. 25, 2011) (suggesting the 
proposed standard could provide a limitation on money market fund 
firms' investments by requiring fund boards to review specific types 
of objective data that credit rating agencies and other risk 
assessment specialists consider in developing credit ratings); 
Comment Letter of Colorado Public Employees' Retirement Association 
(Apr. 21, 2011) (advocating that any approach to replacing credit 
ratings contain quantitative and qualitative elements with certain 
specific characteristics).
    \52\ See Letter to Registrants from Kathryn McGrath, Director, 
Division of Investment Management, SEC (May 8, 1990) (``1990 Staff 
Letter''); Letter to Matthew Fink, President, Investment Company 
Institute from Kathryn McGrath, Director, Division of Investment 
Management, SEC (Dec. 6, 1989) (``1989 Staff Letter'').
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    Our staff also has had opportunities to observe how money market 
fund advisers evaluate minimal credit risk through its examinations of 
money market funds. Although staff has noted a range in the quality and 
breadth of credit risk analyses among the money market funds examined, 
staff has also observed that when performing their minimal credit risk 
determinations, most of the advisers to these funds evaluate some 
common factors that bear on the ability of an issuer or guarantor to 
meet its short-term financial obligations.\53\ Based on the staff's 
experience and in consideration of general criteria included in 
recommendations by an industry money market working group of best 
practices for making minimal credit risk determinations,\54\ we believe 
that an assessment of the strength of any issuer's or guarantor's 
ability to satisfy these obligations generally should include an 
analysis of the following factors to the extent appropriate: (i) The 
issuer or guarantor's financial condition, i.e., analysis of recent 
financial statements, including trends relating to cash flow, revenue, 
expenses, profitability, short-term and total debt service coverage, 
and leverage (including financial leverage and operating leverage); 
\55\ (ii) the issuer or guarantor's liquidity, including bank lines of 
credit and alternative sources of liquidity; (iii) the issuer or 
guarantor's ability to react to future events, including a discussion 
of a ``worst case scenario,'' and its ability to repay debt in a highly 
adverse situation; and (iv) the strength of the issuer or guarantor's 
industry within the economy and relative to economic trends as well as 
the issuer or guarantor's competitive position within its industry 
(including diversification in sources of profitability, if 
applicable).\56\ In

[[Page 47992]]

addition, a minimal credit risk evaluation could include an analysis of 
whether the price and/or yield of a security is similar to that of 
other securities in the fund's portfolio.\57\
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    \53\ Under the current rule, a security may be determined to be 
an eligible security or a first tier security based solely on 
whether the guarantee is an eligible security or a first tier 
security, as the case may be. Rule 2a-7(d)(2)(ii).
    \54\ ICI Working Group Report, supra note 22, at Appendix I.
    \55\ Under the current rule, when a security's maturity is 
determined with reference to a demand feature, the fund's board of 
directors must perform an 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 demand 
feature's issuer. Rule 2a-7(g)(3).
    \56\ Many of these considerations have been included in staff 
guidance as well as in best practices for determining minimal credit 
risk set forth in the Report of the Money Market Working Group 
submitted to the Board of Governors of the Investment Company 
Institute in 2009. See 1990 Staff Letter, supra note 52 (advising 
registrants that in the staff's view a board of directors can only 
make a minimal credit risk determination regarding a security based 
on an analysis of the issuer's capacity to repay its short-term 
debt, which analysis would include: (i) A cash flow analysis; (ii) 
an assessment of the issuer's ability to react to future events, 
including a review of the issuer's competitive position, cost 
structure and capital intensiveness; (iii) an assessment of the 
issuer's liquidity, including bank lines of credit and alternative 
sources of liquidity to support its commercial paper; and (iv) a 
``worst case scenario'' evaluation of the issuer's ability to repay 
its short-term debt from cash sources or asset liquidations in the 
event that the issuer's backup credit facilities are unavailable); 
1989 Staff Letter, supra note 52 (advising that in making its 
minimal credit risk determination, a money market fund board of 
directors should take into account certain kinds of factors, such as 
the issuer's or guarantor's current and future credit quality; the 
strength of the issuer's or guarantor's industry within the economy 
and relative to economic trends; the issuer's or guarantor's market 
position within its industry; cash flow adequacy; the level and 
nature of earnings; financial leverage; asset protection; the 
quality of the issuer's or guarantor's accounting practices and 
management; the likelihood and nature of event risks, and the effect 
of any significant ownership positions; the degree of financial 
flexibility of the issuer or guarantor to cope with unexpected 
challenges and to take advantage of opportunities, as well as an 
assessment of the degree and nature of event risks; the likelihood 
of a sudden change of credit quality from external and internal 
sources); ICI Working Group Report, supra note 22, at Appendix I 
(recommending the same general criteria set forth in the 1990 Staff 
Letter for assessing the credit risks of issuers and securities in 
procedures for determining minimal credit risks as well as 
consideration of financial and other information provided by the 
issuer). See also OCC Guidance on Due Diligence Requirements in 
Determining Whether Securities are Eligible for Investment, 77 FR 
35259 (June 13, 2012) (``OCC Guidance'') (matrix of examples of 
factors for national banks and Federal savings associations to 
consider as part of a robust credit risk assessment framework (``OCC 
credit risk factors'') for certain investment securities includes 
capacity to pay and assess operating and financial performance 
levels and trends).
    \57\ See 2013 Net Capital Rule Amendments, supra note 51, at 
second paragraph preceding n.99.
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    The staff has also observed other factors that money market fund 
advisers may take into account when evaluating minimal credit risks of 
particular asset classes. To the extent applicable, fund advisers may 
wish to consider the following additional factors:
     For municipal securities: (i) Sources of repayment; (ii) 
issuer demographics (favorable or unfavorable); \58\ (iii) the issuer's 
autonomy in raising taxes and revenue; (iv) the issuer's reliance on 
outside revenue sources, such as revenue from a state or Federal 
government entity; and (v) the strength and stability of the supporting 
economy.\59\
---------------------------------------------------------------------------

    \58\ Demographics could include considerations such as the type, 
size, diversity and growth or decline of the local government's tax 
base, including income levels of residents, and magnitude of 
economic activity.
    \59\ See 1989 Staff Letter, supra note 52 (additional factors 
such as sources of repayment, autonomy in raising taxes and revenue, 
reliance on outside revenue sources and strength and stability of 
the supporting economy should be considered with respect to tax-
exempt securities); OCC Guidance, supra note 56.
---------------------------------------------------------------------------

     For conduit securities under rule 2a-7: \60\ Analysis of 
the underlying obligor as described above for all securities except 
asset backed securities (including asset backed commercial paper).\61\
---------------------------------------------------------------------------

    \60\ Under rule 2a-7, a ``conduit security'' means a security 
issued by a municipal issuer 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. Rule 2a-7(a)(7). A ``municipal 
issuer'' is defined under the rule to mean 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. Id. A conduit security does not 
include a security that is: (i) Fully and unconditionally guaranteed 
by a municipal issuer; (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. Id.
    \61\ See OCC Guidance, supra note 56 (OCC credit risk factors 
for revenue bonds include consideration of the obligor's financial 
condition and reserve levels).
---------------------------------------------------------------------------

     For asset backed securities (including asset backed 
commercial paper): (i) Analysis of the underlying assets to ensure they 
are properly valued and that there is adequate coverage for the cash 
flows required to repay the asset backed security under various market 
conditions; (ii) analysis of the terms of any liquidity or other 
support provided; and (iii) legal and structural analyses to determine 
that the particular asset backed security involves no more than minimal 
credit risks for the money market fund.\62\
---------------------------------------------------------------------------

    \62\ See 2010 Money Market Fund Adopting Release, supra note 41, 
at section II.A.3 (citing Revisions to Rules Regulating Money Market 
Funds, Investment Company Act Release No. 21837 (Mar. 21, 1996) [61 
FR 13956 (Mar. 28, 1996)] (``1996 Money Market Fund Adopting 
Release'') at section II.E.4).
---------------------------------------------------------------------------

     For other structured securities, such as variable rate 
demand notes,\63\ tender option bonds,\64\ extendible bonds \65\ or 
``step up'' securities,\66\ or other structures, in addition to 
analysis of the issuer or obligor's financial condition, as described 
above, analysis of the protections for the money market fund provided 
by the legal structure of the security.\67\
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    \63\ A variable rate demand obligation (which includes variable 
rate demand notes) is a security for which the interest rate resets 
on a periodic basis and holders are able to liquidate their security 
through a ``put'' or ``tender'' feature, at par. To ensure that the 
securities are able to be ``put'' or ``tendered'' by a holder in the 
event that a remarketing agent is unable to remarket the security, a 
VRDO typically operates with a liquidity facility--a Letter of 
Credit or Standby Bond Purchase Agreement--that ensures that an 
investor is able to liquidate its position. See Electronic Municipal 
Market Access, Understanding Variable Rate Demand Obligations, 
https://emma.msrb.org/EducationCenter/UnderstandingVRDOs.aspx.
    \64\ A tender option bond is an obligation that grants the 
bondholder the right to require the issuer or specified third party 
acting as agent for the issuer (e.g., a tender agent) to purchase 
the bonds, usually at par, at a certain time or times prior to 
maturity or upon the occurrence of specified events or conditions. 
See Municipal Securities Rulemaking Board, Glossary of Municipal 
Securities Terms, Tender Option Bond, https://www.msrb.org/glossary/definition/tender-option-bond.aspx. Tender option bonds are 
synthetically created by a bond dealer or other owner of a long-term 
municipal obligation purchased in either the primary or secondary 
markets, or already in a portfolio.
    \65\ An extendible bond is a long-term debt security with an 
embedded option for either the investor or the issuer to extend its 
maturity date. To qualify as an eligible security under rule 2a-7, 
the issuer must not have the right to extend the maturity of the 
bond so that it is more than 397 days to maturity at any time. 
Typically, if an extendible bond is of the type that qualifies as an 
eligible security under rule 2a-7, a money market fund will have the 
option to either extend the maturity of the bond to no more than 397 
days in the future, or elect not to extend, in which case the bond's 
maturity must be no longer than 397 days at that time.
    \66\ A ``step up'' security pays an initial interest rate for 
the first period, and then a higher rate for the following periods.
    \67\ See OCC Guidance, supra note 56 (OCC credit risk factors 
for structured securities include evaluation and understanding of 
specific aspects of the legal structure including loss allocation 
rules, potential impact of performance and market value triggers, 
support provided by credit and liquidity enhancements, and adequacy 
of structural subordination).
---------------------------------------------------------------------------

     For repurchase agreements that are ``collateralized 
fully'' under rule 2a-7,\68\ an assessment of the creditworthiness of 
the counterparty,\69\ of the volatility and liquidity of the market for 
collateral, if the collateral is a government agency collateralized 
mortgage obligation or mortgage backed security, or other non-
standardized security, and the process for liquidating collateral.\70\
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    \68\ Under rule 2a-7(a)(5), for a repurchase agreement to be 
``collateralized fully,'' among other requirements, the collateral 
must consist entirely of cash items or Government securities. See 
rule 5b-3(c)(1).
    \69\ See rule 2a-7(d)(3)(ii)(A) (requiring the fund's board of 
directors to evaluate the creditworthiness of the seller of a fully 
collateralized repurchase agreement when looking to the collateral 
issued for purposes of determining issuer's diversification under 
the rule).
    \70\ See ICI Working Group Report, supra note 22, at Appendix I 
('' When repayment of an obligation (such as a repurchase agreement) 
may depend on the liquidation of securities or other assets 
(Collateral), the credit analysis should include an assessment of 
the volatility and liquidity of the market for the Collateral, 
especially in times of market stress. The analysis also should 
consider the process for liquidating the Collateral, who would be 
likely buyers of the Collateral, and how long it might take to 
complete the liquidation. These factors should be included in the 
analysis of the Collateral's potential volatility and liquidity.'').

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[[Page 47993]]

     For repurchase agreements that are not fully 
collateralized under rule 2a-7, a financial analysis and assessment of 
the minimal credit risk of the counterparty, as described above, 
without regard to the value of the collateral, and consideration of the 
type of collateral accepted and the ability of the money market fund to 
liquidate the collateral.\71\
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    \71\ See id.
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    This list is not meant to be exhaustive. We recognize that the 
range and type of specific factors appropriate for consideration could 
vary depending on the category of issuer and particular security or 
credit enhancement under consideration, and may include any factors in 
addition to those discussed above that the board determines appropriate 
to the credit assessment.\72\ Individual purchases may require more or 
less analysis depending on the security's risk characteristics. As 
discussed in greater detail below, we also would expect that the 
written record of the minimal credit risk determination generally would 
address any factors considered and the analysis of those factors.\73\
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    \72\ See supra text accompanying and following notes 55-70. As 
noted above, money market fund boards of directors typically 
delegate minimal credit risk determinations to the fund's adviser. 
See supra note 22. Rule 2a-7 requires money market fund boards to 
establish and periodically review written procedures regarding the 
delegation (including guidelines for determining whether securities 
present minimal credit risks) and to take measures reasonably 
necessary to assure that the guidelines and procedures are being 
followed. See rule 2a-7(j); see also rule 38a-1 (requiring funds to 
adopt and implement written policies and procedures reasonably 
designed to prevent a fund from violating the Federal securities 
laws). These policies and procedures generally should identify the 
process to be followed by the adviser in performing credit 
assessments, including, as appropriate, the types of data to be used 
or factors to be considered with respect to particular securities 
and the person(s) or position(s) responsible under the delegated 
authority. They also generally should provide for regular reporting 
to the board, as appropriate, about these evaluations, to allow the 
board to provide effective oversight of the process. See 2013 
Ratings Removal Adopting Release, supra note 4, at n.50; 1983 
Adopting Release, supra note 14, at paragraph preceding paragraph 
accompanying n.3.
    \73\ See infra section II.A.3; proposed rule 2a-7(h)(3).
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    We request comment on the factors discussed above for 
consideration, as appropriate, in the determinations that portfolio 
securities present minimal credit risk. Do commenters agree that these 
are relevant factors for advisers to consider in assessing whether 
portfolio securities present minimal credit risk? Are the factors 
sufficiently clear? Would it be helpful to describe any of the factors 
with additional specificity? To what extent do investment advisers 
currently consider these factors in making minimal credit risk 
determinations? Do commenters agree with our understanding that 
consideration of these factors is consistent with current industry 
practice? Are there factors we should omit or other factors we should 
consider including, such as credit spreads or the issuer or guarantor's 
risk management structure? \74\ If so, why? In light of the amendments 
being considered in this re-proposal, would the guidance contribute to 
more consistency in the quality and breadth of money market funds' 
credit analyses? If so, would it reduce the potential for significant 
variations in money market funds' risk profiles? \75\ Should the 
factors address other asset classes? If so, what types of securities 
should be included and what factors would be appropriate for 
consideration? We do not presently propose to codify the factors as 
part of rule 2a-7. We request comment, however, on whether codifying 
these factors would further ensure that funds use objective factors and 
market data in making credit quality determinations and thereby promote 
uniformity in making minimal credit risk determinations and/or assist 
money market fund managers in understanding their obligations 
pertaining to portfolio quality under rule 2a-7.
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    \74\ These factors have been included in other guidance on 
making creditworthiness determinations. See 2013 Net Capital Rule 
Amendments, supra note 51; 1989 Staff Letter, supra note 52; OCC 
Guidance, supra note 56.
    \75\ See Dreyfus Comment Letter, supra note 30.
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2. Conditional Demand Features
    Rule 2a-7 limits money market funds to investing in securities with 
remaining maturities of no more than 397 days.\76\ A long-term security 
subject to a conditional demand feature \77\ (``underlying security''), 
however, may be determined to be an eligible security (or a first tier 
security) if among other conditions: (i) The conditional demand feature 
is an eligible security or a first tier security; and (ii) the 
underlying security (or its guarantee) has received either a short-term 
rating or a long-term rating, as the case may be, within the highest 
two categories from the requisite NRSROs or is a comparable unrated 
security.\78\ The rule currently requires this analysis of both the 
short-term and long-term credit aspects of the demand instrument 
because a security subject to a conditional demand feature combines 
both short-term and long-term credit risks.\79\ Our re-proposal would 
require a similar analysis, but consistent with section 939A of the 
Dodd-Frank Act would remove the requirement in the rule that the fund 
board (or its delegate) consider credit ratings of underlying 
securities.\80\
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    \76\ See rule 2a-7(a)(12) (defining ``eligible security'' to 
mean, among other things, a security with a remaining maturity of 
397 calendar days or less).
    \77\ A conditional demand feature is a demand feature that a 
fund may be precluded from exercising because of the occurrence of a 
condition. See rule 2a-7(a)(6) (defining ``conditional demand 
feature'' as a demand feature that is not an unconditional demand 
feature); rule 2a-7(a)(30) and re-proposed rule 2a-7(a)(25) 
(defining ``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). For 
purposes of rule 2a-7, a demand feature allows the security holder 
to receive, upon exercise, the approximate amortized cost of the 
security, plus accrued interest, if any, at the later of the time of 
exercise or the settlement of the transaction, paid within 397 
calendar days of exercise and upon no more than 30 calendar days' 
notice. Rule 2a-7(a)(9).
    \78\ Rule 2a-7(d)(2)(iv). Although underlying securities are 
generally long-term securities when issued originally, they become 
short-term securities when the remaining time to maturity is 397 
days or less.
    \79\ The quality of a conditional demand instrument depends both 
on the ability of the issuer of the underlying security to meet 
scheduled payments of principal and interest and upon the 
availability of sufficient liquidity to allow a holder of the 
instrument to recover the principal amount and accrued interest upon 
exercise of the demand feature. See Acquisition and Valuation of 
Certain Portfolio Instruments by Registered Investment Companies, 
Investment Company Act Release No. 14607 (July 1, 1985) [50 FR 27982 
(July 9, 1985)], at n.33. The rule permits the determination of 
whether a security subject to an unconditional demand feature is an 
eligible or first tier security to be based solely on whether the 
unconditional demand feature is an eligible or first tier security 
because credit and liquidity support will be provided even in the 
event of default of the underlying security. See rule 2a-
7(d)(2)(iii).
    \80\ In a conforming change, we propose to remove two provisions 
in current rule 2a-7 that reference credit ratings in connection 
with securities subject to a demand feature or guarantee of the same 
issuer that are second tier securities: Rule 2a-7(d)(3)(i)(C) 
(limiting a fund's investments in securities subject to a demand 
feature or guarantee of the same issuer that are second tier 
securities to 2.5% of the fund's total assets); rule 2a-7(f)(1)(iii) 
(providing that if, as a result of a downgrade, more than 2.5% of a 
fund's total assets are invested in securities issued by or subject 
to demand features from a single institution that are second tier 
securities, a fund must reduce its investments in these securities 
to no more than 2.5% of total assets by exercising the demand 
feature at the next succeeding exercise date(s)). In other 
conforming changes, we are re-proposing to amend two rules under the 
Act that reference the definition of ``demand feature'' and 
``guarantee'' under rule 2a-7, which references would change under 
our re-proposed amendments. Specifically, we propose to amend: (i) 
Rule 12d3-1(d)(7)(v), to replace the references to ``rule 2a-
7(a)(8)'' and ``rule 2a-7(a)(15)'' with ``Sec.  270.2a-7(a)(9)'' and 
``Sec.  270.2a-7(a)(16)''; and (ii) rule 31a-1(b)(1), to replace the 
phrase ``(as defined in Sec.  270.2a-7(a)(8) or Sec.  270.2a-
7(a)(15) respectively)'' with ``(as defined in Sec.  270.2a-7(a))(9) 
or Sec.  270.2a-7(a)(16) respectively)''.
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    Under our re-proposal, a fund would have to determine, as with any 
short-term security, that the conditional

[[Page 47994]]

demand feature is an eligible security.\81\ In addition, a fund's board 
of directors (or its delegate) would have to evaluate the long-term 
risk of the underlying security and determine that it (or its 
guarantor) ``has a very strong capacity for payment of its financial 
commitments.'' \82\ This standard is similar to those articulated by 
credit ratings agencies for long-term securities assigned the second-
highest rating.\83\ An issuer that the board determines has a very low 
risk of default, and a capacity for payment of its financial 
commitments that is not significantly vulnerable to reasonably 
foreseeable events would satisfy the proposed standard. We do not 
believe that securities that are rated in the third-highest category 
for long-term ratings (or comparable unrated securities), which have 
expectations of low credit risk or whose obligors have only a strong 
capacity to meet their financial commitments, would satisfy the 
proposed standard for underlying securities.\84\ In making the credit 
quality determinations required under the re-proposed amendment, a fund 
adviser could continue to take into account analyses provided by third 
parties, including ratings provided by ratings agencies, that it 
considers reliable for such purposes.\85\
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    \81\ See re-proposed rule 2a-7(d)(2)(iii)(A).
    \82\ Re-proposed rule 2a-7(d)(2)(iii)(C). An underlying security 
that is a short-term security (because its remaining maturity is 
less than 397 days, although its original maturity may have been 
longer) also would have to meet the re-proposed standard.
    \83\ See Fitch Ratings Scales, supra note 38, at 12, 15 (for 
corporate finance obligations, ```AA' ratings denote expectations of 
very low credit risk. They indicate very strong capacity for payment 
of financial commitments;'' for structured, project and public 
finance obligations, ```AA' ratings denote expectations of very low 
default risk. They indicate very strong capacity for payment of 
financial commitments.''); Moody's Rating Definitions, supra note 
38, at 5 (on the global long-term rating scale, obligations ``rated 
Aa are judged to be of high quality and are subject to very low 
credit risk.''); and S&P Ratings Definitions, supra note 38, at 3 
(``An obligation rated `AA' differs from the highest-rated 
obligations only to a small degree. The obligor's capacity to meet 
its financial commitment on the obligation is very strong.'').
    \84\ See Moody's Rating Definitions, supra note 38, at 5 (long-
term obligations ``rated A are judged to be upper-medium grade and 
are subject to low credit risk.''); Fitch Ratings Scales, supra note 
38, at 12 (long-term ``A ratings denote expectations of low credit 
risk. The capacity for payment of financial commitments is 
considered strong.''); S&P Ratings Definitions, supra note 38, at 4 
(a long-term obligation ``rated `A' is somewhat more susceptible to 
the adverse effects of changes in circumstances and economic 
conditions than obligations in higher-rated categories. However, the 
obligor's capacity to meet its financial commitment on the 
obligation is still strong.'').
    \85\ See supra paragraph following note 45.
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    The amendments that we are re-proposing to the provisions of rule 
2a-7 affecting securities subject to a conditional demand feature are 
designed to reflect the same standard as the amendment we proposed in 
2011.\86\ Specifically, in 2011, we proposed to remove the credit 
rating requirement from the rule 2a-7 provision setting forth the 
conditions under which a security subject to a conditional demand 
feature may be determined to be an eligible security and instead 
require that the fund's board (or its delegate) determine that the 
underlying security be of high credit quality and subject to very low 
credit risk.\87\ The re-proposed standard differs in phrasing to more 
closely parallel the required finding in our re-proposed minimal risk 
determination.\88\ Comments we received on the 2011 proposal all urged 
us to retain the requirement that a security subject to a demand 
feature has received at least a second tier rating, to limit the risk 
that a demand feature might terminate if its underlying security 
receives a rating below investment grade (i.e., if the underlying 
security receives a downgrade of two ratings categories under the 
current rule).\89\
---------------------------------------------------------------------------

    \86\ See 2011 Proposing Release, supra note 4, at section 
II.A.2.
    \87\ See id. at n.36 and accompanying text.
    \88\ See Schwab Comment Letter, supra note 30 (querying whether 
different language for proposed descriptions of second tier 
securities was intended to suggest different standards).
    \89\ See, e.g., Federated Comment Letter, supra note 30; 
Fidelity Comment Letter, supra note 31; ICI Comment Letter, supra 
note 30.
---------------------------------------------------------------------------

    The re-proposed amendments are consistent with section 939A of the 
Dodd-Frank Act regarding the removal of ratings. Nevertheless, we 
recognize the risks of a money market fund investing in securities 
whose eligibility as portfolio securities depends on a demand feature 
that would terminate if downgraded by a single rating category, and we 
believe it would be prudent for a money market fund to avoid investing 
in these securities. A downgrade of this type would result in the loss 
of the demand feature, which would render the security no longer 
eligible for the portfolio and expose the fund to the increased 
interest rate risk associated with a long-term security. For this 
reason, we would retain the current rule 2a-7 requirements that a 
security subject to a conditional demand feature is an eligible 
security only if at the time it is acquired, the fund's board (or the 
board's delegate) determines that there is minimal risk that the 
circumstances that would result in the conditional demand feature 
terminating will occur, and that either (i) the conditions limiting the 
demand feature's exercise can be monitored, or (ii) the fund otherwise 
receives notice of the occurrence of a limiting condition and the 
opportunity to exercise the demand feature in accordance with its 
terms.\90\
---------------------------------------------------------------------------

    \90\ See re-proposed rule 2a-7(d)(2)(iii)(B) (providing that a 
security subject to a conditional demand feature is an eligible 
security only if, 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: (i) 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 
(ii) 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).
---------------------------------------------------------------------------

    We request comment on our proposed credit quality standard for 
securities with a conditional demand feature. Do commenters believe 
that this is an appropriate standard of creditworthiness? Is it 
consistent with our goal of retaining a similar degree of risk 
limitation as in the current rule? Are there alternative standards that 
would provide a more robust or objective evaluation of credit quality 
for an underlying security? How should such criteria be applied and/or 
used? Are there alternative subjective standards that would provide 
meaningful distinctions among underlying securities? Is our 
understanding of a fund's ability to monitor for conditions that would 
terminate a demand feature correct? How do funds currently satisfy this 
monitoring condition? Are we correct in our assumption that removing 
references to ratings in the credit quality requirement for underlying 
securities is not likely to change fund investment policies 
significantly?
3. Monitoring Minimal Credit Risks
    Rule 2a-7 currently requires a money market fund board (or its 
delegate) promptly to reassess whether a security that has been 
downgraded by an NRSRO continues to present minimal credit risks, and 
take such action as it determines is in the best interests of the fund 
and its shareholders.\91\ In addition, rule 2a-7 requires ongoing 
review of the minimal credit risks associated with securities for which 
maturity is determined by reference to a demand feature.\92\
---------------------------------------------------------------------------

    \91\ Rule 2a-7(f)(1)(i)(A). This current reassessment is not 
required, however, if the downgraded security is disposed of or 
matures within five business days of the specified event and in the 
case of certain events (specified in rule 2a-7(f)(1)(i)(B)), the 
board is subsequently notified of the adviser's actions. Rule 2a-
7(f)(1)(ii).
    \92\ Rule 2a-7(g)(3).
---------------------------------------------------------------------------

    In 2011, we proposed to amend the rule to require that, in the 
event the

[[Page 47995]]

money market fund's adviser (or any person to whom the board has 
delegated portfolio management responsibilities) becomes aware of any 
credible information about a portfolio security or an issuer of a 
portfolio security that suggests that the security is no longer a first 
tier security or a second tier security, as the case may be, the board 
(or its delegate) would have to reassess promptly whether the portfolio 
security continues to present minimal credit risks.\93\
---------------------------------------------------------------------------

    \93\ See 2011 Proposing Release, supra note 4, at section 
II.A.3.
---------------------------------------------------------------------------

    Most of those who commented on this proposed amendment objected to 
it.\94\ They asserted that the proposed standard is too vague and would 
be burdensome to administer.\95\ A number of commenters recommended 
that we instead eliminate the requirement for reassessing minimal 
credit risk when a security is downgraded by an NRSRO and include a 
general ongoing obligation to monitor the credit risks of portfolio 
securities, which would eliminate the need for a separate requirement 
to identify specific triggers.\96\
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    \94\ But see Comment Letter of CFA Institute (July 13, 2011) 
(supporting the proposed monitoring standard).
    \95\ See, e.g., ICI Comment Letter, supra note 30 (there are 
numerous sources of information about issuers, much of which is not 
relevant to the issuer's ability to meet its short-term 
obligations); Invesco Comment Letter, supra note 30 (the ambiguity 
in the terms ``credible information'' and ``suggest'' will 
complicate enforcement of the rule); Schwab Comment Letter, supra 
note 30 (the word ``suggests'' is not constrained by a 
reasonableness or likelihood standard).
    \96\ See, e.g., Federated Comment Letter, supra note 30; ICI 
Comment Letter, supra note 30; T. Rowe Price Comment Letter, supra 
note 30.
---------------------------------------------------------------------------

    We have carefully considered commenters' concerns and suggested 
modifications and have been persuaded to re-propose a different 
standard. In order to meet the requirements of section 939A of the 
Dodd-Frank Act, we re-propose to eliminate the requirement that a fund 
reassess credit risks of an issuer when a security is downgraded by an 
NRSRO.\97\ In consideration of our re-proposed standard for credit 
quality, and consistent with the approach suggested by a number of 
commenters, we instead re-propose to require that each money market 
fund adopt written procedures that require the fund adviser to provide 
ongoing review of the credit quality of each portfolio security 
(including any guarantee or demand feature on which the fund relies to 
determine portfolio quality, maturity, or liquidity) to determine that 
the security continues to present minimal credit risks.\98\ Ongoing 
monitoring of minimal credit risks would include the determination of 
whether the issuer of the portfolio security, and the guarantor or 
provider of a demand feature, to the extent relied upon by the fund to 
determine portfolio quality, maturity or liquidity, continues to have 
an exceptionally strong capacity to repay its short-term financial 
obligations.\99\ The review would typically update the information that 
was used to make the initial minimal credit risk determination and 
would have to be based on, among other things, financial data of the 
issuer or provider of the guarantee or demand feature.\100\ We note 
that funds could continue to consider external factors, including 
credit ratings, as part of the ongoing monitoring process.\101\
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    \97\ See rule 2a-7(f)(1).
    \98\ Re-proposed rule 2a-7(g)(3). Our re-proposal would remove 
current rule 2a-7(f)(1)(i) (downgrades and rating below second tier 
previously unrated securities) and 2a-7(g)(3) (securities for which 
maturity is determined by reference to demand features). Re-proposed 
rule 2a-7 includes a new paragraph (g)(3), which would contain the 
required procedures for the ongoing review of credit risks.
    \99\ The re-proposal also would make conforming amendments to 
the recordkeeping provision related to the determination of credit 
risks, which among other things currently requires funds to retain a 
written record of the determination that a portfolio security 
presents minimal credit risks. See rule 2a-7(h)(3). As noted above, 
the re-proposal would require funds to retain a written record of 
the determination that a portfolio security is an eligible security, 
including the determination that it presents minimal credit risks. 
Re-proposed rule 2a-7(h)(3). Because under our re-proposal a fund 
adviser would be required to conduct an ongoing review of the credit 
quality of a fund's portfolio securities, rule 2a-7's current 
recordkeeping requirement could be understood to require the fund to 
provide for an ongoing documentation of the adviser's ongoing 
review, which could prove burdensome. Accordingly, our re-proposal 
would require the fund to maintain and preserve a written record of 
the determination that a portfolio security presents minimal credit 
risks at the time the fund acquires the security, or at such later 
times (or upon such events) that the board of directors determines 
that the investment adviser must reassess whether the security 
presents minimal credit risks. See re-proposed rule 2a-7(h)(3).
    \100\ See re-proposed rule 2a-7(g)(3)(ii). Currently, when a 
security's maturity is determined by reference to a demand feature, 
the board's review of the security's minimal credit risks must be 
based on, among other things, financial data for the most recent 
fiscal year of the issuer of a demand feature. See rule 2a-7(g)(3). 
A fund also should review any other factors considered as part of 
its initial minimal credit risk determination.
    \101\ See infra text following note 178 (discussing the 
Commission's belief that the majority of funds would continue to 
refer to credit ratings in making minimal credit risk 
determinations).
---------------------------------------------------------------------------

    Although rule 2a-7 does not explicitly require ongoing monitoring 
of whether a security presents minimal credit risks, as a practical 
matter, we believe most fund advisers currently engage in similar types 
of ongoing monitoring because (i) funds regularly ``roll over'' 
positions in portfolio securities, which triggers the obligation to 
make a new minimal credit risk determination \102\ (ii) rule 2a-7 
requires funds to reassess whether a security presents minimal credit 
risks upon the occurrence of certain events \103\ (iii) events such as 
downgrades can result in a decrease in the mark-to-market value of the 
fund portfolio, threatening the ability of the fund to maintain a 
stable net asset value \104\ (iv) changes in credit ratings of a fund's 
portfolio securities may threaten the fund's own ability to maintain a 
rating from an NRSRO \105\ and (v) shareholders may be more likely to 
redeem if the credit quality of portfolio securities declines.\106\ We 
do not believe that the re-proposal for an explicit monitoring 
requirement would significantly change current fund practices in 
monitoring minimal credit risks in the portfolio. Moreover, we do not 
believe that the re-proposal to remove the credit reassessment 
requirement in the event of a downgrade would result in less diligence 
on the part of money market fund managers because, as discussed above, 
a decline in the quality of a fund's portfolio securities could affect 
a fund's own NRSRO rating and could increase shareholder redemptions.
---------------------------------------------------------------------------

    \102\ Funds must limit their portfolios to securities that, 
among other requirements, are eligible securities at the time of 
acquisition, which is defined to mean any purchase or subsequent 
rollover. Rules 2a-7(a)(1); 2a-7(d)(2).
    \103\ Rule 2a-7(f)(1) (requiring a money market fund's board of 
directors to reassess promptly whether a security continues to 
present minimal credit risks if (i) a first tier portfolio security 
has been downgraded (or an unrated security is no longer of 
comparable quality to a first tier security), and (ii) the fund 
adviser becomes aware that any unrated security or second tier 
security has been given a rating below a second tier rating).
    \104\ See rule 2a-7(g)(1).
    \105\ See, e.g., Moody's Investors Service, Moody's Revised 
Money Market Fund Rating Methodology and Symbols, Mar. 10, 2011, 
available at https://www.citibank.com/transactionservices/home/oli/files/moodys_03_10_2011.pdf (discussing the assessment of a money 
market fund's ``Portfolio Credit Profile'' as a part of Moody's 
methodology for rating money market funds).
    \106\ See, e.g., 2013 Money Market Fund Proposing Release, supra 
note 5, at text accompanying nn. 100-103; Response to Questions 
Posed by Commissioners Aguilar, Paredes, and Gallagher, a report by 
staff of the Division of Risk, Strategy, and Financial Innovation 
(Nov. 30, 2012), available at https://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf, at 33 (noting that investors began 
redeeming government money market fund shares in July and August of 
2011 when concerns about the U.S. debt ceiling impasse and possible 
rating downgrades of government securities may have fueled investor 
concerns); Report of the President's Working Group on Financial 
Markets, Money Market Fund Reform Options (Oct. 2010), available at 
https://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf, at 12.
---------------------------------------------------------------------------

    We also note that a fund adviser's obligation to monitor risks to 
which the

[[Page 47996]]

fund is exposed would, as a practical matter, require the adviser to 
monitor for downgrades by relevant credit rating agencies \107\ because 
such a downgrade would likely affect the security's market value. 
Nevertheless, we acknowledge that one consequence of our proposal would 
be that a fund adviser could decide to keep a portfolio security that 
has been downgraded from second tier status without involving the 
fund's board in that decision. As part of its oversight of the 
adviser's investment decisions, however, we would expect that a fund 
board generally should establish procedures for the adviser to notify 
the board in such circumstances.\108\
---------------------------------------------------------------------------

    \107\ We use the term ``relevant credit rating agencies'' to 
mean those NRSROs whose downgrades would likely affect the value of 
a portfolio security.
    \108\ See rule 2a-7(j)(2); rule 2a-7(g)(1) (requiring that for 
funds using amortized cost, the board, as part of its overall duty 
of care owed to its shareholders, adopt written procedures 
reasonably designed, taking into account current market conditions 
and the money market fund's investment objectives, to maintain a 
stable net asset value per share).
---------------------------------------------------------------------------

    For the reasons discussed above, we believe this re-proposed 
requirement to monitor credit risk would essentially codify the current 
practices of fund managers, which are already explicit (and implicit) 
in several provisions of the rule discussed above. Our re-proposal to 
explicitly require that funds perform ongoing monitoring of credit 
risks is designed to ensure that funds are better positioned to quickly 
identify potential risks of credit events that could impact portfolio 
security prices and ultimately, for certain funds, the ability of the 
fund to maintain its stable net asset value.\109\
---------------------------------------------------------------------------

    \109\ As under the current rule, the process undertaken by the 
fund's board (or adviser) for establishing credit quality and the 
records documenting that process would be subject to review in 
regulatory examinations by Commission staff. See Removal of Certain 
References to Credit Ratings Under the Securities Exchange Act of 
1934, Securities Exchange Act Release No. 64352 (Apr. 27, 2011) [76 
FR 26550 (May 6, 2011)], at text following n.30. In the context of 
such an examination, a fund should be able to support each minimal 
credit risk determination it makes in light of financial data or 
market data it has considered with appropriate documentation to 
reflect that process and determination. A fund that acquires 
portfolio securities without having adopted, maintained, or 
implemented written policies and procedures reasonably designed to 
assess minimal credit risk, as required under rules 2a-7 and 38a-1, 
could be subject to disciplinary action for failure to comply with 
those rules. See id. See also Ambassador Capital Management LLC, et 
al., Investment Company Act Release No. 30809 (Nov. 26, 2013) 
(alleging that money market fund adviser's failure to (i) make and 
retain a written record of its minimal credit risk determinations 
resulted in the fund's violation of rule 22c-1 and (ii) follow the 
fund's compliance procedures regarding the determination of minimal 
credit risk and the maintenance of records of the determination 
resulted in the fund's violations of rule 38a-1).
---------------------------------------------------------------------------

    We request comment on the re-proposed monitoring requirement. Is 
our understanding of how funds currently monitor fund portfolio 
securities correct? If not, how are fund practices different? Would our 
proposed amendments, if adopted, impose additional or different costs 
on funds or their advisers, and if so, what would these costs be? 
Should the rule include specific objective events that would require a 
reevaluation of minimal credit risks? Would an explicit monitoring 
requirement change current fund priorities in monitoring minimal credit 
risks in the portfolio? Would the re-proposal assist funds to better 
position themselves to quickly identify potential risks of credit 
events that could impact portfolio security prices? Would replacing the 
credit reassessment requirement in the event of a downgrade with a 
requirement for ongoing monitoring result in less or more diligence on 
the part of money market fund managers? As a practical matter, would a 
fund adviser's obligation to monitor risks to which the fund is exposed 
likely require the adviser to monitor for downgrades by relevant credit 
ratings agencies, as well as monitor, for each portfolio security, each 
NRSRO rating considered as part of the minimal credit risk 
determination at the time the security was acquired? Are there any 
alternatives to the re-proposed monitoring requirement that would 
permit funds to monitor minimal credit risks more effectively, or that 
would better reflect funds' current monitoring practices, than the re-
proposed requirement?
4. Stress Testing
    Money market funds currently must adopt written procedures for 
stress testing their portfolios and perform stress tests according to 
these procedures on a periodic basis.\110\ Specifically, a fund must 
test its ability based on certain hypothetical events, including a 
downgrade of particular portfolio security positions, to: (i) Have 
invested at least 10 percent of its total assets in weekly liquid 
assets; and (ii) minimize principal volatility (and, in the case of a 
money market fund using the amortized cost method of valuation or penny 
rounding method of pricing, the fund's ability to maintain a stable 
share price per share).\111\ In 2011, we proposed to replace this 
reference to ratings downgrades with the requirement that money market 
funds stress test their portfolios for an adverse change in the ability 
of a portfolio security issuer to meet its short-term credit 
obligations.\112\
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    \110\ See rule 2a-7(g)(8).
    \111\ See rule 2a-7(g)(8)(i) (requiring written procedures 
providing for periodic stress testing in light of various events, 
including a ``downgrade or default of particular portfolio security 
positions, each representing various portions of the fund's 
portfolio (with varying assumptions about the resulting loss in the 
value of the security), in combination with various levels of an 
increase in shareholder redemptions''); 2014 Money Market Fund 
Adopting Release, supra note 8, at section III.J.
    \112\ See 2011 Proposing Release, supra note 4, at section 
II.A.4.
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    Commenters on the 2011 proposal who addressed this issue uniformly 
advocated against eliminating the reference to a downgrade in the 
stress testing conditions.\113\ They argued that the Dodd-Frank Act 
does not prohibit regulations, such as this stress testing provision, 
that refer to credit ratings without requiring an assessment of a 
security's creditworthiness.
---------------------------------------------------------------------------

    \113\ See, e.g., Dreyfus Comment Letter, supra note 30; ICI 
Comment Letter, supra note 30.
---------------------------------------------------------------------------

    In consideration of the comments we received and the mandate in 
section 939A of the Dodd-Frank Act, we re-propose to replace the 
reference to ratings downgrades in the stress testing requirement with 
a hypothetical event that is designed to have a similar impact on a 
money market fund's portfolio. Our re-proposed stress testing 
amendments would require that money market funds stress test for an 
event indicating or evidencing credit deterioration of particular 
portfolio security positions, each representing various exposures in a 
fund's portfolio.\114\ The re-proposed amendments would describe the 
type of hypothetical event that funds should use for testing and 
include a downgrade or default as examples of that type of event. Thus, 
funds could continue to test their portfolios against a potential 
downgrade or default in addition to any other indication or evidence of 
credit deterioration they determine appropriate (and that might 
adversely affect the value or liquidity of a portfolio security).
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    \114\ Re-proposed rule 2a-7(g)(8)(i)(B) (the re-proposal would 
require stress testing for an event indicating or evidencing the 
credit deterioration, such as a downgrade or default, of a portfolio 
security position representing various portions of the fund's 
portfolio (with varying assumptions about the resulting loss in the 
value of the security), in combination with various levels of an 
increase in shareholder redemptions).
---------------------------------------------------------------------------

    We note that the 2013 Money Market Fund Reform Proposing Release 
requested comment on certain aspects of money market fund stress 
testing as it relates to our obligation under section 165(i)(2) of the 
Dodd-Frank Act to specify certain stress testing requirements for 
nonbank financial

[[Page 47997]]

companies \115\ that have total consolidated assets of more than $10 
billion and are regulated by a primary Federal financial regulatory 
agency.\116\ As discussed in that release and the 2014 Money Market 
Fund Adopting Release, we intend to engage in a separate rulemaking to 
implement the requirements to section 165(i) of the Dodd-Frank 
Act.\117\ We request comment on our re-proposed amendment to the stress 
testing requirements. Should the rule require testing against 
specifically named events rather than an event the fund chooses that 
indicates or evidences credit deterioration? Does the re-proposed 
hypothetical event provide adequate guidance to funds? Is there a 
different hypothetical event, other than a downgrade, that we should 
specify?
---------------------------------------------------------------------------

    \115\ For a definition of ``nonbank financial companies'' for 
these purposes, see Definition of ``Predominantly Engaged in 
Financial Activities'' and ``Significant'' Nonbank Financial Company 
and Bank Holding Company, Board of Governors of the Federal Reserve 
System [78 FR 20756 (Apr. 5, 2013)].
    \116\ See 2013 Money Market Fund Proposing Release, supra note 
5, at section III.L.
    \117\ See id. at section III.L; 2014 Money Market Fund Adopting 
Release, supra note 8, at section III.J.5.
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B. Form N-MFP

    As part of the money market fund reforms adopted in 2010, money 
market funds must provide to the Commission a monthly electronic filing 
of portfolio holdings information on Form N-MFP.\118\ The information 
that money market funds must disclose with respect to each portfolio 
security (and any guarantee, demand feature, or other enhancement 
associated with the portfolio security) includes the name of each 
designated NRSRO for the portfolio security and the rating assigned to 
the security.\119\
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    \118\ See rule 30b1-7; see also 2010 Money Market Fund Adopting 
Release, supra note 41, at n.301 and accompanying and preceding 
text.
    \119\ See Form N-MFP Items 34 (requiring disclosure of each 
designated NRSRO for a portfolio security and the credit rating 
given by the designated NRSRO for each portfolio security); 37b-c 
(requiring disclosure of each designated NRSRO and the credit rating 
given by the designated NRSRO for each portfolio security demand 
feature); 38b-c (requiring disclosure of each designated NRSRO and 
the credit rating given by the designated NRSRO for each portfolio 
security guarantee); and 39c-d (requiring disclosure of each 
designated NRSRO and the credit rating given by the designated NRSRO 
for each portfolio security enhancement).
---------------------------------------------------------------------------

    In 2011, we proposed to eliminate the form items that currently 
require a fund to identify whether a portfolio security is a first tier 
or second tier security or is an unrated security, and that require the 
fund to identify the ``requisite NRSROs'' for each security (and for 
each demand feature, guarantee or other credit enhancement). Several 
commenters strongly objected to removing ratings disclosures in Form N-
MFP. They argued that the Dodd-Frank Act does not require us to 
eliminate these disclosures because these references to ratings do not 
require the use of an assessment of creditworthiness.\120\ We have 
carefully considered these comments and are re-proposing instead to 
require that each money market fund disclose, for each portfolio 
security, (i) each rating assigned by any NRSRO if the fund or its 
adviser subscribes to that NRSRO's services, as well as the name of the 
agency providing the rating, and (ii) any other NRSRO rating that the 
fund's board of directors (or its delegate) considered in making its 
minimal credit risk determination, as well as the name of the agency 
providing the rating.\121\ The first prong of this requirement reflects 
our assumption that a fund manager subscribes to the services of a 
particular NRSRO because the manager has confidence in that NRSRO's 
analysis and, therefore, when assessing the credit quality of a 
portfolio security, would consider any rating the NRSRO assigns to the 
security. If a fund's adviser has considered more than one NRSRO rating 
in making a minimal credit risk determination for a particular 
portfolio security, the Form N-MFP disclosure would need to reflect 
each rating considered (in addition to each rating assigned by an NRSRO 
if the fund or its adviser subscribes to its services). If the fund and 
its adviser subscribe to no NRSRO ratings services, and no other rating 
was considered in making a minimal credit risk determination, the fund 
would disclose no rating for the portfolio security. We believe this 
information on ratings may be useful both to the Commission and to 
investors to monitor credit ratings that funds use in evaluating the 
credit quality of portfolio securities and to evaluate risks that fund 
managers take.\122\ Disclosures of individual portfolio securities 
ratings would provide investors, Commission staff, and others with a 
snapshot of potential trends in a fund's overall risk profile, which 
could in turn prompt those monitoring to research or evaluate further 
whether that profile is changing.
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    \120\ See, e.g., Federated Comment Letter, supra note 30; 
Dreyfus Comment Letter, supra note 30.
    \121\ See re-proposed Form N-MFP Item C.10. In a conforming 
change, the re-proposal would also amend Form N-MFP Item C.9 to 
require disclosure of whether the portfolio security is an eligible 
security.
    \122\ See Comment Letter of BlackRock, Inc. (Apr. 25, 2011) 
(``BlackRock Comment Letter'') (``this disclosure facilitates 
investors' ability to evaluate [money market fund] portfolios and to 
compare [money market funds] to each other.'').
---------------------------------------------------------------------------

    We seek comment on the re-proposed disclosures relating to credit 
ratings in Form N-MFP. Are we correct in our assumption that as part of 
its minimal credit risk determination a fund manager would consider 
each rating assigned to a portfolio security by an NRSRO to whose 
services the fund or the manager subscribes? Would the proposed 
disclosures assist investors in monitoring credit risks in money market 
fund portfolios? Would the disclosures be more useful if they required 
funds that consider any rating to disclose the highest and lowest 
rating assigned to the portfolio security, regardless of whether the 
fund considered that rating? Should fund managers that consider more 
than one credit rating in their credit evaluations be required to 
disclose only one rating and its source? Would disclosure of only one 
rating limit an investor's ability to monitor the fund's credit risk if 
another rating assigned to a portfolio security differs from the rating 
disclosed by the fund in Form N-MFP (i.e., the security is split-
rated)? Under such an approach, if a portfolio security is split-rated, 
which rating should the fund have to disclose, or should a fund be able 
to choose the rating it discloses? If a fund could choose, would any 
funds disclose a lower rating assigned by an NRSRO? We took a similar 
approach in recent amendments removing the required use of credit 
ratings in Forms N-1A, N-2 and N-3. Under those amendments, funds that 
choose to use credit quality to present their portfolio securities in 
shareholder reports and use credit ratings to depict credit quality may 
use credit ratings assigned by different rating agencies (including 
credit rating agencies that are not NRSROs), provided that the fund 
also describes how it determines the credit quality of portfolio 
holdings and how ratings are identified and selected.\123\ Would a 
similar disclosure describing how a money market fund determines the 
credit quality of portfolio holdings, including how ratings are 
identified and selected be appropriate considering the format of Form 
N-MFP? If not, would disclosure in another form, such as Form N-1A, 
appropriately mitigate the risk that a fund could ``cherry-pick'' the 
rating to disclose on Form N-MFP? Would investors find disclosure about

[[Page 47998]]

the source of the credit rating to be useful information?
---------------------------------------------------------------------------

    \123\ Form N-1A Item 27(d); Form N-2 Item 24, Instruction 6(a); 
Form N-3 Item 28(a), Instruction 6(i); see also 2013 Ratings Removal 
Adopting Release, supra note 4, at section III.B.
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C. Exclusion From the Issuer Diversification Requirement

    In addition to the provisions regarding credit quality discussed 
above, rule 2a-7's risk limiting conditions require a money market 
fund's portfolio to be diversified, both as to the issuers of the 
securities it acquires and providers of guarantees and demand features 
related to those securities.\124\ Generally, money market funds must 
limit their investments in the securities of any one issuer of a first 
tier security (other than government securities) to no more than 5 
percent of total assets.\125\ They must also generally limit their 
investments in securities subject to a demand feature or a guarantee to 
no more than 10 percent of total assets from any one provider.\126\ We 
adopted these requirements in order to limit the exposure of a money 
market fund to any one issuer, guarantor, or demand feature 
provider.\127\
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    \124\ See rule 2a-7(d)(3). 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 Investment Company Act. A money market fund that satisfies the 
applicable diversification requirements of paragraph (d)(3) of rule 
2a-7 is deemed to have satisfied the requirements of section 
5(b)(1). Rule 2a-7(d)(3)(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.
    \125\ Rule 2a-7(d)(3)(i)(A) and (B). A single state fund, 
however, may invest up to 25% of its total assets in the first tier 
securities of any single issuer. Rule 2a-7(d)(3)(i)(B). A fund also 
may invest no more than 0.5% of fund assets in any one issuer of a 
second tier security. Rule 2a-7(d)(3)(i)(C). The rule provides a 
safe harbor under which a taxable and national tax-exempt fund may 
invest up to 25% of its total 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(d)(3)(i)(A). Under our re-proposal, which 
would eliminate the distinction between first and second tier 
securities, the issuer diversification requirements would apply 
regardless of a portfolio security's rating and the safe harbor 
would be available with respect to any portfolio security regardless 
of its rating. See supra note 36.
    \126\ Rule 2a-7 also provides a ``fifteen percent basket'' for 
tax-exempt (including single-state) money market funds, under which 
as much as 15% of the value of securities held in a tax-exempt 
fund's portfolio may be subject to guarantees or demand features 
from a single institution. See rule 2a-7(d)(3)(iii)(B). The tax-
exempt fund, however, may only use the 15% basket to invest in 
demand features or guarantees issued by non-controlled persons that 
are first tier securities. See rule 2a-7(c)(4)(iii)(B) and (C). 
Under our re-proposal, the 15% basket would be available with 
respect to any demand feature or guarantee issued by a non-
controlled person without regard to the rating of the security, 
guarantee or demand feature. See supra note 36.
    \127\ See Money Market Fund Reform, Investment Company Act 
Release No. 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)] 
(``2009 Money Market Fund Proposing Release'') at n.220 and 
accompanying text; Revisions to Rules Regulating Money Market Funds, 
Investment Company Act Release No. 17589 (July 17, 1990) [55 FR 
30239 (July 25, 1990)], at text accompanying n.23 (``Diversification 
limits investment risk to a fund by spreading the risk of loss among 
a number of securities.'').
---------------------------------------------------------------------------

    By permitting money market funds a higher 10 percent limit on their 
indirect exposures to a single provider of a guarantee or demand 
feature than the 5 percent limit on direct investments in any one 
issuer, rule 2a-7 permits a money market fund to take on greater 
indirect exposures to providers of demand features and guarantees. That 
is because, rather than looking solely to the issuer, the money market 
fund would have two potential sources of repayment--the issuer whose 
securities are subject to the demand features or guarantees and the 
providers of those features or guarantees if the issuer defaults. Both 
the issuer and the demand feature provider or guarantor would have to 
default at the same time for the money market fund to suffer a loss. 
And if a guarantor or demand feature provider were to come under 
stress, the issuer may be able to obtain a replacement.\128\
---------------------------------------------------------------------------

    \128\ See, e.g., Revisions to Rules Regulating Money Market 
Funds, Investment Company Act Release No.19959 (Dec. 17, 1993) [58 
FR 68585 (Dec. 28, 1993)] at n.83 and accompanying text (observing 
that, if the guarantor of one of the money market fund's securities 
comes under stress, ``issuers or investors generally can either put 
the instrument back on short notice or persuade the issuer to obtain 
a substitute for the downgraded institution'').
---------------------------------------------------------------------------

    Today, we adopted amendments to certain provisions of these 
diversification requirements in the 2014 Money Market Fund Adopting 
Release.\129\ Among other things, our amendments require that money 
market funds treat certain entities that are affiliated with each other 
as single issuers when applying the 5 percent issuer diversification 
provision of rule 2a-7 and treat the sponsors of asset-backed 
securities as guarantors subject to the 10 percent diversification 
provision of rule 2a-7 applicable to guarantees and demand features, 
unless the fund's board makes certain findings. These amendments were 
intended to increase the resiliency of and reduce risk in money market 
funds by limiting their ability to concentrate investments in a single 
economic enterprise.
---------------------------------------------------------------------------

    \129\ See 2014 Money Market Fund Adopting Release, supra note 8, 
at section III.I.1.d.
---------------------------------------------------------------------------

    When we proposed these amendments, we also discussed and sought 
comment on additional alternatives that we had considered to 
appropriately limit money market funds' risk exposure.\130\ These 
alternatives included requiring money market funds to be more 
diversified by reducing the current 5 percent and 10 percent 
diversification thresholds of rule 2a-7 and by imposing industry 
concentration limits. Several commenters supported some of these 
tighter diversification requirements.\131\ One of these commenters 
suggested limiting any one corporate issuer to 2.5 percent of the 
fund's total assets rather than the current 5 percent issuer 
diversification requirement, while two others supported additional 
sector diversification requirements.\132\ Others, however, argued 
against further narrowing the diversification provisions of rule 2a-7 
relating to issuers and guarantors.\133\
---------------------------------------------------------------------------

    \130\ See 2013 Money Market Fund Proposing Release, supra note 
5, at sections III.J.1-2.
    \131\ See Comment Letter of Eric S. Rosengren, President, 
Federal Reserve Bank of Boston, et al. (Sept. 12, 2013) (``Boston 
Federal Reserve Comment Letter''); Comment Letter of Robert Comment, 
Ph.D. (Jun. 14, 2013) (``R. Comment Comment Letter''); Comment 
Letter of John C. Barber, KeyBank, NA (Sept. 16, 2013) (``J. Barber 
Comment Letter'').
    \132\ See J. Barber Comment Letter, supra note 131 (recommending 
2.5% issuer limit); R. Comment Comment Letter, supra note 131 
(advocating sector diversification); Boston Federal Reserve Comment 
Letter, supra note 131 (same).
    \133\ Comment Letter of Phillip S. Gillespie, Executive Vice 
President and General Counsel, State Street Global Advisors (Sept. 
17, 2013) (opposing the additional alternatives because existing 
diversification limits are already challenging due to the short-term 
market's current supply structure); Comment Letter of Investment 
Company Institute (Sept. 17, 2013) (``ICI 2013 Comment Letter''). 
One of these expressed concern that further restricting 
diversification limits may potentially force money market funds to 
invest in less creditworthy issuers, which could have the effect of 
increasing the risk within money market funds' portfolios, rather 
than decreasing it. See id.
---------------------------------------------------------------------------

    We also asked in the 2013 Money Market Fund Proposing Release more 
generally whether we should continue to distinguish between a fund's 
exposure to guarantors and issuers by providing different 
diversification requirements for these exposures.\134\ We explained 
that rule 2a-7 permits a money market fund, when determining if a 
security subject to a guarantee satisfies the credit quality standards, 
to rely exclusively on the credit quality of the guarantor.\135\ We 
specifically asked whether the guarantor should be treated as the 
issuer and subject to a 5 percent

[[Page 47999]]

diversification requirement whenever the money market fund is relying 
exclusively on the credit quality of the guarantor. No commenters 
specifically addressed this issue, and we decided not to propose 
amendments that would implement this approach, or any of the 
alternative diversification approaches about which we sought comment as 
discussed above.
---------------------------------------------------------------------------

    \134\ See 2013 Money Market Fund Proposing Release, supra note 
5, at sections III.J.1-2.
    \135\ Rule 2a-7(d)(2)(iii). That a money market fund has both 
the issuer and guarantor as sources of repayment may not 
meaningfully reduce the risks of the investment in all cases because 
the issuer of the guaranteed securities need not satisfy rule 2a-7's 
credit quality requirements, and if the issuer of the guaranteed 
securities is of lesser credit quality, allowing the money market 
fund to have up to 10% of its assets indirectly exposed to the 
guarantor may not be justified.
---------------------------------------------------------------------------

    In considering the comments we received on the proposed amendments 
to the diversification provisions and the alternatives discussed above, 
we noted that money market funds also may effectively rely exclusively 
on the credit quality of certain guarantors for purposes of the 
diversification requirements. Notwithstanding the 5 percent issuer 
diversification provision, rule 2a-7 does not require a money market 
fund to be diversified with respect to issuers of securities that are 
subject to a guarantee by a non-controlled person.\136\ This exclusion 
could allow, for example, a fund to invest a significant portion or all 
of the value of its portfolio in securities issued by the same entity 
if the securities were guaranteed by different non-controlled person 
guarantors such that none guaranteed securities with a value exceeding 
10 percent of the fund's total assets. By diversifying solely against 
the guarantor, the fund could be relying on the guarantors' credit 
quality or repayment ability, not the issuer's. Thus, the fund would 
effectively substitute the credit of the guarantor for that of the 
issuer for diversification purposes, without imposing the tighter 5 
percent requirement that rule 2a-7 generally applies for issuer 
diversification. The fund also would have a highly concentrated 
portfolio and would be subject to substantial risk if the single issuer 
in whose securities it had such a significant investment were to come 
under stress or default.
---------------------------------------------------------------------------

    \136\ Rule 2a-7(d)(3)(i). A guarantee issued by a non-controlled 
person means a guarantee issued by: (i) A person that, directly or 
indirectly, does not control, and is not controlled by or under 
common control with the issuer of the security subject to the 
guarantee; or (ii) a sponsor of a special purpose entity with 
respect to an asset-backed security. Rule 2a-7(a)(19). Control has 
the same meaning as in section 2(a)(9) of the Investment Company 
Act, 15 U.S.C. 80a-2(a)(9).
---------------------------------------------------------------------------

    We are concerned that a money market fund relying on the exclusion 
from the issuer diversification provision need only comply with the 10 
percent guarantor diversification requirement, notwithstanding the 
credit substitution discussed above. In consideration of our reform 
goal of limiting concentrated exposure of money market funds to 
particular economic enterprises, we no longer believe that ignoring a 
fund's exposure to the issuer in these circumstances is 
appropriate.\137\ Rather than subject these guarantors to a unique 5 
percent requirement, however, we believe that a better approach would 
be to restrict risk exposures to all issuers of securities subject to a 
guarantee or demand feature under rule 2a-7 in the same way. That is, 
under today's proposed amendment, each money market fund that invests 
in securities subject to a guarantee (whether or not the guarantor is a 
non-controlled person) would have to comply with both the 10 percent 
diversification requirement for the guarantor as well as the 5 percent 
diversification requirement for the issuer. As a result, except for the 
special provisions regarding single-state money market funds, no money 
market fund non-government portfolio security would be excluded from 
rule 2a-7's limits on issuer concentration.
---------------------------------------------------------------------------

    \137\ See 2014 Money Market Fund Adopting Release, supra note 8, 
at text following n.1600 and accompanying n.1601. The exclusion from 
the 5% issuer diversification requirement for certain guaranteed 
securities was adopted in the 1996 money market fund amendments to 
provide flexibility in municipal investments, and was premised on 
the ability of a money market fund to rely on the guarantee if an 
issuer became distressed. See 1996 Money Market Fund Adopting 
Release, supra note 62. Since 1996, our amendments have generally 
scaled back on the amount of additional flexibility focused on the 
municipal markets, particularly where money market funds do not 
heavily rely on the exclusion. See, e.g., 2010 Money Market Fund 
Adopting Release, supra note 41.
---------------------------------------------------------------------------

    We recognize that the proposed removal of this exclusion and 
tightening of issuer diversification requirements for securities 
subject to a guarantee by a non-controlled person could impact issuers 
of these securities and the fund's risk profile (although we note that 
fewer than 2 percent of money market funds appear to be relying on this 
exclusion).\138\ The proposed amendments could occasionally prevent 
some issuers from selling securities to a money market fund that would 
otherwise invest in the issuer's securities above the 5 percent 
diversification requirement. In addition, while we recognize that 
removing the exclusion could cause some money market funds to invest in 
securities with higher credit risk, we note that a money market fund's 
portfolio securities must meet certain credit quality requirements, 
such as posing minimal credit risks, as discussed above.\139\ We 
therefore believe that the substantial risk limiting provisions of rule 
2a-7 would mitigate the potential that these money market funds would 
significantly increase their investments in securities with higher 
credit risk. We also believe that eliminating this exclusion would more 
appropriately limit money market fund risk exposures by limiting the 
concentration of exposure that a money market fund could have otherwise 
had to a particular issuer.\140\
---------------------------------------------------------------------------

    \138\ See infra section V.C.2.
    \139\ See rule 2a-7(d)(2) (portfolio quality); supra notes 20-24 
and accompanying text.
    \140\ See infra section V.C.2.
---------------------------------------------------------------------------

    We request comment on our proposal to eliminate the exclusion from 
the issuer diversification requirement. Do commenters agree with our 
approach to treat securities subject to a guarantee by a non-controlled 
person similar to other securities with a guarantee or demand feature 
under rule 2a-7? Should we instead, as discussed above, require that a 
guarantor be treated as the issuer and subject to a 5 percent 
diversification requirement when a money market fund is relying 
exclusively on the credit quality of the guarantor or when the security 
need not meet the issuer diversification requirements? Or should we 
impose a higher limit on issuer exposure when the security is 
guaranteed by a non-controlled person? If so, what would be an 
appropriate limit? For example, would a 10 percent, 15 percent, or some 
other limit be appropriate? What limit would appropriately balance the 
interests discussed above--allowing greater flexibility for funds with 
respect to indirect exposures to providers of guarantees and demand 
features because of the potential that tighter diversification 
provisions could lead to investments in lower quality securities and 
limiting exposure risk when a fund is relying solely on such a provider 
for repayment? Could commenters provide empirical analysis to support a 
particular percentage? Do commenters agree with our understanding that 
most money market funds do not currently rely on the issuer 
diversification exclusion for securities subject to a guarantee issued 
by a non-controlled person? Do commenters believe that many money 
market funds have used this exclusion in the past or may do so in the 
future absent our proposed amendment? We note that most of the funds 
whose portfolios have greater than 5 percent exposure to an issuer are 
tax-exempt funds, and that most of these funds exceed the 5 percent 
threshold by less than 2 percent of fund assets. In addition, none of 
the funds that appear to have relied on the exclusion is a single state 
fund.\141\ As a result, we have assumed that tax-exempt funds do not

[[Page 48000]]

need this exclusion. Is this assumption correct? Is the supply of high 
quality eligible municipal investments sufficiently limited such that 
we should preserve the exclusion for tax-exempt or single state funds? 
Are there any other particular types of funds for which the current 
exclusion from the issuer diversification requirement should be 
preserved? Is the proposed amendment likely to result in money market 
funds investing in securities that present higher credit risk, or not, 
given the credit quality requirements of rule 2a-7?
---------------------------------------------------------------------------

    \141\ As noted above, rule 2a-7 currently permits a single state 
fund to invest up to 25% of its assets in any single issuer, thus 
these funds appear not to need the exclusion. See supra note 125.
---------------------------------------------------------------------------

III. Compliance Period for the Proposed Rule and Form Amendments

    We anticipate that the compliance date for the re-proposed 
amendments to rule 2a-7 and Form N-MFP and the proposed amendments to 
the issuer diversification requirements would be [INSERT DATE 18 MONTHS 
AFTER JULY 2014 MONEY MARKET FUND RULES' EFFECTIVE DATE]. We expect 
that this compliance date should provide an adequate period of time for 
money market funds to review and revise their policies and procedures 
for complying with rule 2a-7, as funds deem appropriate in connection 
with the re-proposed and proposed amendments, if adopted.\142\ We note 
that this compliance date would coincide with the compliance date for 
the rule 2a-7 amendments relating to diversification and stress testing 
adopted in the 2014 Money Market Fund Adopting Release, as well as the 
Form N-MFP amendments also adopted in that release. As discussed below, 
we believe that coordinating the compliance date of the re-proposed 
amendments with the compliance date of certain related amendments 
adopted in the 2014 Money Market Fund Adopting Release should reduce 
costs to the extent feasible by consolidating changes to be made to a 
fund's policies and procedures, as well as changes to Form N-MFP, at a 
single time.\143\ We request comment on this compliance date.
---------------------------------------------------------------------------

    \142\ See infra note 219 and accompanying text.
    \143\ See infra note 233 and accompanying text.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act Analysis

    Certain provisions of our proposal contain ``collections of 
information'' within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\144\ 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 30b1-7 under the 
Investment Company Act of 1940, Monthly report for money market funds'' 
(OMB Control No. 3235-0657); and (3) ``Form N-MFP under the Investment 
Company Act of 1940, Monthly schedule of portfolio holdings of money 
market funds'' (OMB Control No. 3235-0657). 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. 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.
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    \144\ 44 U.S.C. 3501-3520.
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    The agency has submitted the proposed collections of information to 
OMB for approval. Comments on the proposed collections of information 
should be directed to: (i) Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Office of 
Management and Budget, Room 10102, New Executive Office Building, 
Washington, DC 20503, or by sending an email to: Shagufta_Ahmed@omb.eop.gov; and (ii) Thomas Bayer, Chief Information Officer, 
Securities and Exchange Commission, c/o Remi Pavlik-Simon, 6432 General 
Green Way, Alexandria, VA 22312 or send an email to: PRA_Mailbox@sec.gov. 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 this collection of information should be in writing, refer to 
File No. S7-07-11, and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 
20549-2736.

A. Rule 2a-7

    As discussed above, we are re-proposing to remove references to 
credit ratings in rule 2a-7, which would affect five elements of the 
rule: (i) Determination of whether a security is an eligible security; 
(ii) determination of whether a security is a first tier security; 
(iii) credit quality standards for securities with a conditional demand 
feature; (iv) requirements for monitoring securities for ratings 
downgrades and other credit events; and (v) stress testing. These 
amendments involve collections of information, and the respondents to 
the collections of information are money market funds. This collection 
of information would be mandatory for money market funds that rely on 
rule 2a-7, and to the extent that the Commission receives confidential 
information pursuant to the collection of information, such information 
will be kept confidential, subject to the provisions of applicable 
law.\145\
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    \145\ See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of 
Information Act provides an exemption for ``trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential.'' 5 U.S.C. 552(b)(4). Exemption 8 of the 
Freedom of Information Act provides an exemption for matters that 
are ``contained in or related to examination, operating, or 
condition reports prepared by, or on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions.'' 5 U.S.C. 552(b)(8)).
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1. Eligible Security Determinations for Money Market Fund Portfolio 
Securities, Including Securities That Are Subject to a Conditional 
Demand Feature
    Rule 2a-7 limits a money market fund's portfolio investments to 
``eligible securities,'' which are currently defined as securities that 
have received credit ratings from a requisite NRSRO in one of the two 
highest short-term rating categories, or comparable unrated 
securities.\146\ The rule also restricts money market fund investments 
to securities that the fund's board, or its delegate, determines 
present minimal credit risks, and requires a fund to adopt policies and 
procedures regarding minimal credit risk determinations.\147\ As 
discussed above, we are re-proposing amendments to rule 2a-7 that would 
remove any reference to, or requirement of reliance on, credit ratings 
in rule 2a-7 and modify the credit quality standard to be used in 
determining the eligibility of a money market fund's portfolio 
securities, including securities that are subject to a conditional 
demand feature. Specifically, the re-proposed amendments would 
eliminate the current requirement that an eligible security be rated in 
one of the two highest short-term rating categories by an NRSRO or be 
of comparable quality, and would combine the current ``first tier'' and 
``second tier'' credit risk categories into a single standard, which 
would be included as part of rule 2a-7's definition of eligible 
security. A security would be an eligible security only if the money 
market fund's board of directors (or its delegate) determines that it 
presents minimal credit risks, which determination would include a 
finding that the security's issuer has an exceptionally strong capacity 
to meet its

[[Page 48001]]

short-term obligations.\148\ The re-proposed amendments also would 
require that, with respect to a security (or its guarantee) subject to 
a conditional demand feature, the underlying security (or its 
guarantee) must have a very strong capacity for payment of its 
financial commitments.\149\
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    \146\ See rule 2a-7(a)(12).
    \147\ See rules 2a-7(d)(2)(i); 2a-7(j)(1); 38a-1.
    \148\ Re-proposed rule 2a-7(a)(11); see supra section II.A.1.
    \149\ Re-proposed rule 2a-7(d)(2)(iii)(C); see supra section 
II.A.2.
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    Money market funds are required to have written policies and 
procedures regarding minimal credit risk determinations.\150\ Thus, 
each money market fund complex would incur one-time costs to comply 
with these re-proposed amendments, if adopted. Specifically, each fund 
complex would incur costs to review the amended provisions of rule 2a-7 
and, as it determines appropriate in light of the re-proposed 
amendments, revise its policies and procedures to incorporate the 
amended credit quality standards to be used in determining the 
eligibility of a money market fund's portfolio securities, including 
securities that are subject to a conditional demand feature. As 
discussed below, we anticipate that many funds are likely to retain 
their investment policies as currently required under rule 2a-7, which 
incorporate NRSRO ratings and which would be permitted under the re-
proposed rule amendments.\151\ Some funds, on the other hand, may 
choose to revise their investment policies to remove references to 
NRSRO ratings and to incorporate the standards provided in the re-
proposal, if adopted. Even if funds choose to eliminate references to 
ratings in their investment policies, funds' investment policies may 
not change substantially, as funds are already required to assess 
credit quality apart from ratings as part of their minimal credit risk 
determinations.\152\ In addition to revisions concerning NRSRO ratings, 
some funds may choose to revise their policies and procedures to 
address certain factors discussed above (to the extent those factors 
are not considered currently) in their credit assessment policies and 
procedures.
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    \150\ See rule 2a-7(j)(1); supra note 22.
    \151\ See infra note 204 and accompanying paragraph.
    \152\ See rule 2a-7(d)(2)(i).
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    While we cannot predict with precision the extent to which funds 
may revise their policies and procedures for determining minimal credit 
risk, we estimate that each money market fund complex on average would 
incur a one-time burden of 9 hours,\153\ at a cost of $2,838,\154\ to 
review and revise, as appropriate, its policies and procedures. Using 
an estimate of 84 money market fund complexes,\155\ we estimate that 
money market funds would incur, in aggregate, a total one-time burden 
of 756 hours,\156\ at a cost of $238,392,\157\ to comply with the 
amended provisions of rule 2a-7 modifying the credit quality standard 
to be used in determining the eligibility of a fund's portfolio 
securities. Amortizing these hourly and cost burdens over three years 
results in an average annual increased burden for all money market fund 
complexes of 252 hours \158\ at a cost of $79,464.\159\ We do not 
believe that funds would newly implement or change any annual review of 
policies and procedures that they currently perform as a result of the 
re-proposed amendments. There would be no external costs associated 
with this collection of information.
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    \153\ We estimate that the lower range of the one-time hour 
burden for a money market fund complex to review and revise, as 
appropriate, its policies and procedures for determining minimal 
credit risk would be 6 hours (4 hours by a compliance manager, and 2 
hours by an attorney). We estimate that the upper range of the one-
time hour burden for a money market fund complex to review and 
revise, as appropriate, its policies and procedures for determining 
minimal credit risk would be 12 hours (8 hours by a compliance 
manager, and 4 hours by an attorney). For purposes of our estimates 
for the PRA analysis, we have taken the mid-point of this range 
(mid-point of 6 hours and 12 hours = 9 hours (6 hours by a 
compliance manager, and 3 hours by an attorney)).
    \154\ This estimate is based on the following calculation: (6 
hours (mid-point of 4 hours and 8 hours incurred by a compliance 
manager) x $283 (rate for a compliance manager) = $1,698) + (3 hours 
(mid-point of 2 hours and 4 hours incurred by an attorney) x $380 
(rate for an attorney) = $1,140) = $2,838. All estimated wage 
figures discussed here and throughout this Release are based on 
published rates that have been taken from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, available at 
https://www.sifma.org/research/item.aspx?id=8589940603, modified by 
Commission staff to account for an 1800 hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    \155\ Based on data from Form N-MFP and iMoneyNet data as of 
February 28, 2014.
    \156\ This estimate is based on the following calculation: 9 
hours x 84 money market fund complexes = 756 hours.
    \157\ This estimate is based on the following calculation: 
$2,838 x 84 money market fund complexes = $238,392.
    \158\ This estimate is based on the following calculation: 756 
hours / 3 years = 252 hours.
    \159\ This estimate is based on the following calculation: 
$238,392 / 3 years = $79,464.
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2. Monitoring Minimal Credit Risks
    Rule 2a-7 currently requires a money market fund board (or its 
delegate) promptly to reassess whether a security that has been 
downgraded by an NRSRO continues to present minimal credit risks.\160\ 
As discussed above, we are re-proposing amendments to rule 2a-7 that 
would eliminate the current use of credit ratings in the rule's 
downgrade and default provisions. Rule 2a-7 instead would require a 
money market fund to adopt written procedures requiring the fund 
adviser, or any person to whom the fund's board of directors has 
delegated portfolio management responsibilities, to provide ongoing 
review of each portfolio security to determine that the issuer 
continues to present minimal credit risks.\161\ To comply with these 
re-proposed amendments, if adopted, a fund complex would incur one-time 
costs to review the amended provisions of rule 2a-7 and adopt policies 
and procedures providing for ongoing review to determine whether a 
money market fund's portfolio securities continue to present minimal 
credit risks. Money market funds are not currently required to maintain 
policies and procedures that specifically address ongoing minimal 
credit risk monitoring. Although we understand, based on staff 
experience, that most money market funds currently monitor portfolio 
securities for minimal credit risk on an ongoing basis,\162\ we are 
assuming that all money market fund complexes would need to adopt new 
written policies and procedures to provide for this ongoing review in 
order to comply with the amended provisions of rule 2a-7.
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    \160\ See rule 2a-7(f)(1)(i).
    \161\ Re-proposed rule 2a-7(g)(3); see supra section II.A.3.
    \162\ See supra notes 102-106 and accompanying text.
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    We estimate that each money market fund complex on average would 
incur a one-time burden of 5 hours,\163\ at a cost

[[Page 48002]]

of $3,619,\164\ to adopt policies and procedures for ongoing review of 
minimal credit risks. Using an estimate of 84 money market fund 
complexes,\165\ we estimate that money market funds would incur, in 
aggregate, a total one-time burden of 378 hours,\166\ at a cost of 
$303,996,\167\ to comply with the amended provisions of rule 2a-7. 
Amortizing these hourly and cost burdens over three years results in an 
average annual increased burden for all money market fund complexes of 
126 hours \168\ at a cost of $101,332.\169\ There would be no external 
costs associated with this collection of information.
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    \163\ These hour estimates assume that the process of adopting 
written policies and procedures will consist primarily of 
transcribing and reviewing any existing policies and procedures that 
funds currently use when monitoring minimal credit risk on an 
ongoing basis. Because we cannot predict the extent to which funds 
may need to develop these policies and procedures to comply with the 
amended provisions of rule 2a-7, if adopted, or may need to 
transcribe and review any existing policies and procedures, we have 
taken, as an estimated average burden, the mid-point of a range of 
hour estimates discussed below in this note 163 for purposes of our 
PRA analysis.
     We estimate that the lower range of the one-time hour burden 
for a money market fund complex to adopt policies and procedures for 
ongoing review to determine whether a money market fund's portfolio 
securities continue to present minimal credit risks would be 3.5 
hours (2 hours by a compliance manager and 1 hour by an attorney to 
develop and review policies and procedures (or transcribe and review 
pre-existing policies and procedures) + 0.5 hours for the fund's 
board to adopt the policies and procedures). We estimate that the 
upper range of the one-time hour burden for a money market fund 
complex to adopt such policies and procedures would be 6.5 hours (4 
hours by a compliance manager and 2 hours by an attorney to develop 
and review policies and procedures (or transcribe and review pre-
existing policies and procedures) + 0.5 hours for the fund's board 
to adopt the policies and procedures). The mid-point of the lower 
range estimate and the upper range estimate is 5 hours.
    \164\ This estimate is based on the following calculation: (3 
hours (mid-point of 2 hours and 4 hours incurred by a compliance 
manager) x $283 (rate for a compliance manager) = $849) + (1.5 hours 
(mid-point of 1 hour and 2 hours incurred by an attorney) x $380 
(rate for an attorney) = $570) + (0.5 hours x $4,400 per hour for a 
board of 8 directors = $2,200)= $3,619. The staff previously 
estimated in 2009 that the average cost of board of director time 
was $4,000 per hour for the board as a whole, based on information 
received from funds and their counsel. Adjusting for inflation, the 
staff estimates that the current average cost of board of director 
time is approximately $4,400.
    \165\ Based on data from Form N-MFP and iMoneyNet data as of 
February 28, 2014.
    \166\ This estimate is based on the following calculation: 4.5 
hours x 84 money market fund complexes = 378 hours.
    \167\ This estimate is based on the following calculation: 
$3,619 x 84 money market fund complexes = $303,996.
    \168\ This estimate is based on the following calculation: 378 
hours / 3 years = 126 hours.
    \169\ This estimate is based on the following calculation: 
$303,996 / 3 years = $101,332.
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3. Stress Testing
    Rule 2a-7 currently requires money market funds to adopt written 
stress testing procedures and to perform stress tests according to 
these procedures on a periodic basis.\170\ We are re-proposing 
amendments to rule 2a-7 that would replace the reference to ratings 
downgrades in the rule's stress testing provisions with a hypothetical 
event that is designed to have a similar impact on a money market 
fund's portfolio.\171\ The re-proposed amendment is designed to retain 
a similar standard for stress testing as under current rule 2a-7. 
Specifically, while rule 2a-7 currently requires a fund to stress test 
its portfolio based on certain hypothetical events, including a 
downgrade of portfolio securities, the re-proposed amendment would 
require a fund to stress test for an event indicating or evidencing 
credit deterioration in a portfolio security, and would include a 
downgrade or default as examples of that type of event. As discussed 
below, we recognize that a money market fund could use its current 
policies and procedures to comply with the re-proposed amendment, and 
could continue to use credit quality evaluations prepared by outside 
sources, including NRSRO downgrades, in stress tests.\172\ Because the 
rule currently requires testing for a downgrade as a hypothetical 
event, we do not believe that funds would take any additional time to 
review and revise their policies and procedures with respect to the 
continued use of downgrades in stress testing. Accordingly, we do not 
expect the proposed amendments would significantly change current 
collection of information burden estimates for rule 2a-7.\173\
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    \170\ See rule 2a-7(g)(8).
    \171\ Re-proposed rule 2a-7(g)(8)(i)(B); see supra section 
II.A.4.
    \172\ See infra text accompanying and preceding note 217.
    \173\ See infra note 174.
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    Total Burden for Rule 2a-7. The current approved collection of 
information for rule 2a-7 is 517,228 annual aggregate hours.\174\ The 
aggregate additional burden hours associated with the re-proposed 
amendments to rule 2a-7 increase the burden estimate to 517,606 hours 
annually for all funds.\175\
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    \174\ The Commission has submitted an application to the OMB for 
revision of the current approved collection of information for rule 
2a-7 in connection with the 2014 Money Market Fund Adopting Release. 
When and if approved, the collection of information for rule 2a-7 
will increase to 617,653 hours annually for all funds.
    \175\ This estimate is based on the following calculation: 
517,228 hours (current approved burden) + 252 hours (eligible 
security determinations for money market fund portfolio securities, 
including securities that are subject to a conditional demand 
feature) + 126 hours (monitoring minimal credit risks) = 517,606 
hours. If the revised collection of information for rule 2a-7 in 
connection with the 2014 Money Market Fund Adopting Release is 
approved, as well as the collection of information associated with 
the re-proposed amendments to rule 2a-7 as discussed in this 
release, the collection of information for rule 2a-7 would increase 
to 618,031 hours (617,653 hours + 252 hours + 126 hours). See supra 
note 174.
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4. Request for Comment
    We request comment on these assumptions and estimates. If 
commenters believe these assumptions or estimates are not accurate, we 
request they provide specific data that would allow us to make more 
accurate estimates.

B. Rule 30b1-7 and Form N-MFP

    Rule 30b1-7 requires money market funds to file a monthly report 
electronically on Form N-MFP within five business days after the end of 
each month. The information required by the form must be data-tagged in 
XML format and filed through EDGAR. Preparing Form N-MFP is a 
collection of information under the PRA.\176\ The respondents to this 
collection of information are money market funds. A fund must comply 
with the requirement to prepare Form N-MFP in order to hold itself out 
to investors as a money market fund or the equivalent of a money market 
fund in reliance on rule 2a-7. Responses to the disclosure requirements 
of Form N-MFP are not kept confidential.
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    \176\ For purposes of the PRA analysis, the current burden 
associated with the requirements of rule 30b1-7 is included in the 
collection of information requirements of Form N-MFP. See infra note 
188.
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    Money market funds are currently required to disclose on Form N-
MFP, with respect to each portfolio security, whether the security is a 
first or second tier security or is unrated, as well as the 
``designated NRSROs'' for each security (and for each demand feature, 
guarantee, or credit enhancement).\177\ As discussed above, the re-
proposed amendments would require that each money market fund disclose 
on Form N-MFP, for each portfolio security, each rating assigned by any 
NRSRO to whose services the fund or its adviser subscribes (together 
with the name of the assigning NRSRO), and any other NRSRO rating that 
the fund's board of directors considered in determining that the 
security presents minimal credit risks (together with the name of the 
assigning NRSRO).\178\ Because we believe that the majority of funds 
would continue to refer to credit ratings in making minimal credit risk 
determinations, we do not believe the re-proposed amendments to Form N-
MFP would result in material changes to the ongoing burden for most 
funds.\179\ However, we believe that funds will incur one-time costs to 
re-program their filing software to reflect the new requirements of 
Form N-MFP.
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    \177\ See Form N-MFP Items C.9, C.10, C.14.b-c, C.15.b-c, 
C.16.c-d.
    \178\ See re-proposed Form N-MFP Items C.9, C.10, C.14.e, 
C.15.c, C.16.d; supra section II.B.
    \179\ See infra note 204 and accompanying paragraph.
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    We estimate that each fund will incur a one-time burden of 3 
hours,\180\ at a cost of $943 per fund,\181\ to comply with

[[Page 48003]]

the amended disclosure requirements of Form N-MFP, if adopted. Using an 
estimate of 559 money market funds that are required to file reports on 
Form N-MFP,\182\ we estimate that money market funds would incur, in 
the aggregate, a total one-time burden of 1,677 hours,\183\ at a cost 
of $527,137,\184\ to comply with the amended disclosure requirements of 
Form N-MFP. Amortizing these hourly and cost burdens over three years 
results in an average annual increased burden for all money market 
funds of 559 hours \185\ at a cost of $175,712.\186\ There would be no 
external costs associated with complying with the amended disclosure 
requirement of Form N-MFP.\187\
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    \180\ We estimate that the one-time hour burden for a money 
market fund to re-program its Form N-MFP filing software to reflect 
the new requirements of Form N-MFP would be 3 hours (1 hour by a 
senior systems analyst, 1 hour by a senior programmer, and 1 hour by 
an attorney).
    \181\ This estimate is based on the following calculation: (1 
hour x $260 (rate for a senior systems analyst) = $260) + (1 hour x 
$303 (rate for a senior programmer) = $303) + (1 hour x $380 (rate 
for an attorney) = $380) = $943.
    \182\ This estimate is based on a review of reports on Form N-
MFP filed with the Commission for the month ended February 28, 2014.
    \183\ This estimate is based on the following calculation: 3 
hours x 559 money market funds = 1,677 hours.
    \184\ This estimate is based on the following calculation: $943 
x 559 money market funds = $527,137.
    \185\ This estimate is based on the following calculation: 1,677 
hours / 3 years = 559 hours.
    \186\ This estimate is based on the following calculation: 
$527,137 / 3 years = $175,712.
    \187\ We understand that a certain percentage of money market 
funds that report information on Form N-MFP license a software 
solution from a third party that is used to assist the funds to 
prepare and file the required information, and that a certain 
percentage of money market funds retain the services of a third 
party to provide data aggregation and validation services as part of 
the preparation and filing of reports on Form N-MFP. See 2014 Money 
Market Fund Adopting Release, supra note 8, at text accompanying nn. 
2334-2336.
     We recognize that, in general, software service providers that 
modify their software may incur additional external costs, which 
they may pass on to money market funds in the form of higher annual 
licensing fees. See id. at text accompanying n. 2340. However, on 
account of the relatively low per-fund one-time hour burden that we 
estimate in connection with the amended disclosure requirements of 
Form N-MFP, we expect that any increase in licensing fees will be 
insignificant, and thus we estimate that there are no external costs 
associated with the amended Form N-MFP disclosure requirements.
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    The current approved collection of information for Form N-MFP is 
45,214 annual aggregate hours and $4,424,480 in external costs.\188\ 
The aggregate additional hours associated with the re-proposed 
amendments to Form N-MFP increase the burden estimate to 45,773 hours 
annually for all funds.\189\ Because we estimate no external costs 
associated with complying with the amended Form N-MFP disclosure 
requirements, the annual external costs associated with the Form N-MFP 
collection of information would remain $4,424,480.
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    \188\ The Commission has submitted an application to the OMB for 
revision of the current approved collection of information for Form 
N-MFP in connection with the 2014 Money Market Fund Adopting 
Release. When and if approved, the collection of information for 
Form N-MFP will increase to 83,412 hours.
    \189\ This estimate is based on the following calculation: 
45,214 hours (current approved burden) + 559 hours = 45,773 hours. 
If the revised collection of information for Form N-MFP in 
connection with the 2014 Money Market Fund Adopting Release is 
approved, as well as the collection of information associated with 
the re-proposed amendments to Form N-MFP as discussed in this 
release, the collection of information for Form N-MFP would increase 
to 83,971 hours (83,412 hours + 559 hours). See supra note 188.
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    We request comment on these estimates. If commenters believe these 
estimates are not accurate, we request they provide specific data that 
would allow us to make more accurate estimates.

V. Economic Analysis

    As discussed above, we are re-proposing amendments to rule 2a-7 and 
Form N-MFP under the Investment Company Act to implement section 939A 
of the Dodd-Frank Act, which requires the Commission, to ``review any 
regulation issued by [the Commission] that requires the use of an 
assessment of the credit-worthiness of a security or money market 
instrument and any references to or requirements in such regulations 
regarding credit ratings.'' \190\ That section further provides that 
the Commission shall ``modify any such regulations identified by the 
review . . . to remove any reference to or requirement of reliance on 
credit ratings and to substitute in such regulations such standard of 
credit-worthiness as [the Commission] shall determine as appropriate 
for such regulations.'' \191\
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    \190\ Public Law 111-203 Sec.  939A(a)(1)-(2). Section 939A of 
the Dodd-Frank Act applies to all Federal agencies.
    \191\ Public Law 111-203 Sec.  939A(b). Section 939A of the Dodd 
Frank Act provides that agencies shall seek to establish to the 
extent feasible, uniform standards of creditworthiness, taking into 
account the entities the agencies regulate and the purposes for 
which those entities would rely on such standards.
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    We also are proposing to amend rule 2a-7 to eliminate the exclusion 
to the issuer diversification requirement for securities subject to a 
guarantee issued by a non-controlled person. As a result, most non-
government securities subject to a guarantee (including an asset-backed 
security with a presumed sponsor guarantee) would have to comply with 
both the 5 percent diversification requirement for issuers (including 
SPE issuers) and the 10 percent diversification requirement for 
guarantors and providers of demand features.\192\
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    \192\ As discussed above, the asset-backed security presumed 
guarantee is counted toward the 10% limitation on guarantees and 
demand features provided by the same institution. Up to 15% of the 
value of securities held in a tax-exempt money market fund's 
portfolio may be subject to guarantees or demand features for a 
single institution, and up to 25% of the value of securities held in 
a single state money market fund portfolio may be issued by any 
single issuer. See supra notes 125-126.
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    The economic baseline for our economic analysis is the regulatory 
framework as it exists immediately before the re-proposal, that is, the 
regulatory framework after the amendments to rule 2a-7 were adopted 
today in the 2014 Money Market Fund Adopting Release. As discussed in 
more detail below, that adopting release makes material changes to 
money market fund regulation that we believe may result in material 
changes to the money market fund industry. Because there is an extended 
compliance period for those amendments, we do not know how market 
participants, including money market fund managers selecting portfolio 
securities, may react as a result. Thus, we are not able to provide 
quantitative estimates for the incremental effects of our re-proposal. 
For example, under the baseline, institutional prime money market funds 
have floating NAVs and maintain the distinction between first and 
second tier securities. We are unable to estimate how institutional 
prime funds will choose to allocate their portfolios among first and 
second tier securities under our re-proposal when they have floating 
NAVs. We can describe potential economic effects of complying with the 
re-proposed and proposed amendments to the rule, but without knowing 
how fund portfolio allocations may change, we cannot quantify these 
potential effects. For the remainder of our economic analysis, we 
discuss separately the re-proposed rule 2a-7 amendments to remove and 
replace ratings references, the re-proposed Form N-MFP amendments, and 
the proposed amendments to rule 2a-7's issuer diversification 
provision.

A. Rule 2a-7

    The re-proposed amendments to rule 2a-7 would affect five elements 
of the rule. These are: (i) Determination of whether a security is an 
eligible security; (ii) determination of whether a security is a first 
tier security; (iii) credit quality standards for securities with a 
conditional demand feature; (iv) requirements for monitoring securities 
for ratings downgrades and other credit events; and (v) stress 
testing.\193\ The re-proposed amendments, which are similar to those we 
proposed in 2011,

[[Page 48004]]

are designed to remove any requirement of reliance on credit ratings 
and to substitute standards of creditworthiness that we believe are 
appropriate.
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    \193\ The re-proposed rule also would make conforming amendments 
to rule 2a-7's recordkeeping and reporting requirements. See re-
proposed rule 2a-7(h)(3).
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1. Economic Baseline
    As discussed above, the credit risk limitations in rule 2a-7 
currently require that money market funds undertake a two-step analysis 
before acquiring a portfolio security.\194\ First, funds must determine 
whether a security has received credit ratings from the ``requisite 
NRSROs'' in one of the two highest short-term rating categories or, if 
the security is unrated, determine that it is of comparable quality. A 
money market fund must invest at least 97 percent of its portfolio in 
first tier securities, which are eligible securities that have received 
a rating from the requisite NRSROs in the highest short-term rating 
category for debt obligations (or unrated securities of comparable 
quality). Second, the fund's board of directors (or its delegate) must 
determine that the security presents minimal credit risks, ``based on 
factors pertaining to credit quality in addition to any rating assigned 
to such securities by a designated NRSRO.'' In addition, under rule 2a-
7, a security subject to a conditional demand feature may be determined 
to be an eligible security or a first tier security if, among other 
conditions: (i) The conditional demand feature is an eligible security 
or a first tier security, and (ii) the underlying security (or its 
guarantee) has received either a short-term rating or a long-term 
rating, as the case may be, within the highest two categories from the 
requisite NRSROs or is a comparable unrated security.
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    \194\ See supra notes 20-25 and accompanying text. The credit 
risk limitations of rule 2a-7, as well as the other specific 
provisions of rule 2a-7 that reference credit ratings, were not 
changed by the adoption of the amendments discussed in the 2014 
Money Market Fund Adopting Release.
---------------------------------------------------------------------------

    Based on Form N-MFP filings from February 28, 2014, the Commission 
estimates that 99.75 percent of aggregate money market fund assets are 
in first tier securities, 0.24 percent of aggregate money market fund 
assets are in second tier securities, and 0.01 percent of aggregate 
money market fund assets are in unrated securities. Among the 559 funds 
that filed Form N-MFP that month, we estimate that 488 funds held only 
tier one rated securities, 503 funds held no tier two rated securities, 
and 537 funds held no unrated securities. In addition, less than 5 
percent of all money market funds, and only 6 prime funds out of 229 
prime funds held the maximum amount of second tier securities permitted 
under rule 2a-7. Using additional data from the Federal Reserve Board, 
we estimate that money market fund holdings of second tier commercial 
paper represent 5.1 percent of the outstanding issues of second tier 
commercial paper.\195\
---------------------------------------------------------------------------

    \195\ This data is based on the Federal Reserve Board's 
statistics on outstanding volume of commercial paper. See Commercial 
Paper Outstanding by special categories, available at https://www.federalreserve.gov/releases/cp/outstanding.htm.
---------------------------------------------------------------------------

    Securities subject to a conditional demand feature are typically 
variable rate demand notes issued by municipalities that have a 
conditional demand feature issued by a bank. Based on Form N-MFP 
filings as of February 28, 2014, the Commission estimates that 11 
percent of money market fund assets are invested in securities with a 
demand feature. We estimate further that securities with conditional 
demand features represent 25 percent of securities with demand features 
and 3 percent of all securities held by money market funds. We further 
estimate that 81 percent of those underlying securities (or their 
issuers or guarantors) have received an NRSRO rating in the second-
highest long-term rating category, while 19 percent have received an 
NRSRO rating in the highest long-term category.\196\
---------------------------------------------------------------------------

    \196\ An underlying long-term security would become a short-term 
security when its remaining time to maturity is less than 397 days. 
See supra note 78. These estimates are based on a random sample of 
10% of the securities that have demand features that were reported 
in February 2014 Form N-MFP filings.
---------------------------------------------------------------------------

    Rule 2a-7 currently requires a money market fund board (or its 
delegate) promptly to reassess whether a security that has been 
downgraded by an NRSRO continues to present minimal credit risks.\197\ 
We understand that downgrades are rare among money market fund 
portfolio securities.\198\ As discussed above, we believe, based on 
staff experience, that most, if not all, money market funds currently 
monitor portfolio securities for minimal credit risk on an ongoing 
basis.\199\ We assume for purposes of this analysis, however, that 
these funds do not have written policies and procedures that 
specifically address ongoing minimal credit risk monitoring.
---------------------------------------------------------------------------

    \197\ See supra notes 91-92 and accompanying text.
    \198\ See, e.g., Response to Questions Posed by Commissioners 
Aguilar, Paredes, and Gallagher, a report by staff of the Division 
of Risk, Strategy, and Financial Innovation (Nov. 30, 2012), 
available at https://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf, at 14-16 (discussing events such as credit 
rating downgrades that have led money market fund sponsors to choose 
to provide support to the fund or to seek staff no-action assurances 
permitting such support).
    \199\ See supra notes 102-106 and accompanying text.
---------------------------------------------------------------------------

    Finally, rule 2a-7 currently requires money market funds to stress 
test their portfolios.\200\ Under the rule, a money market fund's board 
of directors must adopt written procedures to test the ability of a 
fund to maintain at least 10 percent of its total assets in weekly 
liquid assets and minimize principal volatility (and, in the case of a 
money market fund using the amortized cost method of valuation or penny 
rounding method of pricing, the fund's ability to maintain a stable 
share price per share) based on certain hypothetical events, including 
a downgrade or default of particular portfolio security positions, each 
representing various portions of the fund's portfolio. We believe that 
funds stress test at least monthly.\201\
---------------------------------------------------------------------------

    \200\ Rule 2a-7(g)(8).
    \201\ See 2014 Money Market Fund Adopting Release, supra note 8, 
at section IV.A.5.
---------------------------------------------------------------------------

2. Economic Analysis
    The re-proposed amendments to rule 2a-7 would assist in further 
implementing section 939A of the Dodd-Frank Act. These amendments are 
designed to establish credit quality standards similar to those 
currently in the rule. By replacing references to credit ratings, the 
re-proposed amendments may, particularly when considered together with 
other amendments the Commission has adopted that remove credit ratings 
references in other rules and forms under the Federal securities laws, 
contribute to the Dodd-Frank Act goals of reducing perceived government 
endorsement of NRSROs and over-reliance on credit ratings by market 
participants.\202\
---------------------------------------------------------------------------

    \202\ See Report of the House of Representatives Financial 
Services Committee to Accompany H.R. 4173, H. Rep. No. 111-517 at 
871 (2010). But see infra notes 209-210 and accompanying text 
(discussing a commenter's view that the Commission's re-proposal to 
eliminate credit ratings could actually increase money market fund 
investor reliance on credit ratings).
---------------------------------------------------------------------------

    Eligible securities. Under the re-proposal, a money market fund 
board (or its delegate) would be required to determine minimal credit 
risk by applying a subjective credit quality standard. Because the 
interpretation of this subjective standard may differ among fund boards 
and their advisers, the possible range of securities available for 
investment may differ from that under the current rule if the re-
proposed standard is adopted. Aggressive risk assessments may result in 
a broader set of securities holdings through investments in more second 
tier securities with a wider range of credit quality, while 
conservative risk

[[Page 48005]]

assessments may result in a more restricted set of securities holdings 
with a narrower range of credit quality. We believe that fund managers 
are generally unlikely to increase exposure of their funds to riskier 
second tier securities in light of both current market practices and 
amendments to rule 2a-7 adopted in the 2014 Money Market Fund Adopting 
Release.\203\ First, we anticipate that many money market funds are 
likely to retain their current investment policies, which incorporate 
NRSRO ratings and would be permitted under the re-proposed rule 
amendments. Indeed, we understand that many funds today have investment 
policies that are more restrictive than rule 2a-7 requires, including 
policies that, for example, limit investments to first tier 
securities.\204\ As a result, we do not expect that these money market 
funds would change current policies and procedures they have adopted 
that limit their investments to those assigned the highest NRSRO 
ratings. We also note that according to Form N-MFP filings from 
February 28, 2014, fund assets in second tier securities represented 
0.24 percent of total money market fund assets and that 24 funds (out 
of a total of 559) currently hold the maximum amount of second tier 
securities permissible under rule 2a-7. We do not anticipate that money 
market funds representing the significant majority of assets under 
management are likely to increase substantially their investments in 
riskier securities as a result of our proposal because these funds do 
not currently invest in second tier securities to the extent permitted 
now.
---------------------------------------------------------------------------

    \203\ As noted above, we do not believe fund managers are likely 
to invest in third tier securities (or comparable unrated 
securities) because those securities would not satisfy the re-
proposed standard for eligible securities that the security's issuer 
have an exceptionally strong capacity to meet its short-term 
financial obligations. See supra note 45 and accompanying and 
following text.
    \204\ As of February 28, 2014, 179 money market funds, 
representing approximately 59% of all money market funds assets (88% 
of all institutional money market fund assets) were invested in 
money market funds that were themselves rated by credit rating 
agencies, and approximately 98% of rated money market funds were 
rated first tier. For a money market fund to receive a first tier 
rating, credit rating agencies generally require the fund to limit 
its portfolio securities to first tier securities. See, e.g., 
FitchRatings, Global Money Market Fund Rating Criteria (Mar. 26, 
2013), available at https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704145 (registration required) (stating 
that its ``AAAmmf'' top rating requires that a money market fund 
have 100% of its portfolio securities rated first tier (``F1+'' or 
``F1'')); Standard & Poor's, Methodology: Principal Stability Fund 
Ratings (June 8, 2011), available at https://www.sbafla.com/prime/portals/8/RiskMan_Oversight/FundProfile/201106_SPPrincipalStabilityFundRatingsMethodology.pdf (stating that ``[i]n 
In order for a fund to be eligible for an investment-grade rating, 
all investments should carry a Standard & Poor's short-term rating 
of `A-1+' or `A-1' (or SP-1+ or SP-1), or Standard & Poor's will 
consider all of the investments to be of equivalent credit 
quality'').
---------------------------------------------------------------------------

    Second, as discussed above, the new amendments to rule 2a-7 may 
reduce the potential that funds would invest in riskier securities. 
Under the reforms, money market funds other than government money 
market funds are subject to fees and gates, while institutional prime 
money market funds will be required to transact at a floating NAV.\205\ 
We believe that these amendments may encourage non-government funds to 
more closely monitor fund liquidity and hold more liquid securities to 
increase the level of daily and weekly liquid assets in the fund 
because doing so will tend to lessen the likelihood of a fee or gate 
being imposed. The newly-adopted money market fund reforms also require 
each fund daily to disclose its market value rounded to four decimal 
points (or an equivalent level of accuracy for a fund using a share 
price other than $1.0000 \206\) and to depict historical information 
about its daily NAV for the previous six months. These disclosures may 
increase informational efficiency by allowing investors to see 
variations in share value that are not apparent in the share price and 
compare the principal volatility among funds over time. As a result, to 
the extent that institutional investors continue to value price 
stability and can see these variations in share value, we believe that 
institutional prime funds will endeavor to reduce NAV fluctuations.
---------------------------------------------------------------------------

    \205\ Rule 2a-7(a)(16) defines a government money market fund as 
a money market fund that invests 99.5% or more of its total assets 
in cash, government securities, and/or repurchase agreements that 
are collateralized fully. See supra note 15.
    \206\ See supra note 49.
---------------------------------------------------------------------------

    Third, funds are permitted to refer to credit ratings while making 
their minimal credit risk determinations. A first tier credit rating 
might help support the fund's determination that the security is an 
eligible security, while a second tier credit rating might not support 
the same determination. Thus, fund managers may have to perform 
additional credit research and analysis on the issuers of second tier 
securities in order to determine whether the investment would be 
permitted under the re-proposed amendments. We believe that many fund 
managers may not wish to invest in the additional resources necessary 
to make this assessment with respect to second tier securities unless 
the fund believes that the expected risk-adjusted return of doing so 
would be greater than the expected costs.
    The re-proposal would eliminate the current limitations on fund 
investments in second tier securities.\207\ As a result, funds may 
increase their holdings of second tier securities despite the 
considerations discussed above. We believe that, to the extent money 
market funds increase investments in riskier securities, institutional 
prime funds are more likely than stable-NAV funds to do so because only 
stable-NAV funds will break the buck if the economic value of the 
underlying portfolio changes too much. While some shareholders may 
continue to demand price stability rather than high yield from 
institutional prime funds, if enough shareholders prefer yield over 
price stability, institutional prime funds will be incentivized to 
increase their investments in second tier securities. Allocative 
efficiency may improve if such preferences result in relatively riskier 
securities moving from the portfolios of stable-NAV funds to the 
portfolios of institutional prime funds because the reallocation may 
enable money market fund shareholders to choose funds that better match 
their preferences for risk and return. We do not, however, know whether 
institutional prime funds with floating NAVs, which will have to 
compete with other money market funds, including stable-NAV government 
funds, will focus on maintaining comparatively stable NAVs or on 
generating comparatively high yields.
---------------------------------------------------------------------------

    \207\ See supra notes 25 and 43 and accompanying text.
---------------------------------------------------------------------------

    Under the assumption that money market funds would increase their 
relative holdings of second tier securities if the re-proposed 
amendments were adopted, the effects on competition and capital 
formation will depend, in part, on whether the increased second tier 
investments come from new assets outside the funds, which when invested 
by money market funds are disproportionately invested in second tier 
securities or whether the increased second tier investments will come 
from a shift of assets from first tier securities to second tier 
securities. If the former, the effects of competition between issuers 
of first and second tier securities might be small, and capital 
formation might improve in the second tier market as the size of the 
new investment increases. If the latter, an increase in capital 
formation from issuers of second tier securities may result in a 
corresponding decrease in capital formation from issuers of first tier 
securities, which, in turn, may lead to increased competition between 
issuers of first and second tier

[[Page 48006]]

securities. We are unable to estimate these effects because we do not 
know how shareholders and funds will respond to the elimination of the 
current limitation on fund investments in second tier securities.
    The re-proposed amendments to Form N-MFP, which are discussed in 
more detail below, may reduce the potential that fund boards (or 
managers) that use credit ratings will increase significantly fund 
investments in second tier securities beyond the level desired by fund 
shareholders. We would require each money market fund to disclose on 
Form N-MFP those NRSRO ratings the fund's board (or its delegate) has 
considered, if any, in determining whether a security presents minimal 
credit risks. The disclosure to investors of these risk indicators may 
have the effect of penalizing funds that assume a level of risk that is 
different from that which is desired by their shareholders.
    As discussed above, the vast majority of money market funds held no 
second tier securities on February 28, 2014, and few funds held the 
maximum permissible 3 percent. We therefore believe that a reduction or 
even elimination of second tier securities from the money market fund 
industry's aggregate portfolio will not likely have a material effect 
on issuers of either first or second tier securities. However, removing 
second tier securities from the portfolios of individual money market 
funds may negatively affect yields in certain funds, especially during 
periods when second tier securities offer substantially higher yields 
than the yields offered by first tier securities.
    One commenter suggested that eliminating references to credit 
ratings in the definition of eligible security would lead to more 
unrated securities issuances in the market.\208\ The commenter argued 
that some issuers of money market instruments might forego the expense 
of ratings because they would face greater uncertainty as to market 
acceptance under the subjective determinations of money market fund 
advisers. In addition, some issuers of instruments that might not 
receive a rating in the highest category might choose not to obtain a 
rating. This commenter opined that such a result would make it more 
difficult to retain a degree of risk limitation similar to that in the 
current rule.
---------------------------------------------------------------------------

    \208\ See Schwab Comment Letter, supra note 30.
---------------------------------------------------------------------------

    We believe that most money market funds would not likely change 
their current investment policies if the re-proposed amendments were 
adopted. Nevertheless, we recognize that some fund boards might choose 
not to consider NRSRO ratings in their credit assessments or as noted 
above, fewer securities may be rated. If, as a result, the demand for 
NRSRO ratings were reduced significantly, NRSROs might invest less in 
producing quality ratings. The importance attached to NRSRO ratings 
currently as a result of the history of their use in regulatory 
requirements may impart franchise value to the NRSRO rating business. 
By eliminating references to NRSRO ratings in Federal regulations, 
section 939A of the Dodd-Frank Act could reduce these franchise values 
and reduce NRSROs' incentives to produce credible and reliable ratings. 
In addition, eliminating the required use of credit ratings in 
Commission rules and forms may reduce the incentive for credit rating 
agencies to register as NRSROs with the Commission, which registration 
subjects them to Commission oversight and the statutory and regulatory 
requirements applicable to NRSROs. If the quality and accuracy of NRSRO 
ratings were adversely affected yet the ratings continued to be used by 
enough other parties, the capital allocation process and economic 
efficiency might be impaired.
    Another commenter stated that our re-proposal to eliminate 
references to credit ratings could increase investor reliance on credit 
ratings.\209\ This commenter stated that to the extent that investors 
cannot be reassured that money market funds are investing in rated 
securities, they can reasonably be expected to seek the ``reassurance'' 
ratings provide in other ways. Specifically, investors could seek rated 
funds in even greater numbers ``as the ratings, and the investment 
guidelines that underlie them, will provide an objective standard that 
investors can use to distinguish amongst funds,'' which would encourage 
more funds to become rated.\210\ If, as a result of the re-proposed 
amendments, currently unrated money market funds obtain ratings to 
compete in the market, it could increase their costs. Such a result 
also might increase rather than reduce investor reliance on credit 
ratings. To the extent that funds continue to use ratings, which we 
believe most will, investors would be able to determine the ratings of 
fund portfolio securities from the disclosures required under the re-
proposed amendments to Form N-MFP.
---------------------------------------------------------------------------

    \209\ See Comment Letter of Wells Fargo Funds Management, LLC 
(Apr. 25, 2011).
    \210\ Id. The comment letter stated that over 80% of 
institutional assets were in rated money market funds.
---------------------------------------------------------------------------

    In our discussion above, we have suggested guidance that a fund 
board (or its delegate) should consider in making credit quality 
assessments. As we noted, based on staff observations in examinations 
and prior staff guidance, we assume that most money market fund 
managers currently take these factors into account, as appropriate, 
when they determine that a portfolio security presents minimal credit 
risks. Moreover, as noted above, the guidance is not intended to define 
the parameters of an appropriate credit quality assessment; that is for 
the fund's board and its adviser to determine with respect to each 
particular portfolio security. Thus, we do not anticipate that the re-
proposal's discussion of factors that a fund manager should consider 
would significantly change the process for evaluating credit quality or 
that consideration of the factors listed above would significantly 
impact the holdings in money market fund portfolios. For these reasons, 
we believe that the guidance will not have a material effect on 
efficiency, competition, or capital formation. Funds may, however, 
consider whether their policies and procedures for credit quality 
assessment should be revised in light of the guidance, and, as a 
result, may update them.
    Conditional Demand Feature. The re-proposed amendments would 
replace the current objective standard for determining the credit 
quality of an underlying security with a subjective standard, which is 
based on the qualitative standard NRSROs use to describe a security 
with the second-highest long term rating. We recognize that fund 
managers could interpret this subjective standard in different ways, 
which could widen the range of credit quality in underlying securities 
in which money market funds invest. However, we do not believe that 
fund managers will likely interpret this subjective standard in a 
manner that results in funds increasing the risk profiles of their 
underlying securities. For the reasons discussed above, we do not 
believe that securities that are rated by NRSROs in the third-highest 
category for long-term ratings (or comparable unrated securities) would 
satisfy the proposed standard that the issuer of underlying securities 
have a very strong capacity to meet its financial commitments.\211\ We 
also note that

[[Page 48007]]

funds currently can invest exclusively in underlying securities rated 
in the second-highest category if the instrument meets the other 
conditions for eligibility.\212\ We estimate that most underlying 
securities held by money market funds (81 percent) are rated in the 
second-highest long-term category, and a smaller portion (19 percent) 
are rated in the highest long-term category.\213\ For these reasons, we 
have no reason to anticipate that funds are likely to increase the 
portion of their underlying securities that are rated in the second-
highest long-term category as a result of the re-proposed amendments. 
Because we believe that our re-proposal will result in only small 
changes to the behavior of funds with respect to investments in 
securities with conditional demand features, we believe that this re-
proposed amendment will result in little to no effect on efficiency, 
competition, or capital formation for either funds or issuers.
---------------------------------------------------------------------------

    \211\ See text accompanying supra note 84. Securities with these 
ratings generally have expectations of low credit risk or have 
obligors have only a strong capacity to meet their financial 
commitments. See Moody's Ratings Definitions, supra note 38, at 5 
(long-term obligations ``rated A are judged to be upper-medium grade 
and are subject to low credit risk.''); Fitch Ratings Scales, supra 
note 38, at 9 (long-term ``A ratings denote expectations of low 
credit risk. The capacity for payment of financial commitments is 
considered strong.''); S&P Ratings Definitions, supra note 38, at 4 
(a long-term obligation ``rated `A' is somewhat more susceptible to 
the adverse effects of changes in circumstances and economic 
conditions than obligations in higher-rated categories. However, the 
obligor's capacity to meet its financial commitment on the 
obligation is still strong.'').
    \212\ Rule 2a-7(d)(2)(iv).
    \213\ See supra note 196 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, we believe that if the re-proposed amendments 
to rule 2a-7 were adopted, money market fund complexes would incur 
certain costs in reviewing and updating their policies and procedures. 
Specifically, each complex would review the amendments to the credit 
quality standards in rule 2a-7 and, as it determines appropriate in 
light of the amendments, revise its policies and procedures to 
incorporate the amended credit quality standards to be used in 
determining the eligibility of a money market fund's portfolio 
securities, including securities that are subject to a conditional 
demand feature.
    Monitoring Minimal Credit Risk. As discussed above, we believe the 
re-proposed requirement that each money market fund adopt written 
policies and procedures for ongoing monitoring of minimal credit risks 
for each portfolio security essentially codifies the current practices 
of fund managers, which are already explicit (and implicit) in several 
provisions of the rule and are discussed above.\214\ Although based on 
staff experience we believe that most, if not all, money market funds 
currently monitor portfolio securities for minimal credit risk on an 
ongoing basis (as rule 2a-7 requires \215\), we note that money market 
funds are not currently required to maintain written policies and 
procedures that specifically address monitoring. We believe that to the 
extent that some money market funds may not have written procedures to 
regularly monitor minimal credit risks, our re-proposal to require such 
procedures is designed to ensure that funds are better positioned to 
identify quickly potential risks of credit events that could impact 
portfolio security prices. The costs associated with the re-proposed 
minimal credit risk monitoring requirement, as discussed above, will 
vary based on the extent to which funds' existing procedures need to be 
transcribed and reviewed.\216\ We believe that the written-procedure 
requirement in the re-proposal will not materially affect efficiency, 
competition, or capital formation because we expect no material changes 
in how funds invest.
---------------------------------------------------------------------------

    \214\ See supra notes 91-92, 102-106 and accompanying text.
    \215\ See id.
    \216\ See supra note 163.
---------------------------------------------------------------------------

    Stress Testing. As discussed above, the re-proposed amendments are 
designed to retain similar standards for stress testing as under 
current rule 2a-7. Specifically, while the re-proposed amendments would 
replace the current reference to ratings downgrades in the rule 2a-7 
stress testing requirement, the amendments would instead require funds 
to test for an event indicating or evidencing credit deterioration of 
particular portfolio security positions, each representing various 
positions of the fund's portfolio, and include a downgrade or default 
as examples of such an event. Consequently, we recognize that a money 
market fund could use its current policies and procedures for stress 
testing, including testing for a downgrade, to comply with the proposed 
amendments. And we believe that funds will do so because a downgrade by 
a relevant NRSRO may impact the price of a portfolio security.\217\ 
Because we believe that funds will not change their stress testing 
policies and procedures in response to this re-proposed amendment, we 
do not believe there would be any costs associated with it.\218\ Thus 
we do not anticipate that this re-proposed amendment is likely to 
impact efficiency, competition, or capital formation.
---------------------------------------------------------------------------

    \217\ See ICI Comment Letter, supra note 30.
    \218\ See supra text accompanying and following note 172.
---------------------------------------------------------------------------

    Policies and Procedures. As discussed above, money market funds 
have written policies and procedures for complying with rule 2a-7, 
including policies and procedures for determining and reassessing 
minimal credit risk and for stress testing the portfolio.\219\ Although 
our re-proposal would not require changes to these policies and 
procedures for most money market funds, we anticipate that funds would 
likely review them and may revise them in consideration of the standard 
provided in the re-proposal, if adopted. We also anticipate that after 
such a review, many fund boards and advisers would retain investment 
policies tied to NRSRO ratings required under the current rule.\220\ 
Although we cannot predict the number of funds that would review and 
revise their policies and procedures or the extent to which funds may 
do so, we estimate that each fund would incur, at a minimum, the 
collection of information costs discussed in the Paperwork Reduction 
Act section for a total average one-time cost of approximately $2,838 
per fund complex.\221\ These minimum costs assume that a fund would 
review its policies and procedures in consideration of the re-proposed 
amendments and make minor changes to conform with revised rule text, 
but would not change significantly the policies and procedures relating 
to the fund's credit quality assessments, monitoring for minimal credit 
risk or stress testing, which currently include consideration of NRSRO 
ratings.
---------------------------------------------------------------------------

    \219\ See rule 38a-1(a).
    \220\ See supra paragraph including note 151. We also note that 
most commenters on the 2011 proposal supported permitting funds to 
continue to use ratings, and some asked us to clarify that ratings 
continue to be a permissible factor for boards or their delegates to 
consider in making credit quality determinations. See, e.g., 
BlackRock Comment Letter, supra note 122; IDC Comment Letter, supra 
note 30. Our re-proposed amendments to Form N-MFP, discussed above, 
reflect our clarification that ratings continued to be a permissible 
factor to use in making credit quality determinations.
    \221\ See supra note 154.
---------------------------------------------------------------------------

    As noted above, we believe that while funds monitor for minimal 
credit risks on an ongoing basis currently, we assume that funds do not 
have written policies and procedures to address monitoring.\222\ We 
estimate the average one-time costs to adopt those written policies 
would be $3,619 per fund.\223\ Because we anticipate that our re-
proposal is not likely to change these fund policies significantly, we 
believe it is not likely to have a significant impact on efficiency, 
competition, or capital formation.
---------------------------------------------------------------------------

    \222\ See supra notes 102-106 and accompanying text.
    \223\ See supra note 164.
---------------------------------------------------------------------------

3. Alternatives
    In addition to the re-proposed amendments to rule 2a-7, we

[[Page 48008]]

considered adopting the amendments we proposed in 2011. That proposal 
would have required fund boards first to determine whether securities 
are eligible securities based on minimal credit risks, and second to 
distinguish between first and second tier securities based on 
subjective standards similar to those the ratings agencies have 
developed to describe their ratings. As discussed above, we have been 
persuaded by the concerns some commenters expressed on the 2011 
proposal. In particular, as several commenters noted, a two-tier 
approach could be confusing without reference to objective standards, 
and fund advisers are likely to make many of the same considerations in 
evaluating first and second tier securities.\224\ In addition, on 
balance, we believe that the re-proposed single standard may better 
reflect the risk limitation in the current rule. The 2011 Proposing 
Release described the standard for second tier securities in language 
similar to the descriptions NRSROs use for second tier securities, 
which fund managers might interpret as permitting funds to invest in 
riskier second tier securities to a greater extent than under our re-
proposal, which is designed to limit investments in very high quality 
second tier securities. Such increased investments in riskier second 
tier securities would increase the risk profile of money market funds.
---------------------------------------------------------------------------

    \224\ See supra note 31 and accompanying text.
---------------------------------------------------------------------------

    We also considered proposing a single standard that would require a 
minimal credit risk determination, but with a finding different from 
what we are re-proposing today. For example, the board could be 
required to find that the issuer or guarantor has a repayment capacity 
that reflects the standard that NRSROs articulate for second tier 
securities. We did not re-propose this alternative because of concerns 
that such a standard could lower the credit quality of money market 
fund portfolios. Under this single standard, there would be no 
distinction between first tier and second tier securities and no 
limitation on fund holdings of second tier securities, unlike the 
current rule, which limits a money market fund to investing no more 
than 3 percent of its total assets in second tier securities. Without 
that investment limitation, a manager could invest a significantly 
greater portion of the fund's portfolio in second tier securities, 
which could result in an increase in the portfolio risk of some funds 
that is inconsistent with the relevant risk limitations in the current 
rule. Both this alternative single standard approach and the two-tier 
approach discussed above could have different effects on competition 
and capital formation than the effects on competition and capital 
formation stemming from the re-proposed approach, as a result of 
ensuing increased or decreased investments in second tier securities. 
However, we are unable to estimate the relative effects on competition 
or capital formation because we do not know how shareholders and funds 
would respond to these approaches as compared to the re-proposed 
elimination of the current limitation on fund investments in second 
tier securities.
    With respect to replacing the reference to ratings in determining 
the eligibility of underlying securities (i.e., those that are subject 
to a conditional demand feature), we considered a qualitative standard 
that NRSROs use to articulate long-term securities in the highest 
rating category. We note generally that few issuers or guarantors have 
received long-term ratings in the highest category.\225\ Moreover, 
issuers assigned a first tier short-term rating may have received a 
long-term rating in the second-highest category.\226\ Because of the 
limited NRSRO assignments of the highest long-term ratings to issuers, 
managers might interpret this alternative to preclude fund investments 
in a security subject to a conditional demand feature (that is itself 
an eligible security) if the underlying security's issuer or guarantor 
is rated in the second-highest category. Such an interpretation could 
significantly deviate from the credit quality standards in the current 
rule, which is not our intent. It also would likely reduce money market 
fund investments in these securities.
---------------------------------------------------------------------------

    \225\ See Vipal Monga & Mike Cherney, CFO Journal: Lose your 
Triple-A Rating? Who Cares?, Wall St. J. (Apr. 29, 2014) (noting the 
decline in companies with triple A long-term ratings).
    \226\ See Moody's Ratings Definitions, supra note 38, at 6 
(showing the linkage between short-term and long-term ratings when 
such long-term ratings exist); Standard &Poor's, About Credit 
Ratings (2012), https://www.standardandpoors.com/aboutcreditratings/RatingsManual_PrintGuide.html (each short-term rating corresponds 
to a band of long-term ratings. For instance, the A-1 short-term 
rating generally corresponds to the long-term ratings of `A+,' `A,' 
and `A-'.''); FitchRatings, Ratings Definitions (2014), https://www.fitchratings.com/jsp/general/RatingsDefinitions.faces?context=5&detail=507&context_ln=5&detail_ln=500 (indicating the relationship between short-term and long-term 
ratings with a table and acknowledging that ``lower relative short-
term default risk, perhaps through factors that lend the issuer's 
profile temporary support, may coexist with higher medium-or longer 
term default risk'').
---------------------------------------------------------------------------

    In re-proposing to eliminate the current reference to ratings 
downgrades in the monitoring standard of rule 2a-7, we considered the 
rule 2a-7 amendments that we proposed in 2011.\227\ These proposed 
amendments would have required that, in the event the money market fund 
adviser (or any person to whom the board has delegated portfolio 
management responsibilities) becomes aware of any credible information 
about a portfolio security or an issuer of a portfolio security that 
suggests that the security is no longer a first tier security or a 
second tier security, as the case may be, the board or its delegate 
would have to reassess promptly whether the security continues to 
present minimal credit risks.\228\ Most of those who commented on this 
proposed amendment objected to it as an inefficient method of notifying 
funds if a portfolio security is potentially impaired. As discussed in 
more detail above, we have been persuaded by commenters' concerns in 
re-proposing a different standard than that proposed in 2011.\229\
---------------------------------------------------------------------------

    \227\ See supra notes 91-93 and accompanying text.
    \228\ Id.
    \229\ See supra notes 97-100 and accompanying text.
---------------------------------------------------------------------------

    Finally, we also considered removing the current reference to 
ratings downgrades in the stress testing provisions of rule 2a-7 and 
replacing this reference with the requirement that money market funds 
stress test their portfolios for an adverse change in the ability of a 
portfolio security issuer to meet its short-term credit obligations. As 
discussed above, we proposed this alternative in 2011, and commenters 
on the 2011 proposal who addressed this issue uniformly advocated 
against removing the reference to a downgrade in the stress testing 
conditions.\230\ We believe that the 2011 proposed standard, as 
compared to the standard we re-propose in this release, was less clear 
and that it would lead to more burdensome monitoring and greater 
inefficiencies in developing hypothetical events for stress testing. In 
light of these commenters' concerns, we have thus decided to re-propose 
amendments to the stress testing provisions of rule 2a-7 that would 
permit funds to continue to test their portfolios against a potential 
downgrade or default, as discussed in more detail above.\231\
---------------------------------------------------------------------------

    \230\ See supra notes 112-113 and accompanying text.
    \231\ See supra note 114 and accompanying text.
---------------------------------------------------------------------------

4. Request for Comment
    We request comment on our estimates and assumptions regarding the 
costs and benefits of the re-proposed amendments to rule 2a-7 and the 
effects of these amendments on efficiency, competition, or capital 
formation. For purposes of the Small Business Regulatory Enforcement

[[Page 48009]]

Fairness Act of 1996 (``SBREFA''),\232\ we also request information 
regarding the potential annual effect of the re-proposed amendments to 
rule 2a-7 on the U.S. economy. Commenters are requested to provide 
empirical data to support their views.
---------------------------------------------------------------------------

    \232\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    In addition to our general request for comment on the costs and 
benefits of the re-proposed amendments, we request specific comment on 
certain aspects of the amendments. What additional operational costs, 
if any, may result from making minimal credit risk determinations based 
on a subjective credit quality standard? Specifically, would the 
potentially broader range of securities available for investment that 
could result from a board's interpretation of this standard produce 
additional or different costs than the current costs of determining 
minimal credit risks? Likewise, what additional operational costs, if 
any, may result from using a subjective standard for determining the 
credit quality of securities subject to a conditional demand feature? 
Would the potentially broader range of underlying securities available 
for investment produce additional or different costs than the current 
costs of evaluating the credit quality of underlying securities?
    We have given guidance on the factors that advisers should 
consider, as appropriate, in determining that a fund's portfolio 
securities present minimal credit risk. To the extent that 
consideration of these factors is not consistent with current industry 
practice, how would funds benefit from consideration of these factors? 
Would this guidance result in money market funds or their advisers 
incurring additional costs, such as costs to change the process for 
evaluating credit quality? What type of costs would funds and advisers 
incur, and how much? With respect to our proposed requirement for money 
market funds to adopt written policies and procedures for ongoing 
monitoring of minimal credit risks to what extent do commenters 
currently have written policies and procedures covering this type of 
monitoring?
    We also request comment on our re-proposed stress test amendments. 
Do commenters agree with our assessment that, under the amendments to 
rule 2a-7 that we re-propose, funds would retain downgrades by relevant 
NRSROs as hypothetical events for stress testing, as under current rule 
2a-7? What hypothetical events are funds likely to use in addition to 
or in place of downgrades and why?
    Finally, we request comment on the costs and benefits of the 
alternatives to the re-proposed amendments discussed above.

B. Form N-MFP

    The re-proposed amendments would require money market funds to 
disclose NRSRO ratings in certain circumstances. Specifically, a fund 
would have to disclose for each portfolio security, (i) each rating 
assigned by any NRSRO if the fund or its adviser subscribes to that 
NRSRO's services, as well as the name of the agency providing the 
rating, and (ii) any other NRSRO rating that the fund's board of 
directors (or its delegate) considered in making its minimal credit 
risk determination, as well as the name of the agency providing the 
rating. NRSRO ratings provide one indicator of riskiness of a fund's 
portfolio securities and, as discussed above, we anticipate that they 
will continue to be considered by many money market fund managers in 
performing credit quality assessments. We believe this ratings 
information may be useful to the Commission, to investors, and to 
various third parties as they monitor and evaluate the risks that fund 
managers take in both stable-NAV and institutional prime funds. We 
believe that this ratings information might be especially useful during 
periods in which funds impose fees and/or gates even though ratings are 
not immediately updated.
1. Economic Baseline
    Under the economic baseline outlined above, money market funds are 
required to disclose in Form N-MFP the credit ratings for each 
portfolio security. More specifically, the baseline form requires a 
fund to identify whether a portfolio security is a first or second tier 
security or is unrated, and it requires the fund to identify the 
``designated NRSROs'' for each security (and for each demand feature, 
guarantee, or other credit enhancement). This disclosure requirement 
was not changed by the 2014 Money Market Fund Adopting Release.
    As noted above, based on Form N-MFP filings from February 28, 2014, 
the Commission estimates that 99.75 percent of aggregate money market 
fund assets are invested in first tier securities, 0.24 percent of 
aggregate money market fund assets are invested in second tier 
securities, and 0.01 percent of aggregate money market fund assets are 
invested in unrated securities. Among the 559 funds that filed that 
month, we estimate that 488 funds held only tier one securities, 503 
funds held no tier two securities, and 537 funds held no unrated 
securities.
2. Economic Analysis
    We anticipate that our re-proposal is likely to have two primary 
benefits. First, it may contribute to eliminating perceived government 
endorsement of NRSROs and reducing over-reliance on credit ratings, 
particularly when considered together with other amendments the 
Commission has adopted that remove credit ratings references in other 
rules and forms under the Federal securities laws. Second, it will 
provide transparency on whether or not specific funds use credit 
ratings when making investment decisions, and, if credit ratings are 
used, it allows shareholders and other interested parties to use those 
ratings to make their own risk assessments.
    We anticipate that our re-proposal is likely to have two primary 
costs. First, it may impose administrative costs on funds that need to 
re-program their Form N-MFP filing software.\233\ Second, because only 
funds that choose to consider credit ratings in assessing minimal 
credit risk will be permitted to disclose NRSRO ratings on Form N-MFP, 
our re-proposal may reduce transparency of risks taken by funds that do 
not choose to consider credit ratings. This loss of transparency could 
create additional servicing costs for such funds if shareholders 
demanded new communications regarding the credit quality of the 
portfolio.\234\
---------------------------------------------------------------------------

    \233\ See supra notes 180-181 and accompanying text (discussion 
of re-programming costs in PRA analysis).
    \234\ See Dreyfus Comment Letter supra note 30 (opposing the 
elimination of credit ratings disclosures in Form N-MFP because of 
the potential that the fund would bear increased shareholder 
servicing costs to provide additional communications regarding the 
credit quality of the portfolio).
---------------------------------------------------------------------------

    The net effect of the re-proposed amendments to Form N-MFP is that 
funds could not disclose credit ratings if credit ratings are not 
considered in determining whether a security is eligible for the 
portfolio. However, as discussed above, we believe that our re-proposal 
will not result in any material changes for the majority of funds 
because they will, we believe, continue to refer to credit ratings. We 
believe, therefore, that the re-proposal's effects on efficiency, 
competition, and capital formation likely will be negligible. To the 
extent that money market funds continue to consider NRSRO ratings in 
making their minimal credit risk determinations, the re-proposed 
amendments to Form N-MFP may reduce the potential that fund managers

[[Page 48010]]

will increase significantly fund investments in riskier second tier 
securities; a fund would be required to disclose ratings considered in 
those credit determinations, and the ratings would reflect that 
increased risk. As a result, the disclosure to investors of these risk 
indicators may have the effect of penalizing funds that assume more 
risk.
3. Alternatives
    In considering how to meet our obligations under the Dodd-Frank Act 
with respect to Form N-MFP, we evaluated two primary alternatives. In 
2011, we proposed to completely eliminate the following two form items: 
the item that requires a fund to identify whether a portfolio security 
is a first tier security, a second tier security, or an unrated 
security; and the item that requires the fund to identify the 
``requisite NRSROs'' for each security (and for each demand feature, 
guarantee, or other credit enhancement). We are not re-proposing this 
alternative because we now believe that completely eliminating such 
disclosure requirements masks not only the credit ratings but also 
information on whether or not the fund uses credit ratings when making 
its investment decisions.
    We also considered not removing the disclosure requirement as 
recommended by several commenters to the 2011 Proposing Release.\235\ 
We elected not to leave the current disclosure requirements as is, but 
instead to re-propose the required disclosure of NRSRO ratings only in 
certain circumstances. We believe this re-proposal would be in keeping 
with Congressional intent underlying section 939A of the Dodd-Frank Act 
to reduce perceived government endorsement of credit ratings.
---------------------------------------------------------------------------

    \235\ See BlackRock Comment Letter, supra note 122; Dreyfus 
Comment Letter, supra note 30; Federated Comment Letter, supra note 
30; Comment Letter of the Securities Industry and Financial Markets 
Association (Apr. 18, 2011).
---------------------------------------------------------------------------

4. Request for Comment
    We request comment on our estimates and assumptions regarding the 
costs and benefits of the re-proposed amendments to Form N-MFP and the 
effects of these amendments on efficiency, competition, or capital 
formation. As discussed above, we believe that most, if not all, money 
market funds will continue to consider NRSRO ratings in some form. We 
request comment on whether any funds expect that they will not report 
NRSRO ratings, and on shareholders' and third parties' likely response 
to funds that do not report NRSRO credit ratings. We also request 
comment on our assumption that the costs to money market funds to 
reprogram their Form N-MFP filing software, in order to comply with the 
re-proposed amendments, would be the same costs that we discuss in the 
Paperwork Reduction Act analysis of this release.\236\ Finally, we 
request comment on the costs and benefits of the alternatives to the 
re-proposed amendments discussed above.
---------------------------------------------------------------------------

    \236\ See supra notes 180-187 and accompanying text.
---------------------------------------------------------------------------

    For purposes of SBREFA, we also request information regarding the 
potential annual effect of the re-proposed amendments to Form N-MFP on 
the U.S. economy. Commenters are requested to provide empirical data to 
support their views.

C. Exclusion From the Issuer Diversification Requirement

1. Economic Baseline
    As discussed above, most money market fund portfolio securities 
that are subject to a guarantee by a non-controlled person are 
currently subject to a 10 percent diversification requirement on 
guarantors but no diversification requirement on issuers, while non-
government securities with guarantors that do not qualify as non-
controlled persons are generally subject to both a 5 percent 
diversification requirement with respect to issuers and a 10 percent 
diversification requirement with respect to guarantors.\237\ Today, we 
adopted amendments to rule 2a-7 that deem sponsors of asset-backed 
securities to be guarantors of the asset-backed security (unless the 
fund's board rebuts the presumption). As a result, under rule 2a-7's 
definition of a guarantee issued by a non-controlled person, both non-
asset-backed securities and asset-backed securities subject to such a 
guarantee (including asset-backed securities with a presumed sponsor 
guarantee) are excluded from the rule's issuer diversification 
requirement. That is, non-asset-backed securities and asset-backed 
securities subject to a guarantee by a non-controlled person are 
subject to a 10 percent diversification requirement on guarantors, but 
they are not subject to a 5 percent issuer diversification requirement 
on the issuer.\238\ This forms the economic baseline for the new 
diversification amendments that we are proposing today.
---------------------------------------------------------------------------

    \237\ We note that single state funds may invest up to 25% of 
fund assets in securities of any single issuer, and tax-exempt funds 
may have as much as 15% of the value of portfolio securities 
invested in securities subject to guarantees or demand features 
issued by a single provider that is a non-controlled person. Rule 
2a-7(d)(3)(i)(B); 2a-7(d)(3)(iii)(B).
    \238\ See rule 2a-7(a)(18) (definition of guarantee); rule 2a-
7(a)19) (definition of guarantee issued by a non-controlled person); 
rule 2a7(d)(3)(i) (issuer diversification).
---------------------------------------------------------------------------

2. Economic Analysis
    We believe that very few money market funds rely on the issuer 
diversification exclusion for securities subject to a guarantee by a 
non-controlled person. This belief is based on our analysis of February 
2014 Form N-MFP data, which shows that only 8 out of 559 money market 
funds held securities with a guarantee by a non-controlled person that 
exceeded the 5 percent diversification requirement for issuers. We 
believe that these and only these funds in February 2014 relied on the 
exclusion from the 5 percent issuer diversification requirement with 
respect to issuers of securities that are subject to a guarantee issued 
by a non-controlled person. However, we recognize that changes in fund 
assets could mask which funds rely on this exclusion at acquisition: a 
fund might be above the 5 percent limit today solely due to a decline 
in fund assets after acquisition, and a fund might be below the 5 
percent limit today solely due to an increase in fund assets after 
acquisition.\239\ Whatever the cause, a money market fund that has 
invested more than 5 percent of its assets in an issuer of securities 
subject to a guarantee issued by a non-controlled person in reliance on 
the current exclusion under current rule 2a-7 would, when those 
investments mature, have to reinvest the proceeds over 5 percent 
elsewhere. Based on the February 2014 Form N-MFP filings, we believe 
that only a few funds would have to make changes to their portfolios to 
bring them into compliance with the proposed amendments. These changes 
may or may not require the funds to invest in alternative securities, 
and the alternative securities may or may not be inferior because they 
offer, for example, lower yields, lower liquidity, or lower credit 
quality. It appears that the proposed elimination of the exclusion 
would have affected only 8 funds in February 2014. Five of these 8 
funds exceeded the 5 percent issuer concentration limit by less than 1 
percent of fund assets, 2 of the 8 exceeded that limit by less than 2

[[Page 48011]]

percent, and the remaining fund exceeded the limit by slightly more 
than 5 percent. In most cases, the fund exceeded the 5 percent 
diversification requirement with respect to only one issuer (one fund 
exceeded the requirement by less than 1 percent with respect to two 
issuers, and two funds had greater than 5 percent exposure to the same 
issuer). Because of the less than significant impact on these funds, we 
believe that the potential lower yields, less liquidity or increased 
risks associated with the proposal would be small for the affected 
funds.\240\
---------------------------------------------------------------------------

    \239\ All of rule 2a-7's diversification limits are applied at 
the time of acquisition. For example, a fund may not invest in a 
particular issuer if, after acquisition, the fund's aggregate 
investments in the issuer would exceed 5% of fund assets. But if the 
fund's aggregate exposure after making the investment was less than 
5%, the fund would not be required to later sell the securities if 
the fund's assets decreased and the fund's investment in the issuer 
came to represent more than 5% of the fund's assets.
    \240\ Consider, for example, how reducing a position from 7% to 
5% might affect fund yields. The effect could be as small as 0% if 
the 2% of assets are reinvested in securities that offer the same 
yield as the original 7% of assets. On the other hand, the portfolio 
change could decrease fund yields by as much as 2/7 [ap] 29% if all 
of the portfolio yield came from the 7% security. We believe that 
funds will choose alternative securities that have similar yields as 
the securities replaced.
---------------------------------------------------------------------------

    We assume that all funds would incur costs associated with updating 
their systems to reflect the proposed amendment, as well as the 
associated compliance costs, if their systems already incorporate this 
issuer diversification exclusion. We believe that these costs would be 
small for all funds because we believe that all funds currently have 
the ability to monitor issuer diversification to comply with rule 2a-
7's limits on issuer concentration.\241\
---------------------------------------------------------------------------

    \241\ See 1991 Adopting Release, supra note 22, at section 
II.B.1 (adopting the issuer concentration limit).
---------------------------------------------------------------------------

    Our proposed amendment offers two primary benefits. First, the 
amendment simplifies rule 2a-7's diversification requirements by 
eliminating the exclusion for securities with a guarantee issued by a 
non-controlled person. This would lower certain compliance and 
operational costs to the extent that funds no longer have to keep track 
of the securities that have such guarantees and would be eligible for 
the exclusion. Second, by requiring greater issuer diversification for 
those funds that rely on the exclusion, the proposed amendments will 
reduce concentration risk in those funds and may make it easier for 
funds to maintain or generate liquidity during periods when they impose 
fees and/or gates.\242\ We estimate that 8 funds exceeded the 5 percent 
issuer diversification limit in February 2014; nevertheless, we 
recognize that these amendments may constrain more funds in the future 
that otherwise would have less issuer diversification.
---------------------------------------------------------------------------

    \242\ See supra section II.C.
---------------------------------------------------------------------------

    Because we believe that the universe of potentially affected funds 
and issuers is small, we believe that our proposed amendments will have 
only negligible effects on efficiency, competition, and capital 
formation. Although we recognize that our proposed amendments may 
affect more funds and more issuers in the future, we estimate that they 
will affect only 8 funds and 8 issuers today. These 8 funds exceed the 
proposed issuer diversification limit by only a small amount for the 8 
issuers. We believe that the 8 funds will find comparable alternative 
securities for the amount that exceeds 5 percent, and we believe that 
the 8 issuers will find other investors willing to buy the amount that 
exceeds the 5 percent for a comparable price.
3. Alternatives
    As an alternative to eliminating the exclusion from issuer 
diversification for securities with a guarantee issued by a non-
controlled person, we considered requiring money market funds to be 
more diversified by lowering a fund's permitted exposure to any 
guarantor or provider of a demand feature from 10 percent to 5 percent 
of total assets. We discussed potential benefits and costs of this 
alternative approach, and we requested comment on it in the 2013 Money 
Market Fund Proposing Release.\243\ As discussed in more detail above, 
we decided that the current requirements for diversification of 
guarantors and providers of demand features together with the issuer 
diversification requirement if applied generally to all securities, as 
under the proposed amendment, appropriately address our concerns 
relating to money market fund risk exposures.\244\ We also believe that 
the potential costs of this alternative approach would likely be more 
significant than the costs of our proposal. As of the end of February 
2014, we estimate that 107 (of 229) prime money market funds had total 
exposure to a single entity (including directly issued, asset backed 
commercial paper sponsorship, and provision of guarantees and demand 
features) in excess of 5 percent. Under the alternative, any fund that 
had exposure to an entity greater than 5 percent when those assets 
matured would have to reinvest the proceeds of the securities creating 
that exposure in different securities or securities with a different 
guarantor. Those changes may or may not require those funds to invest 
in alternative securities, and those securities might present greater 
risk if they offered lower yields, lower liquidity, or lower credit 
quality. The alternative approach would appear to affect many more 
funds than would the proposed amendment. As a result, we believe that a 
better approach to achieving our reform goal would be to restrict risk 
exposures to all non-government issuers of securities subject to a 
guarantee or demand feature in the same way, and to require money 
market funds (other than tax-exempt and single state funds as described 
above) that invest in non-government securities subject to a guarantee 
to comply with the 5 percent issuer diversification requirement and the 
10 percent diversification requirement on guarantors and demand feature 
providers.
---------------------------------------------------------------------------

    \243\ See 2013 Money Market Fund Proposing Release, supra note 
5, at section III.J.4. We received no comments on this alternative 
approach. We also requested comment in 2009 on whether to reduce 
rule 2a-7's current diversification limits. See 2009 Money Market 
Fund Proposing Release, supra note 127, at section II.D. Most 
commenters opposed these reforms because, among other reasons, the 
reductions could increase risks to funds by requiring the funds to 
invest in relatively lower quality securities. See id. at n.909.
    \244\ See supra text following note 137 and accompanying notes 
138-140.
---------------------------------------------------------------------------

4. Request for Comment
    We request comment on our estimates and assumptions regarding the 
costs and benefits of the proposed amendments to rule 2a-7 that would 
remove the issuer diversification exclusion for securities subject to a 
guarantee by a non-controlled person, as well as the effects of this 
amendment on efficiency, competition, and capital formation. For 
purposes of SBREFA, we also request information regarding the potential 
annual effect of this proposed amendment to rule 2a-7 on the U.S. 
economy. Commenters are requested to provide empirical data to support 
their views.
    In addition to our general request for comment on the costs and 
benefits of the proposed amendment, we request specific comment on 
certain aspects of the amendment. Are we correct in assuming that funds 
would not make substantial changes to their securities holdings as a 
result of the proposal? Do commenters expect that funds would incur 
operational costs in addition to, or that differ from, the costs we 
outlined above? What would be the costs of making such changes? Do 
commenters expect that money market funds would encounter any 
difficulties in finding alternative investments under our proposal that 
have suitable characteristics? Why or why not? How would this proposal 
affect fund yields and the stability of fund NAVs and liquidity? Will 
any of these or other effects be large enough to affect the behavior of 
money market fund shareholders? How will shareholders

[[Page 48012]]

respond? Would any of these effects be different in floating NAV funds 
than they would be in non-floating NAV funds? Would our proposed 
amendments have a differential effect on funds that impose fees and/or 
gates? Do commenters agree that our proposed amendments will have only 
negligible effects on issuers? Why or why not? Are there benefits or 
costs in any part of the money market fund industry that we have not 
identified or discussed? If so, what are those costs or benefits? Are 
we correct in our belief that there will be only negligible effects on 
efficiency, competition, and capital formation? If not, what are the 
effects that we overlooked?

VI. Regulatory Flexibility Act Certification

    Section 3(a) of the Regulatory Flexibility Act of 1980 \245\ 
(``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.\246\ Pursuant to 5 U.S.C. section 605(b), the 
Commission hereby certifies that the re-proposed and proposed 
amendments to rule 2a-7 under the Investment Company Act and the re-
proposed amendments to Form N-MFP under the Investment Company Act 
would not, if adopted, have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \245\ 5 U.S.C. 603(a).
    \246\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    We are re-proposing amendments to replace references to credit 
ratings in rule 2a-7 and modify disclosures of credit ratings in Form 
N-MFP. In addition, we are proposing to amend rule 2a-7's provisions 
relating to issuer diversification to eliminate an exclusion from the 
current issuer diversification requirement for securities that are 
subject to a guarantee issued by a non-controlled person.
    Based on information in filings submitted to the Commission, we 
believe that there are no money market funds that are small 
entities.\247\ For this reason, the Commission believes that the re-
proposed and proposed amendments to rule 2a-7 and the re-proposed 
amendments to Form N-MFP would not, if adopted, have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \247\ Under the Investment Company Act, an investment company is 
considered a small business or small organization if it, together 
with other investment companies in the same group of related 
investment companies, has net assets of $50 million or less as of 
the end of its most recent fiscal year. See 17 CFR 270.0-10.
---------------------------------------------------------------------------

    We encourage written comments regarding this certification. We 
solicit comment as to whether the re-proposed and proposed amendments 
to rule 2a-7 and the re-proposed amendments to Form N-MFP 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.

Statutory Authority

    The Commission is proposing amendments to rule 2a-7 under 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)] and section 939A of the 
Dodd-Frank Act. The Commission is proposing amendments to Form N-MFP 
under the 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)] and section 939A of the Dodd-Frank Act.

List of Subjects in 17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Rule and Form Amendments

    In accordance with the foregoing, 17 CFR parts 270 and 274, as 
amended elsewhere in this issue of the Federal Register, are proposed 
to be amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
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, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *
0
2. Section 270.2a-7 is amended by:
0
a. In paragraph (a)(5), removing the words ``and (D)'';
0
b. Removing paragraph (a)(11);
0
c. Redesignating paragraphs (a)(12) through (a)(13) as (a)(11) through 
(a)(12);
0
d. Revising newly designated paragraph (a)(11);
0
e Removing paragraph (a)(14);
0
f. Redesignating paragraphs (a)(15) through (a)(21) as (a)(13) through 
(a)(19);
0
g. In newly designated paragraph (a)(16):
0
i. Removing the phrase ``(a)(12)(iii) (definition of eligible 
security)'' from paragraph (a)(16)(ii);
0
ii. Removing the phrase ``(d)(2)(iii)'' and adding in its place 
``(d)(2)(ii)'' in paragraph (a)(16)(ii);
0
h. Revising newly designated paragraph (a)(17);
0
i. Removing paragraph (a)(22);
0
j. Redesignating paragraph (a)(23) as paragraph (a)(20);
0
k. Removing paragraph (a)(24);
0
l. Redesignating paragraph (a)(25) as paragraph (a)(21);
0
m. Removing paragraph (a)(26);
0
n Redesignating paragraphs (a)(27) through (a)(31) as paragraphs 
(a)(22) through (a)(26);
0
o. Removing paragraph (a)(32);
0
p. Redesignating paragraphs (a)(33) and (a)(34) as paragraphs (a)(27) 
and (a)(28);
0
q Revising paragraph (d)(2)(i);
0
r. Removing paragraph (d)(2)(ii);
0
s. Redesignating paragraphs (d)(2)(iii) and (d)(2)(iv) as paragraphs 
(d)(2)(ii) and (d)(2)(iii);
0
t. Revising newly designated paragraph (d)(2)(ii);
0
u. In newly designated paragraph (d)(2)(iii):
0
i. Removing the words ``or a first tier security'' from the 
introductory text;
0
ii. removing the words ``or first tier security, as the case may be'' 
from paragraph (A);
0
v. Revising newly designated paragraph (d)(2)(iii)(C);
0
w. Adding paragraph (d)(2)(iii)(D);
0
x. In paragraph (d)(3);
0
i. Removing the words ``and securities subject to a guarantee issued by 
a non-controlled person'' in paragraph (d)(3)(i);
0
ii. Removing the words ``first tier'' in paragraph (d)(3)(i)(A)(1);
0
iii. Removing paragraph (d)(3)(i)(C);
0
iv. Removing paragraph (d)(3)(iii)(C);
0
y. In paragraph (f):
0
i. Removing the word ``Downgrades,'' from the paragraph heading;
0
ii. Removing paragraph (f)(1);
0
iii. Redesignating paragraphs (f)(2) through (f)(4) as paragraphs 
(f)(1) through (f)(3);
0
iv. Removing the words ``and other events'' in the heading of newly 
designated paragraph (f)(1);
0
v. In the introductory text of newly designated paragraph (f)(1), 
removing the phrase ``paragraphs (f)(2)(i) through (iii)'' and adding 
in its place ``paragraphs (f)(1)(i) through (iii)'';
0
vi. Revising newly designated paragraph (f)(1)(ii);
0
vii. Removing newly designated paragraph (f)(1)(iii) and redesignating 
paragraph (f)(1)(iv) as paragraph (f)(1)(iii);
0
viii. In the heading of newly designated paragraph (f)(3), removing the 
phrase ``paragraphs (f)(2) and (3)''

[[Page 48013]]

and adding in its place ``paragraphs (f)(1) and (2)'';
0
ix. In the introductory text of newly designated paragraph (f)(3), 
removing the phrase ``paragraphs (f)(2) and (3)'' and adding in its 
place ``paragraphs (f)(1) and (2)'';
0
x. In newly designated paragraph (f)(3)(iii), removing the phrase 
``paragraph (a)(18)(ii)'' and adding in its place ``paragraph 
(a)(16)(ii)'';
0
z. Revising paragraph (g)(3);
0
aa. Revising paragraph (g)(8)(i)(B);
0
bb. Revising paragraph (h)(3);
0
cc. In paragraph (j):
0
i. Removing the words ``(a)(11)(i) (designation of NRSROs)'' in the 
introductory text; and
0
ii. Removing the phrase ``(f)(2)'' and adding in its place ``(f)(1)'' 
in the introductory text;
0
iii. Removing the phrase ``in paragraph (d)(2)'' and adding in its 
place the phrase ``in paragraphs (d)(2) and (g)(3)'' in paragraph (1);
0
iv. Removing the phrase ``(f)(3)'' and adding in its place ``(f)(2)'' 
in paragraph (2).
    The additions and revisions read as follows:


Sec.  270.2a-7  Money market funds.

    (a) * * *
    (11) Eligible security means a security:
    (i) With a remaining maturity of 397 calendar days or less that the 
fund's board of directors determines presents minimal credit risks, 
which determination must include a finding that the security's issuer 
has an exceptionally strong capacity to meet its short-term financial 
obligations;

    Note to paragraph (a)(11)(i): For a discussion of the phrase 
``exceptionally strong capacity to meet its short-term financial 
obligations,'' see Investment Company Act Release No. 31184, (July 
23, 2014).

    (ii) That is issued by a registered investment company that is a 
money market fund; or
    (iii) That is a government security.
* * * * *
    (17) Guarantee issued by a non-controlled person means a guarantee 
issued by 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)).
* * * * *
    (d) * * *
    (2) * * *
    (i) General. The money market fund shall limit its portfolio 
investments to those United States dollar-denominated securities 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, provided 
however, that the issuer of the guarantee, or another institution, has 
undertaken to promptly notify the holder of the security in the event 
the guarantee is substituted with another guarantee (if such 
substitution is permissible under the terms of the guarantee).
    (iii) * * *
    (C) The fund's board of directors determines that the issuer of the 
underlying security or any guarantor of such security has a very strong 
capacity for payment of its financial commitments; and
    (D) The issuer of the conditional demand feature, or another 
institution, has undertaken to promptly notify the holder of the 
security in the event the conditional demand feature is substituted 
with another conditional demand feature (if such substitution is 
permissible under the terms of the conditional demand feature).
* * * * *
    (f) * * *
    (1) * * *
    (ii) A portfolio security ceases to be an eligible security (e.g., 
no longer presents minimal credit risks); or
* * * * *
    (g) * * *
    (3) Ongoing review of credit risks. The written procedures must 
require the adviser to provide ongoing review of whether each security 
(other than a government security) continues to present minimal credit 
risks. The review must:
    (i) Include an assessment of each security's credit quality, 
including the issuer's capacity to meet its short-term financial 
obligations; and
    (ii) Be based on, among other things, financial data of the issuer 
of the portfolio security or provider of the guarantee or demand 
feature, as the case may be, 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 (e)(2)(iii) of this 
section, whether such data is publicly available or provided under the 
terms of the security's governing documents.
* * * * *
    (8) * * *
    (i) * * *
    (B) An event indicating or evidencing credit deterioration, such as 
a downgrade or default, of particular portfolio security positions, 
each representing various portions of the fund's portfolio (with 
varying assumptions about the resulting loss in the value of the 
security), in combination with various levels of an increase in 
shareholder redemptions;
* * * * *
    (h) * * *
    (3) 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 must be maintained and preserved in 
an easily accessible place of the determination that a portfolio 
security is an eligible security, including the determination that it 
presents minimal credit risks at the time the fund acquires the 
security, or at such later times (or upon such events) that the board 
of directors determines that the investment adviser must reassess 
whether the security presents minimal credit risks.
* * * * *
0
3. Section 270.12d3-1(d)(7)(v) is amended by removing the phrase 
``Sec. Sec.  270.2a-7(a)(8) and 270.2a-7(a)(15)'' and adding in its 
place the phrase ``Sec. Sec.  270.2a-7(a)(9) and 270.2a-7(a)(16)'';
0
4. Section 270.31a-1(b)(1) is amended by removing the phrase ``(as 
defined in Sec.  270.2a-7(a)(8) or Sec.  270.2a7(a)(15) respectively)'' 
and adding in its place the phrase ``(as defined in Sec.  270.2a-
7(a)(9) or ``Sec.  270.2a-7(a)(16) respectively)''.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
5. 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.
* * * * *
0
4. Form N-MFP (referenced in Sec.  274.201) is amended by:
0
a. Revising Item C.9;
0
b. Revising Item C.10;
0
d. Removing Items C.14.b and C.14.c;
0
e. Redesignating Items C.14.d through C.14.f as Items C.14.b through 
C.14 d;
0
f. Adding new Item C.14.e;
0
g. Removing Items C.15.b and C.15.c;
0
h. Redesignating Item C.15.d as Item C.15.b;
0
i. Adding new Item C.15.c;
0
j. Removing Items C.16.c and C.16.d;
0
k. Redesignating Item C.16.e as Items C.16.c; and
0
l. Adding new Item C.16.d.
    The revisions read as follows:

    Note: The text of Form N-MFP does not, and this amendment will 
not, appear in the Code of Federal Regulations.


[[Page 48014]]



FORM N-MFP

* * * * *
    Item C.9 Is the security an Eligible Security? [Y/N]
    Item C.10 Security rating(s) considered. Provide each rating 
assigned by any NRSRO to whose services the fund or its adviser 
subscribes (together with the name of the assigning NRSRO), and any 
other NRSRO rating that the fund's board of directors considered in 
determining that the security presents minimal credit risks (together 
with the name of the assigning NRSRO). If none, leave blank.
* * * * *
    Item C.14 * * *
    e. Rating(s) considered. Provide each rating assigned to the demand 
feature(s) or demand feature provider(s) by any NRSRO to whose services 
the fund or its adviser subscribes (together with the name of the 
assigning NRSRO), and any other NRSRO rating assigned to the demand 
feature(s) or demand feature provider(s) that the board of directors 
considered in evaluating the quality, maturity or liquidity of the 
security (together with the name of the assigning NRSRO). If none, 
leave blank.
* * * * *
    Item C.15 * * *
    c. Rating(s) considered. Provide each rating assigned to the 
guarantee(s) or guarantor(s) by any NRSRO to whose services the fund or 
its adviser subscribes (together with the name of the assigning NRSRO), 
and any other NRSRO rating assigned to the guarantee(s) or guarantor(s) 
that the board of directors considered in evaluating the quality, 
maturity or liquidity of the security (together with the name of the 
assigning NRSRO). If none, leave blank.
    Item C.16 * * *
    d. Rating(s) considered. Provide each rating assigned to the 
enhancement(s) or enhancement provider(s) by any NRSRO to whose 
services the fund or its adviser subscribes (together with the name of 
the assigning NRSRO), and any other NRSRO rating assigned to the 
enhancement(s) or enhancement provider(s) that the board of directors 
considered in evaluating the quality, maturity or liquidity of the 
security (together with the name of the assigning NRSRO). If none, 
leave blank.

    By the Commission.

    Dated: July 23, 2014.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-17746 Filed 8-13-14; 8:45 am]
BILLING CODE 8011-01-P