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pdfSECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 270 and 274
[Release No. IC-28807; File No. S7-11-09]
RIN 3235-AK33
Money Market Fund Reform
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is
proposing amendments to certain rules that govern money market funds under the Investment
Company Act. The amendments would: (i) tighten the risk-limiting conditions of rule 2a-7 by,
among other things, requiring funds to maintain a portion of their portfolios in instruments that
can be readily converted to cash, reducing the weighted average maturity of portfolio holdings,
and limiting funds to investing in the highest quality portfolio securities; (ii) require money
market funds to report their portfolio holdings monthly to the Commission; and (iii) permit a
money market fund that has “broken the buck” (i.e., re-priced its securities below $1.00 per
share) to suspend redemptions to allow for the orderly liquidation of fund assets. In addition, the
Commission is seeking comment on other potential changes in our regulation of money market
funds, including whether money market funds should, like other types of mutual funds, effect
shareholder transactions at the market-based net asset value, i.e., whether they should have
“floating” rather than stabilized net asset values. The proposed amendments are designed to
make money market funds more resilient to certain short-term market risks, and to provide
greater protections for investors in a money market fund that is unable to maintain a stable net
asset value per share.
2
DATES: Comments should be received on or before September 8, 2009.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments:
•
Use the Commission’s Internet comment form
(http://www.sec.gov/rules/proposed.shtml); or
•
Send an e-mail to [email protected]. Please include File Number S7-11-09 on the
subject line; or
•
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments:
•
Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-11-09. This file number should be included on
the subject line if e-mail is used. To help us process and review your comments more efficiently,
please use only one method. The Commission will post all comments on the Commission’s
Internet website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for
public inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE,
Washington, DC 20549, on official business days between the hours of 10:00 am and 3:00 pm.
All comments received will be posted without change; we do not edit personal identifying
information from submissions. You should submit only information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT: Office of Regulatory Policy, at (202)
551-6792, Division of Investment Management, Securities and Exchange Commission, 100 F
3
Street, NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment
amendments to rules 2a-7 [17 CFR 270.2a-7], 17a-9 [17 CFR 270.17a-9], and 30b1-5 [17 CFR
270.30b1-5], new rules 22e-3 [17 CFR 270.22e-3] and 30b1-6 [17 CFR 270.30b1-6], and new
Form N-MFP under the Investment Company Act of 1940 (“Investment Company Act” or
“Act”). 1
TABLE OF CONTENTS
I.
BACKGROUND ...................................................................................................................... 4
A.
Money Market Funds...............................................................................................4
B.
Market Significance .................................................................................................7
C.
Regulation of Money Market Funds ........................................................................9
D.
Recent Developments ............................................................................................11
II.
DISCUSSION ....................................................................................................................... 23
A.
Portfolio Quality ....................................................................................................25
1.
Second Tier Securities .............................................................................. 26
2.
Eligible Securities ..................................................................................... 31
3.
Credit Reassessments................................................................................ 37
4.
Asset Backed Securities............................................................................ 38
B.
Portfolio Maturity ..................................................................................................41
1.
Weighted Average Maturity ..................................................................... 42
2.
Weighted Average Life............................................................................. 45
3.
Maturity Limit for Government Securities ............................................... 51
4.
Maturity Limit for Other Portfolio Securities........................................... 51
C.
Portfolio Liquidity .................................................................................................52
1.
Limitation on Acquisition of Illiquid Securities ....................................... 54
2.
Cash and Securities that Can Be Readily Converted to Cash................... 55
3.
Stress Testing ............................................................................................ 68
D.
Diversification........................................................................................................72
E.
Repurchase Agreements.........................................................................................74
1
15 U.S.C. 80a. Unless otherwise noted, all references to statutory sections are to the Investment
Company Act, and all references to rules under the Investment Company Act, including rule 2a-7,
will be to Title 17, Part 270 of the Code of Federal Regulations [17 CFR 270].
4
F.
G.
H.
I.
Disclosure of Portfolio Information.......................................................................77
1.
Public Website Posting ............................................................................. 77
2.
Reporting to the Commission ................................................................... 80
3.
Amendment to Rule 30b1-5...................................................................... 85
Processing of Transactions ....................................................................................86
Exemption for Affiliate Purchases.........................................................................88
1.
Expanded Exemptive Relief ..................................................................... 89
2.
New Reporting Requirement .................................................................... 92
Fund Liquidation....................................................................................................93
1.
Proposed Rule 22e-3 ................................................................................. 93
2.
Request for Comment on Other Regulatory Changes .............................. 97
III.
REQUEST FOR COMMENT ................................................................................................. 100
A.
Floating Net Asset Value .....................................................................................101
B.
In-Kind Redemptions...........................................................................................108
IV.
PAPERWORK REDUCTION ACT ANALYSIS ........................................................................ 110
V.
COST BENEFIT ANALYSIS ................................................................................................ 121
VI.
COMPETITION, EFFICIENCY AND CAPITAL FORMATION ................................................... 148
VII.
REGULATORY FLEXIBILITY ACT CERTIFICATION ............................................................. 156
VIII.
STATUTORY AUTHORITY ................................................................................................. 159
TEXT OF PROPOSED RULES AND FORM ............................................................................ 159
I.
BACKGROUND
A.
Money Market Funds
Money market funds are open-end management investment companies that are registered
under the Investment Company Act and regulated under rule 2a-7 under the Act. They invest in
high-quality, short-term debt instruments such as commercial paper, Treasury bills and
repurchase agreements. 2 Money market funds pay dividends that reflect prevailing short-term
interest rates and, unlike other investment companies, seek to maintain a stable net asset value
2
Money market funds are also sometimes called “money market mutual funds” or “money funds.”
5
per share, typically $1.00 per share. 3
This combination of stability of principal and payment of short-term yields has made
money market funds one of the most popular investment vehicles for many different types of
investors. Commonly offered features, such as check-writing privileges, exchange privileges,
and near-immediate liquidity, have contributed to the popularity of money market funds. More
than 750 money market funds are registered with the Commission, and collectively they hold
approximately $3.8 trillion of assets. 4 Money market funds account for approximately 39
percent of all investment company assets. 5
Individual (or “retail”) investors use money market funds for a variety of reasons. For
example, they may invest in money market funds to hold cash temporarily or to take a temporary
“defensive position” in anticipation of declining equity markets. Money market funds also play
an important role in cash management accounts for banks, broker-dealers, variable insurance
products, and retirement accounts. As of December 2008, about one-fifth of U.S. households’
cash balances were held in money market funds. 6
Different types of money market funds have been introduced to meet the differing needs
of retail money market fund investors. Historically, most retail investors have invested in “prime
money market funds,” which hold a variety of taxable short-term obligations issued by
3
See generally Valuation of Debt Instruments and Computation of Current Price Per Share by
Certain Open-End Investment Companies (Money Market Funds), Investment Company Act
Release No. 13380 (July 11, 1983) [48 FR 32555 (July 18, 1983)] (“1983 Adopting Release”).
Most money market funds seek to maintain a stable net asset value per share of $1.00, but a few
seek to maintain a stable net asset value per share of a different amount, e.g., $10.00. For
convenience, throughout this release, the discussion will simply refer to the stable net asset value
of $1.00 per share.
4
See Investment Company Institute, Trends in Mutual Fund Investing, Apr. 2009, available at
http://www.ici.org/highlights/trends_04_09 (“ICI Trends”).
5
See id.
6
See INVESTMENT COMPANY INSTITUTE, REPORT OF THE MONEY MARKET WORKING GROUP, at
21 (Mar. 17, 2009), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf (“ICI REPORT”).
6
corporations and banks, as well as repurchase agreements and asset backed commercial paper
secured by pools of assets. 7 Prime money market funds typically have paid higher yields than
other types of money market funds available to retail investors. 8 “Government money market
funds” principally hold obligations of the U.S. Government, including obligations of the U.S.
Treasury and federal agencies and instrumentalities, as well as repurchase agreements
collateralized by Government securities. Some government money market funds limit
themselves to holding only Treasury obligations. Compared to prime funds, government funds
generally offer greater safety of principal but historically have paid lower yields. “Tax exempt
money market funds” primarily hold obligations of state and local governments and their
instrumentalities, and pay interest that is generally exempt from federal income taxes.
Institutional investors account for a growing portion of investments in money market
funds. These investors include corporations, bank trust departments, securities lending
operations of brokerage firms, state and local governments, hedge funds and other private funds.
Many corporate treasurers of large businesses have essentially “outsourced” cash management
operations to money market funds, which may be able to manage cash more efficiently due both
to the scale of their operations and their expertise. As of January 2008, approximately 80 percent
of U.S. companies used money market funds to manage at least a portion of their cash balances. 9
At year-end 2008, U.S. non-financial businesses held approximately 32 percent of their cash
balances in money market funds. 10 According to the Investment Company Institute, about 66
7
See INVESTMENT COMPANY INSTITUTE, 2009 INVESTMENT COMPANY FACT BOOK, at 147, Table
38 (May 2009), available at http://www.ici.org/pdf/2009_factbook.pdf (“2009 FACT BOOK”).
8
See, e.g., iMoneyNet Money Fund Report (Mar. 20, 2009), available at
http://www.imoneynet.com/files/Publication_News/mfr.pdf.
9
See ICI REPORT, supra note 6, at 28-29, Figure 3.7.
10
See id. at 28-29, Figure 3.6.
7
percent of money market fund assets are held in money market funds or share classes intended to
be sold to institutional investors (“institutional money market funds”). 11
Institutional money market funds hold securities similar to those held by prime funds and
government funds. They typically have large minimum investment amounts (e.g., $1 million),
and offer lower expenses and higher yields due to the large account balances, large transaction
values, and smaller number of accounts associated with these funds. As we will discuss in more
detail below, institutional money market funds also tend to have greater investment inflows and
outflows than retail money market funds.
B.
Market Significance
Due in large part to the growth of institutional funds, money market funds have grown
substantially over the last decade, from approximately $1.4 trillion in assets under management
at the end of 1998 to approximately $3.8 trillion in assets under management at the end of
2008. 12 During this same period, retail taxable money market fund assets grew from
approximately $835 billion to $1.36 trillion, or 63 percent, while institutional taxable money
market fund assets grew from approximately $516 billion to $2.48 trillion, or 380 percent. 13
One implication of the growth of money market funds is the increased role they play in
the capital markets. They are by far the largest holders of commercial paper, owning almost 40
percent of the outstanding paper. 14 The growth of the commercial paper market has generally
11
See Investment Company Institute, Money Market Mutual Fund Assets, June 11, 2009, available
at http://www.ici.org/highlights/mm_06_11_09.
12
See INVESTMENT COMPANY INSTITUTE, 1999 MUTUAL FUND FACT BOOK, at 4 (May 1999),
available at http://www.ici.org/pdf/1999_factbook.pdf; Investment Company Institute, Trends in
Mutual Fund Investing, May 28, 2009, available at
http://www.ici.org/highlights/trends_04_2009.
13
See INVESTMENT COMPANY INSTITUTE, 2008 INVESTMENT COMPANY FACT BOOK, at 144, Table
35 (May 2008) (“2008 FACT BOOK”); 2009 FACT BOOK, supra note 7, at 147, Table 38.
14
FEDERAL RESERVE BOARD, STATISTICAL RELEASE Z.1: FLOW OF FUNDS ACCOUNTS OF THE
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followed the growth of money market funds over the last three decades. 15 Today, money market
funds provide a substantial portion of short-term credit extended to U.S. businesses.
Money market funds also play a large role in other parts of the short-term market. They
hold approximately 23 percent of all repurchase agreements, 65 percent of state and local
government short-term debt, 24 percent of short-term Treasury securities, and 44 percent of
short-term agency securities. 16 They serve as a substantial source of financing in the broader
capital markets, holding approximately 22 percent of all state and local government debt,
approximately nine percent of U.S. Treasury securities and 15 percent of agency securities. 17
As a consequence, the health of money market funds is important not only to their
investors, but also to a large number of businesses and state and local governments that finance
current operations through the issuance of short-term debt. A “break in the link [between
borrowers and money market funds] can lead to reduced business activity and pose risks to
UNITED STATES: FLOWS AND OUTSTANDINGS FOURTH QUARTER 2008, at 86, Table L.208 (Mar.
12, 2009), available at http://www.federalreserve.gov/releases/z1/Current/z1.pdf (“FED. FLOW OF
FUNDS REPORT”).
15
See INSTRUMENTS OF THE MONEY MARKET, at 121, Table 2 (Timothy Q. Cook & Robert K.
Laroche eds., 1993), available at
http://www.richmondfed.org/publications/research/special_reports/instruments_of_the_money_m
arket/pdf/full_publication.pdf; FED. FLOW OF FUNDS REPORT, supra note 14, at Tables L.206 and
L.208. One commenter has called the growth of these two markets “inextricably linked.” See
Leland Crabbe & Mitchell A. Post, The Effect of SEC Amendments to Rule 2a-7 on the
Commercial Paper Market, at 4 (Federal Reserve Board, Finance and Economics Discussion
Series #199, May 1992) (“Crabbe & Post”).
16
These securities include securities issued or guaranteed by the Federal National Mortgage
Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and
the Federal Home Loan Banks. See ICI REPORT, supra note 6, at 19, Figure 2.3. See generally
U.S. Treasury Department, FAQs on Fixed Income Agency Securities, available at
http://www.treas.gov/education/faq/markets/fixedfederal.shtml.
17
See Fed. Flow of Funds Report, supra note 14 (percentages derived from flow of funds data).
Foreign banks also have relied substantially on U.S. money market funds for dollar-denominated
funding. See Naohiko Baba, Robert N. McCauley, & Srichander Ramaswamy, U.S. Dollar
Money Market Funds and non-U.S. Banks, BIS QUARTERLY REVIEW, Mar. 2009, available at
http://www.bis.org/publ/qtrpdf/r_qt0903g.htm (“U.S. Dollar Money Market Funds”).
9
economic growth.” 18 The regulation of money market funds, therefore, is important not only to
fund investors, but to a wide variety of operating companies as well as state and local
governments that rely on these funds to purchase their short-term securities.
C.
Regulation of Money Market Funds
The Commission regulates money market funds under the Investment Company Act and
pursuant to rule 2a-7 under the Act. We adopted rule 2a-7 as an exemptive rule in 1983 and
amended it in 1986 to facilitate the development of tax exempt money market funds. 19 We also
amended it substantially in 1991 (taxable funds) and 1996 (tax exempt funds) to provide for a
more robust set of regulatory conditions and to expand the rule to apply it to any investment
company holding itself out as a money market fund. 20
The Investment Company Act and applicable rules generally require that mutual funds
price their securities at the current net asset value per share by valuing portfolio instruments at
market value or, if market quotations are not readily available, at fair value determined in good
faith by the board of directors. 21 As a consequence, the price at which funds will sell and redeem
shares ordinarily fluctuates daily with changes in the value of the fund’s portfolio securities.
These valuation and pricing requirements are designed to prevent investors’ interests from being
18
See Mike Hammill & Andrew Flowers, MMMF, and AMLF, and MMIFF, MACROBLOG (Federal
Reserve Bank of Atlanta), Oct. 30, 2008, available at
http://www.macroblog.typepad.com/macroblog/2008/10/index.html.
19
See 1983 Adopting Release, supra note 3; Acquisition and Valuation of Certain Portfolio
Instruments by Registered Investment Companies, Investment Company Act Release No. 14983
(Mar. 12, 1986) [51 FR 9773 (Mar. 21, 1986)] (“1986 Adopting Release”).
20
See Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No.
18005 (Feb. 20, 1991) [56 FR 8113 (Feb. 27, 1991)] (“1991 Adopting Release”); Revisions to
Rules Regulating Money Market Funds, Investment Company Act Release No. 21837 (Mar. 21,
1996) [61 FR 13956 (Mar. 28, 1996)] (“1996 Adopting Release”).
21
See section 2(a)(41) of the Act (defining “value” of fund assets); rule 2a-4 (defining “current net
asset value” for use in computing the current price of a redeemable security); and rule 22c-1
(generally requiring open-end funds to sell and redeem their shares at a price based on the funds’
current net asset value as next computed after receipt of a redemption, purchase, or sale order).
10
diluted or otherwise adversely affected if fund shares are not priced fairly. 22
Rule 2a-7, however, permits money market funds to use the amortized cost method of
valuation and penny-rounding method of pricing instead, which facilitate money market funds’
ability to maintain a stable net asset value. 23 Under the amortized cost method, portfolio
securities generally are valued at cost plus any amortization of premium or accumulation of
discount (“amortized cost”). 24 The basic premise underlying money market funds’ use of the
amortized cost method of valuation is that high-quality, short-term debt securities held until
maturity will eventually return to the amortized cost value, regardless of any current disparity
between the amortized cost value and market value, and would not ordinarily be expected to
fluctuate significantly in value. 25 Therefore, the rule permits money market funds to value
portfolio securities at their amortized cost so long as the deviation between the amortized cost
and current market value remains minimal and results in the computation of a share price that
represents fairly the current net asset value per share of the fund. 26
To reduce the likelihood of a material deviation occurring between the amortized cost
value of a portfolio and its market-based value, the rule contains several conditions (which we
22
See Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No.
17589 at n.7 and accompanying text (July 17, 1990) [55 FR 30239 (July 25, 1990)] (“1990
Proposing Release”).
23
The penny-rounding method of pricing means the method of computing a fund’s price per share
for purposes of distribution, redemption and repurchase whereby the current net asset value per
share is rounded to the nearest one percent. See rule 2a-7(a)(18).
24
See rule 2a-7(a)(2) (defining the amortized cost method as calculating an investment company’s
net asset value whereby portfolio securities are valued at the fund’s acquisition cost as adjusted
for amortization of premium or accretion of discount rather than at their value based on current
market factors).
25
See 1983 Adopting Release, supra note 3, at nn.3-7 and accompanying text; Valuation of Debt
Instruments and Computation of Current Price Per Share by Certain Open-End Investment
Companies, Investment Company Act Release No. 12206, at nn.3-4 and accompanying text (Feb.
1, 1982) [47 FR 5428 (Feb. 5, 1982)] (“1982 Proposing Release”).
26
See rule 2a-7(c)(1), (c)(7)(ii)(C).
11
refer to as “risk-limiting conditions”) that limit the fund’s exposure to certain risks, such as
credit, currency, and interest rate risks. 27 In addition, the rule includes certain procedural
requirements overseen by the fund’s board of directors. One of the most important is the
requirement that the fund periodically “shadow price” the amortized cost net asset value of the
fund’s portfolio against the mark-to-market net asset value of the portfolio. 28 If there is a
difference of more than ½ of 1 percent (or $0.005 per share), the fund’s board of directors must
consider promptly what action, if any, should be taken, including whether the fund should
discontinue the use of the amortized cost method of valuation and re-price the securities of the
fund below (or above) $1.00 per share, an event colloquially known as “breaking the buck.” 29
D.
Recent Developments
Money market funds have had a record of stability during their more than 30 years of
operation. Before last fall, only one money market fund had ever broken the buck. 30 This record
appears to be due primarily to three factors. First, the short-term debt markets generally were
relatively stable during this period. Second, many fund advisers (and their portfolio managers
27
For example, the rule requires, among other things, that a money market fund’s portfolio
securities meet certain credit quality requirements, such as being rated in the top one or two rating
categories by nationally recognized statistical rating organizations (“NRSROs”), and by limiting
the portion of the fund’s portfolio that may be invested in securities rated in the second highest
rating category. See rule 2a-7(c)(3). The rule also places limits on the remaining maturity of
securities in the fund’s portfolio. A fund generally may not acquire, for example, any securities
with a remaining maturity greater than 397 days, and the dollar-weighted average maturity of the
securities owned by the fund may not exceed 90 days. See rule 2a-7(c)(2).
28
See rule 2a-7(c)(7); see also supra note 21 and accompanying text.
29
See rule 2a-7(c)(7)(ii)(B). Regardless of the extent of the deviation, rule 2a-7 imposes on the
board of a money market fund a duty to take appropriate action whenever the board believes the
extent of any deviation may result in material dilution or other unfair results to investors or
current shareholders. Rule 2a-7(c)(7)(ii)(C). See 1983 Adopting Release, supra note 3, at nn.5152 and accompanying text.
30
In September 1994, a series of a small institutional money market fund re-priced its shares below
$1.00 as a result of loss in value of certain floating rate securities. The fund promptly announced
that it would liquidate and distribute its assets to its shareholders. See 1996 Adopting Release,
supra note 20, at n.162.
12
and credit analysts) were skillful in analyzing the risks of portfolio securities and thereby largely
avoiding significant losses that could force a fund to break the buck. 31 Finally, fund managers
and their affiliated persons have had significant sources of private capital that they were willing
to make available to support the stable net asset value of a money market fund when it
experienced losses in one or more of its portfolio securities.
Since the late 1980s, fund managers from time to time have sought to prevent a money
market fund from breaking the buck by voluntarily purchasing distressed portfolio securities
from the fund, directly or through an affiliated person, at the higher of market price or amortized
cost. 32 These events occurred irregularly and involved a limited number of funds. 33 In response
to these events, the Commission tightened the risk-limiting conditions of the rule for taxable
funds in 1991 and for tax exempt funds in 1996. 34 Among other things, we added diversification
requirements to the rule, which limited the exposure of a fund to any one issuer of securities,
thus reducing the consequences of a credit event affecting the value of a portfolio holding. 35 We
repeatedly emphasized the responsibility of fund managers to manage, and fund boards to
oversee that the fund is managed, in a manner consistent with the investment objective of
31
We made similar observations last year. See Temporary Exemption for Liquidation of Certain
Money Market Funds, Investment Company Act Release No. 28487, at text accompanying nn.6-7
(Nov. 20, 2008) [73 FR 71919 (Nov. 26, 2008)] (“Rule 22e-3T Adopting Release”).
32
These transactions implicate section 17(a) of the Investment Company Act, which prohibits an
affiliated person of a fund or an affiliated person of such a person from knowingly purchasing a
security from the fund, except in limited circumstances. Under section 17(b) of the Act, such
persons can apply to the Commission for an exemption from these prohibitions. In 1996, the
Commission adopted rule 17a-9, which permits affiliated persons of funds and affiliated persons
of such persons to purchase distressed securities in funds’ portfolios subject to certain conditions,
without the need to first obtain an individual exemption. We are proposing certain amendments
to rule 17a-9 in this release, as well as an amendment to rule 2a-7 that would require money
market funds to notify us of any transactions under rule 17a-9. See infra Section II.H.
33
See 1990 Proposing Release, supra note 22, at nn.16-18 and accompanying text; 1996 Adopting
Release, supra note 20, at nn.22-23 and accompanying text.
34
See 1991 Adopting Release, supra note 20; 1996 Adopting Release, supra note 20.
35
See rule 2a-7(c)(4).
13
maintaining a stable net asset value. 36
In 2007, however, losses in the subprime mortgage markets adversely affected a
significant number of money market funds. These money market funds had invested in asset
backed commercial paper issued by structured investment vehicles (“SIVs”), which were
off-balance sheet conduits sponsored mostly by certain large banks and money managers. 37
Although we understand that most SIVs had little exposure to sub-prime mortgages, they
suffered severe liquidity problems and significant losses when risk-averse short-term investors
(including money market funds), fearing increased exposure to liquidity risk and residential
mortgages, began to avoid the commercial paper the SIVs issued. 38 Unable to roll over their
short-term debt, SIVs were forced to liquidate assets to pay off maturing obligations and began
to wind down operations. 39 In addition, NRSROs rapidly downgraded SIV securities, increasing
downward price pressures already generated by these securities’ lack of liquidity. The value of
the commercial paper fell, which threatened to force several money market funds to break the
buck.
Money market funds weathered this storm. In some cases, bank sponsors of SIVs
provided support for the SIVs. 40 In other cases, money market fund affiliates voluntarily
36
See 1983 Adopting Release, supra note 3, at nn.41-42 and accompanying text; 1996 Adopting
Release, supra note 20, at nn.22-29 and accompanying text.
37
See Neil Shah, Money Market Funds Cut Exposure to Risky SIV Debt—S&P, REUTERS, Nov. 21,
2007, available at http://www.reuters.com/article/bondsNews/idUSN2146813220071121.
38
We know of at least 44 money market funds that were supported by affiliates because of SIV
investments. In many of these cases the affiliate support was provided in reliance on no-action
assurances provided by Commission staff. Many of these no-action letters are available on our
website. See http://www.sec.gov/divisions/investment/im-noaction.shtml#money. Unlike other
asset backed commercial paper, SIV debt was not backed by an external liquidity provider.
39
See, e.g., Alistair Barr, HSBC’s Bailout Puts Pressure on Citi, “Superfund,” MARKETWATCH,
Nov. 26, 2007, available at http://www.marketwatch.com/story/hsbcs-35-bln-siv-bailout-putspressure-on-citi-superfund.
40
See, e.g., id.
14
provided support to the funds by purchasing the SIV investments at their amortized cost or
providing some form of credit support. 41 Money market funds also benefited from strong cash
flows into money market funds, as investors fled from riskier markets. During the period from
July 2007 to August 2008, more than $800 billion in new cash was invested in money market
funds, increasing aggregate fund assets by one-third. 42 Eighty percent of these investments came
from institutional investors.43
As financial markets continued to deteriorate in 2008, however, money market funds
came under renewed stress. This pressure culminated the week of September 15, 2008 when the
bankruptcy of Lehman Brothers Holdings Inc. (“Lehman Brothers”) led to heavy redemptions
from about a dozen money market funds that held Lehman Brothers debt securities. On
September 15, 2008, The Reserve Fund, whose Primary Fund series held a $785 million position
in commercial paper issued by Lehman Brothers, began experiencing a run on its Primary Fund,
which spread to the other Reserve funds. The Reserve funds rapidly depleted their cash to
satisfy redemptions, and began offering to sell the funds’ portfolio securities into the market,
further depressing their valuations. Unlike the other money market funds that held Lehman
Brothers debt securities (and SIV commercial paper), The Reserve Primary Fund ultimately had
no affiliate with sufficient resources to support the $1.00 net asset value. On September 16,
2008, The Reserve Fund announced that as of that afternoon, its Primary Fund would break the
41
See, e.g., Shannon D. Harrington & Christopher Condon, Bank of America, Legg Mason Prop Up
Their Money Funds, BLOOMBERG, Nov. 13, 2007, available at
http://www.bloomberg.com/apps/news?pid=20601087&sid=aWWjLp8m3J1I&refer=home.
Under rule 17a-9, funds are not required to report to us all such transactions. See infra Section
II.H.
42
See ICI REPORT, supra note 6, at 49.
43
Id.
15
buck and price its securities at $0.97 per share. 44 On September 22, 2008, in response to a
request by The Reserve Fund, the Commission issued an order permitting the suspension of
redemptions in certain Reserve funds, to permit their orderly liquidation.45
These events led many investors, especially institutional investors, to redeem their
holdings in other prime money market funds and move assets to Treasury or government money
market funds. 46 This trend was intensified by turbulence in the market for financial sector
securities as a result of the bankruptcy of Lehman Brothers and the near failure of American
International Group, whose commercial paper was held by many prime money market funds.
During the week of September 15, 2008, investors withdrew approximately $300 billion
from prime (taxable) money market funds, or 14 percent of the assets held in those funds. 47 Most
of the heaviest redemptions were from institutional funds, which depleted cash positions and
threatened to force a fire sale of portfolio securities that would have placed widespread pressure
44
See Press Release, The Reserve Fund, A Statement Regarding The Primary Fund (Sept. 16,
2008). The Reserve Fund subsequently stated that the fund had broken the buck earlier in the day
on September 16. See Press Release, The Reserve Fund, Important Notice Regarding Reserve
Primary Fund’s Net Asset Value (Nov. 26, 2008) (“The Fund is announcing today that, contrary
to previous statements to the public and to investors, the Fund’s net asset value per share was
$0.99 from 11:00 a.m. Eastern time to 4:00 p.m. Eastern time on September 16, 2008 and not
$1.00.”).
45
See In the Matter of The Reserve Fund, Investment Company Act Release No. 28386 (Sept. 22,
2008) [73 FR 55572 (Sept. 25, 2008)] (order). Several other Reserve funds also obtained an
order from the Commission on October 24, 2008 permitting them to suspend redemptions to
allow for their orderly liquidation. See Reserve Municipal Money-Market Trust, et al.,
Investment Company Act Release No. 28466 (Oct. 24, 2008) [73 FR 64993 (Oct. 31, 2008)]
(order).
46
See U.S. Dollar Money Market Funds, supra note 17, at 72; BLACKROCK, THE CREDIT CRISIS:
U.S. GOVERNMENT ACTIONS AND IMPLICATIONS FOR CASH INVESTORS (Nov. 2008), available at
https://www2.blackrock.com/webcore/litService/search/getDocument.seam?venue=PUB_INS&S
erviceName=PublicServiceView&ContentID=50824 (“THE CREDIT CRISIS”); Standard & Poor’s,
Money Market Funds Tackle ‘Exuberant Irrationality,’ RATINGS DIRECT, Sept. 30, 2008,
available at
http://www2.standardandpoors.com/spf/pdf/media/MoneyMarketFunds_Irrationality.pdf.
47
See ICI REPORT, supra note 6, at 62 (analyzing data from iMoneyNet); see also Investment
Company Institute, Money Market Mutual Fund Assets Historical Data, Apr. 30, 2009, available
at http://www.ici.org/pdf/mm_data_2009.pdf (“ICI Mutual Fund Historical Data”).
16
on fund share prices. 48 Fearing further redemptions, money market fund (and other cash)
managers began to retain cash rather than invest in commercial paper, certificates of deposit or
other short-term instruments. 49 In the final two weeks of September 2008, money market funds
reduced their holdings of top-rated commercial paper by $200.3 billion, or 29 percent. 50
As a consequence, short-term markets seized up, impairing access to credit in short-term
private debt markets. 51 Some commercial paper issuers were only able to issue debt with
overnight maturities. 52 The interest rate premium (spread) over three-month Treasury bills paid
48
See ICI Mutual Fund Historical Data, supra note 47.
49
See Philip Swagel, “The Financial Crisis: An Inside View,” Brookings Papers on Economic
Activity, at 31 (Spring 2009) (conference draft), available at
http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2009_spring_bpea
_papers/2009_spring_bpea_swagel.pdf.
50
See Christopher Condon & Bryan Keogh, Funds’ Flight from Commercial Paper Forced Fed
Move, BLOOMBERG, Oct. 7, 2008, available at
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5hvnKFCC_pQ.
51
See Minutes of the Federal Open Market Committee, FEDERAL RESERVE BOARD, Oct. 28-29,
2008, at 5, available at
http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20081029.pdf (“FRB Open
Market Committee Oct. 28-29 Minutes”) (stating that following The Reserve Fund’s
announcement that the Primary Fund would break the buck, “risk spreads on commercial paper
rose considerably and were very volatile” and “[c]onditions in short-term funding markets
improved somewhat following the announcement of…a number of mutual initiatives by the
Federal Reserve and the Treasury to address the pressures on money market funds and the
commercial paper market”). See also Press Release, Federal Reserve Board Announces Creation
of the Commercial Paper Funding Facility (CPFF) to Help Provide Liquidity to Term Funding
Markets (Oct. 7, 2008), available at
http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm (“The commercial
paper market has been under considerable strain in recent weeks as money market mutual funds
and other investors, themselves often facing liquidity pressures, have become increasingly
reluctant to purchase commercial paper, especially at longer-dated maturities. As a result, the
volume of outstanding commercial paper has shrunk, interest rates on longer term commercial
paper have increased significantly, and an increasingly high percentage of outstanding paper must
now be refinanced each day. A large share of outstanding commercial paper is issued or
sponsored by financial intermediaries, and their difficulties placing commercial paper have made
it more difficult for those intermediaries to play their vital role in meeting the credit needs of
businesses and households.”).
52
See Matthew Cowley, Burnt Money Market Funds Stymie Short-Term Debt, DOW JONES
INTERNATIONAL NEWS, Oct. 1, 2008; Anusha Shrivastava, Commercial-Paper Market Seizes Up,
THE WALL STREET JOURNAL, Sept. 19, 2008, at C2.
17
by issuers of three-month commercial paper widened significantly from approximately 25-100
basis points before the September 2008 market events to approximately 200-350 basis points,
and issuers were exposed to the costs and risks of having to roll over increasingly large amounts
of commercial paper each day. 53 Many money market fund sponsors took extraordinary steps to
protect funds’ net assets and preserve shareholder liquidity by purchasing large amounts of
securities at the higher of market value or amortized cost and by providing capital support to the
funds. 54
On September 19, 2008, the U.S. Department of the Treasury and the Board of Governors
of the Federal Reserve System (“Federal Reserve Board”) announced an unprecedented market
intervention by the federal government in order to stabilize and provide liquidity to the
short-term markets. The Department of the Treasury announced its Temporary Guarantee
Program for Money Market Funds (“Guarantee Program”), which temporarily guaranteed certain
investments in money market funds that decided to participate in the program. 55 The Federal
53
See Federal Reserve Board data, available at
http://www.frbatlanta.org/econ_rd/macroblog/102808b.jpg (charting three-month commercial
paper spreads over three-month Treasury bill); see also Federal Reserve Board Chairman Ben S.
Bernanke, Testimony before the Committee on Financial Services, U.S. House of Representatives
(Nov. 18, 2008), available at
http://www.federalreserve.gov/newsevents/testimony/bernanke20081118a.htm.
54
Commission staff provided no-action assurances allowing 100 money market funds in 18
different fund complexes to enter into such arrangements during the period from September 16,
2008 to October 1, 2008. See, e.g., http://www.sec.gov/divisions/investment/imnoaction.shtml#money.
55
See Press Release, U.S. Department of the Treasury, Treasury Announces Guaranty Program for
Money Market Funds (Sept. 19, 2008), available at
http://www.treas.gov/press/releases/hp1147.htm. The Program insures investments in money
market funds, to the extent of their shareholdings as of September 19, 2008, if the fund has
chosen to participate in the Program. The Guarantee Program is due to expire on September 18,
2009. We adopted, on an interim final basis, a temporary rule, rule 22e-3T, to facilitate the
ability of money market funds to participate in the Guarantee Program. The rule permits a
participating fund to suspend redemptions if it breaks a buck and liquidates under the terms of the
Program. See Rule 22e-3T Adopting Release, supra note 31. The temporary rule will expire on
October 18, 2009. We discuss this rule in more detail in infra Section II.I.
18
Reserve Board announced the creation of its Asset-Backed Commercial Paper Money Market
Mutual Fund Liquidity Facility (“AMLF”), through which it extended credit to U.S. banks and
bank holding companies to finance their purchases of high-quality asset backed commercial
paper from money market funds. 56 In addition, the Federal Reserve Board’s Commercial Paper
Funding Facility (“CPFF”) provided support to issuers of commercial paper through a conduit
that purchased commercial paper from eligible issuers, although the CPFF did not purchase
commercial paper from money market funds. 57 The Commission and its staff worked closely
with the Treasury Department and the Federal Reserve Board to help design these programs,
most of which relied in part on rule 2a-7 to tailor the program and/or condition the terms of a
fund’s participation in the program, and we also assisted in administering the Guarantee
Program. 58 Our staff also worked with sponsors of money market funds to provide regulatory
56
See Press Release, Federal Reserve Board, Federal Reserve Board Announces Two
Enhancements to its Programs to Provide Liquidity to Markets (Sept. 19, 2008), available at
http://www.federalreserve.gov/newsevents/press/monetary/20080919a.htm. The AMLF will
expire on February 1, 2010, unless extended. See Press Release, Federal Reserve Board, Federal
Reserve Announces Extensions of and Modifications to a Number of Its Liquidity Programs
(June 25, 2009), available at
http://www.federalreserve.gov/newsevents/press/monetary/20090625a.htm (“2009 Federal
Reserve Extension and Modification Announcement”).
57
See Press Release, Federal Reserve Board, Board Announces Creation of the Commercial Paper
Funding Facility (CPFF) to Help Provide Liquidity to Term Funding Markets (Oct. 7, 2008),
available at http://www.federalreserve.gov/newsevents/press/monetary/20081007c.htm. At one
point the Federal Reserve had purchased about one-fifth of all commercial paper outstanding in
the U.S. market. See Bryan Keogh, GE Leads Commercial Paper “Test” as Fed’s Buying Ebbs,
BLOOMBERG, Jan. 27, 2009, available at
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHWA87Aa2aQQ. The CPFF
will expire on February 1, 2010, unless extended. See 2009 Federal Reserve Extension and
Modification Announcement, supra note 56. Although the CPFF did not directly benefit money
market funds, it did indirectly benefit them by stabilizing the commercial paper market. See, e.g.,
Richard G. Anderson, The Success of the CPFF? (Economic Synopses No. 18, Federal Reserve
Bank of St. Louis, 2009), at 2, available at
http://www.research.stlouisfed.org/publications/es/09/ES0918.pdf.
58
See, e.g., Guarantee Agreement that money market funds participating in the Treasury’s
Guarantee Program were required to sign, at 2, 10, available at
http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-docs/GuaranteeAgreement_form.pdf (under which money market funds were required to state that they operated
19
relief they requested to participate fully in these programs. 59
These steps helped to stanch the tide of redemptions from institutional prime money
market funds, 60 and provided liquidity to money market funds that held asset backed commercial
paper. Commercial paper markets remained illiquid, however, and, as a result, money market
funds experienced significant problems pricing portfolio securities. Institutional as well as retail
money market funds with little redemption activity and no distressed securities reported to our
staff that they nevertheless faced the prospect of breaking the buck as a consequence of their
reliance on independent pricing services that reported prices based on models with few reliable
inputs. The Commission’s Office of Chief Accountant and the Financial Accounting Standards
Board provided funds and others guidance on determining fair value of securities in turbulent
markets, 61 but it appeared that fund boards remained reluctant to deviate from the prices received
from their vendors. On October 10, 2008, our Division of Investment Management issued a
letter agreeing not to recommend enforcement action if money market funds met the “shadow
pricing” obligations of rule 2a-7 by pricing certain of their portfolio securities with a remaining
in compliance with rule 2a-7 to be eligible to initially participate in the program and must
continue to comply with rule 2a-7 to continue to participate in the program); see also
http://www.sec.gov/divisions/investment/mmtempguarantee.htm.
59
See Investment Company Institute, SEC Staff No-Action Letter (Sept. 25, 2008) (relating to the
AMLF); Investment Company Institute, SEC Staff No-Action Letter (Oct. 8, 2008) (relating to
the Guarantee Program). These no-action letters are available on our website at
http://www.sec.gov/divisions/investment/im-noaction.shtml#money.
60
During the week ending September 18, 2008, taxable institutional money market funds
experienced net outflows of $165 billion. See Money Fund Assets Fell to $3.4T in Latest Week,
ASSOCIATED PRESS, Sept. 18, 2008. Almost $80 billion was withdrawn from prime money
market funds even after the announcement of the Guarantee Program on September 19, 2008.
See Diana B. Henriques, As Cash Leaves Money Funds, Financial Firms Sign Up for U.S.
Protection, N.Y. TIMES, Oct. 2, 2008, at C10. However, by the end of the week following the
announcement, net outflows from taxable institutional money market funds had ceased. See
Money Fund Assets Fell to $3.398T in Latest Week, ASSOCIATED PRESS, Sept. 25, 2008.
61
See Press Release No. 2008-234, Securities and Exchange Commission, Office of the Chief
Accountant and FASB Staff Clarifications on Fair Value Accounting (Sept. 30, 2008), available
at http://www.sec.gov/news/press/2008/2008-234.htm.
20
final maturity of less than 60 days by reference to their amortized cost. 62
Over the four weeks after The Reserve Fund’s announcement, assets in institutional
prime money market funds shrank by 30 percent, or approximately $418 billion (from $1.38
trillion to $962 billion). 63 No money market fund other than The Reserve Primary Fund broke
the buck, although money market fund sponsors or their affiliated persons in many cases
committed extraordinary amounts of capital to support the $1.00 net asset value per share. Our
staff estimates that during the period from August 2007 to December 31, 2008, almost 20 percent
of all money market funds received some support from their money managers or their affiliates. 64
During this time period, short-term credit markets became virtually frozen as market
participants hoarded cash and generally refused to lend on more than an overnight basis. 65
Interest rate spreads increased dramatically. 66 After shrinking to historically low levels as credit
markets boomed in the mid-2000s, interest rate spreads surged upward in the summer of 2007
62
Investment Company Institute, SEC Staff No-Action Letter (Oct. 10, 2008). This letter is
available on our website at
http://www.sec.gov/divisions/investment/noaction/2008/ICI101008.htm. The letter by its terms
did not apply, however, to shadow pricing if particular circumstances (such as the impairment of
the creditworthiness of the issuer) suggested that amortized cost was not appropriate. The staff
position also was limited to portfolio securities that were “first tier securities” under rule 2a-7 and
that the fund reasonably expected to hold to maturity. The letter applied to shadow pricing
procedures through January 12, 2009.
63
On September 10, 2008, six days prior to The Reserve Fund’s announcement, approximately
$1.38 trillion was invested in institutional prime (taxable) money market funds. See ICI Mutual
Fund Historical Data, supra note 47. On October 8, 2008, approximately $962 billion was
invested in those funds. See id. In addition, between September 10 and September 17, the assets
of these funds fell by approximately $193 billion. See id.
64
This estimate is based on no-action requests and other conversations with our staff during this
time period.
65
THE CREDIT CRISIS, supra note 46, at 1 (“After experiencing more than $400 billion in outflows
over a short period of time, money funds had little appetite for commercial paper; even quality
issuers discovered they could not access the commercial paper market ....”).
66
An interest rate spread measures the difference in interest rates of debt instruments with different
risk. See Markus K. Brunnermeier, Deciphering the Liquidity and Credit Crunch 2007-2008, 23
J. ECON. PERSPECTIVES 77, 85, Winter 2009 (“Brunnermeier”).
21
and peaked after the bankruptcy of Lehman Brothers in September 2008. 67 Money market funds
shortened the weighted average maturity of their portfolios to be better positioned in light of
increased liquidity risk to the funds. 68
Although the crisis money markets faced last fall has abated, the problems have not
disappeared. Today, while interest rate spreads have recently declined considerably, they remain
above levels prior to the crisis, 69 and short-term debt markets remain fragile. 70 Although the
average weighted average maturity of taxable money market funds (as a group) had risen to 53
days as of the week ended June 16, 2009, 71 we understand that the long-term securities that
67
See id.; David Oakley, LIBOR Hits Record Low as Credit Fears Ease, FIN. TIMES, May 5, 2009.
For example, the “TED” spread (the difference between the risk-free U.S. Treasury Bill rate and
the riskier London Inter-bank Offering Rate (“LIBOR”)), normally around 50 basis points,
reached a high of 463 basis points on October 10, 2008. See David Serchuk, Banks Led by the
TED, FORBES, Jan. 12, 2009.
68
Taxable money market fund average weighted average maturities shortened to 40-42 days during
October 2008 from 45-46 days shortly prior to this period based on analysis of data from the
iMoneyNet Money Fund Analyzer database.
69
The TED spread was 52 basis points on May 29, 2009. The LIBOR-OIS spread (the difference
between three-month dollar London Interbank Offered Rate and the overnight index swap rate)
was 45 basis points. See Lukanyo Mnyanda, Libor Declines for Second Day on Signs Economic
Slump is Easing, BLOOMBERG, May 29, 2009, available at
http://www.bloomberg.com/apps/news?pid=20670001&sid=agpZArg2paJE. Prior to the start of
the financial turbulence in the summer of 2007, the TED spread averaged approximately 25-50
basis points and the three-month LIBOR-OIS spread averaged 7-9 basis points. See historical
chart of TED spread available at
http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND; Simon Kwan, Behavior of
LIBOR in the Current Financial Crisis, FRBSF ECONOMIC LETTER (Federal Reserve Bank of
San Francisco), Jan. 23, 2009, at 2-3, available at
http://www.frbsf.org/publications/economics/letter/2009/el2009-04.pdf.
70
See Bryan Keogh, John Detrixhe & Gabrielle Coppola, Coca-Cola Flees Commercial Paper for
Safety in Bonds, BLOOMBERG, Mar. 17, 2009, available at
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atxKQSJUp6RE (noting that
certain companies are issuing long-term debt to replace commercial paper to avoid the risk of not
being able to roll over their commercial paper, given the instability in short-term credit markets);
Michael McKee, Fed Credit Has Stabilized Markets, Not Fixed Them, Study Says, BLOOMBERG,
Mar. 6, 2008, available at
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRGBZuGYE78Y.
71
This information is based on analysis of data from the iMoneyNet Money Fund Analyzer
database.
22
account for the longer weighted average maturity are not commercial paper and corporate
medium term notes (as they were before the crisis), but instead are predominantly government
securities, which suggests that money market funds may still be concerned about credit risk.
The Treasury Guarantee Program has been extended twice, but is set to expire on
September 18, 2009. 72 Programs established by the Federal Reserve Board to support liquidity
in the short-term market are set to expire early next year.73 Total money market fund assets have
continued to grow and now amount to approximately $3.8 trillion. 74 However, the composition
of those assets has changed dramatically. Between September 10 and October 8, 2008,
government money market fund assets increased by about 47 percent compared to a decrease of
about 21 percent in taxable prime money market fund assets. 75 Since that time, prime money
market fund assets have begun to grow again, although they remain below pre-September 2008
levels and government money market fund assets remain elevated. 76
Finally, The Reserve Primary Fund has yet to distribute all of its remaining assets to
shareholders, many of whom were placed in financial hardship as a result of losing access to
72
See Press Release, U.S. Department of the Treasury, Treasury Announces Extension of
Temporary Guarantee Program for Money Market Funds (Nov. 24, 2008), available at
http://www.treas.gov/press/releases/hp1290.htm; Press Release, U.S. Department of the Treasury,
Treasury Announces Extension of Temporary Guarantee Program for Money Market Funds (Mar.
31, 2009), available at http://www.treas.gov/press/releases/tg76.htm.
73
The AMLF and the CPFF will expire on February 1, 2010. See Press Release, Federal Reserve
(June 25, 2009), available at
http://www.federalreserve.gov/newsevents/press/monetary/20090625a.htm. The use of the
AMLF peaked on October 1, 2008, with holdings of $152.1 billion. See FEDERAL RESERVE
BOARD, STATISTICAL RELEASE H.4.1: FACTORS AFFECTING RESERVE BALANCES (Oct. 2, 2008),
available at http://www.federalreserve.gov/releases/h41/20081002. AMLF holdings as of April
29, 2009 stood at $3.699 billion. See FEDERAL RESERVE BOARD, STATISTICAL RELEASE H.4.1:
FACTORS AFFECTING RESERVE BALANCES (Apr. 30, 2009), available at
http://www.federalreserve.gov/releases/h41/20090430.
74
See ICI Trends, supra note 4.
75
See ICI Mutual Fund Historical Data, supra note 47.
76
See id.
23
their investments. 77 The dissolution of the fund has been affected by several factors, including
operational difficulties and lack of liquidity in the secondary markets, and by legal uncertainties
over the disposition of the remaining assets. We recently instituted an action in federal court
seeking to ensure that the liquidation is effected on a fair and equitable basis, 78 and propose in
this release regulatory changes designed to protect investors in a fund that breaks a dollar in the
future. 79
II.
DISCUSSION
The severe problems experienced by money market funds since the fall of 2007 and
culminating in the fall of 2008 have prompted us to review our regulation of money market
funds. Based on that review, including our experience with The Reserve Fund, we today are
proposing for public comment a number of significant amendments to rule 2a-7 under the
Investment Company Act.
In formulating these proposals, Commission staff has consulted extensively with other
members of the President’s Working Group on Financial Markets, and in particular the
Department of Treasury and the Federal Reserve Board, which provided support to money
market funds and the short-term debt markets last fall, and which continue to administer
programs from which money market funds and their shareholders benefit. We have consulted
77
The Reserve Primary Fund did not make an initial partial pro rata distribution of assets until
October 30, 2008. See Press Release, The Reserve Fund, Reserve Primary Fund Makes Initial
Distribution of $26 Billion to Primary Fund Shareholders (Oct. 30, 2008). The fund has
distributed approximately 90 percent of its assets. See Press Release, The Reserve Fund, Court
Issues Order Setting Objection and Hearing Dates on Securities and Exchange Commission’s
Proposed Plan for Distribution of Reserve Primary Fund’s Assets (June 15, 2009).
78
See SEC v. Reserve Management Co., Inc., et al., Litigation Release No. 21025 (May 5, 2009),
available at http://www.sec.gov/litigation/litreleases/2009/lr21025.htm. We note that we also
have filed fraud charges against several entities and individuals who operate The Reserve Primary
Fund alleging that they failed to provide key material facts to investors and trustees about the
fund’s vulnerability as Lehman Brothers sought bankruptcy protection. See id.
79
See infra Section II.I.
24
with managers of money market funds and other experts to develop a deeper understanding of
the stresses experienced by funds and the impact of our regulations on the readiness of money
market funds to cope with market turbulence and satisfy heavy demand for redemptions. In
March, we received an extensive report from a “Money Market Working Group” assembled by
the Investment Company Institute (“ICI Report”), which recommended a number of changes to
our rule 2a-7 that it believes could improve the safety and oversight of money market funds. 80
We have also drawn from our experience as a regulator of money market funds under rule 2a-7
for more than 25 years and particularly since autumn 2007.
Our proposals, which we discuss in more detail below, are designed to increase the
resilience of money market funds to market disruptions such as those that occurred last fall. The
proposed rules would reduce the vulnerability of money market funds to breaking the buck by,
among other things, improving money market funds’ ability to satisfy significant demands for
redemptions. If a particular fund does break the buck and determines to liquidate, the proposed
rules would facilitate the orderly liquidation of the fund in order to protect the interests of all
fund shareholders. These changes together should make money market funds (collectively) less
susceptible to a run by diminishing the chance that a money market fund will break a dollar and,
if one does, provide a means for the fund to orderly liquidate its assets. Finally, our proposals
would improve our ability to oversee money market funds by requiring funds to submit to us
current portfolio information.
Our proposals represent the first step in addressing issues we believe merit immediate
attention. 81 Throughout this release, we ask comment on other possible regulatory changes
80
ICI REPORT, supra note 6.
81
We note that we accomplished the reforms of money market fund regulation we initiated in 1990
in two steps. See 1990 Proposing Release, supra note 22 (taxable money market funds);
25
aimed at further strengthening the stability of money market funds. In addition, we ask comment
on some more far-reaching changes that could transform the business and regulatory model on
which money market funds have operated for more than 30 years, including whether money
market funds should move to a floating net asset value. 82 We expect to benefit from the
comments we receive before deciding whether to propose further changes.
A.
Portfolio Quality
To limit the amount of credit risk to which money market funds can be exposed, rule 2a-7
limits them to investing in securities that a fund’s board of directors (or its delegate pursuant to
written guidelines) determines present minimal credit risks. 83 In addition, securities must at the
time of acquisition be “eligible securities,” which means in part that they must have received the
highest or second highest short-term debt ratings from the “requisite NRSROs.” 84 Because of the
additional credit risk that generally is represented by securities rated in the second highest, rather
than the highest, NRSRO rating category, a taxable money market fund may not invest more
Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No.
19959 (Dec. 17, 1993) [58 FR 68585 (Dec. 28, 1993)] (tax exempt money market funds) (“1993
Proposing Release”).
82
See infra Section III.A.
83
Rule 2a-7(c)(3)(i). Although rule 2a-7 refers to determinations to be made by a fund or its board,
many of these determinations under the rule may be delegated to the investment adviser or fund
officers pursuant to written guidelines that the board establishes and oversees to assure that the
applicable procedures are being followed. Rule 2a-7(e).
84
Rule 2a-7(a)(10)(i) (defining “eligible security”). If the securities are unrated, they must be of
comparable quality. Rule 2a-7(a)(10)(ii). The term “requisite NRSROs” is defined in paragraph
(a)(21) of the rule to mean “(i) Any two NRSROs that have issued a rating with respect to a
security or class of debt obligations of an issuer; or (ii) If only one NRSRO has issued a rating
with respect to such security or class of debt obligations of an issuer at the time the fund Acquires
the security, that NRSRO.” Thus, a security can satisfy the ratings requirement in one of four
ways: (1) it is rated in the same (top two) category by any two NRSROs; (2) if it is rated by at
least two NRSROs in either of the top two categories, but no two NRSROs assign the same
rating, the lower rating is assigned; (3) it is rated by only one NRSRO, in one of the top two
categories; or (4) it is an unrated security that the board or its delegate determines to be of
comparable quality to securities satisfying the rating criteria. The terms “rated security” and
“unrated security” are defined in paragraphs (a)(19) and (a)(28) of rule 2a-7, respectively.
26
than five percent of its total assets in “second tier securities.” 85 Tax exempt money market funds
are limited in the same manner only with respect to second tier “conduit securities,” i.e.,
municipal securities backed by a private issuer.86
We are also proposing a change to the provisions of rule 2a-7 that limit money market
funds to investing in high quality securities. We propose to generally limit money market fund
investments to securities rated in the highest NRSRO ratings category. In addition, we are
seeking comment on whether to modify provisions of the rule that incorporate minimum ratings
by NRSROs to reflect changes made to the federal securities laws by the Credit Rating Agency
Reform Act of 2006 (“Rating Agency Reform Act”). 87
1.
Second Tier Securities
We propose to amend rule 2a-7 to allow money market funds to invest only in first tier
securities. Under the proposed amendments, money market funds could “acquire” only “eligible
securities,” which would be re-defined to include securities receiving only the highest (rather
than the highest two) short-term debt ratings from the “requisite NRSROs.” 88 Funds would not
85
Rule 2a-7(c)(3)(ii)(A). See also rule 2a-7(a)(10) (defining “eligible security”), (a)(22) (defining
“second tier security” as any eligible security that is not a first tier security), and (a)(12) (defining
“first tier security” as, among other things, any eligible security that, if rated, has received the
highest short-term term debt rating from the requisite NRSROs or, if unrated, has been
determined by the fund’s board of directors to be of comparable quality). See also 1990
Proposing Release, supra note 22, at Section II.1.b.
86
Rule 2a-7(c)(3)(ii)(B). See also rule 2a-7(a)(7) (defining “conduit security”).
87
Credit Rating Agency Reform Act of 2006, Pub. L. No. 109-291, 120 Stat. 1327.
88
See rule 2a-7(a)(1) (defining acquisition (or acquire) as any purchase or subsequent rollover, but
not including the failure to exercise a demand feature); proposed rule 2a-7(a)(11)(iii) (defining
eligible security); proposed rule 2a-7(c)(3) (portfolio quality). Because eligible securities would
no longer be divided into first tier and second tier securities, both of those terms would be deleted
from the rule, as would provisions relating specifically to second tier securities. See rule
2a-7(a)(12), (a)(22), (c)(3)(ii), (c)(4)(i)(C), (c)(4)(iii)(B), (c)(6)(i)(A), and (c)(6)(i)(C). We would
therefore amend the definition of eligible security to require that securities receive “the highest,”
as opposed to “one of the two highest” short-term rating categories, as the current definition
provides, and delete other references in the rule to the second highest rating category. See
proposed rule 2a-7(a)(11)(iii). The definition of eligible security also would be expanded to
27
have to immediately dispose of a security that was downgraded by the requisite NRSROs but,
under existing provisions of rule 2a-7, the fund would have to dispose of the security “as soon as
practicable consistent with achieving an orderly disposition of the security” unless the fund’s
board of directors finds that such disposal would not be in the best interest of the fund. 89
We have considered previously the extent to which money market funds should be
permitted to invest in second tier securities. In 1991, following distress at several money market
funds that held defaulted commercial paper, the Commission, among other things, limited a
taxable money market fund’s total investment in second tier securities to five percent of the
fund’s portfolio assets and limited the investment in any particular issuer of second tier securities
to no more than the greater of one percent of the fund’s portfolio assets or $1 million. 90 At that
time, commenters in favor of eliminating money market funds’ investment in second tier
securities argued that such securities may undergo a rapid deterioration and thus may pose risks
to the fund holding such securities as well as to investor confidence in money market funds in
general. 91 On the other hand, issuers of second tier securities urged the Commission not to limit
money market funds’ holdings of second tier securities, arguing that the Commission’s concerns
regarding the creditworthiness of second tier securities were misplaced and that restrictions
would raise issuers’ borrowing costs and discourage money market funds from holding any
include two types of securities, securities issued by a money market fund and “Government
securities,” that were formerly part of the definition of first tier securities. See proposed rule
2a-7(a)(11)(i) and (ii); see also rule 2a-7(a)(14) (defining Government security). Unrated
securities determined by the board of directors of the fund or its delegate to be of comparable
quality also would still be eligible securities. See proposed rule 2a-7(a)(11)(iv).
89
See rule 2a-7(c)(6)(ii); proposed rule 2a-7(c)(7)(ii).
90
See rule 2a-7(c)(3)(ii)(A), (c)(4)(i)(C)(1). See also 1991 Adopting Release, supra note 20.
91
See 1991 Adopting Release, supra note 20, at n.36 and accompanying text. Most commenters
representing the mutual fund industry supported or did not oppose the limitations we proposed.
Id. at n.35 and accompanying text.
28
second tier securities. 92 Based principally on the potential risk to money market funds of holding
second tier securities, we adopted the five percent and one percent limitations to limit (but not
eliminate) exposure of money market funds to second tier securities and any one issuer of second
tier securities. 93
Second tier securities were not directly implicated in the recent strains on money market
funds. The ICI’s Money Market Working Group expressed concern to us, however, that these
securities may present an “imprudent” risk to the stable value of money market funds because
they present “weaker credit profiles, smaller overall market share, and smaller issuer program
sizes ....” 94 Our examination of the data discussed below suggests support for their
recommendation that money market funds no longer be permitted to invest in these securities. 95
Compared to the market for first tier securities, the market for second tier securities is
relatively small. As of June 24, 2009, there was $1082.5 billion in rule 2a-7-eligible commercial
paper outstanding, consisting of $1035.8 billion (95.7 percent) of first tier and $46.7 billion (4.3
percent) of second tier. 96 The size of the second tier market has remained consistently small over
time. 97
In addition, second tier securities present potentially substantially more risk than first tier
92
See id. at text following n.35.
93
See id. at n.35-37 and accompanying text; 1990 Proposing Release, supra note 22, at n.33 and
accompanying text.
94
ICI REPORT, supra note 6, at 101.
95
Id. at 100.
96
See Federal Reserve Board Commercial Paper Outstanding Chart, available at
http://www.federalreserve.gov/releases/cp/outstandings.htm (showing weekly levels of rule
2a-7-eligible commercial paper outstanding).
97
See Federal Reserve Board Commercial Paper Data Download Program, available at
http:www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP (select year-end outstandings
from the preformatted data package menu and follow the instructions for download). Over the
last eight years, the market for second tier securities on average has represented only 4.6 percent
of the rule 2a-7-eligible commercial paper market.
29
securities. As the following chart shows, during the market disruptions of last fall, second tier
securities experienced significantly wider credit spreads than first tier securities. 98
basis points
Credit Spreads for Tier 1 and Tier 2 Commercial Paper
700
Tier 1
600
Tier 2
500
400
300
200
100
0
2001
2002
2003
2004
2005
2006
2007
2008
Source of Data: Federal Reserve, available at http://www.federalreserve.gov/DataDownload/Choose.aspx?rel=CP.
Second tier securities as an asset class also are of weaker credit quality in terms of interest
coverage ratios, debt coverage ratios, and debt to equity ratios. 99 These data strongly suggest
98
See Federal Reserve Board Commercial Paper Rates Chart, available at
http://www.federalreserve.gov/releases/cp/default.htm. See also FRANK J. FABOZZI, THE
HANDBOOK OF FIXED INCOME SECURITIES, at 4 (7th ed. 2005) (“Default risk or credit risk refers
to the risk that the issuer of a bond may be unable to make timely payment of principal or interest
payments .... The spread between Treasury securities and non-Treasury securities that are
identical in all respects except for quality is referred to as a credit spread or quality spread.”).
99
See STANDARD & POOR’S, CREDITSTATS: 2007 ADJUSTED KEY U.S. INDUSTRIAL AND UTILITY
FINANCIAL RATIOS, at 6, Table 3 (Sept. 10, 2008), available at
http://www2.standardandpoors.com/spf/pdf/fixedincome/CreditStats_2007_Adjusted_Key_Finan
cial_Ratios.pdf (showing A-2 rated commercial paper had EBIT interest coverage of 7.2x, free
operating cash flow to debt of 16.7%, and debt to debt plus equity of 45.1%, compared to A-1
averages of 11.5x, 31.3%, and 37.1%, respectively, represented as three-year (2005-2007)
averages).
30
that second tier securities generally present additional risks to a money market fund. This is a
conclusion that may have been reached by money market fund managers, most of which (as
described below) do not invest in second tier securities. In light of the risks that second tier
securities generally present to money market funds, and the consequences to funds and fund
investors of breaking a dollar, we are proposing to limit funds to investing in first tier securities.
We believe such a limitation would make it less likely that a money market fund would hold a
problematic security, or a security that would lose significant value as a result of market
disruptions.
It does not appear that amending rule 2a-7 to eliminate money market funds’ ability to
acquire second tier securities would be materially disruptive to funds. Prior to our amendments
to rule 2a-7 in 1991, non-government money market funds held more than eight percent of their
assets in second tier securities. 100 After we restricted the amount of second tier securities money
market funds could buy, the funds soon reduced their holdings to almost zero. 101 Our staff’s
review of money market fund portfolios in September 2008 found that second tier securities
represented only 0.4 percent of the $3.6 trillion held by the funds (approximately $14.6 billion).
We request comment on our proposal to eliminate the ability of money market funds to
invest in second tier securities. What would be the impact on funds? Would the benefit of
reducing credit risk by eliminating the ability of money market funds to invest in second tier
securities outweigh any potential diversification benefits that second tier securities may
otherwise provide to money market funds? What, if any, diversification benefits do money
market funds currently receive from investing in second tier securities? Would this change have
a significant effect on yields?
100
See Crabbe & Post, supra note 15, at 11, Table 2.
101
See id, at 11-12.
31
Would there be a proportionately greater impact of eliminating second tier securities on
smaller or less established money market funds or on particular types of funds (e.g., single-state
tax exempt funds)? If the proposal to eliminate funds’ ability to hold second tier securities is
adopted, what transition period should we provide money market funds to dispose of their
existing second tier holdings in an orderly manner? Should we allow funds that hold second tier
securities after the amended rule becomes effective to continue to hold such securities until
maturity?
Are there alternatives to eliminating entirely the ability of a money market fund to invest
in second tier securities? For example, should money market funds instead be limited to
investing in second tier securities (i) with a maximum maturity of, for example, 45 days, or (ii)
as a smaller portion of fund assets, such as two percent of the total assets, or (iii) a combination
of both? A security with a shorter maturity presents less credit risk to a fund (because the
exposure is shorter) and less liquidity risk (because cash will be available sooner). Would such
an approach address, or at least partly address, the concerns raised by the ICI Report and in this
Release? 102 Could additional credit risk analysis or other procedures be imposed with respect to
second tier securities to address these concerns?
2.
Eligible Securities
a.
Use of NRSROs
As discussed above, rule 2a-7 currently requires a money market fund to limit its
portfolio investments to eligible securities, i.e., short-term securities that at the time of
acquisition have received ratings from the “requisite NRSROs” in one of the two highest short-
102
See ICI REPORT, supra note 6, at 100-101.
32
term debt rating categories and securities that are comparable to rated securities. 103
A determination that a security is an eligible security as a result of its NRSRO ratings is a
necessary but not sufficient finding in order for a fund to acquire the security. 104 References to
NRSRO ratings in rule 2a-7 and other regulations were designed to provide a clear reference
point to regulators and market participants. The reliability of credit ratings, however, has been
questioned, in particular in light of developments during the recent financial crisis. As a result,
there have been calls to produce higher quality ratings. Last year, we proposed to eliminate the
use of NRSRO ratings in rules under the Investment Company Act, including rule 2a-7, and
instead to rely solely on the fund manager’s credit risk determination. 105 In 2003, in a concept
release seeking comment on various issues relating to credit rating agencies, we also asked
whether credit ratings should be used as a minimum objective standard in rule 2a-7. Most
commenters who addressed the specific question in 2003 supported retaining the ratings
requirement in rule 2a-7. 106 One commenter asserted that “[t]he combination of this objective
test with the ‘subjective test’ (credit analysis performed by the adviser to the money market
103
See supra note 84 and accompanying text. A “rated security” generally means a security that (i)
has received a short-term rating from an NRSRO, or whose issuer has received a short-term rating
from an NRSRO with respect to a class of debt obligations that is comparable in priority and
security with the security; or (ii) is subject to a guarantee that has received a short-term rating
from an NRSRO, or a guarantee whose issuer has received a short-term rating from an NRSRO
with respect to a class of debt obligations that is comparable in priority and security with the
guarantee. Rule 2a-7(a)(19).
104
The rule also requires fund boards (which typically rely on the fund’s adviser) to determine that
the security presents minimal credit risks, and specifically requires that determination “be based
on factors pertaining to credit quality in addition to any ratings assigned to such securities by an
NRSRO.” Rule 2a-7(c)(3)(i).
105
See, e.g., References to Ratings of Nationally Recognized Statistical Rating Organizations,
Investment Company Act Release No. 28327 (July 1, 2008) [73 FR 40124 (July 11, 2008)]
(“NRSRO References Proposal”).
106
See, e.g., Comment Letter of Fidelity Investments (July 25, 2003) (File No. S7-12-03). Comment
letters on File No. S7-12-03 are available at http://www.sec.gov/rules/concept/s71203.shtml.
33
fund) provides an important complementary rating structure under Rule 2a-7.” 107 Similarly, in
our proposal last year, a substantial majority of commenters disagreed with the proposed
elimination of the ratings requirement. 108 The ICI Report summed up the views of many of these
commenters, asserting that elimination of the NRSRO ratings’ “floor ... would remove an
important investor protection from Rule 2a-7, introduce new uncertainties and risks, and abandon
a regulatory framework that has proven to be highly successful.” 109 A few commenters
supported removing the ratings requirement in 2003 and as proposed in 2008, however. One of
these commenters noted that “one of the core causes of the sub-prime crisis was dependence on
inaccurate and unsupportable credit ratings.” 110
In light of recent market developments, we request that commenters again address
whether or not the approach we proposed last year would provide safeguards with respect to
credit risk that are comparable to the continued inclusion of NRSRO references in the rule.
What other alternatives could we adopt to encourage more independent credit risk analysis and
meet the regulatory objectives of rule 2a-7’s requirement of NRSRO ratings? Are there
additional factors that we should consider with respect to last year’s proposal? Should we
consider establishing a roadmap for phasing in the eventual removal of NRSRO references from
the rule? We are also considering an approach under which a money market fund’s board would
designate three (or more) NRSROs that the fund would look to for all purposes under rule 2a-7
107
Comment Letter of Denise Voigt Crawford, Securities Commissioner, Texas State Securities
Board (July 28, 2003) (File No. S7-12-03).
108
See, e.g., Comment Letter of T. Rowe Price Family of Funds (Sept. 5, 2008) (File No. S7-19-08).
Comment letters on File No. S7-19-08 are available at http://www.sec.gov/comments/s7-1908/s71908.shtml.
109
See ICI REPORT, supra note 6, at 81.
110
See Comment Letter of Professor Frank Partnoy (received Sept. 5, 2008) (File No. S7-19-08).
34
in determining whether a security is an eligible security. 111 In addition, the board would be
required to determine at least annually that the NRSROs it has designated issue credit ratings that
are sufficiently reliable for that use. 112 We request comment on an approach in which the fund
board designates NRSROs. Would the inclusion of a number of “designated NRSROs” improve
rule 2a-7’s use of NRSRO ratings as a threshold investment criterion and be consistent with the
goals of Congress in passing the Rating Agency Reform Act? 113 What are the advantages and
disadvantages of such an approach? Should funds be required to designate a minimum number
of NRSROs to use in determining thresholds for Eligible Securities or in monitoring ratings? If
so, would at least three be the appropriate number, as some have suggested? 114 Would more be
appropriate to address these purposes (e.g., four, five or six)? Should we permit fund boards to
designate different NRSROs with respect to different types of issuers of securities in which the
fund invests? Should the funds be required to disclose these designated NRSROs in their
111
Commenters on our NRSRO References Proposal and the ICI Report recommended similar
approaches. See Comment Letter of Federated Investors, Inc. (Sept. 5, 2008) (File No. S7-19-08)
(suggesting that rule 2a-7 require the board or its delegate to select by security type at least three
NRSROs on which the fund would rely under the rule); Comment Letter of OppenheimerFunds,
Inc. (Sept. 4, 2008) (File No. S7-19-08) (suggesting the rule allow fund boards to designate
(presumably after considering any recommendations of the investment manager) the identity and
number of NRSROs whose ratings will be used to determine eligible portfolio securities); ICI
REPORT, supra note 6, at 82 (recommending the fund designate three or more NRSROs that the
fund would use in determining the eligibility of portfolio securities). See also Comment Letter of
Stephen A. Keen on behalf of Federated Investors, Inc. (Mar. 12, 2007) (File No. S7-04-07) (in
response to our 2007 proposal on oversight of NRSROs, asserting that investment advisers should
be free to choose which NRSROs they will rely upon and monitor only their ratings).
112
The only time that funds would be required to look to all NRSROs under this approach would be,
as under the current rule, in determining whether a long-term security with a remaining maturity
of 397 calendar days or less that does not, and whose issuer does not, have a short-term rating is
an eligible security. See infra section II.A.2.b.
113
See Senate Committee on Banking, Housing, and Urban Affairs, Credit Rating Agency Reform
Act of 2006, S. Rep. No. 109-326, at 2 (2006) (“Senate Report 109-326”) (purposes of the Act
include improving the quality of NRSRO credit ratings by fostering accountability, transparency,
and competition in the credit rating industry).
114
See supra note 111.
35
statements of additional information? 115
What impact would a requirement that the fund board designate NRSROs have on
competition among NRSROs? Would NRSROs compete through ratings to achieve designation
by money market funds? Given that the staff believes it is reasonable to assume that the three
NRSROs that issued almost 99 percent of all outstanding ratings across all categories that were
issued by the 10 registered NRSROs as of June 2008, 116 also issued well over 90 percent of all
outstanding ratings of short term debt, and in light of concerns about enhancing competition
among NRSROs, should the minimum number of designated NRSROs be greater than three,
such as four, five, or six? 117 What are the advantages and disadvantages of requiring boards to
monitor the ratings issued by all NRSROs? Should rule 2a-7 specify certain minimum policies
and procedures for monitoring NRSROs? Should money market fund boards be permitted to
designate credit rating agencies or credit evaluation providers that are not registered as NRSROs
with the Commission under the Securities Exchange Act of 1934 and the rules we have adopted
under those provisions? 118 Should a board be solely responsible for designating and annually
reviewing a designated NRSRO or should we permit delegation of this responsibility? How
many NRSROs would money market fund boards be likely to evaluate before making their
designations? After a fund board had designated NRSROs, what incentives would the board
have to change the designated NRSROs?
115
See Part B of Form N-1A.
116
The staff’s belief is based on its report that three NRSROs issued almost 99 percent of all the
outstanding ratings across all categories that were issued by the 10 registered NRSROs as of June
2008. See SEC, ANNUAL REPORT ON NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATIONS at 35 (June 2008) (“2008 NRSRO REPORT”).
117
According to the ICI Report, requiring money market funds to designate at least three NRSROs
whose ratings the fund would use in determining eligible portfolio securities could encourage
competition among NRSROs to achieve designation by money market funds. See ICI REPORT,
supra note 6, at 82.
118
See 15 U.S.C. 78o-7; 17 CFR 240.17g-1 (rules governing the registration of NRSROs).
36
We request comment on the impact of any of these approaches on funds and their ability
to maintain a stable net asset value. Would any particular requirement help funds to better
determine whether a security is an eligible security? We also request comment on the potential
impact on competition among NRSROs.
b.
Long-Term Unrated Securities
Rule 2a-7 permits money market funds to invest in a long-term security with a remaining
maturity of 397 calendar days or less (“stub security”) that is an unrated security (i.e., neither the
security nor its issuer or guarantor has a short-term rating) unless the security has received a
long-term rating from any NRSRO that is not within the NRSRO’s three highest categories of
long-term ratings. 119 Under rule 2a-7, the measure of quality is the rating given to the issuer’s
short-term debt. In the absence of a short-term rating, the minimum long-term rating is designed
to provide an independent check on a fund’s quality determination.120 In light of the changes we
are proposing above to increase the portfolio quality standards of the rule, we propose to permit
money market funds to acquire such securities only if they have received long-term ratings in the
highest two ratings categories to more narrowly limit the credit risk to which a money market
fund may be exposed. 121 As under the current rule, fund boards would continue to be required to
determine that such a security is “of comparable quality” to a rated security if it met these
119
Rule 2a-7(a)(10)(ii)(A). Nonetheless, the security may be an eligible security if it has received a
long-term rating from the requisite NRSROs in one of the three highest long-term rating
categories and (as with any unrated security that is an eligible security) is of comparable quality
to a rated security. Id.
120
See 1991 Adopting Release, supra note 20, at text accompanying nn.65-68.
121
Proposed rule 2a-7(a)(11)(iv)(A). Similar to the provision in the current rule, the security might
be an eligible security even if it received a long-term rating below the two highest long-term
rating categories if the requisite NRSROs rate the security in one of the two highest long-term
rating categories. Id.
37
proposed conditions. 122
We request comment on this proposed change. Given our proposal to increase the quality
standards of the rule, is the proposed change appropriate? Should we consider permitting funds
to acquire these stub securities only if they have received long-term ratings in the highest rating
category? What impact would the proposed amendment have on money market funds’ current
portfolio holdings? We request commenters expressing views on this change to provide us with
data identifying the relationship between the long-term ratings on these stub securities and shortterm ratings.
3.
Credit Reassessments
Rule 2a-7 currently requires a money market fund’s board of directors to promptly
reassess whether a portfolio security continues to present minimal credit risks if, subsequent to
its acquisition by the fund, (i) the security has ceased to be a first tier security (e.g., the security
is downgraded to second tier by one of the requisite NRSROs), or (ii) the fund’s adviser becomes
aware that an unrated or second tier security has received a rating from any NRSRO below the
second highest short-term rating category. 123 In light of the proposed elimination of second tier
securities from the definition of eligible security, we propose to amend rule 2a-7 so the only
circumstance in which the fund’s board of directors would be required to reassess whether a
security continues to present minimal credit risks would be if, subsequent to its acquisition by the
fund, the fund’s money market fund adviser becomes aware that an unrated security has received
a rating from any NRSRO below the highest short-term rating category. 124
122
Proposed rule 2a-7(a)(11)(iv).
123
Rule 2a-7(c)(6)(i)(A)(1) and (2).
124
Proposed rule 2a-7(c)(7)(i)(A). As under the current rule, the proposed rule amendment would
not require, and we would not expect, investment advisers to subscribe to every rating service
publication in order to comply with the requirement that the board reassess when the fund’s
38
We request comment on whether these are appropriate circumstances under which to
require a reassessment in light of our proposal to eliminate the ability of money market funds to
invest in second tier securities.
4.
Asset Backed Securities
Rule 2a-7 contains provisions that specifically address asset backed securities
(“ABSs”), 125 including the circumstances under which an ABS is an eligible security, 126 the
maturity of an ABS, 127 and how a fund must treat such an investment under the diversification
provisions. 128 The rule, however, does not specifically address how a fund board (or its delegate)
should determine that an investment in an ABS (or other potential portfolio investment) presents
minimal credit risks, nor does it specifically address liquidity issues presented by a money
market fund’s investment in an ABS.
Both such matters were raised in 2007 by money market funds’ investment in SIVs,
which we discussed briefly above. SIVs issued commercial paper to finance a portfolio of longer
term, higher yielding investments, including residential mortgages. Unlike other commercial
paper programs, SIVs typically did not have access to liquidity facilities to protect commercial
paper investors (including money market funds) against the risk of the issuer’s inability to
reissue (or “rollover”) commercial paper caused by either a credit event of the issuer or a
adviser becomes aware that any NRSRO has rated an unrated security below its highest rating.
We would expect an investment adviser to become aware of a subsequent rating if it is reported in
the national financial press or in publications to which the adviser subscribes. See 1991 Adopting
Release, supra note 20, at n.71.
125
An asset backed security is defined very generally to mean a fixed income security that entitles its
holders to receive payments that depend primarily on the cash flow from financial assets
underlying the asset backed security. See rule 2a-7(a)(3).
126
See rule 2a-7(a)(10)(ii)(B).
127
See rules 2a-7(a)(8)(ii) and 2a-7(d).
128
See rule 2a-7(c)(4)(ii)(D).
39
disruption in the commercial paper market. 129 When they could no longer rollover their debt
beginning in 2007, those SIVs, unable to secure liquidity support from sponsoring banks, were
forced to begin selling the vehicles’ assets into depressed markets to pay maturing debt and to
begin winding down their operations. SIV credit ratings deteriorated rapidly as they
deleveraged, placing pressure on valuations of SIV securities held by money market funds. We
understand that eventually most funds holding SIV securities not supported by a large bank
entered into agreements with affiliates of the fund to support the fund’s stable net asset value per
share.
We request comment on whether, and if so how, we should amend rule 2a-7 to address
risks presented by SIVs or similar ABSs. As discussed above, rule 2a-7 requires that money
market funds only invest in securities that the board of directors or its delegate determines
present minimal credit risks. 130 The Commission has stated that “[d]etermining that an ABS
presents minimal credit risks requires an examination of the criteria used to select the underlying
assets, the credit quality of the put providers, and the conditions of the contractual relationships
among the parties to the arrangement. When an ABS consists of a large pool of financial assets,
such as credit card receivables or mortgages, it may not be susceptible to conventional means of
credit risk analysis because credit quality is based not on a single issuer but on an actuarial
analysis of a pool of financial assets.” 131 We also said, however, that we were concerned that
“fund credit analysts may be unable to perform the thorough legal, structural and credit analyses
required to determine whether a particular ABS involves inappropriate risks for money market
129
For a discussion of the evolution of the asset backed commercial paper market and SIV securities
during this period, see generally Jim Croke, New Developments in Asset-Backed Commercial
Paper (2008), at 2-4, available at http://www.orrick.com/fileupload/1485.pdf.
130
Rule 2a-7(c)(3)(i).
131
1993 Proposing Release, supra note 81, at text accompanying nn.108-109.
40
funds” and, as a result, required that any ABS in which a money market fund invested be rated
by an NRSRO because of NRSROs’ role in assuring that the underlying ABS assets are properly
valued and provide adequate asset coverage for the cash flows required to fund ABSs. 132
As discussed above, beginning in 2007, SIV securities were rapidly downgraded by
NRSROs revealing money market funds’ varying minimal credit risk determinations with respect
to these securities. In light of this experience, should we provide additional guidance to money
market funds on the required minimal credit risk evaluation with respect to ABSs? We believe
that part of this analysis, when evaluating any security, should include an evaluation of the
issuer’s ability to maintain its promised cash flows which, in the case of an asset backed security,
would entail an analysis of the underlying assets, their behavior in various market conditions,
and the terms of any liquidity or other support provided by the sponsor of the security. 133 Should
we amend rule 2a-7 to remove the requirement that any ABS be rated by an NRSRO in order to
be an eligible security for money market funds in light of the NRSROs’ recent rapid
downgrading of these securities? Under our proposed liquidity requirements (discussed below),
the liquidity features of an ABS would have to be considered in determining whether the fund
holds sufficiently liquid assets to meet shareholder redemptions. 134
We request comment on whether rule 2a-7 should explicitly require fund boards of
directors (or their delegates) to evaluate whether the security includes any committed line of
credit or other liquidity support. Are there other factors that we should require money market
132
Id. at nn.110-112 and accompanying text.
133
The ICI Report recommended that we amend rule 2a-7 to require money market fund advisers to
adopt a “new products committee.” See ICI REPORT, supra note 6, at 79-80. Although such
committees may be useful, their usefulness would turn on what might be a “new product” as well
as the judgment of its members, whose judgment is today required to be brought to bear on
whether the security presents minimal credit risks.
134
See infra Section II.C.
41
fund boards to evaluate when determining whether SIV investments or other new financial
products pose minimal credit risks? We note that some money market funds invested more
significantly in SIV securities while other money market funds avoided such investments
entirely. Are there facets of the credit analysis that led certain money market funds to avoid such
investments that should be incorporated explicitly into rule 2a-7? 135 Should we limit money
market funds to investing in ABSs that the manager concludes can be paid upon maturity with
existing cash flow, i.e., the payment upon maturity is not dependent on the ability of the special
purpose entity to rollover debt? Alternatively, should the rule itself require ABSs to be subject
to unconditional demand features to be eligible securities? 136
B.
Portfolio Maturity
Rule 2a-7 restricts the maximum remaining maturity of a security that a money market
fund may acquire, and the weighted average maturity of the fund’s portfolio, in order to limit the
exposure of money market fund investors to certain risks, including interest rate risk. The
Commission is proposing changes to the rule’s maturity limits to further reduce such risks, as
discussed below. First, we propose to reduce the maximum weighted average portfolio maturity
permitted by the rule. Second, we propose a new maturity test that would limit the portion of a
135
The staff’s recent examinations of money market funds indicate that credit analysts for money
market funds that invested in SIVs that subsequently defaulted appear to have had access to the
same basic set of information on SIVs as did analysts at money market funds that did not and that
the judgment of these credit analysts regarding minimal creditworthiness of the SIVs that
subsequently defaulted appeared to have been different. The staff’s exams also appear to indicate
that credit analysts for money market funds that invested in SIVs that subsequently defaulted
placed less emphasis on the length of time that payment experience was available on assets in the
collateral pool and they were willing to accept sub-prime mortgage credits as a seasoned asset
class. In addition, their decision, in part, may have been influenced by the greater amount of
over-collateralization of the collateral pools and the high yields paid by notes supported by
sub-prime credits.
136
Rule 2a-7(a)(26) defines an “unconditional demand feature” as a “demand feature” that by its
terms would be readily exercisable in the event of a default in payment of principal or interest on
the underlying security or securities.
42
fund’s portfolio that could be held in longer term variable- or floating-rate securities. Third, we
propose to delete a provision in the rule that permits certain money market funds to acquire
Government securities with extended maturities of up to 762 calendar days. We are also
requesting comment on other ways of adjusting the rule’s maturity provisions in order to
accomplish our goal of decreasing the risks associated with a money market fund holding longer
term investments.
1.
Weighted Average Maturity
Rule 2a-7 requires a money market fund to maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable net asset value or price per share, but
in no case greater than 90 days. 137 We adopted this provision because securities that have shorter
periods remaining until maturity (and are of higher quality) generally exhibit a low level of
volatility and thus provide a greater assurance that the money market fund will continue to be
able to maintain a stable share price. 138
Having a portfolio weighted towards securities with longer maturities poses several risks
to a money market fund. First, as we have noted in the past, a longer weighted average maturity
increases a fund’s exposure to interest rate risk. 139 Second, and as we discuss in more detail
137
See rule 2a-7(c)(2)(iii).
138
See 1983 Adopting Release, supra note 3, at n.7 and accompanying text.
139
See 1990 Proposing Release, supra note 22, at text accompanying n.60. See also STANDARD &
POOR’S, MONEY MARKET FUND RATINGS CRITERIA, at 21 (2007) available at
http://www2.standardandpoors.com/spf/pdf/events/MMX709.pdf (“S&P 2007 RATINGS
CRITERIA”) (“The portfolio’s weighted average maturity (WAM) is a key determinant of the
tolerance of a fund’s investments to rising interest rates. In general, the longer the WAM, the
more susceptible the fund is to rising interest rates. A fund comprised entirely of Treasury
securities with a WAM of 45 days could withstand approximately twice the interest rate increase
than could a fund with a 90-day WAM, leaving all other factors aside.”); FABOZZI, supra note 98,
at 4 (“[T]he volatility of a bond’s price is closely associated with maturity: Changes in the
market level of [interest] rates will wrest much larger changes in price from bonds of long
maturity than from otherwise similar debt of shorter life.”).
43
below, longer maturities also amplify the effect of widening credit and interest rate spreads on a
fund. 140 Finally, a fund holding securities with longer maturities generally is exposed to greater
liquidity risk, because fewer securities mature on a daily or weekly basis. Perhaps in recognition
of these risks, few fund managers maintain weighted average maturity at or near the maximum
permissible 90 days. 141
In view of the extraordinary market conditions we have witnessed recently, the
Commission is concerned that the 90-day maximum weighted average maturity under the rule
may be too long. Particularly during the market events of last fall, funds with shorter portfolio
maturities were much better positioned to withstand heavy redemptions, because a greater
portion of their portfolios matured each week and provided cash to pay to redeeming investors.
They also were better able to withstand increased credit spreads in certain financial sector notes
because of the shorter period of exposure to such distressed securities. Finally, interest rate
spreads on longer maturity securities widened to a much greater degree than interest rate spreads
on shorter maturity securities. 142
The ICI Report recommended reducing the maximum weighted average maturity to 75
days. 143 Historically, however, most funds have maintained shorter maturities. During the last
20 years, the average weighted average maturity of taxable money market funds (as a group) has
140
See also supra notes 65-71 and accompanying text.
141
According to monthly statistics kept by the Investment Company Institute, during the past 10
years, the weighted average maturities of funds in the longest maturity categories (the 90th
percentile of all taxable prime money market funds) seldom have exceeded 75 days. As of April
30, 2009, these funds maintained an average weighted maturity of 67 days. These statistics are
available in File No. S7-11-09.
142
See, e.g., U.S. Department of the Treasury, Daily Treasury Yield Curve Rates, available at
http://www.treasury.gov/offices/domestic-finance/debt-management/interestrate/yield_historical_main.shtml.
143
See ICI REPORT, supra note 6, at 77.
44
never exceeded 58 days. 144 As of June 16, 2009, it was 53 days. 145 Some money market funds
have, from time to time, extended their maturities substantially longer than the average to gain a
yield advantage, anticipating declining or stable interest rates. By doing so, these funds assumed
greater risk and would be more likely to experience losses that could result in their breaking the
buck if interest rates rise, credit markets do not behave as they expect, or they receive substantial
redemption requests.
Most European money market funds with stable share prices (many of which are
domiciled in Ireland) are limited to 60-day weighted average maturities. 146 So are money market
funds rated highly by the NRSROs. 147 In light of these considerations, we believe that a shorter
period may be appropriate. Accordingly, we propose that rule 2a-7 be amended to impose a 60144
2008 FACT BOOK, supra note 13, at Table 38. In 2009, the ICI Fact Book began presenting this
information separately for taxable government and taxable non-government money market funds,
which had average maturities of 49 days and 47 days, respectively, in 2008. 2009 FACT BOOK,
supra note 7, at 150-51, Tables 41 & 42.
145
See Money Fund Report, IMONEYNET, May 7, 2008. Average maturity for tax exempt money
market funds (as a group) is even lower – 24 days as of June 16, 2009. Id.
146
See Irish Financial Services Regulatory Authority, Valuation of Assets of Money Market Funds,
2008 GUIDANCE NOTE 1/08 (Aug. 2008), available at http://www.financialregulator.ie/industrysectors/funds/Documents/Guidance%20Note%20108%20Valuation%20of%20Assets%20of%20
Money%20Market%20Funds.pdf (“Financial Regulator Guidance Note 1/08”). As of April 2009,
money market funds registered in Ireland managed approximately €317 billion ($419 billion) in
assets. See Irish Financial Regulator statistics available at
http://www.irishfunds.ie/money_marketfunds.htm. In addition, the Institutional Money Market
Funds Association (“IMMFA”) requires the triple-A rated institutional money market funds
sponsored by its members to comply with a Code of Practice that generally limits portfolio
maturity to 60 days. See IMMFA, CODE OF PRACTICE, Part IV., ¶ 22 (2005), available at
http://www.immfa.org/about/Codefinal.pdf. As of February 13, 2009, IMMFA-member constant
net asset value money market funds managed approximately $493 billion in assets. See IMMFA
statistics, available at http://www.immfa.org/stats/IMFR130209.pdf. See also ICI REPORT, supra
note 6, at 184, Appendix H.
147
See S&P 2007 RATINGS CRITERIA, supra note 139, at 21; MOODY’S INVESTORS SERVICE,
FREQUENTLY ASKED QUESTIONS ABOUT MOODY’S RATINGS OF MANAGED FUNDS, at 4 (July 20,
2005), available at
http://www.moodys.com/moodys/cust/research/MDCdocs/20/2003600000425726.pdf?search=5&
searchQuery=Frequently+Asked+Questions+about+Moody; FITCH RATINGS, U.S. MONEY
MARKET FUND RATINGS, at 4 (Mar. 3, 2006), available at
http://www.fitchresearch.com/creditdesk/reports/report_frame.cfm?rpt_id=266376.
45
day weighted average maturity limit. 148
We request comment on the proposed 60-day weighted average maturity limit. Would it
decrease portfolio volatility and increase fund liquidity, as we suggest? What would be the
anticipated effect on money market fund yields? Would a negative effect on yields make money
market funds less attractive to investors? Should a different weighted average maturity limit
apply, such as 45 days or 75 days? We request that commenters provide us with data
demonstrating the effect that alternative weighted average maturity limits would have had on
portfolios of money market funds during the recent economic turmoil.
2.
Weighted Average Life
We propose to add to rule 2a-7 a new maturity test, which would limit the weighted
average life maturity of portfolio securities to 120 days. 149 As explained further below, the
weighted average life of a portfolio would be measured without regard to a security’s interest
rate reset dates, and thus would limit the extent to which a fund could invest in longer term
securities that may expose a fund to interest rate spread risk and credit spread risk. 150
Generally, under rule 2a-7 the maturity of a portfolio security is the period remaining
until the date on which the principal must unconditionally be repaid according to its terms (its
final “legal” maturity) or, in the case of a security called for redemption, the date on which the
redemption payment must be made. 151 The rule contains exceptions from this general approach
148
See proposed rule 2a-7(c)(2)(ii).
149
See proposed rule 2a-7(c)(2)(iii).
150
While the proposed rule would ignore interest rate resets for purposes of calculating the fund’s
weighted average life to maturity, a security’s demand features could continue to be used in this
calculation. See, e.g., rule 2a-7(d)(3) and (d)(5).
151
See rule 2a-7(d).
46
for specific types of securities, which are referred to as the “maturity shortening” provisions. 152
Among these exceptions are three provisions that allow a fund to treat a variable- or floating-rate
security as having a maturity equal to the time remaining to the next interest rate reset date. 153
First, a fund may treat a short-term variable-rate security (i.e., one with a remaining maturity of
397 days or less), as having a maturity equal to the earlier of the interest rate reset date or the
time it would take the fund to recover the principal by exercising a demand feature. 154 Second, a
fund may treat a short-term floating-rate security (i.e., one with a remaining maturity of 397 days
or less) as having a maturity of one day. 155 Third, a variable- or floating-rate Government
security generally may be deemed to have a maturity equal to the next reset date even if it is a
long-term security. 156 For purposes of calculating weighted average maturity, the rule effectively
treats short-term variable- and floating-rate securities and all adjustable-rate Government
securities as if they were a series of short-term obligations that are continually “rolled over” on
the reset dates at the current short-term interest rates.
As the ICI Report explains, however, longer term adjustable-rate securities are more
sensitive to credit spreads (the amount of additional yield demanded by purchasers above a risk-
152
Id. We added maturity shortening provisions to the rule in 1986; they are particularly important
for tax exempt funds, which invest in municipal obligations, most of which are issued with longer
maturities. See 1986 Adopting Release, supra note 19, at nn.9-10 and accompanying text.
153
See rule 2a-7(a)(13) (defining “floating rate security”) and (a)(29) (defining “variable rate
security”). The interest rate for a variable-rate security is established on set dates, whereas the
interest rate for a floating-rate security adjusts whenever a specified interest rate changes. We
also may refer to variable- and floating-rate securities collectively in this Release as “adjustablerate” securities.
154
See rule 2a-7(d)(2). See also rule 2a-7(a)(8) (definition of “demand feature”).
155
See rule 2a-7(d)(4).
156
See rule 2a-7(d)(1) (allowing a variable-rate Government security where the variable rate is
readjusted no less frequently than every 762 days to be deemed to have a maturity equal to the
period remaining until the next readjustment of the interest rate, and a floating-rate Government
security to be deemed to have a remaining maturity of one day).
47
free rate of return to compensate for the credit risk of the issuer) than short-term securities with
final maturities equal to the reset date of the longer term security. 157 Longer term adjustable-rate
securities also are subject for a longer period of time to risk from widening interest rate
spreads. 158 As a result, prices of longer term adjustable-rate securities could fall more than prices
of comparable short-term securities in times of market turbulence. The ICI Report also notes
that while adjustable-rate securities do protect a fund against changes in interest rates, permitting
maturity shortening based on interest rate resets does not protect against liquidity risk to the
portfolio. 159
We are concerned that the traditional weighted average maturity measurement of rule
2a-7 does not require that a manager of a money market fund limit these risks. We understand
that some money market fund portfolio managers, to protect the fund, have already begun using
a weighted average maturity measurement that ignores interest rate resets.
The ICI Report confirms our observations of the behavior of prices for certain securities
last fall, when money market funds found it difficult to sell at amortized cost longer term
adjustable-rate securities, including securities issued by agencies of the federal government. We
believe that the use of the measurement the ICI recommends, which we will call the “weighted
average life” to maturity of a money market fund portfolio, appears to be a prudent limitation on
the structure of a money market fund portfolio and would limit credit and interest rate spread
risks not encompassed by the weighted average maturity restriction of rule 2a-7. As suggested
157
See ICI REPORT, supra note 6, at 77.
158
Interest rate spreads can widen because a variable-rate note has a fixed period of time to the next
interest reset date and during that time the benchmark interest rate will likely change. Interest
rate spreads can also widen because market conditions change after the security is issued such
that investors may demand a greater margin to hold the security. See FABOZZI, supra note 98, at
196.
159
See ICI REPORT, supra note 6, at text accompanying n.140.
48
by the ICI Report, we are proposing that money market funds maintain a weighted average life
of no more than 120 days. 160 The Commission believes that a 120-day weighted average life
requirement would provide a reasonable balance between strengthening the resilience of money
market funds to market stress (e.g., interest rate increases, widening spreads, and large
redemptions) while not unduly restricting the funds’ ability to offer a diversified portfolio of
short-term, high quality debt securities.
One of the effects of a limit on the weighted average life of a portfolio would appear to
be on funds that hold longer term floating-rate Government securities, which are issued by
federal agencies. Consider a money market fund with a portfolio consisting 50 percent of
overnight repurchase agreements and 50 percent of two-year Government agency floating-rate
obligations that reset daily based on the federal funds rate. Using the reset dates as permitted by
the rule’s maturity shortening provisions, the portfolio would have a weighted average maturity
of one day. In contrast, by applying a measurement that does not recognize resets, the portfolio
would have a weighted average life of 365.5 days (i.e., half of the portfolio has a one day
maturity and half has a two-year maturity), which would be considerably longer than the 120-day
limit we are proposing. The weighted average life limitation would provide an extra layer of
protection for funds and their shareholders against spread risk, particularly in volatile markets.
We request comment on all aspects of the proposed weighted average life limitation. Is
this new maturity test appropriate? Is 120 days an appropriate limit? What would be the effect
on yield? Does it place too much of a constraint on the ability of money market fund advisers to
effectively manage fund portfolios? Does it permit funds to assume too much risk? Would a
160
The proposed rule would require a money market fund to maintain a weighted average maturity
not to exceed 120 days, determined without reference to the exceptions in paragraph (d) of the
rule regarding interest rate resets. See proposed rule 2a-7(c)(2)(iii).
49
different limit be more appropriate, such as 90 days or 150 days? Would the proposed weighted
average life limitation have a material impact on the issuers of short-term debt and, if so, what
would it be?
We request comment on whether there are alternative approaches to measuring these
risks. We understand that some fund managers use an alternative maturity test that focuses
solely on credit spread risk. Such a test not only disregards interest rate resets, but also excludes
Government securities from the weighted average maturity calculation. Would this test provide
a clearer indication of the overall credit spread risk of the portfolio? Are there other advantages
to such an approach? If so, what would be an appropriate limit? Should it be the same as
proposed weighted average life limitation of 120 days, or should it be different, such as 90 days
or 150 days? We request that commenters provide us with data demonstrating the effect of such
alternative credit limitations and/or weighted average life limitations on their portfolios during
the recent economic turmoil.
When the Commission first adopted rule 2a-7, we explained that we were allowing
Government securities to use resets for purposes of the maturity limitations under the rule
because we understood that the volatility of such instruments would be no greater than the
volatility of fixed interest rate instruments having a maturity equal to the period before the
security’s interest rate reset. 161 The Commission noted, however, that this position was based
entirely upon experience with Small Business Administration guaranteed debentures – at the
time the only adjustable-rate Government securities of which the Commission was aware. 162 The
Commission stated that it would consider amending this provision if market experience indicates
161
See 1983 Adopting Release, supra note 3, at n.16.
162
See id.
50
that such treatment is inappropriate. 163
Since 1983, the number and variety of adjustable-rate Government securities have grown
and, in particular, the issuance of such securities by Freddie Mac and Fannie Mae increased
significantly with the growth in mortgage-backed securities. While adjustable-rate securities
historically have maintained market values similar to equivalent short-term fixed-rate securities,
last fall these Government securities experienced increased credit and interest rate spreads and
greater volatility than Government securities with maturities similar to the reset dates of the
adjustable-rate securities. 164 Further, as noted above, other short-term adjustable-rate securities
also experienced increased credit and interest rate spreads and greater volatility than securities
with maturities similar to the reset dates.
Currently, rule 2a-7 permits funds to rely on these reset provisions to shorten portfolio
maturities only if boards or their delegates can reasonably expect that the security’s market value
will approximate its amortized cost on the reset date. 165 However, recent experience suggests
that in times of market stress, this expected performance may not hold true. Would the weighted
average life to maturity limitation adequately address this risk? Are there other alternative
limitations or tests that would have mitigated this risk last fall? Should we restrict a fund’s
ability to use the maturity-shortening provisions of the rule to those adjustable-rate securities,
including Government securities, with maximum final maturities of no more than two years,
three years, or four years? What would be the impact of the weighted average life limitation on
longer term adjustable-rate Government securities issuers?
163
See id.
164
See Jody Shenn, Fannie Mae Debt Spreads Hit Records as GMAC Seeks Bank Status,
BLOOMBERG, Nov. 20, 2008; Jody Shenn, Agency Mortgage-Bond Spreads Head for Worst
Month on Record, BLOOMBERG, Oct. 31, 2008, available at
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSc8k8D7ZMw0.
165
See rule 2a-7(a)(13) and (a)(29).
51
3.
Maturity Limit for Government Securities
The Commission is proposing to delete a provision of the rule that permits a fund that
relies exclusively on the penny-rounding method of pricing to acquire Government securities
with remaining maturities of up to 762 days, rather than the 397-day limit otherwise provided by
the rule. 166 We are unaware of money market funds today that rely solely on the penny-rounding
method of pricing, and none that hold fixed-rate Government securities with remaining
maturities of two years, which we are concerned would involve the assumption of a substantial
amount of interest rate risk. We request comment on our proposal to delete the provision. Are
we correct that funds no longer use it? If not, are there reasons why we should retain it?
4.
Maturity Limit for Other Portfolio Securities
Currently, in order to qualify as an eligible security under rule 2a-7, an individual
security generally cannot have a remaining maturity that exceeds 397 days. 167 We request
comment on whether we should consider reducing the maximum maturity for individual nonGovernment securities acquired by a money market fund from 397 days to, for example, 270
days. 168
The length of time remaining before a security matures affects its sensitivity to increases
in interest rates. In addition, a shorter maturity decreases the amount of time a fund is exposed to
potential investment losses for a particular security. On the other hand, it is less clear that such a
change would produce a significant increase in the safety and stability of money market funds if
166
See rule 2a-7(c)(2)(ii). We added this provision in 1991. See 1991 Adopting Release, supra note
20, at nn.53-57 and accompanying text. In a conforming change, we also propose to revise the
maturity-shortening provision of the rule for variable-rate Government securities to require that
the variable rate of interest is readjusted no less frequently than every 397 days, instead of 762
days as currently permitted. See rule 2a-7(d)(1); proposed rule 2a-7(d)(1).
167
See rule 2a-7(a)(10)(i) and (c)(2)(i).
168
A maturity limit of 270 days would be consistent with the exemption for commercial paper under
section 3(a)(3) of the Securities Act of 1933 [15 U.S.C. 77c(a)(3)].
52
we were to adopt it in addition to adopting the proposed 60-day weighted average maturity and
120-day weighted average life limitations. Moreover, unlike the weighted average maturity and
weighted average life limitations, a stricter maturity limitation on individual securities could
have a substantially greater adverse impact on issuers of short-term obligations other than
commercial paper, including issuers of tax exempt municipal securities.
What would be the effects on money market funds and the capital markets of shortening
the maturity limit on individual portfolio securities to 270 days? Would there be benefits to
funds from shortening the maturities of individual securities beyond the benefits that would be
attained through the 60-day weighted average maturity and 120-day weighted average life
limitations? What would be the likely impact on money market fund yields? What effect, if any,
would shortening the maturity limit have on the supply of rule 2a-7-eligible securities? Should
Government securities be excluded from a 270-day maturity limit? 169 If we were to adopt a
maximum 270-day maturity for individual securities, should we include or exclude securities
issued by municipalities, which typically issue debt securities with maturities of a year or more?
C.
Portfolio Liquidity
Rule 2a-7 does not contain any provisions limiting the ability of a money market fund to
hold or acquire illiquid assets. 170 Money market funds are, however, subject to section 22(e) of
the Act, which requires registered investment companies to satisfy redemption requests in no
169
We note that, while posing less credit risk, Government securities are subject to much the same
risks as corporate securities from rising spreads between their market price and money market
benchmarks, whether due to liquidity concerns, changes in interest rates, or other factors. For this
reason some rating agencies have imposed limitations on remaining maturities of adjustable-rate
Government securities held by money market funds. See, e.g., S&P 2007 RATINGS CRITERIA,
supra note 139, at 30 (setting a two-year limit for remaining maturities of floating- or variablerate Government securities held by money market funds for the fund to maintain the highest
rating).
170
See 1983 Adopting Release, supra note 3 at n.37 and accompanying text (“[Rule 2a-7] does not
limit a money market fund’s portfolio investments solely to negotiable and marketable
instruments ….”).
53
more than seven days – a requirement we have construed as restricting a money market fund
from investing more than 10 percent of its assets in illiquid securities. 171 Since rule 2a-7 was
first adopted we have emphasized the importance of a money market fund holding sufficiently
liquid securities. Money market funds often have a greater, and perhaps less predictable, volume
of redemptions than other open-end investment companies. 172 And because many promise to
provide redemptions sooner than other types of open-end funds – often on the same day that the
redemption request is received – money market funds need sufficient liquidity to meet
redemption requests on a more immediate basis. 173
By holding illiquid securities, a money market fund exposes itself to a risk that it may be
unable to satisfy redemption requests promptly, without selling illiquid securities at a loss that
could impair its ability to maintain a stable net asset value per share.174 Illiquid securities also
complicate the valuation of the fund’s portfolio. 175 Moreover, illiquid securities are subject to
greater price volatility, exposing the fund to greater risk of breaking a buck as a result of net
asset values eroding in a declining market. 176
We have not included a specific provision in rule 2a-7 regarding liquidity because, until
recently, money market funds had not experienced a severe liquidity shortfall. As discussed
above, in September 2008, the markets for both traditional and asset backed commercial paper
essentially seized up. Large portions of many money market fund portfolios became illiquid
171
See, e.g., id. at nn.37-38 and accompanying text; 1986 Adopting Release, supra note 19, at n.21
and accompanying text.
172
See, e.g., 1986 Adopting Release, supra note 19, at text preceding and accompanying n.22; 1983
Adopting Release, supra note 3, at text following n.39.
173
See 1983 Adopting Release, supra note 3, at text following n.39.
174
Id. at text preceding, accompanying and following nn.37-39.
175
Id. at text preceding section titled “Obligation of the Board to Maintain Stable Price.”
176
S&P 2007 RATINGS CRITERIA, supra note 139, at 21.
54
when buyers of asset backed and traditional commercial paper fled the market. 177 At the same
time, many money market funds – principally institutional money market funds – received
substantial redemption requests. 178 The ability of these funds to maintain a stable net asset value
turned on their ability to convert portfolio holdings to cash without selling them at “fire sale”
prices.
These events suggest to us that rule 2a-7 should be amended to address liquidity risks that
money market funds face. We propose to amend rule 2a-7 to add new risk-limiting conditions
designed to improve money market funds’ ability to meet significant redemption demands.
1.
Limitation on Acquisition of Illiquid Securities
We propose to prohibit money market funds from acquiring securities unless, at the time
acquired, they are liquid, i.e., securities that can be sold or disposed of in the ordinary course of
business within seven days at approximately their amortized cost value. 179 In light of the risk to
177
See Board of Governors of the Federal Reserve, Report Pursuant to Section 129 of the Emergency
Economic Stabilization Act of 2008: Asset-Backed Commercial Paper Money Market Mutual
Fund Liquidity Facility (undated), available at
http://www.federalreserve.gov/monetarypolicy/files/129amlf.pdf at 1-2 (“In ordinary
circumstances, MMMFs would have been able to meet these redemption demands by selling
assets. At the time of the establishment of the AMLF, however, many money markets were
extremely illiquid, and the forced liquidation of assets by MMMFs was placing increasing stress
on already strained financial markets.”); see generally Board of Governors of the Federal
Reserve, Monetary Policy Report to the Congress (Feb. 24, 2009), Part 2,
http://www.federalreserve.gov/monetarypolicy/mpr_20090224_part2.htm.
178
See ICI Mutual Fund Historical Data, supra note 47 (in the week ending September 17, the day
after the Reserve Primary Fund announced that it would break a dollar, institutional money
market fund assets fell by more than $119 billion while retail money market fund assets fell by
$1.1 billion).
179
Proposed rule 2a-7(c)(5). “Liquid security” would be defined in proposed rule 2a-7(a)(19). Last
year in the NRSRO References Proposal, we proposed to define “liquid security” as a security
that can be sold or disposed of in the ordinary course of business within seven days at
approximately the cost ascribed to it by the money market fund. See supra note 105, at n.28 and
accompanying text. See also 1986 Adopting Release, supra note 19, at text following n.21 (“The
term ‘illiquid security’ generally includes any security which cannot be disposed of promptly and
in the ordinary course of business without taking a reduced price.”). The one comment we
received on the proposed definition recommended the definition refer to the “shadow price”
rather than the “value” ascribed to the security by the money market fund. Most funds that rely
55
the fund of securities becoming illiquid as a result of market events, such as those that occurred
last fall, investing any portion of the fund in securities that are already illiquid may be imprudent
and thus should be prohibited by rule 2a-7.
We request comment on our proposal to preclude funds from acquiring illiquid securities.
We understand that some funds make very limited investments in securities that, at the time of
acquisition, are illiquid, such as insurance company funding agreements, loan participations, and
structured notes that have no demand features. Would this proposed provision (which would not
prohibit funds from continuing to hold securities that become illiquid after their purchase) have a
significant impact on money market funds? What would be the impact on funds of not being
able to buy illiquid securities? Would there be a material impact on yield?
2.
Cash and Securities that Can Be Readily Converted to Cash
As discussed above, liquidity of a money market fund portfolio is critical to the fund’s
ability to maintain a stable net asset value. Our traditional notions of liquidity incorporated into
our guidelines (discussed above) appear to be inadequate to meet the needs of a money market
fund because the guidelines assume that a fund has time (up to seven days) to sell securities and
that there will be a market for the securities. As noted above, money market funds typically
undertake to pay their investors more quickly (frequently the same or following day). As the
events of last fall demonstrated, money market funds may be unable to rely on a secondary or
dealer market ready to provide immediate liquidity at amortized cost under all market conditions.
Therefore we are proposing new liquidity tests that would be based on the fund’s legal right to
receive cash rather than its ability to find a buyer of the security.
on rule 2a-7 value their securities using the amortized cost method and thus would be required to
acquire securities that can be sold or disposed of in the ordinary course of business within seven
days at approximately amortized cost value.
56
The amount of liquidity a fund will need will vary from fund to fund and will turn on
cash flows resulting from purchases and redemptions of shares. As a general matter, a fund that
has some large shareholders, any one of which could redeem its entire position in a single day,
will have greater liquidity needs than a retail fund that has thousands of relatively small
shareholders. A fund that competes for yield-sensitive shareholders (e.g., “hot money”) through
electronic “portals” will have substantially greater liquidity needs than a fund holding the cash of
commercial enterprises that have predictable needs (such as payrolls). 180
Our proposed formulation of a new liquidity standard is designed to take into
consideration each of these factors. The proposed daily and weekly standards, discussed
immediately below, would be minimum standards; the proposed general standard (which we
discuss after the minimum standards) may require a fund to maintain a higher portion of its
portfolios in cash or securities that can readily be converted into cash.
a.
Minimum Daily Liquidity Requirement
Taxable Retail Funds. We propose to require each taxable retail money market fund to
invest at least five percent of its assets in cash, U.S. Treasury securities, or securities that can
provide the fund with daily liquidity, i.e., securities that the fund can reasonably expect to
180
See Money Market Funds Tackle “Exuberant Irrationality,” Standard & Poor’s, RatingsDirect
(Sept. 30, 2008), available at
http://www2.standardandpoors.com/spf/pdf/media/MoneyMarketFunds_Irrationality.pdf (“It is
likely that certain yield-sensitive institutions commonly referred to as 'hot money' accounts,
moved money from one investment to another to capture a higher yielding, or seemingly safer,
option. For example, after Lehman Bros. filed for bankruptcy, corporations that issued
commercial paper (CP) to fund their business operations were forced to pay a significantly higher
premium to obtain funding because of investor concerns with holding debt from any
nongovernment issuer. The subsequent ‘flight to quality’ pushed some overnight and 30-day CP
rates up by 0.5% (to approximately 3.5%) for issuers whose credit or financial/risk profile did not
seem to change. As a result, these hot money accounts moved their investments from money
market funds yielding less than 2.75%.”).
57
convert to cash within a day. 181 Unlike our liquidity guidelines discussed above, which allow for
a period during which a fund would be expected to seek buyers in a secondary market, these
daily liquidity requirements would be significantly more demanding, requiring a portion of the
funds’ assets be held in “daily liquid assets,” which the rule would define as: (i) cash (including
demand deposits); (ii) securities (including repurchase agreements) for which the fund has a
contractual right to receive cash within one business day either because the security will mature
or the fund can exercise a demand feature; 182 or (iii) U.S. Treasury securities, which have
historically traded in deep, liquid markets, even in times of market distress. 183
Under the proposed amendments, a money market fund that is a “retail fund” could not
acquire any securities other than daily liquid assets if, immediately after the acquisition, the fund
would have invested less than five percent of its total assets in those assets (“minimum daily
181
Proposed rule 2a-7(c)(5)(iii).
182
A “demand feature” means a feature permitting (i) the holder of a security to sell the security at
an exercise price equal to the approximate amortized cost of the security plus accrued interest, if
any, at the time of exercise, and (ii) the holder of an asset backed security unconditionally to
receive principal and interest within 397 calendar days of making demand. Rule 2a-7(a)(8).
183
U.S. Treasury securities were highly liquid last fall. See, e.g., FRB Open Market Committee Oct.
28-29 Minutes, supra note 51, at 5 (“Yields on short-term nominal Treasury coupon securities
declined over the intermeeting period, reportedly as a result of substantial flight-to-quality flows
and heightened demand for liquidity. In contrast, higher term premiums and expectations of
increases in the supply of Treasury securities associated with the Emergency Economic
Stabilization Act and other initiatives seemed to put upward pressure on longer term nominal
Treasury yields. Yields on longer term inflation-indexed Treasury securities, which are relatively
illiquid, rose more sharply than did those on nominal securities.”); Minutes of the Federal Open
Market Committee, FEDERAL RESERVE BOARD, Dec. 15-16, 2008, at 5, available at
http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20081029.pdf (“FRB Open
Market Committee Oct. 28-29 Minutes”) (Dec. 15-16, 2008), at 4, available at
http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20081216.pdf (“Yields on
nominal Treasury coupon securities declined significantly over the intermeeting period in
response to safe-haven demands as well as the downward revisions in the economic outlook and
the expected policy path. Meanwhile, yields on inflation-indexed Treasury securities declined by
smaller amounts, leaving inflation compensation lower. Although the decline in inflation
compensation occurred amid sharp decreases in inflation measures and energy prices, it was
likely amplified by increased investor preference for the greater liquidity of nominal Treasury
securities relative to that of inflation-protected Treasury securities.”).
58
liquidity requirement”). 184 Compliance with the daily liquidity requirement would be
determined at the time each security is acquired, and thus a fund would not have to dispose of
less liquid securities (and potentially realize an immediate loss) if the portion of the fund held in
highly liquid securities fell below five percent as a result of redemptions.
Retail money market funds experienced relatively modest redemption demands last fall,
even in the midst of substantial market turbulence. 185 Thus we believe that a five percent
requirement, which was recommended in the ICI Report, may be sufficient. 186 We request
comment on our analysis, and whether a five percent standard is appropriate in light of the
liquidity needs of retail money market funds (which we distinguish from institutional money
market funds in the next section of this release). Should we consider a higher percentage, such
as 10 percent or 15 percent, or a lower percentage, such as two percent or three percent? Do our
proposed amendments strike the right balance between reducing liquidity risk and limiting the
impact on yield? What would be the effect on yields of a lower or higher minimum daily
liquidity requirement? There may be a number of factors that influence the lower redemption
rates among retail investors, including investment purposes and practices, size of investments
and possible differences in the information that retail as opposed to institutional investors obtain
184
The term “daily liquid assets” is defined in proposed rule 2a-7(a)(8). A “retail fund” would be
defined as any fund other than an institutional fund. Proposed rule 2a-7(a)(24). For a discussion
of the definition of “institutional fund,” see infra text preceding, accompanying and following
note 196. “Total assets” means with respect to a money market fund using the amortized cost
method, the total amortized cost of its assets and, with respect to any other money market fund,
the total market-based value of its assets. Rule 2a-7(a)(27).
185
See supra note 178. On September 17, 2008, approximately 4% of prime retail money market
funds and 25% of prime institutional money market funds had outflows greater than 5%; on
September 18, 2008, approximately 5% of prime retail funds and 30% of prime institutional funds
had outflows greater than 5%; and on September 19, 2008, approximately 5% of prime retail
funds and 22% of prime institutional funds had outflows greater than 5%. This information is
based on analysis of data from the iMoneyNet Money Fund Analyzer database.
186
See ICI REPORT, supra note 6, at 74.
59
and the time when they obtain the information. We solicit comment on whether these factors did
or would in the future influence the level of retail redemptions. If so, how should the proposed
rule be revised to address such factors?
We also request comment on the definition of “daily liquid assets.” Are there other
securities that are sufficiently liquid that should be included in the definition?
A fund’s contractual rights to cash will be different if the fund is relying on an
unconditional demand feature rather than a conditional demand feature, which the fund may not
be able to exercise if there is a default or other credit event with respect to the issuer of the
securities. 187 Rule 2a-7 permits both to be used to shorten the maturity of an instrument. 188 For
purposes of determining the daily liquidity requirement, should the rule distinguish between
securities subject to conditional and unconditional demand features?
As discussed above, compliance with the daily liquidity requirement would be
determined at the time each security is acquired. A fund could acquire only daily liquid assets
until the portfolio investments met the five percent daily liquidity test. 189 Because the
requirement applies only at the time of acquisition, a money market fund would not have to
maintain a specified percentage of its assets in daily liquid assets at all times (subject to the
general liquidity requirement discussed below), even though the fund is exposed to liquidity risk
at all times. We request comment on whether to impose a minimum liquidity maintenance
requirement, i.e., require that a money market fund maintain five percent of its portfolio at all
times in daily liquid assets. What are the advantages and disadvantages of each approach?
187
See rule 2a-7(a)(26) (defining “unconditional demand feature”); rule 2a-7(a)(6) (defining
“conditional demand feature”).
188
See rule 2a-7(d)(3), (5).
189
This is also the approach rule 2a-7 takes with respect to money market fund credit quality and
diversification requirements. See rule 2a-7(c)(3), (4).
60
Taxable Institutional Funds. We propose to limit a taxable institutional fund to acquiring
daily liquid assets unless, immediately after acquiring a security, the fund holds at least 10
percent of its total assets in daily liquid assets. 190 Institutional money market funds typically
maintain a greater portion of their assets in cash and overnight repurchase agreements than retail
funds, which reflects the greater liquidity needs of these funds. 191 These greater needs were
demonstrated last fall, when (as discussed above) institutional funds were subject to substantially
greater redemption pressure than retail funds. 192 We understand that some of these institutional
funds had cash positions of almost 50 percent in their portfolios in anticipation of substantial
redemptions following the large amount of inflows during 2007 through August 2008.
We request comment on whether institutional money market funds should be subject to a
higher daily liquidity requirement (10 percent) than retail funds (five percent). Should we
consider a higher percentage, such as 15 or 20 percent? Ten percent daily liquidity could seem
high for a money market fund that reserved the right to delay payment of redemptions for seven
days. We are not proposing to adjust the appropriate minimum daily liquidity requirement for
institutional or retail funds solely by reference to the seven day period, however, because many
money market funds undertake to pay redemption proceeds on the same day or the next day, and
an announcement by a fund of a delay in payment of redemption could itself precipitate a run on
funds. We request comment on whether a five percent daily liquidity requirement for retail
funds or a 10 percent daily liquidity requirement for institutional funds should turn on the
representations the money market fund has made to its investors regarding the timing of
190
Proposed rule 2a-7(c)(5)(iii).
191
This information is based on analysis of data from the iMoneyNet Money Fund Analyzer
database.
192
See supra note 178.
61
payments of redemption proceeds.
We propose to add two new definitions to rule 2a-7 to distinguish between retail and
institutional money market funds. Although the ICI and others who compile data about money
market funds have traditionally distinguished between retail and institutional money market
funds, in practice the distinctions are not always clear. 193 An institutional fund may have
investors who invest on behalf of retail investors. For example, institutional money market funds
commonly have investors that are bank sweep accounts or master funds in master-feeder
arrangements. 194 Although these investors ordinarily provide cash flows to the fund that are
more similar to retail funds, a single decision-maker may be in a position to redeem all of the
shares of the money market fund and move the sweep account to another money market fund. In
addition, some funds have a single portfolio but issue separate classes of shares to retail and
institutional investors that bear different expenses. In these cases, the cost of managing the
institutional share class’s relatively greater cash flow volatility is shared with the retail investors.
Our proposed amendments would require that a money market fund’s board determine,
193
See, e.g., ICI, Frequently Asked Questions About Money Market Funds,
http://www.ici.org/faqs/faqs_money_funds (describing (i) institutional money market funds as
“held primarily by businesses, governments, institutional investors, and high-net worth
households” that as of July 2008, held 63 percent of all money market fund assets and (ii) retail
money market funds as “offered primarily to individuals with moderate-sized accounts” that as of
July 2008, held around 37 percent of all money market fund assets); iMoneyNet home page,
http://imoneynet.com/ (separates information and analysis on money market funds into
institutional and retail categories); Crane Data, Money Fund Intelligence (June 2009) at 30,
http://www.cranedata.us/products/money-fund-intelligence/ (select issue 2009-06-01 (Vol.4, #6))
(classifying money market funds as institutional or individual based on expense ratio, minimum
investment and “who they’re sold to”).
194
A “master-feeder fund” is an arrangement in which one or more funds with identical investment
objectives (“feeder funds”) invest all their assets in a single fund (“master fund”) with the same
investment objective. Investors purchase securities in the feeder fund, which is an open-end fund
and a conduit to the master fund. See H.R. REP. NO. 622, 104TH CONG., 2D SESS., at 41 (1996)
(“H.R. REP. NO. 622”); see generally Exemption for Open-End Management Investment
Companies Issuing Multiple Classes of Shares; Disclosure by Multiple Class and Master Feeder
Funds; Voting on Distribution Plans; Final Rules and Proposed Rule, Investment Company Act
Release No. 20915 (Feb. 23, 1995) [60 FR 11876, 11876-77 (Mar. 2, 1995)].
62
no less frequently than once each calendar year, whether the fund is an institutional money
market fund for purposes of meeting the liquidity requirements. 195 In particular, the fund’s board
of directors would determine whether the money market fund is intended to be offered to
institutional investors or has the characteristics of a fund that is intended to be offered to
institutional investors, based on the: (i) nature of the record owners of fund shares; (ii) minimum
amount required to be invested to establish an account; and (iii) historical cash flows, resulting or
expected cash flows that would result, from purchases and redemptions. 196 The provision is
designed to permit fund directors to evaluate the overall characteristics of the fund based on
relevant factors. 197 Under the provision, a fund offered through two classes, a majority of whose
shares are held by retail investors, should nonetheless be deemed to be an institutional fund by
the fund board if the cash flows from purchases and redemptions and the portfolio management
required to meet liquidity needs based on those cash flows are more characteristic of an
institutional money market fund.
We request comment on our proposed definitions. The differences today in the liquidity
management of institutional and retail money market funds suggest to us that fund managers
(and perhaps fund boards) currently distinguish between retail and institutional funds. Would
our proposed definition permit them to continue to draw the distinctions they draw today? Are
there additional factors the board should consider in determining whether a fund is an
institutional fund? Would a different approach result in better distinctions? If we cannot
distinguish between retail and institutional funds, should we amend rule 2a-7 to apply the
195
Proposed rule 2a-7(c)(5)(v).
196
Proposed rule 2a-7(a)(18) (defining “institutional fund”).
197
Proposed rule 2a-7(a)(24) would define “retail fund” as any money market fund that the board of
directors has not determined within the calendar year is an institutional fund.
63
minimum daily liquidity requirements we propose for institutional funds to all funds? Would
setting the same minimum daily liquidity requirement for institutional and retail funds impose
unnecessary costs (in terms of lower yields) on retail investors in light of retail funds’ reduced
liquidity needs?
Might one effect of the proposed amendments be that funds currently offering two classes
of shares, one retail and one institutional, would decide to divide the fund into two funds and
manage them differently? Would one of the advantages of such a result be that retail investors
would not bear the cost of maintaining liquidity for institutional investors? Would a
disadvantage be the loss to retail investors of the economies of scale in these multi-class funds?
What additional advantages and disadvantages do commenters foresee? Retail investors may not
be aware of the higher redemption rates that institutional funds experienced last fall. Should we
consider requiring institutional funds to provide additional disclosures regarding the risk to the
fund of large redemptions?
Tax Exempt Money Market Funds. We propose to exempt tax exempt funds from the
minimum daily liquidity requirements. 198 We understand that most of the portfolios of tax
exempt funds consist of longer term floating- and variable-rate securities with seven day demand
features from which the fund obtains much of its liquidity. We understand that these funds are
unlikely to have investment alternatives that would permit them to meet a daily liquidity
requirement. 199 We request comment on whether tax exempt money market funds could meet a
daily liquidity requirement, such as we have proposed for taxable retail funds. Do tax exempt
retail money market funds nevertheless have similar liquidity requirements as taxable retail
198
Proposed rule 2a-7(c)(5). Rule 2a-7 defines a “tax exempt fund” as a money market fund that
holds itself out as distributing income exempt from regular federal income tax. Rule 2a-7(a)(24).
199
See ICI REPORT, supra note 6, at 74.
64
funds? If so, should rule 2a-7 treat them differently and how?
b.
Minimum Weekly Liquidity Requirement
We propose that all money market funds (including tax exempt funds) also be subject to a
minimum weekly liquidity requirement (“minimum weekly liquidity requirement”).
Specifically, retail and institutional funds could not acquire any securities other than U.S.
Treasury securities or securities (including repurchase agreements) that mature or are subject to a
demand feature exercisable and payable in five business days (together with cash, “weekly liquid
assets”) if, immediately after the acquisition, (i) the retail fund would have invested less than 15
percent of its total assets in weekly liquid assets and (ii) the institutional fund would have
invested less than 30 percent of its total assets in weekly liquid assets. 200
The proposed minimum weekly liquidity requirement would supplement the proposed
minimum daily liquidity requirement (discussed above) and give greater assurance that money
market funds could meet their statutory obligations to redeem shareholders in times of market
turbulence. We estimate that under our proposed minimum weekly liquidity requirement,
approximately 93 percent of retail funds and 91 percent of institutional funds would have been
able to satisfy the level of redemption demands during the periods of greatest redemption
pressure last fall without having to sell portfolio securities. 201
We request comment on the minimum weekly liquidity requirements. Would a minimum
daily liquidity requirement alone be sufficient to allow funds to adequately manage risk in the
200
Proposed rule 2a-7(c)(5)(iv). The term “weekly liquid assets” would be defined in proposed rule
2a-7(a)(32).
201
During the week of September 15–19, 2008, approximately 6% of retail funds had net
redemptions that exceeded 15%, and 9% of institutional money market funds had redemptions
that exceeded 30% of assets. In addition, in the 52 weeks preceding September 17, 2008, roughly
the same portion of redemption requests in institutional and retail funds (less than 2%) would
have exceeded the weekly liquidity requirements. This information is based on analysis of data
from iMoneyNet Money Fund Analyzer database.
65
event of unexpected shareholder redemptions in excess of the daily threshold and market
illiquidity? Are the proposed minimums of 15 percent of a retail fund’s total assets and 30
percent of an institutional fund’s total assets sufficient? 202 Should we, as the ICI Report
suggests, adopt the same (20 percent of total assets) test for both retail and institutional funds?
As discussed above, we designed our minimum weekly liquidity requirements so that more than
90 percent of retail and institutional funds could have met redemption requests during the week
of September 15-19, 2008 without selling portfolio securities. Should we set the threshold
lower, such as at 80 percent or 70 percent? Should we set the threshold higher at 95 percent or
100 percent? The weekly liquidity requirement would be essentially the same as the daily
liquidity requirement, except that the fund must be able to access cash on a weekly rather than
daily basis. Compliance with the test would be determined upon the acquisition of a security,
and demand features could be used to determine the maturity of a portfolio security for purposes
of the test.
We propose to treat as weekly liquid assets for purposes of the weekly liquidity
requirements, the same securities that would be daily liquid assets except that the requirement for
maturing securities or demand features would be five business days rather than one. 203 The ICI
Report suggests that we ought to treat as a weekly liquid asset a security issued by an agency of
the U.S. Government that, when originally issued, had a maturity of 95 days or less. 204 Is there a
basis on which to treat these agency securities as weekly liquid assets? If so, why should the
maturity of the security be 95 days based on original issue rather than specifying a period
202
We note that for most weeks during the past year, prime institutional money market funds
maintained over 30% of their assets in securities maturing in seven days or less. This information
is based on analysis of data from iMoneyNet Money Fund Analyzer database.
203
Compare proposed rule 2a-7(a)(8) with proposed rule 2a-7(a)(32).
204
See ICI REPORT, supra note 6, at 74.
66
remaining to maturity? We urge commenters supporting such treatment to submit market data to
support their views.
c.
General Liquidity Requirement
As discussed above, the daily and weekly liquidity requirements would be minimum
requirements a fund would have to satisfy upon acquisition of a security. A fund’s liquidity
needs, however, depending upon the volatility of its cash flows, may be greater. Therefore, we
also propose to require that a money market fund at all times hold highly liquid securities
sufficient to meet reasonably foreseeable redemptions in light of its obligations under section
22(e) of the Act and any commitments the fund has made to shareholders, such as undertaking to
pay redemptions more quickly than seven days. 205
To comply with this condition, we would expect money market funds to consider a
number of factors that could affect the fund’s liquidity needs. For example, a money market
fund would have to understand the characteristics of its investors and their likely liquidity needs.
A volatile investor base, e.g., one consisting of a few relatively larger investors that are likely to
make significant redemptions, would require a fund to maintain greater liquidity than a stable
investor base, which is generally associated with a retail fund with many hundreds or thousands
of smaller investors. With this information, a fund manager could take different steps to protect
the fund from greater liquidity risk. For example, the fund manager could increase the amount of
205
Proposed rule 2a-7(c)(5)(ii). Our proposal is similar to the liquidity standard we proposed last
year in the proposal on NRSRO references. See NRSRO References Proposal, supra note 105, at
Section III.A.2. Among the commenters that specifically addressed that proposed standard, two
suggested that codification of the standard was not needed because money market fund advisers
already understand and adhere to the current standards. See Comment Letter of Fidelity
Management & Research Company (Aug. 29, 2008) (File No. S7-19-2008); Comment Letter of
the Securities Industry and Financial Markets Association Credit Rating Agency Task Force
(Sept. 4, 2008) (File No. S7-19-2008). A third suggested eliminating the standard because it
involves “subjective, forward-looking estimates,” while retaining a proposed maximum level for
illiquid securities holdings to “preserve a clearer bright-line test”). See Comment Letter of
Morrison & Foerster (Sept. 5, 2008) (File No. S7-19-2008).
67
daily or weekly liquid assets above those required by the daily and weekly requirements, or
could decline to accept new investments from investors whose liquidity needs are inconsistent
with the objectives of the management of the fund. 206
We request comment on this proposed requirement for liquidity. Should we consider
incorporating specific objective standards for liquidity in this requirement? Should we provide
guidance regarding the steps fund advisers could take to evaluate the fund’s liquidity needs? If
so, what should the guidance be?
Because the obligation would be ongoing, we believe a fund should adopt policies and
procedures to assure that appropriate efforts are undertaken to identify risk characteristics of
shareholders, particularly those that hold their securities through omnibus accounts, or access the
fund through “portals” or through other arrangements that provide the fund with little or no
transparency with respect to the beneficial shareholder. We are not proposing to amend rule 2a-7
to require that funds adopt specific procedures because we believe those procedures would be
required by rule 38a-1, the “compliance rule” under the Investment Company Act, if we adopt
the proposed general liquidity requirement. 207 Should the Commission provide guidance to
funds to assist them in determining the adequacy of their policies and procedures? Should we
consider specifying any particular aspects of the policies and procedures?
In their consideration of these procedures and in their oversight of their implementation,
fund directors should understand that fund managers’ interest in increasing fund assets, and thus
their advisory fees, may lead them to accept investors who present greater risks to the fund than
206
We do not mean to suggest that each money market fund should minimize the volatility of cash
flows, but rather should limit its liquidity risks. Some money market funds with the most volatile
shareholder base manage liquidity risk by, for example, investing exclusively in overnight
repurchase agreements or Treasury debt.
207
See rule 38a-1(a)(1) (requiring funds to adopt and implement written policies and procedures
reasonably designed to prevent violation of the federal securities laws by the fund).
68
they might otherwise have accepted. We urge directors to consider the need for establishing
guidelines for advisers to money market funds that address this potential conflict. We are aware
of more than one occasion in which a fund adviser (or its affiliate that served as the principal
underwriter to the fund) has marketed the fund to “hot money” in order to increase fund assets,
which has exposed the fund to substantially higher risks.
3.
Stress Testing
We are also proposing to amend rule 2a-7 to require the board of directors of each money
market fund using the amortized cost method to adopt procedures providing for periodic stress
testing of the money market fund’s portfolio. 208 The procedures would require testing of the
fund’s ability to maintain a stable net asset value per share based upon certain hypothetical
events, including an increase in short-term interest rates, an increase in shareholder redemptions,
a downgrade of or default on a portfolio security, and widening or narrowing of spreads between
yields on an appropriate benchmark selected by the fund for overnight interest rates and
commercial paper and other types of securities held by the fund.
Our proposal would require funds to test for certain hypothetical events, but would not
specify other details of the stress testing. The proposal would require that stress tests be
conducted at intervals that the board of directors determines appropriate and reasonable in light
of current market conditions. This is the same approach that rule 2a-7 currently takes with
respect to the frequency of shadow pricing. 209
The proposed amendments also would leave to the money market fund’s board of
directors (and the fund manager) the specifics of the scenarios or assumptions on which the tests
are based. Boards should, for example, consider procedures that require the fund to test for the
208
Proposed rule 2a-7(c)(8)(ii)(D)(1).
209
Rule 2a-7(c)(7)(ii)(A)(1).
69
concurrence of multiple hypothetical events, e.g., where there is a simultaneous increase in
interest rates and substantial redemptions. The proposed amendments also would require that the
board receive a report of the results of the testing at its next regularly scheduled meeting, which
report must include: (i) the date(s) on which the fund portfolio was tested; and (ii) the magnitude
of each hypothetical event that would cause the money market fund to break the buck. 210 Thus, a
fund must test each hypothetical event to a degree of severity that it would result in the marketbased per share net asset value of the fund to fall below $0.995 (in the case of a fund that is
maintaining a stable net asset value at $1.00). The proposed amendment also would require the
written procedures to include the provision of an assessment by the adviser of the fund’s ability
to withstand the events (and concurrent occurrences of those events) that are reasonably likely to
occur within the following year. 211 The adviser’s assessment would provide the fund board
context within which to evaluate the magnitude of the events that would cause the fund to break
the buck. Finally, funds would be required to maintain records of the stress testing for six years,
the first two years in an easily accessible place. 212
We believe that the proposed stress testing procedures would provide money market fund
boards a better understanding of the risks to which the fund is exposed and would give managers
a tool to better manage those risks. We understand that stress testing is already a best practice
followed by many money market funds. The ICI Report recommends that rule 2a-7 require
money market funds regularly to “stress test” their portfolios, although it does not suggest a
particular means of stress testing. 213 The Institutional Money Market Funds Association provides
210
Proposed rule 2a-7(c)(8)(ii)(D)(2).
211
Proposed rule 2a-7(c)(8)(ii)(D)(3).
212
Proposed rule 2a-7(c)(11)(vii).
213
ICI REPORT, supra note 6, at 75.
70
guidance for its members in stress testing money market fund portfolios, 214 and the ratings
agencies stress test the portfolios of money market funds they rate. 215
We request comment on our proposed stress test requirement. Would this requirement
allow fund managers to better understand and manage the risks to which the fund is exposed?
Have we identified the correct stress events? If not, what additional or alternative scenarios or
assumptions should we require the fund to test? Should we specify at least one base-line stress
test that would test the fund portfolio against a combination of two or more events? For
example, the rule could require that the market value per share of the fund be tested against an
assumed 50 basis point increase in LIBOR and a redemption of 15 percent of fund shares. Are
there alternative base-line tests we should consider requiring?
We request comment on our proposal to require that the board receive a report on these
tests. Would the report help the board identify when a fund adviser is exposing the fund to
greater risks? Should the board only receive a report when the tests indicate a particular level of
risk? If so, what particular level of risk should the rule identify? Should we consider including
additional information in the report, and if so, what should it be? Should the rule provide for a
minimum frequency of testing? If so, what should be the frequency (e.g., monthly, weekly, or a
shorter period)? Should we consider different intervals for different types of money market
funds? If so, what intervals would be appropriate for what types of money market funds?
214
See Institutional Money Market Funds Association, Stress Testing for Money Market Funds (Feb.
2009).
215
See, e.g., STANDARD & POOR’S, FUND RATINGS CRITERIA, at 9 (2007), available at
http://www2.standardandpoors.com/spf/pdf/events/FundRatingsCriteria.pdf. See also Financial
Regulator Guidance Note 1/08, supra note 146, at 5 (requirements of the Irish Financial Services
Authority for money market funds domiciled in Ireland include stress testing: “A money market
fund is expected to be subject to monthly portfolio analysis incorporating stress testing to
examine portfolio returns under various market scenarios to determine if the portfolio constituents
are appropriate to meet pre-determined levels of credit risk, interest rate risk, market risk and
investor redemptions.”).
71
Should the frequency depend upon the market-based value of the fund portfolio or other criteria
or events?
We note that certain of the hypothetical events we propose funds include in their testing
may not be meaningful for some money market funds. For example, U.S. Treasury money
market funds (i.e., funds that invest solely in direct obligations of the U.S. government such as
U.S. Treasury bills and other short term securities backed by the full faith and credit of the U.S.
government) are not likely to experience downgrades of or defaults on those securities. Should
these money market funds be exempted from testing certain hypothetical events, such as a
downgrade of or default on a portfolio security, that may not present risks to the fund? Are there
other money market funds that we should exempt from testing for certain of the proposed
hypothetical events? If so, which funds should have exemptions and which events should be
exempted from their testing?
The ICI Report suggests that the results of stress testing could be used to evaluate
whether a money market fund’s liquidity thresholds need to be adjusted. 216 Should we consider
imposing minimum liquidity requirements based on the results of a particular stress test? For
example, should we require that a fund invest 50 percent of its portfolio in daily or weekly liquid
assets if a five percent increase in shareholder redemptions would cause the fund to break the
buck? If we considered imposing minimum liquidity requirements, should they be different for
retail and institutional funds?
216
See ICI REPORT, supra note 6, at 75.
72
D.
Diversification
Rule 2a-7 requires a money market fund’s portfolio to be diversified, both as to the
issuers of the securities it acquires and to the guarantors of those securities. 217 Generally, money
market funds must limit their investments in the securities of any one issuer (other than
Government securities), to no more than five percent of fund assets. 218 They must also generally
limit their investments in securities subject to a demand feature or a guarantee to no more than
ten percent of fund assets from any one provider. 219 The Commission adopted these
requirements in order to limit the exposure of a money market fund to any one issuer or
guarantor. 220
The issuer diversification provisions of the rule generally were not implicated by the
market turbulence last fall. 221 The Reserve Primary Fund, for example, held only 1.2 percent of
its assets in Lehman Brothers commercial paper, well below what rule 2a-7 permits. The market
turbulence did, however, implicate the guarantor and demand feature diversification provisions –
217
Rule 2a-7(c)(4)(i). The diversification requirements of rule 2a-7 differ in significant respects
from the requirements for diversified management investment companies under section 5(b)(1) of
the Act. A money market fund that satisfies the applicable diversification requirements of the
paragraphs (c)(4) and (c)(5) of the rule is deemed to have satisfied the requirements of section
5(b)(1). Rule 2a-7(c)(4)(v). Subchapter M of the Internal Revenue Code contains other
diversification requirements for a money market fund to be a “regulated investment company” for
federal income tax purposes. 26 U.S.C. 851 et seq. See also 1990 Proposing Release, supra note
22, at n.25.
218
Rule 2a-7(c)(4)(i)(A). The rule contains a safe harbor where a taxable and national tax exempt
fund may invest up to 25 percent of its assets in the first tier securities of a single issuer for a
period of up to three business days after acquisition (but a fund may use this exception for only
one issuer at a time). Rule 2a-7(c)(4)(i)(A).
219
Rule 2a-7(c)(4)(iii). With respect to 25 percent of total assets, holdings of a demand feature or
guarantee provider may exceed the 10 percent limit subject to certain conditions. See rule
2a-7(c)(4)(iii)(A), (B), and (C). See also rule 2a-7(a)(8) (definition of “demand feature”) and
(a)(15) (definition of “guarantee”).
220
See 1990 Proposing Release, supra note 22, at II.1. (“Diversification limits investment risk to a
fund by spreading the risk of loss among a number of securities.”).
221
The positions held by funds in distressed securities were in almost all cases well below the rule’s
diversification limits.
73
many funds (particularly tax exempt funds) were heavily exposed to bond insurers, and some
were heavily exposed to a few major securities firms that served as liquidity providers. 222
Should we propose to further restrict the diversification limits of the rule? If so, by how
much should we reduce them? Should the five percent diversification limit for issuers be
reduced to, for example, three percent? Would it be possible to further reduce the guarantor
diversification limits without reducing the quality of portfolio securities? Even a diversification
limitation of one percent would not preclude a fund from breaking a buck if the security should
sustain sufficient losses as did the securities issued by Lehman Brothers. Moreover, such a
diversification limit may force funds to invest in relatively lower quality securities. If so, might
lower diversification limits increase the likelihood of a default or other credit event affecting a
money market fund while diminishing the impact of such an event on the fund? We request that
commenters address the tradeoffs of lower diversification limits for different types of money
market funds.
Last fall, money market funds did appear to be extensively exposed to securities issued
by participants in the financial sector, which contributed significantly to the difficulties they
experienced. 223 Money market funds are not subject to any industry concentration limitations
under rule 2a-7. Should we consider proposing such a limitation? If we did, what should the
concentration limit be? Are distinctions among industry sectors sufficiently clear that a
concentration limitation would be meaningful? 224
222
See, e.g., Brunnermeier, supra note 66, at 87.
223
See, e.g., U.S. Dollar Money Market Funds, supra note 17, at 67 (mid-2008 holdings of 15 largest
prime money market funds showed they had invested $1 trillion, or half of their portfolios, with
non-U.S. banks).
224
In 1992, our staff observed that “the current [statutory] treatment of ‘concentration’ suffers from
problems of industry definition. There is no clear standard to determine what constitutes an
‘industry,’ much less ‘a group of industries.’ Indeed, as the boundaries between different
74
E.
Repurchase Agreements
Money market funds typically invest a significant portion of their assets in repurchase
agreements, many of which mature the following day and provide an immediate source of
liquidity. 225 In a typical repurchase agreement, a fund purchases securities from a broker-dealer
or a bank (“counterparty”), upon an agreement that the counterparty will repurchase the same
securities at a specified price, at a later date. The securities purchased serve as the collateral for
the agreement.
Money market funds may treat the acquisition of a repurchase agreement as an
acquisition of the collateral underlying the repurchase agreement for purposes of meeting rule
2a-7’s diversification requirement, provided that the repurchase agreement is “collateralized
fully.” 226 A repurchase agreement collateralized fully must, among other things, qualify for an
exclusion from any automatic stay of creditors’ rights against the counterparty under applicable
industries erode and the trend toward corporate diversification and conglomeration continues, it is
often difficult to fit companies into distinct industry categories ....” DIVISION OF INVESTMENT
MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION, PROTECTING INVESTORS: A
HALF CENTURY OF INVESTMENT COMPANY REGULATION, at n.103 (May 1992).
225
In 2008, repurchase agreements accounted for 26.4% of taxable Government money market
funds’ total net assets and 9.1% of taxable non-Government money market funds’ total net assets.
See 2009 FACT BOOK, supra note 7, at 150-51, Tables 41 & 42.
226
See rule 2a-7(c)(4)(ii)(A). We have allowed this “look-through” treatment, for diversification
purposes, based on the notion that a money market fund looks to the collateral rather than the
counterparty as the ultimate source of repayment. See Treatment of Repurchase Agreements and
Refunded Securities as an Acquisition of the Underlying Securities, Investment Company Act
Release No. 25058 (July 5, 2001) [66 FR 36156 (July 11, 2001)] (“2001 Repo Rule Adopting
Release”), at Background. Rule 5b-3 allows the same treatment for purposes of section 5 and
section 12(d)(3) of the Act. The rule 5b-3(c)(1) definition of collateralized fully, which is crossreferenced by rule 2a-7(a)(5), sets forth the related conditions. Money market funds may enter
into repurchase agreements that are not collateralized fully. Any agreement or portion of
agreement that is not collateralized fully would be deemed an unsecured loan. As such the loan
itself would have to meet the quality requirements set forth in rule 2a-7, both with respect to the
minimal credit risk and the high quality rating, as well as the five percent diversification test. See
1991 Adopting Release, supra note 20, at n.31.
75
insolvency law. 227 We propose two amendments to rule 2a-7 affecting a money market fund’s
investment in repurchase agreements.
First, we propose to limit money market funds to investing in repurchase agreements
collateralized by cash items or Government securities in order to obtain special treatment under
the diversification provisions of rule 2a-7. 228 Such a limitation would make it less likely that, in
the event of the default of a counterparty during a period of market turmoil such as last fall, a
money market fund would experience losses upon the sale of collateral that had become illiquid.
Such a consequence is more likely in the case of a default by a large counterparty when, as a
result, many investors in repurchase agreements seek to liquidate similar collateral at the same
time. 229
We request comment on this amendment. We understand that most money market funds
that take advantage of the diversification “look-through” provision enter into repurchase
agreements that are collateralized by Government securities. Is our understanding correct? If so,
would this amendment have a significant impact on money market funds? Would the
227
See rule 5b-3(c)(1)(v).
228
Proposed rule 2a-7(a)(5). Under the current definition of collateralized fully, a money market
fund may look through repurchase agreements collateralized with cash items, Government
securities, securities with the highest rating or unrated securities of comparable credit quality.
Rule 5b-3(c)(1)(iv). Repurchase agreements have traditionally been collateralized with U.S.
Treasury and agency securities, but over the years borrowers have increasingly used investment
grade corporate bonds, mortgage-backed securities and other potentially illiquid securities. See
Martin Duffy et al., supra note 191, at 3. Our staff's examination of the portfolio holdings in the
15 largest money market fund complexes last spring indicated that approximately 75% of the
collateral supporting repurchase agreements held by the funds consisted of Government securities
(48.3% agencies and 26.4% U.S. Treasuries). The exam further indicated that the remaining
collateral consisted of a variety of instruments, such as equities, commercial paper, corporate
notes, and mortgage loan obligations.
229
If the counterparty defaults, a money market fund might be required to dispose of the collateral as
soon as possible to the extent that the collateral, now part of the fund’s portfolio, does not meet
the fund’s maturity or liquidity requirements. Such requirements do not apply to the collateral
when it is not part of the fund’s portfolio. See 1991 Adopting Release, supra note 20, at n.33 and
accompanying text.
76
amendment significantly reduce the risk of losses upon the default of a repurchase agreement
counterparty? Would it negatively impact money market funds’ yields? Should we apply this
limitation to repurchase agreements that are not collateralized fully, and thus do not qualify for
the special “look-through” treatment?
Second, we propose to require that the money market fund’s board of directors or its
delegate evaluate the creditworthiness of the counterparty, regardless of whether the repurchase
agreement is collateralized fully. 230 We eliminated this requirement in 2001 in light of
amendments to relevant bankruptcy law that protected funds from the automatic stay of
creditors’ rights under applicable bankruptcy law. 231 The events of last fall, which involved the
failure of a large investment bank holding company that served as a counterparty, suggest we
should revisit this determination. 232 We are concerned that in the midst of a crisis following the
bankruptcy of a counterparty, a money market fund may find it difficult to protect fully its
interests in the collateral without incurring losses. 233 A fund should seek to avoid such a crisis by
limiting its counterparties to those that are creditworthy. We request comment on this proposed
amendment.
230
Proposed rule 2a-7(c)(4)(ii)(A). It appears that this evaluation is already being made in many
fund complexes. See ICI REPORT, supra note 6, at n.90.
231
See 2001 Repo Rule Adopting Release, supra note 226, at nn.18-20 and accompanying text.
232
We understand that a number of money market funds discontinued entering into repurchase
agreements with The Bear Stearns Companies Inc. (“Bear Stearns”) when it was threatened with
collapse in March 2008. ICI REPORT, supra note 6, at 51.
233
See Stephen Morris & Hyun Song Shin, Financial Regulation in a System Context, Brookings
Papers on Economic Activity, Fall 2008, at 229, 239 (noting that “if Bear Stearns had become
illiquid, and the assets pledged as collateral reverted to the money market funds, they would have
been forced to sell those assets quickly, possibly at a large loss.”). Cf. Calyon N.Y. Branch v. Am.
Home Mortg. Corp. (In re Am. Home Mortg., Inc.), 379 B.R. 503, 520-22 (Bankr. D. Del. 2008)
(Holding that seller in bankruptcy was not required to transfer to the buyer the right to service the
collateral of the repurchase agreement. The court found that the servicing provisions of the
agreement were severable from the repurchase provisions, dismissing the buyer’s argument that
without the servicing rights the buyer’s ability to liquidate the collateral would have been
impaired.).
77
F.
Disclosure of Portfolio Information
1.
Public Website Posting
The Commission is proposing to amend rule 2a-7 to require money market funds to
disclose information about their portfolio holdings each month on their websites. Specifically, a
fund would be required to disclose the fund’s schedule of investments, as prescribed by rules
12-12 to 12-14 of Regulation S-X, 234 identifying, among other things, the issuer, the title of the
issue, the principal amount of the security, and its current amortized cost. 235 The fund would be
required to post the information no later than the second business day of the month, current as of
the last business day of the previous month, and would have to maintain the information on the
website for at least twelve months. 236
Currently, money market funds must report portfolio holdings information to us four
times a year, no earlier than within 60 days of the close of the covered period. 237 Many funds
today provide this information to their investors much more frequently on their websites, with
some funds updating information each day. 238
We understand that the greater transparency provided by many funds today responds to
demands from investors, particularly institutional investors, who wish to have a better
234
17 CFR 210.12-12 – 12-14.
235
Proposed rule 2a-7(c)(12).
236
Id.
237
Money market funds must provide a full schedule of their portfolio holdings in quarterly filings to
the Commission. See Form N–CSR [17 CFR 274.128] (form used by registered management
investment companies to file shareholder reports); Form N-Q [17 CFR 274.130] (form used by
registered management investment companies to file quarterly reports of portfolio holdings after
the first and third quarters).
238
See Colleen Sullivan & Mike Schnitzel, Money Funds Move to Update Holdings Faster, FUND
ACTION, Sept. 29, 2008, available at http://www.fundaction.com/pdf/FA092908.pdf.
78
understanding of the current risks to which the fund is exposed. 239 Those investors find that the
quarterly reports are too infrequent in light of the rapid turnover of money market fund
portfolios. We believe that the greater transparency of fund portfolios is a positive development
by which investors can exert influence on risk-taking by fund advisers, and thus reduce the
likelihood that a fund will break the buck.
We request comment on the proposed monthly portfolio disclosure requirement. Should
we require more information from funds than what we have proposed? If so, what additional
information should we require? Should we require that money market funds also post their
market-based net asset value per share and the market-based prices of their portfolio securities?
This information would enable investors to understand the fund’s exposure to distressed
securities (the market value of which would be less than the amortized cost). In addition, it
could help investors understand the risk that the fund may be unable to maintain a $1.00 stable
net asset value. Currently, only larger, more sophisticated investors may be able to gauge this
risk, by themselves estimating the market value of portfolio securities disclosed on fund
websites. Thus, a requirement that funds disclose the market-based values may help to level the
playing field for all investors. On the other hand, we acknowledge that disclosure of shadow
pricing could cause certain investors to redeem their holdings once the shadow price drops below
a certain threshold and thus potentially introduce greater instability.
We request comment on how investors might react to the disclosure of market-based
values and the consequences to funds and shareholders if such information were disclosed.
Would investors seek to redeem their shares when the fund’s market-based net asset value falls
below a certain threshold because of concerns that other investors may seek to redeem? Would
239
See id.
79
market analysts follow and report this information and thereby cause investors to redeem if the
fund’s market-based net asset value falls below a certain threshold? Would the disclosure of
market-based values, in addition to amortized cost, confuse investors, particularly retail
investors? Are there costs to disclosing this information, and, if so, what are they?
Alternatively, would this information provide shareholders with useful information regarding the
fund’s risk characteristics? Would it enable investors to make better informed investment
decisions? Would this information benefit investors, and, if so, how? If the market-based values
were required to be disclosed, how frequently should they be disclosed? Would monthly
disclosure be frequent enough for investors to understand how often and to what extent a money
market fund’s market-based share price deviates from the $1.00 stable share price?
Should we omit any of the proposed disclosure requirements? If so, what information
should be omitted from the proposed requirement, and why?
Each money market fund would have to update its portfolio schedule as of the end of
each month and post the update no later than two business days after the end of the month.
Should we provide for a longer delay to prevent cash investors other than shareholders from
trading along with the fund, to the possible detriment of the fund and its shareholders? The ICI
Report recommended monthly disclosure with a two-day delay, asserting that “front running”
concerns are less of a risk for money market funds than other types of mutual funds. 240 We
understand that funds that already post portfolio schedules frequently have come to the same
conclusion. Should funds be required to provide more frequent disclosure of portfolio holdings
(e.g., weekly or biweekly)?
The amendments would require that a fund post the information on its website for at least
240
See ICI REPORT, supra note 6, at 93.
80
12 months. Should the information be accessible on the website for a longer or shorter time
period? Should we require this information somewhere other than on the fund’s website? Do all
money market funds have websites?
2.
Reporting to the Commission
We are also proposing a new rule requiring money market funds to provide the
Commission a monthly electronic filing of more detailed portfolio holdings information. 241 The
information would enable the Commission to create a central database of money market fund
portfolio holdings, which could enhance our oversight of money market funds and our ability to
respond to market events. 242
Our current information on money market fund portfolios is limited to quarterly reports
filed with us which, as noted above, quickly become stale. Moreover, the reports are not filed in
a format that allows us to search expeditiously across portfolios or within a portfolio to identify
securities that may raise concerns. In 2007, our staff was not able to ascertain quickly which
money market funds held SIVs, and last fall we had to engage in lengthy and time-consuming
inquiries to determine which money market funds held commercial paper issued by Lehman
Brothers after it declared bankruptcy. Further, if we had had such data immediately available to
us, we could have provided additional assistance to the Treasury Department or the Federal
Reserve Board in structuring the programs they put into place to protect investors. 243 In
241
Proposed rule 30b1-6.
242
In 1995, the Commission proposed, but did not adopt, a similar rule that would have required
money market funds to file quarterly reports of portfolio holdings. Money Market Fund
Quarterly Reporting, Investment Company Act Release No. 21217 (July 19, 1995) [60 FR 38467
(July 26, 1995)]. See also Rulemaking Petition from Fund Democracy, et al. (Jan. 16, 2008) (File
No. 4-554) (recommending that the Commission require money market funds to make nonpublic
monthly electronic filings of their portfolio holdings).
243
The Treasury’s Guarantee Program requires a participating money market fund to provide a
schedule of its portfolio holdings if its market-based net asset value falls below 99.75 percent of
its stable net asset value. See U.S. Department of the Treasury, “Guarantee Agreement (Stable
81
preparing this release we have relied in part on data about money market funds available only
through industry associations and publications. 244
Proposed rule 30b1-6 would provide us information that would assist our staff in
analyzing the portfolio holdings of money market funds, and thus enhance our understanding of
the risk characteristics of individual money market funds and money market funds as a group
and industry trends. We would be able to identify quickly those funds that are holding certain
types of securities or specific securities, such as distressed securities, and funds that have unusual
portfolios that may involve greater risks than are typical (e.g., funds that have higher gross
yields).
Although the portfolio reports to the Commission are not primarily designed for
individual investors, we would expect to make the information available to the public two weeks
after their filing. We anticipate that academic researchers, financial analysts and economic
research firms would use this information to study money market fund holdings and evaluate
their risk information. Their analyses may further help investors and regulators better understand
risks in money market funds. In addition, we believe that delaying the public availability of this
information would alleviate possible concerns about the public disclosure of the detailed
portfolio holdings information contained in the filing, without compromising its utility. 245
Proposed rule 30b1-6 would require money market funds to file a monthly portfolio
Value),” ¶ 5(b), available at http://www.treas.gov/offices/domestic-finance/keyinitiatives/money-market-docs/Guarantee_Agreement_Stable-Value.pdf.
244
See, e.g., supra note 68.
245
As discussed above, we understand the confidentiality of certain portfolio holdings information is
not of critical importance to money market funds. Accordingly, the proposed amendments to rule
2a-7 would require money market funds to disclose certain monthly portfolio holdings
information on their websites within two days after the end of month. See also ICI REPORT,
supra note 6, at 93 (recommending that funds disclose monthly portfolio holdings information
after a two-day delay). Here, however, the more detailed information included in the filing to the
Commission may present more significant concerns.
82
holdings report on new Form N-MFP (for “money fund portfolio” reporting) no later than the
second business day of each month, current as of the last business day of the previous month. 246
Proposed Form N-MFP would require the fund to report, with respect to each portfolio security
held on the last business day of the prior month, among other things: (i) the name and CIK
number of the issuer; (ii) the title of the issue; (iii) the CUSIP number or other unique identifier;
(iv) the category of investment (e.g., Treasury debt, government agency debt, corporate
commercial paper, structured investment vehicle notes, etc.); (v) the current credit ratings of the
issuer and the requisite NRSROs giving the ratings; (vi) the maturity date as determined under
rule 2a-7, (vii) the final legal maturity date; (viii) whether the maturity date is extendable;
(ix) whether the instrument has certain enhancement features; (x) the identity of any
enhancement provider; (xi) the current credit rating of the enhancement provider; (xii) the
principal amount; (xiii) the current amortized cost value; (xiv) certain valuation information (i.e.,
whether the inputs used in determining the value of the securities are Level 1, Level 2 or Level
3, 247 if applicable); and (xv) the percentage of the money market fund’s assets invested in the
security. 248 In addition, Form N-MFP would require funds to report to us information about the
fund’s risk characteristics, such as the fund’s dollar weighted average maturity of its portfolio
and its 7-day gross yield.
Given the rapidly changing composition of money market fund portfolios, which is
246
The portfolio securities information that money market funds currently must report is more
limited in scope, and includes information about the issuer, the title of the issue, the balance held
at the close of the period, and the value of each item at the close of the period. See Form N-Q,
Item 1 [17 CFR 274.130]; Rules 12-12 – 12-14 of Regulation S-X [17 CFR 210.12-12 – 12.14].
247
See Financial Accounting Standards Board, Statement of Financial Accounting Standards No.
157, “Fair Value Measurement,” available at
http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blob
where=1175818754924&blobheader=application%2Fpdf.
248
In addition, proposed Form N-MFP would include an “Explanatory Notes” item to permit funds
to add miscellaneous information that may be material to other disclosure in the form.
83
largely the result of securities maturing, we believe that monthly reports would improve the
timeliness and relevance of portfolio information. Once a money market fund has established a
system for tagging and filing a Form N-MFP, we expect the marginal costs of filing additional
reports would be minimal. 249
Under the proposed rule, Form N-MFP would be filed electronically through the
Commission’s EDGAR system in an eXtensible Markup Language (“XML”) tagged data
format. 250 We understand that money market funds already maintain the requested information,
and therefore would need only to tag the data and file the reports with the Commission. 251 We
anticipate that, in the future, many funds may be able to collect, tag, and file this information
with the Commission through even more efficient, automated processes, thereby minimizing the
related costs and potential for clerical error.
We request comment on the proposed monthly portfolio reporting requirement. Should
we require funds to file the portfolio holdings report on a more frequent basis? As discussed
above, we intend to make this information publicly available two weeks after the report is filed
with the Commission. Would such a delay alleviate concerns about possible front-running or
other possible harms that might be caused by making the information public? Should the lag
time between the filing of the form and its public availability be longer or shorter? Should the
information be immediately available to the public upon filing? Should we instead provide that
249
See also infra Section V.
250
We anticipate that the XML interactive data file would be compatible with a wide range of open
source and proprietary information management software applications. Continued advances in
interactive data software, search engines, and other web-based tools may further enhance the
accessibility and usability of the data.
251
We understand that many funds often provide this type of information in different formats to
various information services and third-parties, including NRSROs. Standardizing the data format
in proposed Form N-MFP may encourage standardization across the industry, resulting in cost
savings for money market funds.
84
all or a portion of the requested information be submitted in nonpublic reports to the
Commission? If so, please identify the specific items that should remain nonpublic and explain
why.
Proposed Form N-MFP requires money market funds to disclose certain items that would
be relevant to an evaluation of the risk characteristics of the fund and its portfolio holdings.
Should we require additional or alternative information, such as the fund’s client concentration
levels, the percentage of the issue held by the fund, or last trade price and trade volume for each
security? 252 Should we require funds to disclose market-based values (including the value of any
credit support agreement), which would allow us to identify funds that have market-based net
asset values that sufficiently deviate from their amortized cost that they present a risk of breaking
the buck? Would the two-week delay in making the information publicly available mitigate any
concerns about the disclosure of this information? Alternatively, should we require funds to
provide the market-based values information to us on a nonpublic basis? 253 If funds were
required to provide market-based values information to us on a nonpublic basis, should we
require funds to provide this information more frequently once the fund’s net asset value per
share falls below a certain threshold? If so, how frequently should funds be required to provide
this information (e.g., weekly or daily) and what should be the threshold (e.g., $0.9975)?
Should we omit any proposed disclosure requirement? Are there specific items that the
proposed form would require that are unnecessary or otherwise should not be required?
We request comment on feasible alternatives that would minimize the reporting burdens
252
See Rulemaking Petition from Fund Democracy, supra note 242 (recommending that the
Commission require money market funds to disclose to the Commission, among other things, the
percentage of an issue owned by a fund and its affiliates and the last trade price and trade volume
for each portfolio security).
253
See supra discussion at paragraph following note 239 and paragraph preceding note 240.
85
on money market funds. 254 We also request comment on the utility of the reports to the
Commission in relation to the costs to money market funds of providing the reports. 255 In
addition, we request comment on whether funds should be permitted to post a human readable
version of their Forms N-MFP on their websites to satisfy the proposed monthly website
disclosure requirement.
The Commission anticipates that the data to be required by proposed Form N-MFP would
be clearly defined and often repetitive from one month to the next. Therefore, we believe the
XML format would provide us with the necessary information in the most timely and
cost-effective manner. Should the Commission allow or require the form to be provided in a
format other than XML, such as eXtensible Business Reporting Language (“XBRL”)? Is there
another format that is more widely used or would be more appropriate for the required data? Is
there a need for more detailed categories of data? What would be the costs to funds of providing
data in the XML format? Would there be a disproportionate cost burden on smaller fund
companies? Is there another format that would be less costly but still allow investors and
analysts easily to view (or download) and analyze the data from a central database? Should the
Commission use the EDGAR database or should it create a new database? Should the
Commission consider the implementation of reporting on Form N-MFP initially through a
voluntary pilot program?
3.
Amendment to Rule 30b1-5
To avoid unnecessarily duplicative disclosure obligations, we propose to amend rule
254
See section 30(c)(2)(A) of the Investment Company Act (requiring Commission to consider and
seek public comment on feasible alternatives to the required filing of information that minimize
reporting burdens on funds).
255
See section 30(c)(2)(B) of the Investment Company Act (requiring Commission to consider and
seek public comment on the utility of information, documents and reports to the Commission in
relation to the associated costs).
86
30b1-5 to exempt money market funds from the requirement to file their schedules of
investments pursuant to Item 1 of Form N-Q, a quarterly schedule of portfolio holdings of
management investment companies. 256 We request comment on this exemption. We are not
proposing to exempt money market funds from the controls and procedures and certification
requirements of Form N-Q. Should we also exempt money market funds from Item 2 of Form
N-Q, which requires disclosure of certain information about a fund’s controls and procedures,
and/or Item 3 of Form N-Q, which requires certain fund officers to file a certification as an
exhibit to the form? 257 Should we exempt money market funds from the portions of Items 2 and
3 that pertain to the schedule of investments required by Form N-Q? Alternatively, should we
amend Form N-Q and/or rule 30b1-5 to apply similar controls and procedures and certification
requirements to the proposed monthly reporting requirement? Should we exempt money market
funds from requirements to provide portfolio schedules in Form N-CSR? 258
G.
Processing of Transactions
We are proposing to require that each money market fund’s board determine in good
faith, at least once each calendar year, that the fund (or its transfer agent) has the capacity to
redeem and sell its securities at a price based on the current net asset value per share. 259 This
proposed amendment would require money funds to have the operational capacity to “break a
dollar” and continue to process investor transactions in an orderly manner. 260
256
Item 1 of Form N-Q requires funds to file the schedule of investments, as of the close of the
reporting period, in accordance with rules 12-12 – 12-14 of Regulation S-X.
257
17 CFR 274.130.
258
See supra note 237.
259
Proposed rule 2a-7(c)(1) (new last two sentences).
260
Once a fund has broken the buck, the fund could no longer use the amortized cost method of
valuing portfolio securities, and therefore would have to compute share price by reference to the
market values of the portfolio with the accuracy of at least a tenth of a cent. See 1983 Adopting
Release, supra note 3, at n.6 and accompanying text. Thus, a fund whose market-based net asset
87
Money market funds that seek to maintain a stable net asset value do not guarantee that
they will be able to maintain the stable net asset value. Indeed, each money market fund
prospectus must disclose that an investor may lose money by investing in the fund. 261
Nonetheless, we understand that some money market funds do not have in place systems to
process purchases and redemptions at prices other than the funds’ stable net asset value. In other
words, the systems of these money market funds and their transfer agents are “hardwired” to
process shareholder transactions at only the stable net asset value.
The consequences of such an operational limitation contributed to the delays in
redeeming shareholders of The Reserve Primary Fund after that fund broke the buck in
September 2008. We understand that all transactions thereafter had to be processed manually, a
time-consuming and expensive process that extended the time that shareholders had to wait for
the proceeds from their shares.262
We believe that money market funds that do not have the operational capacity to price
value was determined to be $0.994 would, upon ceasing to use the amortized cost method of
valuation, begin to redeem shares at $0.994 (rather than at $0.990). See generally id.
261
Item 2(c)(1)(ii) of Form N-1A [17 CFR 239.15A, 274.11A]. Similar disclosure is required in
money market fund advertisements and sales literature. See rule 482(b)(4) under the Securities
Act of 1933 [17 CFR 230.482]; rule 34b-1(a).
262
See Press Release, The Reserve Fund, Timeframe for Initial Distribution Payment of Reserve
Primary Fund (Sept. 30, 2008) (explaining that “[m]oney market management systems … are
programmed to accommodate a constant $1.00 NAV [and that making] a distribution to holders
that have made redemption requests since September 15, 2008 necessitated a series of system
modifications designed to ensure an accurate and equitable distribution of funds”); Press Release,
The Reserve Fund, Reserve Primary Fund Disbursement Update (Oct. 15, 2008) (explaining that
Reserve Fund investors were “supported by complex technology at The Reserve as well as their
own systems, which had to be adjusted due to the decline of the net asset value below $1.00 on
September 16 … [and that The Reserve Fund was] working diligently to enhance … existing
software and add new programs to hasten the distribution process”). See also Press Release, The
Reserve Fund, Statement About The Reserve Yield Plus Fund (Oct. 17, 2008) (“apologiz[ing] for
the delay in meeting redemption requests” in a short-term bond fund, and explaining that the
fund’s sponsor needed to “first move the Fund to a different computer platform that’s able to
account for a share price below $1.00 … [ which] wasn’t anticipated when the Fund was
created”).
88
shares according to market values expose their shareholders to unnecessary risks – risks that may
render a money market fund unable to meet its obligations under section 22(e) of the Act to pay
the proceeds of a redemption within seven days. Therefore, we propose to amend rule 2a-7 to
require that a money market fund’s board determine in good faith, no less frequently than once
each calendar year, that the fund (or its transfer agent) has the capacity to redeem and sell fund
shares at prices based on the current net asset value per share. The proposed amendment also
clarifies that this capacity includes the capacity to sell and redeem shares at prices that do not
correspond to the stable net asset value or price per share. 263
We request comment on this proposed amendment. Is it appropriate? Should the board
play a role in this determination? Should we instead revise the risk-limiting conditions of the
rule to require that the fund simply have the capacity to redeem and sell securities at marketbased prices? Alternatively, should the rule require that the board determine that the fund has
adopted procedures adequate to enable the fund to redeem and sell securities at market-based
prices? Or should the rule require that the board approve such procedures? If the rule requires a
determination by the board, is an annual determination appropriate? Should the determination be
more frequent (e.g., quarterly) or less frequent (e.g., every three years)?
H.
Exemption for Affiliate Purchases
The Commission is proposing to amend rule 17a-9, which provides an exemption from
section 17(a) of the Act to permit affiliated persons of a money market fund to purchase
distressed portfolio securities from the fund. 264 The amendment would expand the
263
Proposed 2a-7(c)(1) (new third sentence).
264
Absent a Commission exemption, section 17(a)(2) prohibits any affiliated person or promoter of
or principal underwriter for a fund (or any affiliated person of such a person), acting as principal,
from knowingly purchasing securities from the fund. Rule 17a-9 exempts certain purchases of
securities from a money market fund from section 17(a). For convenience, in this Release, we
refer to all of the persons who would otherwise be prohibited by section 17(a)(2) from purchasing
89
circumstances under which affiliated persons can purchase money market fund portfolio
securities. 265 The Commission is also proposing a related amendment to rule 2a-7, which would
require that funds report all such transactions to the Commission.
1.
Expanded Exemptive Relief
In 1996, the Commission adopted rule 17a-9 under the Act to permit affiliated persons to
purchase a security from an affiliated money market fund that is no longer an eligible security
under rule 2a-7, as long as the purchase price is paid in cash and is equal to the amortized cost of
the security or its market price, whichever is greater. 266 The rule codified a series of staff noaction letters in which the staff agreed not to recommend enforcement action to the Commission
if affiliated persons of a money market fund purchased portfolio securities from the fund in order
prevent the fund from realizing losses on the securities that may otherwise have caused it to
break the buck. 267 When we adopted the rule we explained that experience had shown that such
transactions appeared to be fair, reasonable, in the best interests of fund shareholders, and
consistent with the requirement that money market funds dispose of a defaulted security in an
orderly manner as soon as practicable. 268
The current rule exempts only purchases of securities that are no longer “eligible
securities of a money market fund as “affiliated persons.” “Affiliated person” is defined in
section 2(a)(3) of the Act.
265
The proposed expansion of the rule would not include “capital support agreements” supporting
the net asset value per share of money market funds, which support fund affiliates provided in
several instances in reliance on no-action assurances by our staff. See supra note 38. Unlike
direct purchases of securities by affiliates, the nature and terms of these agreements are highly
customized and terminate after a limited period of time. As a result, these situations do not
readily lend themselves to being addressed in a rule of general applicability.
266
Rule 17a-9(a) and (b). See 1996 Adopting Release, supra note 20, at nn.190-94 and
accompanying text.
267
See 1996 Adopting Release, supra note 20, at nn.190-92 and accompanying text.
268
See id.
90
securities” under rule 2a-7 because, for example, their ratings have been downgraded. This
limitation served as a proxy indicating that the market value of the security was likely less than
its amortized cost value, and thus the resulting transaction was fair to the fund and did not
involve overreaching. 269 Since rule 17a-9 was adopted, our staff has responded to several
emergency requests for no-action relief for transactions involving portfolio securities that
remained eligible securities. In some cases, the fund’s adviser anticipated that the securities
would be downgraded and sought to arrange a purchase by an affiliate as a preventive measure
before the distressed security could impact the fund’s market-based net asset value. 270 In other
cases, markets for portfolio securities had become illiquid and the affiliated person sought to
provide the fund with cash to satisfy redemptions by purchasing portfolio securities. 271 In all
cases, the terms of the transactions met all the requirements of rule 17a-9 except that the
securities were eligible securities.
269
See id. at text following n.194 (“The rule, as adopted, is available for transactions involving
securities that are no longer eligible securities because they no longer satisfy either the credit
quality or maturity limiting provisions (e.g., the securities are long-term adjustable-rate securities
whose market values no longer approximate their par values on the interest rate readjustment
dates).”).
270
See, e.g., Fixed Income Shares – Allianz Dresdner Daily Asset Fund, SEC Staff No-Action Letter
(May 5, 2008); First American Funds, Inc. – Prime Obligation Fund, SEC Staff No-Action Letter
(Dec. 3, 2007); MainStay VP Series Fund – MainStay VP Cash Management Portfolio, SEC Staff
No-Action Letter (Oct. 22, 2008); Institutional Liquidity Trust – Prime Master Series, SEC Staff
No-Action Letter (Apr. 30, 2008); Penn Series Funds, Inc. – Money Market Fund, SEC Staff NoAction Letter (Oct. 22, 2008); Phoenix Opportunities Trust – Phoenix Money Market Fund and
Phoenix Edge Series Fund – Phoenix Money Market Series, SEC Staff No-Action Letter (Oct. 22,
2008); USAA Mutual Funds Trust – USAA Money Market Fund, SEC Staff No-Action Letter
(Oct. 22, 2008). SEC staff no-action letters are available on the SEC website at
http://www.sec.gov/divisions/investment/im-noaction.shtml under the hyperlink for the relevant
letter.
271
See, e.g., Dreyfus Money Funds, SEC Staff No-Action Letter (Oct. 20, 2008); Mount Vernon
Securities Lending Trust, Inc. – Mount Vernon Securities Lending Prime Portfolio, SEC Staff
No-Action Letter (Oct. 22, 2008); Morgan Stanley Money Market Funds, SEC Staff No-Action
Letter (Oct. 22, 2008); Reserve New York Municipal Money-Market Trust – New York
Municipal Money-Market Fund, SEC Staff No-Action Letter (Nov. 18, 2008); Russell Investment
Company – Russell Money Market Fund, SEC Staff No-Action Letter (Oct. 20, 2008).
91
Our staff’s experience is that these transactions appear to be similarly fair and reasonable
and in the best interest of shareholders. We are therefore proposing to extend the exemption to
additional types of transactions, which will eliminate the need for affiliated persons to seek noaction assurances from our staff for these transactions when the delay would not be in the best
interests of shareholders.
Currently, under rule 17a-9 a security must no longer be an eligible security for an
affiliated person of a money market fund to purchase such security. Under the proposed
amendment, a money market fund could sell a portfolio security that has defaulted (other than an
immaterial default unrelated to the financial condition of the issuer), to an affiliated person, even
though the security continued to be an eligible security. 272 Any such transaction would have to
satisfy the existing requirements of rule 17a-9. 273
In addition, we propose to add a new provision to rule 17a-9 that would permit affiliated
persons, for any reason, to purchase other portfolio securities (e.g., eligible securities that have
not defaulted) from an affiliated money market fund for cash at the greater of its amortized cost
value or market value, provided that such person promptly remits to the fund any profit it
realizes from the later sale of the security. 274 Because in these circumstances there may not be an
objective indication that the security is distressed (and thus that the transaction is clearly in the
interest of the fund), the proposed “claw-back” provision would eliminate incentives for fund
advisers and other affiliated persons to buy securities for reasons other than protecting fund
272
Proposed rule 17a-9(a). Other provisions of rule 2a-7 currently except immaterial defaults
unrelated to the financial condition of the issuer. See rule 2a-7(c)(6)(ii)(A). As we have noted in
the past, this exception is intended to exclude defaults that are technical in nature, such as where
the obligor has failed to provide a required notice or information on a timely basis. See 1991
Adopting Release, supra note 20, at Section II.E.2.
273
Proposed rule 17a-9(a)(1) and (2).
274
Proposed rule 17a-9(b)(2).
92
shareholders from potential future losses.
We request comment on all aspects of the proposed expansion of rule 17a-9. Should we
instead expand the exemption to include only those portfolio securities that fall within
enumerated categories (e.g., securities have defaulted, have become illiquid, have been
determined by the board of directors to no longer present minimal credit risk)? If so, what would
those categories be and why? Would any additional conditions be needed with respect to
particular categories of purchases to control for potential conflicts of interest on the part of the
adviser? Is so, what conditions should we include? Is it appropriate to subject only eligible
securities that have not defaulted to the proposed claw-back provision? Is such a provision
necessary and fair? Should we provide a time limit after purchase when the required claw-back
provision would no longer apply? Should we exclude from the claw-back requirement potential
payments to money market funds that are subsequently liquidated?
2.
New Reporting Requirement
The Commission is also proposing an amendment to rule 2a-7 that would require a
money market fund whose securities have been purchased by an affiliated person in reliance on
rule 17a-9 to provide us with prompt notice of the transaction via electronic mail. 275 We
proposed a similar amendment last summer in connection with the NRSRO References
Proposal. 276 That proposal is superseded by the requirement we propose here, which contains
one change. 277 Due to the nature of the proposed amendments to rule 17a-9, which do not restrict
the purchase of a portfolio security from a fund to particular categories, we propose to require
275
Proposed rule 2a-7(c)(7)(iii)(B). The electronic mail notification would be directed to the
Director of our Division of Investment Management, or the Director’s designee. Proposed rule
2a-7(c)(7)(iii).
276
See NRSRO References Proposal, supra note 105, at n.35 and accompanying text.
277
Proposed rule 2a-7(c)(7)(iii)(B).
93
not only notice of the fact of the purchase, but also the reasons for the purchase. Such reasons
might include, for example, that the fund’s adviser expected that the security would be
downgraded, that due to the decreased market value of the security the fund was at risk of
breaking the buck, or that the fund was experiencing heightened redemption requests and wished
to avoid a “fire sale” of assets to satisfy such requests.
We continue to believe that the current notice requirement in rule 2a-7, which is triggered
when a security over a threshold amount of the fund’s assets defaults, provides us with
incomplete information about money market fund holdings of distressed securities, particularly
those that have engaged in affiliated transactions. 278 We also continue to believe that this
proposed notice requirement, which is a concept supported by some commenters last summer, 279
would impose little burden on money market funds or their managers, and would enhance our
oversight of money market funds especially during times of economic stress. We request
comment on this proposed notice requirement. Is the proposed requirement that the notice
include the reasons for the purchase by the affiliate sufficiently clear? Should we require that
any additional information be included in the notice and should the notice take a particular form?
I.
Fund Liquidation
1.
Proposed Rule 22e-3
The Commission is proposing a new rule 22e-3, which would exempt money market
funds from section 22(e) to permit them to suspend redemptions in order to facilitate an orderly
liquidation of the fund. The new rule would replace rule 22e-3T, a temporary rule that provides
278
See NRSRO References Proposal, supra note 105, at Section III.A.4.
279
See, e.g., Comment Letters of the Investment Company Institute (Sept. 5, 2008); Commenter
Letter of the Mutual Fund Directors Forum (Sept. 5, 2008); Comment Letter of
OppenheimerFunds, Inc. (Sept. 4, 2008); Comment Letter of Charles Schwab Co., Inc. (Sept. 5,
2008). Comment letters may be accessed on the Commission’s website at
http://www.sec.gov/comments/s7-19-08/s71908.shtml.
94
a similar exemption for money market funds participating in the Treasury Department’s
Guarantee Program. 280
Section 22(e) of the Act generally prohibits funds, including money market funds, from
suspending the right of redemption, and from postponing the payment or satisfaction upon
redemption of any redeemable security for more than seven days. The provision was designed to
prevent funds and their investment advisers from interfering with the redemption rights of
shareholders for improper purposes, such as the preservation of management fees. 281 Although
section 22(e) permits funds to postpone the date of payment or satisfaction upon redemption for
up to seven days, it does not permit funds to suspend the right of redemption, absent certain
specified circumstances or a Commission order.
As discussed above, on September 22, 2008, we issued an order under section 22(e) to
permit two series of The Reserve Fund to suspend redemptions and postpone payments in the
midst of a run on the fund. In November 2008, we adopted rule 22e-3T to permit money market
funds participating in the Treasury’s Guarantee Program to suspend redemptions and postpone
the payment of redemption proceeds if a fund breaks the buck and begins liquidation proceedings
under the Guarantee Program. 282
The temporary rule was intended to facilitate the orderly disposal of assets in a manner
that would protect the interests of all shareholders. Absent the exemption provided by rule
22e-3T, a fund participating in the Guarantee Program that faces a run would be compelled by
280
The Treasury’s Guarantee Program guarantees that shareholders of a participating money market
fund will receive the fund’s stable share price for each share owned as of September 19, 2008, if
the fund liquidates under the terms of the Program. See supra note 55 and accompanying text.
281
See Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of
the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 291 (1940) (statement of David
Schenker, Chief Counsel, Investment Trust Study, SEC).
282
See Rule 22e-3T Adopting Release, supra note 31.
95
section 22(e) to continue to redeem shares. In order to raise the money to pay redemption
proceeds to shareholders, a fund may have to sell portfolio securities. Massive redemption
requests could thus force a fund to liquidate positions in a fire sale, further depressing the fund’s
market value share price. Earlier redeeming shareholders would receive higher share prices (at
or near the amortized cost) but, as a result of the fund’s diminishing asset base, later redeeming
shareholders may receive lower prices. 283 Moreover, as demonstrated by the events of last fall, a
run on a single fund can quickly spread to other funds and, as multiple funds attempt to meet
redemption requests, seriously deplete the value of portfolio holdings and drain the availability
of cash and more liquid securities.
We believe that rule 22e-3T, which will expire on October 18, 2009 in conjunction with
the Guarantee Program, should be replaced with a rule that would provide for a similar
exemption independent of the Guarantee Program. 284 Proposed rule 22e-3 would permit all
money market funds to suspend redemptions upon breaking a buck, if the board, including a
majority of independent directors, approves liquidation of the fund, in order to liquidate in an
orderly manner. The proposed rule is intended to reduce the vulnerability of investors to the
283
Id.
284
One commenter on rule 22e-3T recommended that we make the rule a permanent rule for any
fund preparing to liquidate, independent of the Guarantee Program. See Comment Letter of the
Investment Company Institute (Dec. 24, 2008). Two other comment letters related to matters
unique to the Guarantee Program. See Comment Letter of the Coalition of Mutual Fund Investors
(Dec. 14, 2008) (recommending that any fund that liquidates and relies on the Guarantee Program
be required to provide information obtained pursuant to rule 22c-2 under the Investment
Company Act); Comment Letter of Michael F. Johnson (Nov. 20, 2008) (requesting information
concerning the applicability of the Guarantee Program to a particular fund). The only other
comment letter that the Commission received concerning interim final rule 22e-3T was a letter
from the Committee of Annuity Insurers, discussed below. See infra note 288 and accompanying
text. Comments on interim final rule 22e-3T, File No. S7-32-08, are available at
http://www.sec.gov/comments/s7-32-08/s73208.shtml.
Once rule 22e-3T expires, the Commission would stand ready to consider applications for
exemptive relief under section 22(e).
96
harmful effects of a run on a fund, and minimize the potential for disruption to the securities
markets.
Proposed rule 22e-3(a) would permit a money market fund to suspend redemptions if:
(i) the fund’s current price per share, calculated pursuant to rule 2a-7(c), is less than the fund’s
stable net asset value per share; (ii) its board of directors, including a majority of directors who
are not interested persons, approves the liquidation of the fund; and (iii) the fund, prior to
suspending redemptions, notifies the Commission of its decision to liquidate and suspend
redemptions, by electronic mail directed to the attention of our Director of the Division of
Investment Management or the Director’s designee. 285 These proposed conditions are intended
to ensure that any suspension of redemptions will be consistent with the underlying policies of
section 22(e). We understand that suspending redemptions may impose hardships on investors
who rely on their ability to redeem shares. Accordingly, our proposal is limited to permitting
suspension of this statutory protection only in extraordinary circumstances. Thus, the proposed
conditions, which are similar to those of the temporary rule, are designed to limit the availability
of the rule to circumstances that present a significant risk of a run on the fund. Moreover, the
exemption would require action of the fund board (including the independent directors), which
would be acting in its capacity as a fiduciary. 286
The proposed rule contains an additional provision that would permit us to take steps to
protect investors. Specifically, the proposed rule would permit us to rescind or modify the relief
provided by the rule (and thus require the fund to resume honoring redemptions) if, for example,
a liquidating fund has not devised, or is not properly executing, a plan of liquidation that protects
285
Proposed rule 22e-3(a).
286
We also note that the potential for abuse may be mitigated because the impending liquidation of
the fund would ultimately eliminate a source of advisory fees for the adviser. See Rule 22e-3T
Adopting Release, supra note 31, at text accompanying nn.19-20.
97
fund shareholders. 287 Under this provision, the Commission may modify the relief “after
appropriate notice and opportunity for hearing,” in accordance with section 40 of the Act.
Paragraph (b) of the proposed rule would provide a limited exemption from section 22(e)
for certain conduit funds that invest, pursuant to section 12(d)(1)(E) of the Act, all of their assets
in a money market fund that suspends redemption in reliance on paragraph (a) of the proposed
rule. 288 Without this exemption, these conduit funds may be placed in the position of having to
honor redemption requests while being unable to liquidate shares of money market funds held as
portfolio securities. We anticipate that this provision would be used principally by insurance
company separate accounts issuing variable insurance contracts and by funds participating in
master-feeder arrangements. 289
We request comment generally on all aspects of proposed rule 22e-3. Is it appropriate to
permit money market funds that break the buck to suspend redemptions during liquidation?
Should the exemption be available to other types of open-end investment companies? Should
there be additional or alternative conditions with regard to the exemption (e.g., should the fund
be required to disclose its liquidation plan to shareholders)? Should there be a limit on the
suspension period so that shareholder assets are not “locked up” for an unduly lengthy period? If
so, what should be the maximum length of the suspension period (e.g., 60 or 90 days)?
2.
Request for Comment on Other Regulatory Changes
We also request comment on certain additional changes that we are considering but are
287
Proposed rule 22e-3(c). We adopted a similar provision in rule 22e-3T. Rule 22e-3T(b); see also
Rule 22e-3T Adopting Release, supra note 31.
288
Proposed rule 22e-3(b). This provision is based on a suggestion we received in a comment letter
submitted in connection with rule 22e-3T. See Comment Letter of the Committee of Annuity
Insurers (Dec. 23, 2008) (requesting that the Commission extend the application of rule 22e-3T to
insurance company separate accounts). Proposed rule 22e-3(b) also would require a fund to
promptly notify the Commission that it has suspended redemptions in reliance on the rule.
289
For a discussion of master-feeder arrangements, see supra note 194.
98
not currently proposing, relating to the suspension of redemptions that may provide additional
protections to money market fund investors.
a.
Temporary Suspensions for Exigent Circumstances
Should we include a provision in rule 22e-3 that would permit fund directors to
temporarily suspend redemptions during certain exigent circumstances other than liquidation of
the fund? The ICI Report recommends that we permit a fund’s directors to suspend temporarily
the right of redemption if the board, including a majority of its independent directors, determines
that the fund’s net asset value is “materially impaired.”290 Under this approach, the fund could
suspend redemptions for up to five days, during which time the fund could attempt to restore its
net asset value (e.g., by securing credit support agreements). In the event that the fund could not
restore its net asset value within that period, the fund would be required to begin the liquidation
process. A fund would be permitted to exercise this option only once every five years. This
“time out” could give money market funds some time during turbulent periods to assess the
viability of the fund. 291
We request comment generally on whether we should provide this additional relief.
Would it make money market funds less appealing to investors? Would it provide time for
directors to find a solution? Or might it accelerate redemptions from shareholders once the
suspension period ends, regardless of any action taken by the board of directors? 292 Could the
290
ICI REPORT, supra note 6, at 85-89.
291
Similarly, the Treasury’s Guarantee Program and rule 22e-3T effectively provide funds with the
ability to temporarily suspend redemptions. The Guarantee Program requires funds that break the
buck to commence liquidation proceedings within five days, unless the fund restores its net asset
value to a level equal to or above $0.995 within that period. Meanwhile, rule 22e-3T permits
funds to suspend redemptions if a fund breaks the buck and has not yet “cured” the event.
292
In other situations, temporary restrictions on redemptions may have exacerbated the situation and
increased the rate of redemptions. See Svea Herbst-Bayliss, “Gates” May Have Hurt More Than
Helped Hedge Funds, REUTERS, Mar. 26, 2009, available at
http://www.reuters.com/article/PrivateEquityandHedgeFunds09/idUSTRE52P4JJ20090326.
99
accumulating redemptions “hanging over the fund” place pressure on the prices of fund portfolio
securities? How could we ensure that directors would use this authority only in exigent
circumstances? When is a money market fund’s net asset value “materially impaired”? Would
this term include circumstances in which the fund has overvalued securities, which, if sold to
satisfy redemptions, would have to be marked down?
We also request comment on how a temporary suspension should operate. What
disclosures should a money market fund be required to make, and when and where should the
fund make them? Should a fund be required to calculate its net asset value during the suspension
period, and, if so, should the net asset value be publicly disclosed? Should the suspension period
be longer or shorter than five days? What factors should the board of directors take into
consideration when deciding whether to suspend redemptions temporarily? How would directors
weigh the various and possibly competing interests of shareholders?
b.
Options for Shareholders in Liquidating Funds
If a fund suspends redemptions in order to liquidate, the directors would likely distribute
money to investors as it becomes available from the sale of portfolio securities, while
maintaining a reserve to cover expenses and potential liabilities. As we have seen, this process
can be lengthy. Should we include conditions in any rule regarding the treatment of shareholders
in a liquidation? 293 For example, should we require that fund assets be distributed on a pro rata
basis? Should there be a limit on allowable reserves?
293
The Investment Company Act does not contain any provisions governing the liquidation of an
investment company, including a money market fund; rather, liquidations are primarily effected
in accordance with applicable state law. The Act does include, however, a provision authorizing
Federal district courts to enjoin a plan of reorganization upon a proceeding initiated by the
Commission on behalf of security holders, if the court determines that the plan of reorganization
is not “fair and equitable to all security holders.” Section 25(c) of the Act. A plan of
“reorganization” includes a voluntary dissolution or liquidation of a fund. Section 2(a)(33) of the
Act.
100
Alternatively, should we permit or require a fund board to recognize that investors will
have different preferences for liquidity and capital preservation? For example, a fund that
decides to liquidate and suspend redemptions could be allowed to offer shareholders the choice
of redeeming their shares immediately at a reduced net asset value per share that reflects the fair
market value of fund assets, i.e., at a price below the fund’s stable net asset value. Remaining
shareholders would receive their redemption proceeds at the end of the liquidation process and
may receive the economic benefit of an orderly disposal of assets. Would such an approach be
fair to all fund shareholders? What conditions would be necessary and appropriate to ensure that
shareholders are treated fairly? Specifically, how would such a mechanism operate? Should
funds be able to deduct an additional discount or “haircut” from earlier redeeming shareholders
to provide additional protection for later redeeming shareholders? Should we permit boards to
decide the amount of the haircut? If so, what factors should boards use to decide such haircuts?
What disclosures and information would be necessary to permit shareholders to make an
informed decision between the options?
Should investors be required to choose their preferences at the time they purchase fund
shares? Should investors be able to change their preferences? If so, how and when? Should
they be able to choose their preferences when a fund announces its intention to liquidate and
suspend redemptions under the rule? If so, should we (or the fund board) establish a default
assumption for investors that fail to respond to the inquiry?
III.
REQUEST FOR COMMENT
The Commission requests comment on the rules and amendments proposed in this
release. Commenters are requested to provide empirical data to support their views. The
Commission also requests suggestions for additional changes to existing rules or forms, and
comments on other matters that might have an effect on the proposals contained in this release.
101
We recognize that the events of the last two years raise the question of whether further
and perhaps more fundamental changes to the regulatory structure governing money market
funds may be warranted. Therefore we are exploring other ways in which we could improve the
ability of money market funds to weather liquidity crises and other shocks to the short-term
financial markets. We invite interested persons to submit comments on the advisability of
pursuing any or all of the following possible reforms, as well as to provide other approaches that
we might consider to achieve our goals. We expect to benefit from the comments we receive
before deciding whether to propose these changes. 294
A.
Floating Net Asset Value
When the Commission adopted rule 2a-7 in 1983, 295 it facilitated money market funds’
maintenance of a stable net asset value by permitting them to use the amortized cost method of
valuing their portfolio securities. As discussed above, section 2(a)(41) of the Act, in conjunction
with rules 2a-4 and 22c-1, normally require a registered investment company to calculate its
current net asset value per share by valuing its portfolio securities for which market quotations
are readily available at current market value and its other securities at their fair value as
determined, in good faith, by the board of directors. Therefore, using the amortized cost method
of valuation is an exception to the general requirement under the Act that investors in investment
companies should pay and receive market value or fair value for their shares.296 The
294
In addition, we note that the U.S. Department of the Treasury’s white paper on Financial
Regulatory Reform calls for the President’s Working Group on Financial Markets to prepare a
report by September 15, 2009 assessing whether more fundamental changes are necessary to
further reduce the money market fund industry’s susceptibility to runs, such as eliminating the
ability of a money market fund to use a stable net asset value or requiring money market funds to
obtain access to reliable emergency liquidity facilities from private sources. See DEPARTMENT
OF THE TREASURY, FINANCIAL REGULATORY REFORM, A NEW FOUNDATION: REBUILDING
FINANCIAL SUPERVISION AND REGULATION, at 38-39 (June 2009).
295
See 1983 Adopting Release, supra note 3.
296
Rule 2a-7 is not the only exception permitting open-end investment companies to value short-
102
Commission did not take lightly its decision to permit money market funds to use the amortized
cost method of valuation. Rule 2a-7 essentially codified several of the Commission’s exemptive
orders relating to money market funds, and these orders were issued only after an administrative
hearing in the late 1970s at which the use of the amortized cost method of valuation was a matter
of considerable debate. 297
The balance the Commission struck was that, in exchange for permitting this valuation
method, it would impose certain conditions on money-market funds designed to ensure that these
funds invested only in instruments that would tend to promote a stable net asset value per share
and would impose on the funds’ boards of directors an ongoing obligation to determine that it
remains in the best interest of the funds and their shareholders to maintain a stable net asset
value. Further, money market funds are permitted to use the amortized cost method of valuation
only so long as their boards believe that it fairly reflects the funds’ market-based net asset value
per share. 298
The $1.00 stable net asset value per share has been one of the trademark features of
money market funds. It facilitates the funds’ role as a cash management vehicle, provides tax
and administrative convenience to both money market funds and their shareholders, 299 and
promotes money market funds’ role as a low-risk investment option. Many investors may hold
term debt securities in their portfolios on an amortized cost basis. Subject to certain conditions,
the amortized cost method of valuation may be used by open-end investment companies to value
investments with a remaining maturity of 60 days or less in accordance with the Commission’s
interpretation set forth in Valuation of Debt Instruments by Money Market Funds and Certain
Other Open-End Investment Companies, Investment Company Act Release No. 9786 (May 31,
1977) [42 FR 28999 (June 7, 1977)].
297
See 1982 Proposing Release, supra note 25, at text preceding, accompanying, and following
nn.2-4.
298
See rule 2a-7(c)(1).
299
A $1.00 stable net asset value per share relieves shareholders of the administrative task of
tracking the timing and price of purchase and sale transactions for capital gain and wash sale
purposes under tax laws.
103
shares in money market funds in large part because of these features. 300 We are mindful that if
we were to require a floating net asset value, a substantial number of investors might move their
investments from money market funds to other investment vehicles.
However, a stable $1.00 net asset value per share also creates certain risks for a money
market fund and its investors. These risks are a consequence of the amortized cost method of
valuation and the resulting insensitivity of the $1.00 net asset value per share to market valuation
changes. It may create an incentive for investors to redeem their shares when a fund’s marketbased net asset value per share falls between $0.995 and $1.00 because they will obtain $1.00 in
exchange for their right to fund assets worth less than $1.00 per share. Regardless of the
motivation underlying the redemptions, the unrealized losses attributable to redeeming
shareholders are now borne by the remaining money market fund shareholders.
Further, particularly in times of market turbulence and illiquidity, regardless of the
motivation behind the redemptions, redemptions at $1.00 in a money market fund whose marketbased net asset value is below $1.00 can further depress the fund’s market-based net asset value,
exacerbating the impact on remaining shareholders. It can create a level of unfairness in
permitting the remaining fund shareholders to pay for the liquidity needs and unrealized losses of
redeeming fund shareholders. Because there is a limited window where only so many
shareholders can redeem at $1.00 in a fund with a portfolio under threat (because of holding
distressed securities or facing significant shareholder redemptions) before the board of the fund
must consider whether to re-price the fund’s shares or take other action, there can be an incentive
300
Some institutional investors are prohibited by board-approved guidelines or firm policies from
investing certain assets in money market funds unless they have a stable net asset value per share.
See ICI REPORT, supra note 6, at 109. One survey also reported that 55% of institutional cash
managers would substantially decrease their investments in money market funds if the funds had
a floating value. See id. at 110 (citing a January 2009 survey by Treasury Strategies, Inc.).
104
to be the first shareholder to place a redemption request upon any hint of stress at a money
market fund. Generalized market dislocations or illiquidity can create this stress on a number of
money market funds simultaneously, leading to runs on money market funds similar to those we
witnessed in September 2008. Even further, a run may result in fire sales of securities, placing
pressure on market prices and transmitting problems that may be originally associated with a
single money market fund to other money market funds. Finally, larger, institutional money
market fund investors, especially those with fiduciary responsibilities for managing their clients’
assets, are more likely to recognize negative events potentially affecting the money market fund
and to be in a position to quickly redeem shares of the money market fund and thus protect their
money market investments and those of their clients, leaving other smaller, more passive money
market investors to bear their losses.
When we determined to permit money market funds to use amortized cost valuation in
1983, money market funds held only about $180 billion in assets 301 and played a minor role in
the short-term credit markets. Their principal benefit was to provide retail investors with a cash
investment alternative to bank deposits, which at the time paid fixed rates substantially below
short-term money market rates. Since that time, money market funds have grown tremendously
and have developed into an industry driven in large part by institutional investors, who hold
approximately 67 percent of the over $3.7 trillion in money market fund assets.302 As noted
earlier, with the ability of institutional investors today to make hourly redemption requests to
money market funds, these investors have the ability to move substantial amounts of money in
and out of money market funds (or between money market funds), with potentially detrimental
effects on the funds, their remaining shareholders, and the marketplace.
301
See ICI REPORT, supra note 6, at 1.
302
See ICI Mutual Fund Historical Data, supra note 47 (data for week ended June 10, 2009).
105
The influx of institutional investments in money market funds, the increased transparency
of fund holdings, and the speed with which large shareholders can buy and redeem shares may
have increased the possibility that the value of some fund investors’ shares will be diluted as a
result of the fund’s use of the amortized cost valuation method. 303 When short-term interest rates
decrease, the fund’s portfolio holdings (with their now above-market yields) become more
valuable. Institutional investors may pay $1.00 per share to purchase fund shares whose market
value is, for example, $1.002 per share. Such institutional inflows would be invested by the fund
in securities offering the new, reduced market yields, diluting the yield advantage that existing
fund shareholders would otherwise enjoy. These institutional investors, in effect, are able to earn
a yield through a money market fund above the market rate they could earn on a direct
investment. They achieve this yield advantage by capturing a portion of the benefit from
declining interest rates that otherwise would benefit existing money market fund investors. 304
Similarly, when interest rates increase, institutional investors could sell shares of money market
funds, obtaining $1.00 per share for a fund that all things being equal likely will be worth less,
e.g., $0.997 per share. 305 If instead the institutional investor sells commercial paper in the market
303
We have considered the impact of dilution in money market funds using the amortized cost
method of valuation in the past. See, e.g., 1982 Proposing Release, supra note 25, at n.6 and
accompanying text.
304
This benefit would otherwise be paid out to money market fund shareholders in the form of
greater dividend payments from the increased yield.
305
See S&P 2007 RATINGS CRITERIA, supra note 139, at 27. Standard and Poor’s gives the example
of an investor holding $1 million in 90-day U.S. Treasury bills yielding 5%. If interest rates
increased 150 basis points, the value of the investment would drop by approximately $3700 and
the investor’s yield would remain at 5%. Compare this to an investor holding one million shares
of a money market fund holding exclusively Treasury bills yielding 5% (setting aside fund
expenses). If interest rates rose 150 basis points, the investor could sell the fund investment for
$1.00 per share and not experience any loss. The investor could then purchase 90-day Treasury
bills yielding 6.5%, instantaneously increasing its return by 1.5%. If the fund is forced to sell
these securities to meet redemption requests, the $3700 unrealized loss would be borne by the
fund and its remaining shareholders.
106
under the same conditions, it could only sell such securities at a discount.
In stable markets and with small shareholdings, amortized cost pricing at most results in
shareholders who purchase or redeem shares receiving slightly more or less (in shares or in
redemption proceeds) than they otherwise would if the fund’s net asset value were to fluctuate
according to market-based pricing. Net redemptions generally are funded by cash on hand. Any
deviation between the market-based net asset value per share of the fund and its amortized cost
value is small enough to have an immaterial effect on the fund, and no effect on investors. It
could be compared to a rounding convention in a billing system.
In a market under significant stress and with institutions holding billions of dollars of
money market fund shares, however, a real arbitrage opportunity can arise, and a race or threat of
a potential race for redemptions may become a real possibility. For example, during last fall’s
market turbulence, as credit spreads on many money market fund portfolio securities widened
and the market value of these securities fell, we understand that the market-based net asset value
of some money market funds dropped low enough that redemptions by a few large shareholders
in the fund at $1.00 per share alone could have caused the fund to break the buck.
We recognize that a floating net asset value would not necessarily eliminate the incentive
to redeem shares during a liquidity crisis—shareholders still would have an incentive to redeem
before the portfolio quality deteriorated further from the fund selling securities into an illiquid
market to meet redemption demands. But a floating net asset value may lessen the impact of any
portfolio deterioration by eliminating the ability of shareholders to redeem their shares for more
than the current market value per share of the fund’s portfolio. It also might better align
investors’ expectations of risk with the actual risks posed by money market fund investments.
We expect that, at least under stable market conditions, the other risk-limiting conditions of rule
107
2a-7 would tend to promote a relatively stable net asset value per share even if we eliminated the
ability of money market funds to rely on the amortized cost method of valuation.
We request comment on the possibility of eliminating the ability of money market funds
to use the amortized cost method of valuation. Would such a change render money market funds
a more stable investment vehicle? Would it lessen systemic risk by making money market funds
less susceptible to runs? Would it make the risks inherent in money market funds more
transparent? Many money market funds’ stable net asset value was supported voluntarily by
fund affiliates over the last two years, and shareholders may not have understood that this
support was provided on a voluntary basis and may not be provided in the future.
On the other hand, would such a change make money market funds more susceptible to
runs because investors might respond quickly to small changes in net asset value? As discussed
above, a stable net asset value per share creates certain administrative, tax, and cash management
conveniences for fund investors. Accordingly, would prohibiting the use of the amortized cost
method of valuation in money market funds encourage investors to shift assets from money
market funds to unregulated offshore funds, bank accounts, or other investments?
Would it
result in some institutional money market funds deregistering with the Commission (in reliance
on section 3(c)(7) of the Act) in order to continue to maintain a stable net asset value? Is this a
result with which the Commission should be concerned?
What impact would this have on investors’ cash management activities? What impact
might such a change have on the short-term credit markets and issuers of short-term debt
securities? How would money market funds whose share prices were based on market-based net
asset values differ from current short-term bond funds? Should any rule amendment eliminating
the ability of money market funds to rely on the amortized cost method of valuation to create a
108
stable net asset value be limited to institutional money market funds? As discussed above,
institutional money market funds are at greater risk of instability, runs and the dilutive effect of
large redemptions.
B.
In-Kind Redemptions
As noted above, one of our concerns relates to the ability of large institutional
shareholders to rapidly redeem substantial amounts of fund assets, which can pose a threat to the
stable net asset value of the fund and can advantage one group of shareholders over another by
requiring remaining shareholders to pay for the liquidity needs of large redeeming
shareholders. 306 While the liquidity requirements we are proposing today may ameliorate
pressures created by redeeming shareholders, during severe market dislocations even more steps
may be necessary to help ensure the stability of a stable net asset value money market fund.
Accordingly, if we retain a stable net asset value for money market funds, we are interested in
exploring other methods of reducing the risks and unfairness posed by significant sudden
redemptions.
One possible way of addressing these issues would be to require that funds satisfy
redemption requests in excess of a certain size through in-kind redemptions. 307 Money market
funds currently are permitted to and many money market funds disclose in their prospectuses that
they may satisfy redemption requests through in-kind redemptions. 308 In the wake of last fall’s
306
This situation to some extent could be analogized to the situation that can be created by market
timing in which selling shareholders receive benefits to the detriment of remaining mutual fund
shareholders.
307
An in-kind redemption occurs when a shareholder’s redemption request to a fund is satisfied by
distributing to that shareholder portfolio assets of that fund instead of cash.
308
See section 2(a)(32) of the Act (defining a redeemable security as a security where the holder “is
entitled ... to receive approximately his proportionate share of the issuer's current net assets, or
the cash equivalent thereof” (italics added)). See also rule 18f-1, which provides an exemption
from certain prohibitions of section 18(f)(1) of the Act with regard to redemptions in kind and in
cash.
109
redemption pressures on money market funds, however, only one announced that it would do
so. 309 In-kind redemptions would lessen the impact of large redemptions on remaining money
market fund shareholders and would require the redeeming investor to bear part of the cost of its
liquidity needs. If shareholders did not immediately sell these securities, requiring in-kind
redemptions in such circumstances may mitigate the impact of large redemptions on short-term
credit markets by reducing the likelihood of large fire sales of short-term securities into the
market. Finally, it also may encourage large investors to diversify their money market fund
holdings among a variety of funds, perhaps lessening the risk that any individual fund would be
threatened by a few redemptions. 310 If proposed, we would expect to set a threshold for requiring
in-kind redemptions sufficiently high that we could reasonably assume that such an investor
would be in the position to assume ownership of such securities.
We request comment on requiring money market funds to satisfy redemption requests in
excess of a certain size through in-kind redemptions. What would be the advantages and
disadvantages of this approach? What type of threshold redemption request should trigger this
requirement? Should there be a different threshold for third-party shareholders versus affiliated
shareholders of a money market fund? Should there be other restrictions on affiliate redemptions
(e.g., prioritizing non-affiliate redemptions over affiliate redemption requests that are submitted
on the same day)? How should the fund determine the value of the securities to be distributed as
309
On September 19, 2008, the American Beacon Money Market Portfolio announced it would
honor redemption requests exceeding $250,000 in a 90-day period through pro rata payments of
cash and “in-kind” distributions of securities held by the fund, to prevent redemptions from
“forcing” the sale of fund assets. See American Beacon Funds, Prospectus Supplement for BBH
ComSet Class, Institutional Class, Cash Management Class, and PlanAhead Class (Sept. 30,
2008), available at
http://www.sec.gov/Archives/edgar/data/809593/000080959308000045/sep3008_prosuppbeacon.
txt.
310
Large investors that did not wish to receive in-kind redemptions could avoid this risk by
spreading their investments among several money market funds such that no single money market
fund investment was large enough to possibly trigger the in-kind redemption requirement.
110
a result of such a redemption request? The securities’ amortized cost value? The securities’ fair
value, as determined based on current market quotations or, if no such quotations are readily
available, as determined in good faith by the fund’s board of directors? Would these shareholders
be able to assume ownership of such securities?
We note that a board of directors alternatively could cause a money market fund to
impose a redemption fee under rule 22c-2 to impose some of the fund’s costs from shareholders’
liquidity needs on the redeeming shareholders. 311 What would be the advantages and
disadvantages of this alternative approach to addressing our concerns regarding significant
shareholder redemptions?
IV.
PAPERWORK REDUCTION ACT ANALYSIS
Certain provisions of the proposed amendments to rules 2a-7 and 30b1-5 and proposed
new rules 22e-3 and 30b1-6 and Form N-MFP under the Investment Company Act contain
“collections of information” within the meaning of the Paperwork Reduction Act of 1995
(“PRA”). 312 The titles for the existing collections of information are: (1) “Rule 2a-7 under the
Investment Company Act of 1940, Money market funds” (OMB Control No. 3235-0268);
(2) “Rule 30b1-5 under the Investment Company Act of 1940, Quarterly filing of schedule of
portfolio holdings of registered management investment companies” (OMB Control No. 32350577); and (3) “Form N-Q under the Investment Company Act of 1940, Quarterly Schedule of
Portfolio Holdings of Registered Management Investment Company” (OMB Control No.
3235-0578). The titles for the new collections of information are: (1) “Rule 22e-3 under the
Investment Company Act of 1940, Exemption for liquidation of money market funds;” (2) “Rule
30b1-6 under the Investment Company Act of 1940, Monthly report for money market funds;”
311
The redemption fee cannot exceed two percent of the value of the shares redeemed.
312
44 U.S.C. 3501-3521.
111
and (3) “Form N-MFP under the Investment Company Act of 1940, Portfolio Holdings of
Money Market Funds.” The Commission is submitting these collections of information to the
Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d)
and 5 CFR 1320.11. Our proposed amendments and new rules are designed to make money
market funds more resilient to risks in the short-term debt markets, and to provide greater
protections for investors in a money market fund that is unable to maintain a stable net asset
value per share. An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless it displays a currently valid control number.
A.
Rule 2a-7
Rule 2a-7 under the Investment Company Act exempts money market funds from the
Act’s valuation requirements, permitting money market funds to maintain stable share pricing,
subject to certain risk-limiting conditions. As discussed above, we are proposing to amend rule
2a-7 in several respects. Our proposal would amend the rule by: revising portfolio quality and
maturity requirements; introducing liquidity requirements; requiring money market fund boards
to adopt procedures providing for periodic stress testing of the fund’s portfolio; requiring funds
to disclose monthly on their websites information on portfolio securities; and finally, requiring
money market fund boards to determine, at least once each calendar year, that the fund has the
capability to redeem and issue its securities at prices other than the fund’s stable net asset value
per share. 313 Three of the proposed amendments would create new collection of information
requirements. The respondents to these collections of information would be money market funds
or their advisers, as noted below.
313
See supra Section II.A-G.
112
1.
Stress Testing
The proposed amendments would require money market fund boards to adopt written
procedures that provide for the periodic testing of the fund’s ability to maintain a stable net asset
value per share based on certain hypothetical events. 314 These procedures also would have to
provide for a report of the testing results to be submitted to the board of directors at its next
regularly scheduled meeting, and an assessment by the fund’s adviser of the fund’s ability to
withstand the events (and concurrent occurrences of those events) that are reasonably likely to
occur within the following year. 315 Compliance with this proposed disclosure requirement would
be mandatory for any fund that holds itself out as a money market fund in reliance on rule 2a-7.
The information when provided to the Commission in connection with staff examinations or
investigations would be kept confidential to the extent permitted by law.
We anticipate that stress testing would give fund advisers a better understanding of the
effect of potential market events and shareholder redemptions on their funds’ ability to maintain
a stable net asset value, the fund’s exposure to that risk, and actions the adviser may need to take
to mitigate the possibility of the fund breaking the buck.
Commission staff believes that in light of the events of last fall most, if not all, money
market funds currently conduct some stress testing of their portfolios as a matter of routine fund
314
Proposed rule 2a-7(c)(8)(ii)(D). These events would include, but would not be limited to, a
change in short-term interest rates, an increase in shareholder redemptions, a downgrade of or
default on portfolio securities, and the widening or narrowing of spreads between yields on an
appropriate benchmark the fund has selected for overnight interest rates and commercial paper
and other types of securities held by the fund.
315
Proposed rule 2a-7(c)(8)(ii)(D)(2), (3). The report to the board would include the dates on which
the testing was performed and the magnitude of each hypothetical event that would cause the
deviation of the money market fund’s net asset value calculated using available market quotations
(or appropriate substitutes that reflect current market conditions) from its net asset value per share
calculated using amortized cost to exceed ½ of 1 percent.
113
management and business practice. 316 These procedures likely vary depending on the fund’s
investments. For example, a prime money market fund that is offered to institutional investors
may test for hypothetical events such as potential downgrades or defaults in portfolio securities
while a U.S. Treasury money market fund may not. Some funds that currently conduct testing
may be required to include additional hypothetical events under our proposed amendments.
These funds likely provide regular reports of the test results to senior management. We expect,
however, that most funds do not have written procedures documenting the stress testing, do not
report the results of testing to their boards of directors, and do not provide an assessment from
the fund’s adviser regarding the fund’s ability to withstand the hypothetical events reasonably
likely to occur in the next year.
Commission staff believes that the stress testing procedures are or would be developed
for all the money market funds in a fund complex by the fund adviser, and would address
appropriate variations for individual money market funds within the complex. Staff estimates
that it would take a fund adviser an average of 21 hours for a portfolio risk analyst initially to
draft procedures documenting the complex’s stress testing, and 3 hours for the board of directors
to consider and adopt the written procedures. We estimate that 171 fund complexes with money
market funds are subject to rule 2a-7. We therefore estimate that the total burden to draft these
procedures initially would be 4104 hours. 317 Amortized over a three-year period, this would
result in an average annual burden of 8 hours for an individual fund complex and a total of 1368
316
The estimates of hour burdens and costs provided in the PRA and cost benefit analyses are based
on staff discussions with representatives of money market funds and on the experience of
Commission staff. We expect that the board of directors would be the same for all the money
market funds in a complex, and thus could adopt the stress test procedures for all money market
funds in the complex at the same meeting.
317
This estimate is based on the following calculation: (21 hours + 3 hours) x 171 fund complexes =
4104 hours.
114
hours for all fund complexes. 318 Staff estimates that a risk analyst also may spend an average of
6 hours per year revising the written procedures to reflect changes in the type or nature of
hypothetical events appropriate to stress tests and the board would spend 1 hour to consider and
adopt the revisions, for a total annual burden of 1197 hours. 319 Commission staff estimates
further that it would take an average of 10 hours of portfolio management time to draft each
report to the board of directors, 2 hours of an administrative assistant’s time to compile and copy
the report and 15 hours of the fund adviser’s time to provide an assessment of the funds’ ability
to withstand reasonably likely hypothetical events in the coming year. The report must be
provided at the next scheduled board meeting, and we estimate that the report would cover all
money market funds in a complex. We also believe that the fund adviser would provide an
assessment each time it provided a report. Finally, we assume that funds would conduct stress
tests no less than monthly. With an average of 6 board meetings each year, we estimate that the
annual burden would be 162 hours for an individual fund complex with a total annual burden for
all fund complexes of 27,702 hours. 320
The proposed amendment would require the fund to retain records of the reports on stress
tests and the assessments for at least 6 years (the first two in an easily accessible place). 321 The
retention of these records would be necessary to allow the staff during examinations of funds to
determine whether a fund is in compliance with the stress test requirements. We estimate that
318
These estimates are based on the following calculations: (21 + 3) ÷ 3 = 8 hours; 8 x 171 fund
complexes = 1368 hours. PRA submissions for approval are made every three years. To estimate
an annual burden for a collection of information that occurs one time, the total burden is
amortized over the three year period.
319
This estimate is based on the following calculation: (6 hours (analyst) + 1 hour (board)) x 171
fund complexes = 1197 hours.
320
These estimates are based on the following calculations: (10 hours + 2 hours + 15 hours) x 6
meetings = 162 hours; 162 hours x 171 fund complexes = 27,702 hours.
321
Proposed rule 2a-7(c)(11)(vii).
115
the burden would be 10 minutes per fund complex per meeting to retain these records for a total
annual burden of 171 hours for all fund complexes. 322
Thus, we estimate that for the three years following adoption, the average annual burden
resulting from the stress testing requirements would be 178 hours for each fund complex with a
total of 30,438 hours for all fund complexes. 323
We request comment on these estimates of hourly burdens. Would funds develop stress
tests on a complex-wide basis for money market funds? Would the adviser prepare one report
regarding stress tests for all the money market funds in a complex, or prepare a separate report
for each money market fund?
2.
Public Website Posting
The proposed amendments would require money market funds to post monthly portfolio
information on their websites. 324 We believe that greater transparency of fund portfolios may
allow investors to exert influence on risk-taking by fund advisers, and thus reduce the likelihood
that a fund will break the buck. Information will be posted on a public website, and compliance
with this requirement would be mandatory for any fund that holds itself out as a money market
fund in reliance on rule 2a-7. We estimate that there are approximately 750 money market funds
that would be affected by this proposal. We understand, based on interviews with industry
representatives, that most money market funds already post portfolio information on their
322
This estimate is based on the following calculation: 0.1667 hours x 6 meetings x 171 fund
complexes = 171 hours.
323
These estimates are based on the following calculations: 8 hours (draft procedures) + 7 hours
(revise procedures) + 72 hours (6 reports) + 90 hours (assessments) + 1 hour (record retention) =
178 hours; 1368 hours (draft procedures) + 1197 hours (revise procedures) + 12,312 hours (6
reports) + 15,390 (6 assessments) + 171 hours (record retention) = 30,438 hours.
324
Proposed rule 2a-7(c)(12).
116
webpages at least quarterly. 325 To be conservative, the staff estimates that 20 percent of money
market funds, or 150 funds, do not currently post this information at least quarterly, and therefore
would need to develop a webpage to comply with the proposed rule. We estimate that a money
market fund would spend approximately 24 hours of internal money market fund staff time
initially to develop the webpage. We further estimate that a money market fund would spend
approximately 4 hours of professional time to maintain and update the relevant webpage with the
required information on a monthly basis. Based on an estimate of 750 money market funds
posting their portfolio holdings on their webpages, including 150 funds incurring start-up costs to
develop a webpage, we estimate that, in the aggregate, the proposed amendment would result in
a total of 37,200 average burden hours for all money market funds for each of the first three
years. 326
3.
Reporting of Rule 17a-9 Transactions
We are proposing to amend rule 2a-7 to require a money market fund to promptly notify
the Commission by electronic mail of the purchase of a money market fund’s portfolio security
by an affiliated person in reliance on the rule and to explain the reasons for such purchase. 327
The proposed reporting requirement is designed to assist Commission staff in monitoring money
market funds’ affiliated transactions that otherwise would be prohibited. The new collection of
325
Certain of the required information is currently maintained by money market funds for regulatory
reasons, such as in connection with accounting, tax and disclosure requirements. We understand
that the remaining information is retained by funds in the ordinary course of business.
Accordingly, for the purposes of our analysis, we do not ascribe any time to producing the
required information.
326
The estimate is based on the following calculations. The staff estimates that 150 funds would
require a total of 3600 hours initially to develop a webpage (150 funds x 24 hours per fund =
3600 hours). In addition, each of the 750 funds would require 48 hours per year to update and
maintain the webpage, for a total of 36,000 hours per year (4 hours per month x 12 months = 48
hours per year; 48 hours per year x 750 funds = 36,000). The average annual hour burden for
each of the first three years would thus equal 37,200 hours ([3600 + (36,000 x 3)] ÷ 3).
327
See proposed rule 2a-7(c)(7)(iii).
117
information would be mandatory for money market funds that rely on rule 2a-7 and that rely on
rule 17a-9 for an affiliated person to purchase a money market fund’s portfolio security.
Information submitted to the Commission related to a rule 17a-9 transaction would not be kept
confidential. 328
We estimate that fund complexes will provide one notice for all money market funds in a
particular fund complex holding a distressed security purchased in a transaction under rule 17a-9.
As noted above, Commission staff estimates that there are 171 fund complexes with money
market funds subject to rule 2a-7. Of these fund complexes, Commission staff estimates that an
average of 25 per year would be required to provide notice to the Commission of a rule 17a-9
transaction, with the total annual response per fund complex, on average, requiring 1 hour of an
in-house attorney’s time. Given these estimates, the total annual burden of this proposed
amendment to rule 2a-7 for all money market funds would be approximately 25 hours. 329
4.
Total burden
The currently approved burden for rule 2a-7 is 1,348,000 hours. In a recent renewal
submission to OMB, we estimated the collection of information burden for the rule is 310,983
hours. The additional burden hours associated with the proposed amendments to rule 2a-7 would
increase the renewal estimate to 378,646 hours annually.330
B.
Rule 22e-3
Proposed rule 22e-3 would permit a money market fund to suspend redemptions and
328
Commission rules provide, however, for a procedure under which persons submitting notices
under the proposed amendment would be able to request that the information not be disclosed
under a Freedom of Information Act request. See 17 CFR 200.83.
329
The estimate is based on the following calculation: (25 fund complexes x 1 hour) = 25 hours.
330
This estimate is based on the following calculation: 310,983 (estimated in 2a-7 renewal
submission) + 30,438 (stress testing) + 37,200 (website posting) + 25 hours (reporting 17a-9
transactions) = 378,646 hours.
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postpone the payment of proceeds pending board-approved liquidation proceedings, provided
that the fund notifies the Commission by electronic mail of its decision to do so. 331 The proposed
rule is intended to reduce the vulnerability of investors to the harmful effects of a run on a fund,
and minimize the potential for disruption to the securities markets. The proposed notification
requirement is a collection of information under the PRA, and is designed to assist Commission
staff in monitoring a money market fund’s suspension of redemptions, which would otherwise be
prohibited. Only money market funds that break the buck and begin board-approved liquidation
proceedings would be able to rely on the rule. The respondents to this information collection
therefore would be money market funds that break the buck and elect to rely on the exemption
afforded by the rule. Compliance with the notification requirements of rule 22e-3 would be
necessary for money market funds that seek to rely on rule 22e-3 to suspend redemptions and
postpone payment of proceeds pending a liquidation, and would not be kept confidential.
We estimate that, on average, one money market fund would break the buck and liquidate
every six years. 332 Staff estimates that a fund providing the required electronic mail notice under
proposed rule 22e-3 would spend approximately 1 hour of an in-house attorney’s time to prepare
and submit the notice. Given these estimates, the total annual burden of proposed rule 22e-3 for
all money market funds would be approximately 10 minutes. 333
C.
Monthly Reporting of Portfolio Holdings
1.
Rule 30b1-6 and Form N-MFP
Proposed rule 30b1-6 would require money market funds to file an electronic monthly
331
See proposed rule 22e-3(c).
332
As discussed above, since the adoption of rule 2a-7 in 1983, only two money market funds have
broken the buck.
333
These estimates are based on the following calculations: (1 hour ÷ 6 years) = 10 minutes per year.
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report on proposed Form N-MFP within two business days after the end of each month. The
proposed rule is intended to improve transparency of information about money market funds’
portfolio holdings and facilitate oversight of money market funds. The information required by
the proposed form would be data-tagged in XML format and filed through EDGAR. The
respondents to rule 30b1-6 would be investment companies that are regulated as money market
funds under rule 2a-7. Compliance with proposed rule 30b1-6 would be mandatory for any fund
that holds itself out as a money market fund in reliance on rule 2a-7. Responses to the disclosure
requirements would not be kept confidential.
We estimate that 750 money market funds would be required by rule 30b1-6 to file, on a
monthly basis, a complete Form N-MFP disclosing certain information regarding the fund and its
portfolio holdings. For purposes of this PRA analysis, the burden associated with the
requirements of proposed rule 30b1-6 has been included in the collection of information
requirements of proposed Form N-MFP.
Based on our experience with other interactive data filings, we estimate that money
market funds would require an average of approximately 40 burden hours to compile, tag and
electronically file the required portfolio holdings information for the first time and an average of
approximately 8 burden hours in subsequent filings. 334 Based on these estimates, we estimate the
average annual burden over a three-year period would be 107 hours per money market fund. 335
Based on an estimate of 750 money market funds submitting Form N-MFP in interactive data
334
We understand that the required information is currently maintained by money market funds
pursuant to other regulatory requirements or in the ordinary course of business. Accordingly, for
the purposes of our analysis, we do not ascribe any time to producing the required information.
335
The staff estimates that a fund would make 36 filings in three years. The first filing would
require 40 hours and subsequent filings would require 8 hours each, for an average annual burden
of 107 hours (1 filing x 40 hours = 40 hours; 35 filings x 8 hours = 280 hours; 40 hours + 280
hours = 320 hours; 320 hours ÷ 3 years = 107 hours). Thereafter, filers generally would not incur
the start-up burdens applicable to the first filing.
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format, each incurring 107 hours per year on average, we estimate that, in the aggregate, Form
N-MFP would result in 80,250 burden hours, on average, for all money market funds for each of
the first three years.
2.
Rule 30b1-5 and Form N-Q
Our proposed amendments to rule 30b1-5 would exempt money market funds from the
requirement to file a schedule of investments pursuant to Item 1 of Form N-Q. The proposed
amendment is intended to eliminate unnecessarily duplicative disclosure requirements. The
proposed amendment would only affect investment companies that are regulated as money
market funds under rule 2a-7.
We estimate that 750 money market funds would be affected by the proposed amendment
to rule 30b1-5. For the purposes of this PRA analysis, the decrease in burden hours resulting
from the proposed amendment is reflected in the collection of information requirements for Form
N-Q.
We estimate that money market funds would require an average of approximately 4 hours
to prepare the schedule of investments required pursuant to Item 1 of Form N-Q. Based on these
estimates, we estimate that the average annual burden avoided would be 8 hours per fund. 336
Based on an estimate of 750 money market funds filing Form N-Q, each incurring 8 burden
hours per year on average, we estimate that, in the aggregate, our proposed exemption would
result in a decrease of 6000 burden hours associated with Form N-Q. 337
D.
Request for Comments
We request comment on whether these estimates are reasonable. Pursuant to 44 U.S.C.
336
Funds are required to file a quarterly report on Form N-Q after the close of the first and third
quarters of each fiscal year.
337
The estimate is based on the following calculation: 750 money market funds x 8 hours per
money market fund = 6000 hours.
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3506(c)(2)(B), the Commission solicits comments in order to: (i) evaluate whether the proposed
collections of information are necessary for the proper performance of the functions of the
Commission, including whether the information will have practical utility; (ii) evaluate the
accuracy of the Commission’s estimate of the burden of the proposed collections of information;
(iii) determine whether there are ways to enhance the quality, utility, and clarity of the
information to be collected; and (iv) determine whether there are ways to minimize the burden of
the collections of information on those who are to respond, including through the use of
automated collection techniques or other forms of information technology.
Persons wishing to submit comments on the collection of information requirements of the
proposed amendments should direct them to the Office of Management and Budget, Attention
Desk Officer for the Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Room 10102, New Executive Office Building, Washington, DC 20503, and
should send a copy to Elizabeth Murphy, Secretary, Securities and Exchange Commission, 100 F
Street, NE, Washington, DC 20549-1090, with reference to File No. S7-11-09. OMB is required
to make a decision concerning the collections of information between 30 and 60 days after
publication of this Release; therefore a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days after publication of this Release. Requests for materials
submitted to OMB by the Commission with regard to these collections of information should be
in writing, refer to File No. S7-11-09, and be submitted to the Securities and Exchange
Commission, Office of Investor Education and Advocacy, 100 F Street, NE, Washington, DC
20549-0213.
V.
COST BENEFIT ANALYSIS
The Commission is sensitive to the costs and benefits imposed by its rules. We have
identified certain costs and benefits of the proposed amendments and new rules, and we request
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comment on all aspects of this cost benefit analysis, including identification and assessment of
any costs and benefits not discussed in this analysis. We seek comment and data on the value of
the benefits identified. We also welcome comments on the accuracy of the cost estimates in each
section of this analysis, and request that commenters provide data that may be relevant to these
cost estimates. In addition, we seek estimates and views regarding these costs and benefits for
particular covered institutions, including small institutions, as well as any other costs or benefits
that may result from the adoption of these proposed amendments and new rules.
A.
Rule 2a-7
1.
Second Tier Securities, Portfolio Maturity and Liquidity Requirements
We are proposing several changes to the risk-limiting conditions of rule 2a-7. While we
believe that these changes would impart substantial benefits to money market funds, we
recognize that they also may impose certain costs.
First, we would limit money market fund investments to first tier securities, i.e., securities
receiving the highest short-term debt ratings from the requisite NRSROs or securities that the
fund’s board of directors or its delegate determines are of comparable quality. 338 We also are
proposing to limit money market funds to acquiring long-term securities that have received longterm ratings in the highest two ratings categories. 339
Second, we are proposing certain changes to rule 2a-7’s portfolio maturity limits. We are
proposing to reduce the maximum weighted average maturity of a money market fund permitted
by rule 2a-7 from 90 days to 60 days. 340 We also are proposing a new maturity limitation based
on the “weighted average life” of fund securities that would limit the portion of a fund’s portfolio
338
See proposed rule 2a-7(a)(11)(iii); proposed rule 2a-7(a)(11)(iv); proposed rule 2a-7(c)(3).
339
See proposed rule 2a-7(a)(11)(iv)(A).
340
See proposed rule 2a-7(c)(2)(ii).
123
that could be held in longer term floating- or variable-rate securities. This restriction would
require a fund to calculate the weighted average maturity of its portfolio without regard to
interest rate reset dates. The weighted average life of a fund’s portfolio would be limited to 120
days. 341 Finally, we are proposing to delete a provision in rule 2a-7 that permits money market
funds not relying on the amortized cost method of valuation to acquire Government securities
with a remaining maturity of up to 762 calendar days. Under the amended rule, money market
funds could not acquire any security with a remaining maturity of more than 397 days, subject to
the maturity shortening provisions for floating- and variable-rate securities and securities with a
Demand Feature. 342
Third, we are proposing new liquidity requirements on money market funds. Under the
proposed amendments, money market funds would be prohibited from acquiring securities
unless, at the time acquired, they are liquid, i.e., securities that can be sold or disposed of in the
ordinary course of business within seven days at approximately the value ascribed to it by the
money market fund. 343 We also propose to limit taxable retail money market funds and taxable
institutional money market funds to acquiring Daily Liquid Assets unless five percent of a retail
fund’s and 10 percent of an institutional fund’s assets are Daily Liquid Assets. 344
In addition, our proposed amendments to rule 2a-7 would impose weekly liquidity
requirements on money market funds. Specifically, retail and institutional money market funds
would not be permitted to acquire any securities other than weekly liquid assets if, after the
acquisition, (i) the retail fund would hold less than 15 percent of its total assets in weekly liquid
341
See proposed rule 2a-7(c)(2)(iii).
342
See proposed rule 2a-7(c)(2)(i); rule 2a-7(d)(1)-(5).
343
See proposed rule 2a-7(c)(5)(i).
344
See proposed rule 2a-7(c)(5)(iii). This restriction would not apply to tax exempt money market
funds.
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assets and (ii) the institutional fund would hold less than 30 percent of its total assets in weekly
liquid assets. 345 Finally, we are proposing to require that a money market fund at all times hold
daily and weekly liquid assets sufficient to meet reasonably foreseeable redemptions in light of
its obligations under section 22(e) of the Act and any commitments the fund has made to
shareholders. 346
Our proposed amendments would rely on a money market fund’s board of directors to
determine, no less frequently than once each calendar year, whether the money market fund is
intended to be offered to institutional investors or has the characteristics of a fund that is
intended to be offered to institutional investors, based on the: (i) nature of the record owners of
fund shares; (ii) minimum amount required to be invested to establish an account; and
(iii) historical cash flows resulting, or expected cash flows that would result, from purchases and
redemptions. 347
a.
Benefits
We believe that the proposed amendments to rule 2a-7’s risk-limiting conditions would
be likely to produce broad benefits for money market fund investors. First, they should reduce
money market funds’ exposure to certain credit, interest rate, and spread risks. For example,
precluding money market funds from investing in second tier securities would decrease money
market funds’ exposure to credit risk. Reducing the maximum weighted average maturity of
money market funds’ portfolios would further decrease their interest rate sensitivity, as well as
reduce their exposure to credit risk. Introducing the weighted average life limitation on money
market funds’ portfolios would limit credit spread risk and interest rate spread risk to funds from
345
See proposed rule 2a-7(c)(5)(iv).
346
See proposed rule 2a-7(c)(5)(ii).
347
See proposed rule 2a-7(a)(18) (defining “Institutional Fund”).
125
longer term floating- or variable-rate securities.
We expect that the proposed amendments also would bolster the ability of money market
funds to maintain a stable net asset value during times when the level of shareholder redemption
demand is high. Fund portfolios with a lower weighted average maturity that include a limited
amount of longer term floating- or variable-rate securities would turn over more quickly and the
fund would be better able to increase its holdings of highly liquid securities in the face of illiquid
markets than funds that satisfy current maturity requirements. The proposed liquidity
requirements are designed to increase a money market fund’s ability to withstand illiquid
markets by ensuring that the fund acquires only liquid securities and that a certain percent of its
assets are held in daily and weekly liquid assets. These requirements also should decrease the
likelihood that a fund would have to realize losses from selling portfolio securities into an
illiquid market to satisfy redemption requests. Because the proposed amendments would require
a fund to have a contractual right to receive cash for the daily and weekly liquid assets, rather
than the current standard, which assumes that a fund would be able to find a buyer for its
securities within seven days, we believe that the proposed required liquidity requirements would
allow money market fund advisers to more easily adjust the funds’ portfolios to increase liquidity
when needed.
We believe that a reduction of these credit, interest rate, spread, and liquidity risks would
better enable money market funds to weather market turbulence and maintain a stable net asset
value per share. The proposed amendments are designed to reduce the risk that a money market
fund will break the buck and therefore prevent losses to fund investors. To the extent that money
market funds are more stable, they also would reduce systemic risk to the capital markets and
provide a more stable source of financing for issuers of short-term credit instruments, thus
126
promoting capital formation. If money market funds become more stable investments as a result
of the proposed rule amendments, they may attract further investment, increasing their role as a
source of capital formation.
b.
Costs
We recognize that there are potential costs that would result if we adopted our proposed
changes regarding second tier securities, portfolio maturity, and liquidity. Second tier securities,
less liquid securities, and longer term credit instruments typically pay a higher interest rate and,
therefore, the proposed amendments may decrease money market funds’ yields.
Precluding ownership of second tier securities also may deprive money market funds of
some benefits of reduced risk through diversification. We invite comment on whether the
benefits of reducing credit risk through precluding purchases of second tier securities justifies the
costs of the lost diversification benefits that second tier securities may provide.
If, as a result of the proposed amendments, there is a smaller set of Eligible Securities for
a money market fund to choose from, that may increase the cost of those securities if their supply
is limited. In particular, to the extent that the proposed liquidity requirements increase demand
for highly liquid securities that is not countered by increased supply, the cost of those securities
may rise as well. Increased costs of portfolio securities will have a negative impact on money
market fund yield. Finally, to the extent that actual investor redemptions are significantly lower
than our proposed liquidity requirements, money market funds may achieve lower yields as a
result of complying with these liquidity requirements.
Although the impact on individual funds would vary significantly, we estimate that the
proposed changes to rule 2a-7’s requirements regarding portfolio quality, portfolio maturity, and
liquidity would decrease the yield that a money market fund is able to achieve in the range of 2
to 4 basis points. We understand that the majority of money market funds are already in
127
compliance with these proposed requirements due either to their own risk-limiting actions or to
their voluntary compliance with the recommendations contained in the ICI Report. Accordingly,
we expect that the decrease in yield from these changes to rule 2a-7’s risk-limiting conditions
would have a relatively minor impact on current money market fund yields.
However, this decreased yield may limit the range of choices that individual money
market fund investors currently have to select their desired level of investment risk. This might
cause some investors to shift their assets to, among other places, offshore or other enhanced cash
funds unregulated by rule 2a-7 that are able to offer a higher yield. Alternatively, some investors
may choose to shift their assets to bank deposits. When markets come under stress, investors
may be more likely to withdraw their money from these offshore or private funds due to their
perceived higher risk 348 and substantial redemptions from those funds and accompanying sales of
their portfolio securities could increase systemic risk to short-term credit markets, which would
impact money market funds. In addition, the proposed stricter portfolio quality, maturity, and
liquidity requirements may result in some money market funds having fewer issuers from which
to select securities if some issuers only offer second tier securities, less liquid securities or a
larger percentage of longer term securities.
Our proposed portfolio quality, maturity, and liquidity restrictions also may impact
issuers. Issuers may experience increased financing costs to the extent that they are unable to
find alternative purchasers of their second tier securities, less liquid securities, longer term
securities, or floating- and variable-rate securities at previous market rates. As noted earlier in
the release, we do not believe that money market funds currently hold a significant amount of
348
During the recent financial crisis, investors redeemed substantial amounts of assets from ultrashort bond funds and certain offshore money market funds. See ICI REPORT, supra note 6, at
106-07.
128
second tier securities, or securities that are illiquid at acquisition. 349 Thus, we expect that the
proposed amendment’s impact on issuers of these securities would be minimal. If the proposed
amendments result in companies or governments issuing shorter maturity securities, those issuers
may be exposed to an increased risk of insufficient demand for their securities and adverse credit
market conditions because they must roll over their short-term financing more frequently. We
note that this impact could be mitigated if money market funds sufficiently staggered or
“laddered” the maturity of the securities in their portfolios. The markets for longer term or
floating- and variable-rate securities may become less liquid if the proposed rule amendments
cause issuance of these instruments to decline. We generally expect that issuers of floating- or
variable-rate securities would respond to the proposed amendments by issuing a greater
proportion of their securities with shorter final maturities.
Our proposed requirement that fund boards distinguish between retail and institutional
money market funds would require boards to make a determination based on an understanding of
the investors in the fund and their behavior. Our proposed liquidity requirements also would
require money market funds to “know their customers,” including their expected redemption
behavior. We expect that most money market funds already have methods to understand their
customers and their redemption needs because “knowing your customer” is already a best
practice. As a result, we also do not expect that these requirements would impose any material
costs on funds.
We do not believe that eliminating the provision in rule 2a-7 that allowed money market
funds relying solely on the penny-rounding method of pricing to hold Government securities
with remaining maturities of up to 762 days would have a material impact on money market
349
See supra note 101 and accompanying and following text, and Section II.C.1.
129
funds, investors, or issuers of longer term Government securities because we believe that
substantially all money market funds rely on the amortized cost method of valuation, and not
exclusively on the penny-rounding method of pricing, and thus are not eligible to rely on this
exception.
We request comment on these costs and benefits. Would money market fund investors
benefit from the proposed portfolio quality, maturity and liquidity requirements? Would money
market funds experience a significant yield and diversification impact from the proposed changes
to rule 2a-7’s second tier security, portfolio maturity, and liquidity requirements? We note that
the highest rated money market funds currently must have a weighted average maturity of 60
days or less, the average weighted average maturity for taxable money market funds as of June
16, 2009 was 53 days, and very few money market funds hold second tier securities. 350 What
other impacts would these changes have on money market funds? What effect would such
changes have on the short-term credit market and issuers of longer term or debt instruments held
to satisfy the daily or weekly liquidity requirements? How would the proposed amendments
impact issuers of, and the market for, longer term variable- or floating-rate debt securities? We
encourage commenters to provide empirical data to support their analysis.
2.
Use of NRSROs
As discussed above, we are considering an approach that would require a money market
fund’s board of directors to designate NRSROs whose credit ratings the fund would use in
determining the eligibility of portfolio securities under rule 2a-7 and that the board would
annually determine issue credit ratings that are sufficiently reliable for that use. As we also
350
See supra text accompanying note 101, note 145 and accompanying text, and note 147.
130
noted above, we proposed eliminating references to NRSROs in rule 2a-7 last year. 351 For a
discussion of the costs and benefits of that proposal, please see Section VI of the NRSRO
References Release. 352 Are there additional factors we should consider since that release was
published?
We request comment on the approach we are considering. We specifically request
comment regarding the standard we are considering for the board’s annual determination, i.e.,
that the designated NRSROs issue ratings that are sufficiently reliable for use in determining the
eligibility of portfolio securities. Is this standard appropriate, and if not, what would be a more
appropriate standard? We expect that in making their initial designation and their annual
determination, fund boards would review a presentation by the fund’s adviser regarding the
relative strength of relevant NRSROs’ ratings and ratings criteria. What kind of guidance, if any,
should the Commission provide with respect to such a standard?
According to the ICI Report, a requirement that funds designate three or more NRSROs
to use in determining the eligibility of portfolio securities could encourage competition among
NRSROs to achieve designation by money market funds. 353 We anticipate that the approach we
are considering, which would require fund boards annually to determine that the designated
NRSROs issue credit ratings sufficiently reliable to use in determining the eligibility of portfolio
securities, may promote competition among NRSROs to produce the most reliable ratings in
order to obtain designation by money market funds. In addition to the potential for competition
among existing NRSROs, the proposed amendment might encourage new NRSROs that issue
ratings specifically for money market fund instruments to enter the market. As we noted above,
351
See NRSRO References Proposal, supra note 105.
352
See id.
353
See ICI REPORT, supra note 6, at 82.
131
however, the staff believes it is reasonable to assume that the three NRSROs that issued almost
99 percent of all outstanding ratings across all categories that were issued by the 10 registered
NRSROs as of June 2008, also issued well over 90 percent of all outstanding ratings of short
term debt. 354 If fund boards were required to designate a minimum of three NRSROs and all
money market fund boards chose to designate these three NRSROs, the requirement could result
in decreased competition among NRSROs. We request comment on the impact that the
approach we are considering, particularly the minimum number of NRSROs, might have on
competition among NRSROs. We also request comment on the impact, if any, of this approach
with respect to the efficiency of fund managers. Finally, we request comment on any potential
benefits this approach might have with respect to money market funds or NRSROs.
We recognize that there could be costs associated with the approach we are considering.
Staff estimates that the costs of this approach would include: initial costs for the board to
designate NRSROs, as well as an annual cost to determine that designated NRSROs continue to
issue ratings that are sufficiently reliable for use in determining the eligibility of portfolio
securities. We expect that fund advisers currently evaluate the strength of NRSRO ratings and
ratings criteria as part of the analysis they perform (under delegated authority from the board) in
determining the eligibility of portfolio securities, and that this evaluation includes consideration
of whether an NRSRO’s rating is sufficient for that use. Accordingly, we anticipate that fund
advisers would not incur additional time to perform an evaluation that would be the basis for
their recommendations to the board when it makes its initial designation and annual
determination, but the adviser would incur costs to draft those recommendations in a presentation
or report for board review.
354
See supra note 116 and accompanying text.
132
Under the current rule, if a money market fund invests in unrated or second tier
securities, the adviser must monitor all NRSROs in case an unrated or second tier security has
received a rating from any NRSRO below the second highest short-term rating category. 355
Because fund advisers currently monitor NRSROs, we do not expect that limiting the number of
NRSROs that a fund would have to monitor to a number designated by the fund board would
result in increased costs to fund advisers to monitor NRSROs.
We request comment on our analysis of the potential costs and benefits of a requirement
to designate NRSROs. Do funds currently evaluate NRSRO ratings for reliability? Would there
be benefits to funds and their advisers if the board designates three or more NRSROs? Would
fund advisers benefit from having fewer NRSROs to monitor? Would fund advisers incur
significant costs to make presentations to the board recommending which NRSROs to designate?
What would be involved, including specific costs, for fund management to evaluate whether an
NRSRO “issues credit ratings that are sufficiently reliable” for the fund’s determination of
whether a security is an eligible security? Would funds incur costs if we required them to
disclose designated NRSROs in the statement of additional information?
We do not anticipate that the designation of NRSROs would have an adverse impact on
capital formation. We request comment on whether requiring fund boards to designate NRSROs
would have an impact on capital formation.
3.
Stress Testing
We are proposing to require that money market fund boards of directors adopt written
procedures that provide for the periodic stress testing of each money market fund’s portfolio. 356
The procedures would require testing of the fund’s ability to maintain a stable net asset value per
355
See rule 2a-7(c)(6)(i)(A)(2).
356
Proposed rule 2a-7(c)(8)(ii)(D).
133
share based upon certain hypothetical events. 357 The procedures also would have to provide for a
report to be delivered to the fund’s board of directors at its next regularly scheduled meeting on
the results of the testing and an assessment by the fund’s adviser of the fund’s ability to
withstand the events (and concurrent occurrences of those events) that are reasonably likely to
occur within the following year. 358
We anticipate that stress testing would give fund advisers a better understanding of the
effect of potential market events and shareholder redemptions on their funds’ ability to maintain
a stable net asset value, the fund’s exposure to the risk that it would break the buck, and actions
the adviser may need to take to mitigate the possibility of the fund breaking the buck. We
believe that many funds currently conduct stress testing as a matter of routine fund management
and business practice. We anticipate, however, that funds that do not currently perform stress
testing and funds that may revise their procedures in light of the proposed rule amendments
would give their managers a tool to better manage those risks. For fund boards of directors that
do not currently receive stress test results, we believe that the regular reports and assessments
would provide money market fund boards a better understanding of the risks to which the fund is
exposed.
We understand that today rigorous stress testing is a best practice followed by many
357
The proposed provision includes as hypothetical events a change in short-term interest rates, an
increase in shareholder redemptions, a downgrade of or default on a portfolio security, and
widening or narrowing of spreads between yields on a benchmark selected by the fund and
securities held by the fund. See proposed rule 2a-7(c)(8)(ii)(D)(1).
358
Proposed rule 2a-7(c)(8)(ii)(D)(2), (3). The report must include dates on which the testing was
performed and the magnitude of each hypothetical event that would cause the deviation of the
money market fund’s net asset value calculated using available market quotations (or appropriate
substitutes that reflect current market conditions) from its net asset value per share, calculated
using amortized cost, to exceed ½ of 1%.
134
money market funds. 359 We understand that the fund complexes that conduct stress tests include
smaller complexes that offer money market funds externally managed by advisers experienced in
this area of management. 360 Accordingly, staff estimates that as a result of the proposed
amendments to adopt stress testing procedures, (i) funds that currently conduct rigorous stress
testing, including tests for hypothetical events listed in the proposed amendment (and concurrent
occurrences of those events) would incur some cost to evaluate whether their current test
procedures would comply with the proposed rule amendment, but would be likely to incur
relatively few costs to revise those procedures or continue the stress testing they currently
perform, (ii) funds that conduct less rigorous stress testing, or that do not test for all the
hypothetical events listed in the proposed rule amendment, would incur somewhat greater
expenses to revise those procedures in light of the proposed amendments and maintain the
revised testing, and (iii) funds that do not conduct stress testing would incur costs to develop and
adopt stress test procedures and conduct stress tests. As noted above, we believe that there is a
range in the extent and rigor of stress testing currently performed by money market funds. We
also expect that stress test procedures are or would be developed by the adviser to a fund
complex for all money market funds in the complex while specific stress tests are performed for
each individual money market fund. We estimate that a fund complex that currently does not
conduct stress testing would require approximately 1 month for 2 risk management analysts and
2 systems analysts to develop stress test procedures at a cost of approximately $155,000, 21
359
As noted above, the ratings agencies stress test the portfolios of money market funds they rate. In
addition, the Irish Financial Services Authority requires stress testing of money market funds
domiciled in Ireland, and the Institutional Money Market Funds Association provides guidance
for its members in stress testing money market fund portfolios. See supra notes 214-215 and
accompanying text.
360
These complexes do not, however, meet the definition of “small entities” under the Investment
Company Act for purposes of the Regulatory Flexibility Act of 1980. 5 U.S.C. 603(a). See infra
note 417.
135
hours for a risk management analyst to draft the procedures, and 3 hours of board of directors’
time to adopt the procedures for a total of approximately $173,000. 361 Costs for fund complexes
that would have to revise or fine-tune their stress test procedures would be less. For purposes of
this cost benefit analysis, we estimate that these funds would incur half the costs of development,
for a total of approximately $95,000. 362 Funds that would not have to change their test
procedures would incur approximately $20,000 to determine compliance with the proposed
amendment, and to draft and adopt the procedures. 363 We also would anticipate that if there is a
demand to develop stress testing procedures, third parties may develop programs that funds
could purchase for less than our estimated cost to develop the programs themselves.
As with the development of stress test procedures, the costs funds would incur each year
as a result of the proposed amendments to update test procedures, conduct stress tests and
provide reports on the tests and assessments to the board of directors would vary. Funds that
currently conduct stress tests already incur costs to perform the tests. In addition, some of those
funds may currently provide reports to senior management (if not the board) of their test results.
We assume, however, that few, if any, fund advisers provide a regular assessment to the board of
the fund’s ability to withstand the events reasonably likely to occur in the following year. For
that reason, we estimate that all fund complexes would incur costs of $3000 to provide a written
report on the test results to the board, $4000 to provide an assessment to the board and $10 to
retain records of the reports and assessments for a total annual cost to a fund complex of
361
This estimate is based on the following calculations: $275/hour x 280 hours (2 senior risk
management specialists) + ($244/hour x 320 hours (2 senior systems analysts) = $155,080;
$275/hour (1 senior risk management specialist) x 21 hours = $5775; $4000/hour x 3 hours =
$12,000; $155,080 + $5775 + $12,000 = $172,855.
362
This estimate is based on the following calculation: (155,080 x 0.5) (revise procedures) + $5775
(draft procedures) + $12,000 (board approval) = $93,315.
363
This estimate is based on the following calculation: $275/hour (senior risk management
specialist) x 8 hours = $2200; $2200 + $5775 + $12,000 = $19,975.
136
approximately $42,000. 364 We estimate that a portion of funds would incur additional costs each
year to perform stress tests and update their procedures each year, up to a maximum of
approximately $113,000. 365
For purposes of this cost benefit analysis, Commission staff has estimated that 25 percent
of fund complexes (or 43 complexes) would have to develop stress test procedures, 50 percent
(or 85) would have stress test procedures, but have to revise those procedures, and 25 percent of
complexes (or 43 complexes) would review the procedures without having to change them.
Based on these estimates, staff further estimates that the total one time costs for fund complexes
to develop or refine existing stress test procedures would be approximately $19 million. 366 In
addition, staff estimates that the annual costs to all funds to conduct stress tests, update test
procedures, provide reports and assessments to fund boards and retain records of the reports and
assessments would be approximately $17 million. 367
We request comment on our estimates. We are particularly interested in comments
regarding how many funds currently conduct stress testing, the extent and nature of that testing,
including whether the procedures can be adopted on a complex wide basis, and the costs to
develop rigorous stress testing procedures. For those money market funds that have stress test
364
This estimate is based on the following calculation: Report: $275/hour x 10 hours (senior risk
management specialist) + $62 x 2 hours (administrative assistant) = $2874; Assessment:
$275/hour x 15 hours (senior risk management specialist) = $4125; Record retention: $62/hour x
0.1667 hours (administrative assistant) = $10.33; ($2874 + $4125 +$10) x 6 (board meetings per
year) = $42,054.
365
This estimate is based on the following calculations: Tests: $275/hour x 15 hours (senior risk
management specialist) + $244/hour x 20 hours (senior systems analyst) = $9,005; $9,005 x 12
(monthly testing) = $108,060; Update procedures: $275/hour x 5 hours (senior risk management
specialist) + $4000/hour x 1 hour = $5375; $108,060 + $5375 = $113,435.
366
This estimate is based on the following calculation: (43 x $173,000) + (85 x $95,000) + (43 x
$20,000) + (171 x $5775) + (171 x $12,000) = $19,413,525.
367
This estimate is based on the following calculation: (43 x $113,000) + (85 x $113,000 x 0.5) +
(171 x $42,054 (reports and assessments)) = $16,852,734.
137
procedures, how significantly would they have to change those procedures in light of the
proposed rule amendment? What costs would they incur, including specific costs for personnel
that would be involved in changes?
4.
Repurchase Agreements
We are proposing to modify the conditions under which a money market fund may treat
the acquisition of a repurchase agreement collateralized fully to be an acquisition of the
repurchase agreement’s collateral for purposes of rule 2a-7’s diversification requirement. 368
Money market funds would be able to adopt this “look-through” treatment only with respect to
repurchase agreements collateralized by cash items or Government securities 369 and as to which
the board of directors or its delegate has evaluated the creditworthiness of the counterparty. 370
We believe that the proposed changes would limit money market funds’ exposure to
credit risk. Collateral other than cash items and Government securities might not adequately
protect money market funds because the funds may be unable to liquidate the collateral without
incurring a loss if the counterparty defaults. The creditworthiness evaluation, moreover, would
make it less likely that a money market fund enters into repurchase agreements with
counterparties that will default and be exposed to risks related to the collateral. As discussed
above, we believe that the reduction of credit risk would better enable money market funds to
weather market turbulence and maintain a stable net asset value per share.
We recognize that these proposed changes could result in costs to money market funds.
368
See rule 2a-7(c)(4)(ii)(A). The rule 5b-3(c)(1) definition of collateralized fully, which is crossreferenced by rule 2a-7(a)(5), sets forth the related conditions. Under the current definition, a
money market fund may look through repurchase agreements collateralized with cash items,
Government securities, securities with the highest rating or unrated securities of comparable
credit quality.
369
Proposed rule 2a-7(a)(5).
370
Proposed rule 2a-7(c)(4)(ii)(A).
138
The limitation on money market funds’ ability to invest in repurchase agreements collateralized
with securities other than cash items and Government securities may result in lower yields for
money market funds to the extent that other investment opportunities do not provide the same
returns as those agreements. The limitation also could lead to an increase in the counterparties’
short-term financing costs. Counterparties may have to substitute such repurchase agreements
with other sources of financing linked to the same type of collateral. If counterparties limited
their own investments in securities that are no longer permissible collateral, the issuers of such
securities could also be indirectly affected by our proposed change. The restrictions on
repurchase agreements held by money market funds might potentially affect the functioning of
these important markets. We invite comment on what effects, if any, these restrictions might
have on the markets for repurchase agreements.
The creditworthiness evaluation would also impose additional costs. A credit risk
evaluation, however, is required with respect to other portfolio securities and to repurchase
agreements for which money market funds do not adopt a look-through treatment. 371 We
understand, moreover, that many money market fund complexes already perform a
creditworthiness evaluation for all repurchase agreement counterparties. Accordingly, we
believe that the additional cost imposed on money market funds, if any, would be minimal.
We request comment on any potential costs and benefits. Would the proposed
amendments significantly reduce the risk that money market funds incur losses upon the default
of their repurchase agreement counterparties? What effect would the limitation on permissible
collateral have on counterparties’ ability to obtain short-term financing? How would the
proposed change impact issuers of securities that would no longer be permissible collateral?
371
See rule 2a-7(c)(3)(i).
139
Would the required creditworthiness evaluation impose any material cost on money market
funds? We encourage commenters to provide empirical data to support their analysis.
5.
Public Website Posting
The proposed amendments to rule 2a-7 would require money market funds to post
monthly portfolio information on their websites. 372 The rule is intended to provide shareholders
with timely information about the securities held by the money market fund.
We anticipate that the proposal to require funds to post monthly portfolio information on
their websites would benefit investors by providing them a better understanding of their own risk
exposure and thus enabling them to make better informed investment decisions. The proposed
rule may thus instill more discipline into portfolio management and reduce the likelihood of a
money market fund breaking the buck. Finally, any increased costs to money market funds from
monthly reporting may be offset to a degree by the proposal to exclude them from current
requirements to file quarterly portfolio holdings information on Form N-Q. For the purposes of
the PRA analysis, we estimate that money market funds would realize, in the aggregate, a
decrease of 6000 burden hours, or $470,880, from this exclusion. 373
The proposed website posting requirement would also impose certain costs on funds. We
estimate that, for the purposes of the PRA, money market funds would be required to spend 24
hours of internal money market fund staff time initially to develop a webpage, at a cost of $4944
per fund. 374 We also estimate that all money market funds would be required to spend 4 hours of
professional time to maintain and update the webpage each month, at a total annual cost of
372
Proposed rule 2a-7(c)(12).
373
This estimate is based on our experience with other filings and an estimated hourly wage rate of
$78.48 (6000 hours x $78.48 = $470,880).
374
The staff estimates that a webmaster at a money market fund would require 24 hours (at $206 per
hour) to develop and review the webpage (24 hours x $206 = $4944).
140
$9888 per fund. 375 We believe, however, that our estimates may overstate the actual costs that
would be incurred to comply with the website posting requirement because many funds currently
post their portfolio holdings on a monthly, or more frequent, basis. 376 For purposes of this cost
benefit analysis, Commission staff estimates that 20 percent of money market portfolios (150
portfolios) do not currently post portfolio holdings information on their websites. Based on these
estimates, we estimate that the total initial costs for the proposed website disclosure would be
$741,600. 377 In addition, we estimate that the annual costs for all money market funds to
maintain and update their webpages would be $7.4 million.378
In addition, monthly website disclosure may impose other costs on funds and their
shareholders. For example, more frequent disclosure of portfolio holdings may arguably expand
the opportunities for professional traders to exploit this information by engaging in predatory
trading practices, such as front-running. However, given the short-term nature of money market
fund investments and the restricted universe of eligible portfolio securities, we believe that the
risk of trading ahead is severely curtailed in the context of money market funds. 379 For similar
reasons, we believe that the potential for “free riding” on a money market fund’s investment
strategies, i.e., obtaining for free the benefits of fund research and investment strategies, is
minimal. Given that shares of money market funds are ordinarily purchased and redeemed at the
stable price per share, we believe that there would be relatively few opportunities for profitable
arbitrage. Thus, we estimate that the costs of predatory trading practices under this proposal
375
The staff estimates that a webmaster would require 4 hours (at $206 per hour) to maintain and
update the relevant webpages on a monthly basis (4 hours x $206 x 12 months = $9888).
376
See supra note 325 and accompanying text.
377
This calculation is based on the following estimate: ($4944 x 150 portfolios) = $741,600.
378
This calculation is based on the following estimate: ($9888 x 750 portfolios) = $7,416,000.
379
See ICI REPORT, supra note 6, at 93.
141
would be minimal. We request comment on the analysis above, and on any other potential costs
and benefits of the proposed website disclosure requirement.
6.
Processing of Transactions
Our proposal would require that a money market fund’s board determine in good faith, on
an annual basis, that the fund (or its transfer agent) has the capacity to redeem and sell securities
at prices that do not correspond to the fund’s stable net asset value per share.380 As discussed
above, the aftermath of 2008 market events revealed that some funds had not implemented
systems to calculate redemptions at prices other than the funds’ stable net asset value per
share. 381 Because of this failure, transactions were processed manually, which extended the time
that investors had to wait for the proceeds from their redeemed shares.
As noted in Section II.G above, money market funds may be required to process
transactions at a price other than the fund’s stable share price and pay the proceeds of
redemptions within seven days (or a shorter time that the fund has represented). We believe that
funds that do not have the operational capacity to price shares at other than the stable share price
risk being unable to meet their obligations under the Act. We expect that the proposed
amendments would help eliminate the risk that money market funds would not be able to meet
these obligations in the event the fund breaks a buck. Shareholders would benefit from the
proposed amendments because they would be more likely to receive the proceeds from their
investments in the event of a liquidation.
Because funds are obligated to redeem at other than stable net asset value per share, there
should be no new cost associated with the requirement for the funds (or their transfer agents) to
have the systems that can meet these requirements. To the extent that funds and transfer agents
380
Proposed rule 2a-7(c)(1).
381
See supra note 262 and accompanying text.
142
have to change their systems, however, these changes will likely entail costs. If a fund complex
were to require one month of a senior systems analyst’s time in assuring that the required
systems are in place, the total cost for the fund complex would be $39,040. 382 Based on this
estimate we estimate that, if one-third of the fund complexes are not currently able to redeem at
prices other than stable net asset value, the total cost to all money market funds would be
$2,225,280. 383 We also anticipate that the board’s determination would result in costs. We
anticipate that the board’s determination would be based on a review at a regularly scheduled
board meeting of the fund adviser’s or the transfer agent’s certification that the operational
systems have the requisite capacity. Commission staff estimates that this review would take
about 15 minutes of board time at a cost of $1000. 384 Based on this estimate we estimate that the
total cost to all money market funds of board determinations would be $171,000. 385 We request
comment on the analysis above, and on any other potential costs and benefits of this proposed
rule amendment.
B.
Rule 17a-9
The Commission is proposing to amend rule 17a-9 to expand the circumstances under
which affiliated persons can purchase money market fund portfolio securities. Under the
proposed amendment, a money market fund could sell a portfolio security that has defaulted
(other than an immaterial default unrelated to the financial condition of the issuer) to an affiliated
person for the greater of the security’s amortized cost value or market value (plus accrued and
382
This estimate is based on the following calculation: $244/hour x 160 hours (senior systems
analyst) = $39,040.
383
This is based on the following calculation: (171 (fund complexes) ÷ 3) x $39,040 = $2,225,280.
384
This is based on the following calculation: $4000/hour (board time) x 0.25 hours = $1000.
385
This is based on the following calculation: $1000 x 171 (fund complexes) = $171,000.
143
unpaid interest), even though the security continued to be an eligible security. 386
The proposed amendment essentially would codify past Commission staff no-action
letters 387 and should benefit investors by enabling money market funds to dispose of troubled
securities (e.g., securities depressed in value as a result of market conditions) from their
portfolios quickly without any loss to fund shareholders. It also would benefit money market
funds by eliminating the cost and delay of requesting no-action assurances in these scenarios and
the uncertainty whether such assurances will be granted. 388 We do not believe that there are any
costs associated with this amendment, but we request comment on this analysis.
In addition, we are proposing to permit affiliated persons to purchase other portfolio
securities from an affiliated money market fund, for any reason, provided that such person would
be required to promptly remit to the fund any profit it realizes from the later sale of the
security. 389 Our staff provided temporary no-action assurances last fall to certain funds facing
extraordinary levels of redemption requests for affiliated persons of such funds to purchase
eligible securities from the funds at the greater of amortized cost or market value (plus accrued
and unpaid interest). 390 In these circumstances, money market funds may need to obtain cash
quickly to avoid selling securities into the market at fire sale prices to meet shareholder
redemption requests, to the detriment of remaining shareholders. The staff also provided noaction assurances to money market funds last fall for affiliated persons of the fund to purchase at
the greater of amortized cost or market value (plus accrued and unpaid interest) certain distressed
386
See proposed rule 17a-9(a).
387
See supra Section II.H.1.
388
Commission staff estimates that the costs to obtain staff no-action assurances range from $50,000
to $100,000.
389
See proposed rule 17a-9(b)(2).
390
Many of the no-action letters can be found on our website. See
http://www.sec.gov/divisions/investment/im-noaction.shtml#money.
144
securities that were depressed in value due to market conditions potentially threatening the stable
share price of the fund, but that remained eligible securities and had not defaulted. 391 Money
market funds and their shareholders would benefit if affiliated persons were able to purchase
securities from the fund at the greater of amortized cost or market value (plus accrued and unpaid
interest) in such circumstances without the time, expense, and uncertainty of applying to
Commission staff for no-action assurances.
Affiliated persons purchasing such securities would have costs in creating and
implementing a system for tracking the purchased securities and remitting to the money market
fund any profit ultimately received as a result. We estimate that creating such a system on
average would require 5 hours of a senior programmer’s time, at a cost of $1460 for each of the
171 fund complexes with money market funds and a total cost of $249,660. 392 After the initial
creation of this system, we expect that the time spent noting in this system that a security was
purchased under rule 17a-9 would require a negligible amount of compliance personnel’s time.
Based on our experience, we do not anticipate that there would be many instances, if any, in
which an affiliated person would be required to repay profits in excess of the purchase price paid
to the fund. However, if there is a payment, it would be made to the fund. If the payment is
sufficiently large, we believe that funds are likely to include it with the next distribution to
shareholders, which would not result in any additional costs to the fund. We request comment
on this analysis. Are our cost estimates accurate? Are there other costs in allowing an affiliated
person of a money market fund to purchase portfolio securities from the fund? Are there
incentives that might encourage an affiliated person to purchase securities that are not distressed
391
Id.
392
This estimate is based on the following calculation: $292/hour x 5 hours x 171 fund complexes =
$249,660.
145
in any way? If so, would such purchases result in any cost to the fund and its investors?
The Commission also is proposing a related amendment to rule 2a-7, which would
require that funds report all transactions under rule 17a-9 to the Commission. We believe that
this reporting requirement would benefit fund investors by allowing the Commission to monitor
the purchases for possible abuses and conflicts of interest on the part of the affiliates. It also
would allow the Commission to observe what types of securities are distressed and which money
market funds are holding distressed securities or are subject to significant redemption pressures.
This information would better enable the Commission to monitor emerging risks at money
market funds. For purposes of the Paperwork Reduction Act analysis, we estimate this
amendment would impose relatively small reporting costs on money market funds of $7625 per
year. 393 We request comment on whether these cost estimates are reasonable. We also request
comment on our analysis of the costs and benefits of this proposed rule amendment.
C.
Rule 22e-3
Proposed rule 22e-3 would permit money market funds that break the buck to suspend
redemptions and postpone payment of proceeds pending board-approved liquidations. The rule
would thus facilitate orderly liquidations, which would protect value for fund shareholders and
minimize disruption to financial markets. The rule would also enable funds to avoid the expense
and delay of obtaining an exemptive order from the Commission, which we estimate would
otherwise cost about $75,000, 394 and would provide legal certainty to funds that wish to suspend
393
This estimate is based on the following calculations: 25 (notices) + $305/hour (attorney) x 1 hour
= $7625. See supra note 329 and accompanying text.
394
See Exchange Traded Funds, Investment Company Act Release No. 28913 (Mar. 11, 2008) [73
FR 14618 (Mar. 18, 2008)] at n.301 (estimating a cost range between $75,000 and $350,000 to
submit an application for relief to operate an ETF). We assume that the costs associated with an
application for exemptive relief from section 22(e) would be on the low end of this range because
section 22(e) exemptive applications are often less involved than ETF exemptive applications.
146
redemptions during a liquidation in the interest of fairness to all shareholders.
Proposed rule 22e-3 would impose certain minimal costs on funds relying on the rule by
requiring them to provide prior notice to the Commission of their decision to suspend
redemptions in connection with a liquidation. We estimate that, for the purposes of the PRA, the
annual burden of the notification requirement would be 10 minutes for a cost of $51. 395 The
proposed rule may also impose costs on shareholders who seek to redeem their shares, but are
unable to do so. In those circumstances, shareholders might have to borrow funds from another
source, and thereby incur interest charges and other transactional fees. We believe the potential
costs associated with proposed rule 22e-3 would be minimal, however, because the proposed rule
would provide a limited exemption that is only triggered in the event of a fund breaking the buck
and liquidating. We request comment on this analysis, and on any other potential costs and
benefits of proposed rule 22e-3.
D.
Rule 30b1-6 and Form N-MFP: Monthly Reporting of Portfolio Holdings
Proposed rule 30b1-6 and Form N-MFP would require money market funds to file with
the Commission interactive data-formatted portfolio holdings information on a monthly basis.
We expect that the proposed rule would improve the efficiency and effectiveness of the
Commission’s oversight of money market funds by enabling Commission staff to manage and
analyze money market fund portfolio information more quickly and at a lower cost than is
currently possible. The interactive data would also facilitate the flow of information between
money market funds and other users of this information, such as information services,
academics, and investors. As the development of software products to analyze the data continues
to grow, we expect these benefits would increase.
395
This estimate is based on the following calculation: $305/hour x 1 ÷ 6 hour = $51.
147
Money market funds may also realize cost savings from the proposed rule. Currently,
money market funds provide portfolio holdings information in a variety of formats to different
third-parties, such as information services and NRSROs. The proposed rule may encourage the
industry to adopt a standardized format, thereby reducing the burdens on money market funds of
having to produce this information in multiple formats. In addition, money market funds may
also benefit from cost savings to the extent that we exempt them from filing certain information
required to be disclosed in existing quarterly portfolio holdings reports.
The proposed reporting requirement would also impose certain costs. We estimate that,
for the purposes of the PRA, these filing requirements (including collecting, tagging, and
electronically filing the report) would impose 128 burden hours at a cost of $35,968 396 per money
market fund for the first year, and 96 burden hours at a cost of $26,976 397 per money market fund
in subsequent years. 398
For the reasons outlined in the discussion on the monthly website posting requirement,
we estimate that there would be minimal additional costs incurred in connection with the
proposed reporting requirement. We request comment on our estimates, including whether our
assumptions about the costs and benefits are correct. We also request comment on other
potential costs and benefits of the proposed reporting requirement.
396
This estimate is based on the following calculation: $281/hour x 128 hours (senior database
administrator) = $35,968.
397
This estimate is based on the following calculation: $281/hour x 96 hours (senior database
administrator) = $26,976.
398
We understand that some money market funds may outsource all or a portion of these
responsibilities to a filing agent, software consultant, or other third-party service provider. We
believe, however, that a fund would engage third-party service providers only if the external costs
were comparable, or less than, the estimated internal costs of compiling, tagging, and filing the
Form N-MFP.
148
E.
Request for Comments
The Commission requests comment on the potential costs and benefits of the proposed
rules and rule amendments. We also request comment on the potential costs and benefits of any
alternatives suggested by commenters. We encourage commenters to identify, discuss, analyze,
and supply relevant data regarding any additional costs and benefits. For purposes of the Small
Business Regulatory Enforcement Act of 1996, 399 the Commission also requests information
regarding the potential annual effect of the proposals on the U.S. economy. Commenters are
requested to provide empirical data to support their views.
VI.
COMPETITION, EFFICIENCY AND CAPITAL FORMATION
Section 2(c) of the Investment Company Act requires the Commission, when engaging in
rulemaking that requires it to consider or determine whether an action is consistent with the
public interest, to consider, in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. 400
A.
Rule 2a-7
1.
Second Tier Securities, Portfolio Maturity, and Liquidity Limits
We are proposing several amendments to rule 2a-7 to tighten the risk-limiting conditions
of the rule. We are proposing to limit money market fund investments to only first tier
securities, i.e., securities receiving the highest short-term ratings from the requisite NRSROs or
unrated securities that the fund’s board of directors or its delegate determines are of comparable
quality. 401 We also are proposing to limit money market funds to acquiring long-term securities
399
Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
400
15 U.S.C. 80a-2(c).
401
See proposed rule 2a-7(a)(11)(iii); proposed rule 2a-7(a)(11)(iv).
149
that have received long-term ratings in the highest two ratings categories. 402
The proposed amendments would reduce the maximum weighted average maturity of a
money market fund permitted by rule 2a-7 from 90 days to 60 days. 403 They also would impose
a new maturity limitation based on the weighted average “life” of fund securities that would limit
the portion of a fund’s portfolio that could be held in longer term floating- or variable-rate
securities. 404 We are proposing to delete a provision in rule 2a-7 that permits money market
funds not relying on the amortized cost method of valuation to acquire Government securities
with a remaining maturity of up to 762 calendar days.
Finally, we are proposing new liquidity requirements on money market funds. Under the
proposed amendments, money market funds would be prohibited from acquiring illiquid
securities 405 and money market funds would be required to comply with certain minimum daily
and weekly liquidity requirements. 406 The amended rule also would require that a money market
fund at all times hold highly liquid securities sufficient to meet reasonably foreseeable
redemptions in light of its obligations under section 22(e) of the Act and any commitments the
fund has made to shareholders. 407
We believe that these changes would reduce money market funds’ sensitivity to interest
rate, credit, and liquidity risks. These changes also would limit the credit spread risk and interest
rate spread risk produced by longer term securities. A reduction of these risks would better
enable money market funds to weather market turbulence and maintain a stable net asset value
402
See proposed rule 2a-7(a)(11)(iv)(A).
403
See proposed rule 2a-7(c)(2)(ii).
404
See proposed rule 2a-7(c)(2)(iii).
405
See proposed rule 2a-7(c)(5)(i).
406
See proposed rule 2a-7(c)(5).
407
See proposed rule 2a-7(c)(5)(ii).
150
per share. We believe that the changes would reduce the risk that a money market fund will
break the buck and therefore prevent losses to fund investors. To the extent that money market
funds are more stable, the changes also would reduce systemic risk to the capital markets and
ensure a stable source of financing for issuers of short-term credit instruments. We believe that
these effects would encourage capital formation by encouraging investment in money market
funds, thereby allowing them to expand as a source of short-term financing in the capital
markets.
These changes also may reduce maturities of short-term credit securities that issuers
offer, which may increase financing costs for these issuers who might have to go back more
frequently to the market for financing. To the extent that some issuers are unwilling or unable to
issue securities that match money market fund demand given these proposed restrictions, the
amendments could have a negative impact on capital formation.
If the proposed amendments reduce yields that money market funds are able to offer,
some investors may move their money to, among other places, offshore unregulated money
market funds that do not follow rule 2a-7’s strictures and thus are able to offer a higher yield.
Beyond the competitive impact, such a change could increase systemic risks to short-term credit
markets and capital formation by increasing investment in less stable short-term instruments.
Precluding ownership of second tier securities also may have anticompetitive effects on
some relatively small money market funds that may compete with larger funds on the basis of
yield. The proposed elimination of the ability of money market funds to invest in second tier
securities may affect the capital raising ability and strategies of the issuers of second tier
securities or otherwise affect their financing arrangements, and may affect the flexibility of
investing options for funds. As noted above, however, second tier securities represent only a very
151
small percentage of money market fund portfolios today, which suggests that our proposed
amendments would not have a material effect on capital formation. We solicit specific comment
on whether the proposed amendments regarding second tier securities would promote efficiency,
competition and capital formation.
2.
Stress Testing
We are proposing to amend rule 2a-7 to require the board of directors of each money
market fund to adopt procedures providing for periodic stress testing of the money market fund’s
portfolio, reporting the results of the testing to fund boards, and providing an assessment to the
board. 408 We believe that stress testing could increase the efficiency of money market funds by
enhancing their risk management and thus making it more likely that the fund will be better
prepared for potential stress on the fund due to market events or shareholder behavior. Money
market funds may become more stable as a result of the risk management benefits provided by
stress testing, allowing them to expand and attract further investment. If so, this result will
promote capital formation. We do not believe that stress testing would have an adverse impact
on competition or capital formation. What effect would the proposed requirement have on
competition, efficiency and capital formation?
3.
Repurchase Agreements
We are proposing to allow money market funds to treat the acquisition of a repurchase
agreement to be an acquisition of the collateral for purposes of rule 2a-7’s diversification
requirement only if the repurchase agreement is collateralized by cash items or Government
securities 409 and after the board of directors or its delegate has evaluated the creditworthiness of
408
Proposed rule 2a-7(c)(8)(ii)(D).
409
Proposed rule 2a-7(a)(5).
152
the counterparty. 410
We believe that these changes would limit money market funds’ exposure to credit risk.
The reduction of credit risk would increase money market funds’ ability to maintain a stable net
asset value per share, thereby preventing losses to fund investors, reducing systemic risk to the
capital markets and ensuring a stable source of financing for issuers of short-term credit
instruments. More stable money market funds may attract greater investments, thus promoting
capital formation and providing a greater source of short-term financing in the capital markets.
The limitation on money market funds’ ability to invest in repurchase agreements
collateralized with securities other than cash items and Government securities may result in an
increase in the short-term financing costs of the counterparties in such agreements, thereby
reducing their willingness to invest in those securities. As a result, issuers of such securities
could also be indirectly affected by our proposed change, which therefore could have a negative
impact on capital formation. We request comment on what effect the proposed amendments
would have on competition, efficiency, and capital formation.
4.
Public Website Disclosure
We are proposing to require money market funds to disclose certain portfolio holdings
information on their websites on a monthly basis. 411 The proposed rule amendment would
provide greater transparency of the fund’s investments for current and prospective shareholders,
and may thus promote more efficient allocation of investments by investors. We believe the
proposed rule amendment may also improve competition, as better-informed investors may
prompt funds managers to provide better services and products. We do not anticipate that funds
would be disadvantaged, with respect to competition, because so many already have chosen to
410
Proposed rule 2a-7(c)(4)(ii)(A).
411
See supra Section II.F.1.
153
provide the information more frequently than monthly. In addition, the investments selected by
money market funds are less likely than, for example, equity funds, to be investments from
which competing funds would obtain benefit by scrutinizing on a monthly basis. The proposed
rule may also promote capital formation by making portfolio holdings information readily
accessible to investors, who may thus be more inclined to allocate their investments in a
particular fund or in money market funds instead of an alternative product. Alternatively, the
proposed rule could have the reverse effect if the portfolio holdings information makes investors
less confident regarding the risks associated with money market funds, including the risk that
market participants may use the information obtained through the disclosures to the detriment of
the fund and its investors, such as by trading along with the fund or ahead of the fund by
anticipating future transactions based on past transactions. We request comment on what effect
this proposed rule would have on competition, efficiency, and capital formation.
5.
Processing of Transactions
We are proposing to require that each money market fund’s board determine, at least
once each calendar year, that the fund has the capability to redeem and sell its securities at prices
other than the fund’s stable net asset value per share. 412 This amendment would require money
funds to have the operational capacity if they break the buck to continue to process investor
transactions in an orderly manner. This amendment would increase efficiency at money market
funds that break the buck by increasing the speed and minimizing the operational difficulties in
satisfying shareholder redemption requests in such circumstances. It may also reduce investors’
concerns that redemption would be unduly delayed if a money market fund were to break the
buck. We do not believe that this amendment would have a material impact on competition or
412
Proposed rule 2a-7(c)(1).
154
capital formation. We request comment on what effect this proposed amendment would have on
competition, efficiency, and capital formation.
B.
Rule 17a-9
The Commission is proposing to amend rule 17a-9 to expand the circumstances under
which affiliated persons can purchase money market fund securities. Under the proposed
amendments, a money market fund could sell a portfolio security that has defaulted (other than
an immaterial default unrelated to the financial condition of the issuer) to an affiliated person for
the greater of the security’s amortized cost value or market value (plus accrued and unpaid
interest), even though the security continued to be an eligible security. 413 In addition, the
proposed amendment would permit affiliated persons, for any reason, to purchase other portfolio
securities from an affiliated money market fund on the same terms provided that such person is
required to promptly remit to the fund any profit it realizes from the later sale of the security. 414
These amendments would increase the efficiency of both the Commission and money market
funds by allowing affiliated persons to purchase portfolio securities from money market funds
under distress without having to seek no-action assurances from Commission staff. We do not
believe that the proposed amendments will have any material impact on competition or capital
formation. We request comment on our analysis. What effect would the proposed amendment
to rule 17a-9 have on efficiency, competition and capital formation?
C.
Rule 22e-3
Proposed rule 22e-3 would permit money market funds that break the buck to suspend
redemptions and postpone the payment of proceeds pending board-approved liquidation
proceedings. We anticipate that the rule would promote efficiency in the financial markets by
413
See proposed rule 17a-9(a).
414
See proposed rule 17a-9(b).
155
facilitating orderly disposal of assets during liquidation. To the extent that investors choose
money market funds over alternative investments because the proposed rule would provide
reassurance as to the protection of their assets in the event the fund breaks the buck and
minimize disruption in the financial markets, the rule also may promote capital formation. If,
however, the possibility that redemptions can be suspended during a liquidation makes money
market funds less appealing to investors, the rule may have a negative effect on capital
formation. The proposed rule also could help make investors more confident that they would be
able to receive the proceeds from their investment in the event of a liquidation of the fund. We
do not believe that the proposed rule would have an adverse effect on competition. We request
comment on what effect the proposed rule would have on competition, efficiency, and capital
formation.
D.
Rule 30b1-6 and Form N-MFP: Monthly Reporting of Portfolio Holdings
Proposed new rule 30b1-6 and Form N-MFP would mandate the monthly electronic filing
of each money market fund’s portfolio holdings information in XML-tagged format. As
discussed above, we believe the new reporting requirement would improve the efficiency and
effectiveness of the Commission’s oversight of money market funds. The availability, and
usability, of this data would also promote efficiency for other third-parties that may be interested
in collecting and analyzing money market funds’ portfolio holdings information. Money market
funds currently are often required to provide this information to various third parties in different
formats. To the extent that the proposal may encourage a standardized format for disclosure or
transmission of portfolio holdings information, the proposal may promote efficiency for money
market funds. We do not believe that the proposed rule would have an adverse effect on
competition or capital formation. We request comment on what effect the proposed rule would
156
have on competition, efficiency, and capital formation.
VII.
REGULATORY FLEXIBILITY ACT CERTIFICATION
Section 3(a) of the Regulatory Flexibility Act of 1980 415 (“RFA”) requires the
Commission to undertake an initial regulatory flexibility analysis (“IRFA”) of the proposed rule
amendments on small entities unless the Commission certifies that the rule, if adopted, would not
have a significant economic impact on a substantial number of small entities.416 Pursuant to 5
U.S.C. section 605(b), the Commission hereby certifies that the proposed amendments to rules
2a-7, 17a-9, and 30b1-5, and proposed rules 30b1-6 and 22e-3 under the Investment Company
Act, would not, if adopted, have a significant economic impact on a substantial number of small
entities.
The proposal would amend rule 2a-7 under the Investment Company Act to:
(i)
Limit money market fund investments to first tier securities (i.e., securities that
received the highest short-term ratings categories from the requisite NRSROs or
unrated securities that the board of directors (or its delegate) determines are of
comparable quality);
(ii)
Limit money market funds to acquiring long-term securities that have received
long-term ratings in the highest two ratings categories from the requisite
NRSROs;
(iii)
Reduce the maximum weighted average maturity of money market funds’
portfolio securities from 90 to 60 days;
(iv)
Require money market funds to maintain a maximum weighted average life to
maturity of portfolio securities of no more than 120 days;
(v)
Eliminate a provision of the rule that permits a fund that relies exclusively on the
penny-rounding method of pricing to acquire Government securities with
remaining maturities of up to 762 days, rather than the 397-day limit otherwise
provided by the rule;
(vi)
Prohibit money market funds from acquiring securities unless, at the time
acquired, they are liquid, i.e., can be sold or disposed of in the ordinary course of
415
5 U.S.C. 603(a).
416
5 U.S.C. 605(b).
157
business within seven days at approximately the value ascribed to it by the money
market fund;
(vii)
Require that immediately after the acquisition of a security, a taxable “retail fund”
hold no less than 5 percent of its total assets in cash, U.S. Treasury securities, or
other securities (including repurchase agreements) that mature, or are subject to a
demand feature exercisable in one business day, and (ii) an “institutional fund”
hold no less than 10 percent of those instruments;
(viii)
Require that immediately after the acquisition of a security (i) a “retail fund”
holds no less than 15 percent of its total assets in cash, U.S. Treasury securities, or
other securities (including repurchase agreements) that are convertible to cash
within five business days, and (ii) an “institutional fund” holds no less than 30
percent of those instruments;
(ix)
Require that a money market fund at all times hold cash, U.S. Treasury securities,
or securities readily convertible to cash on a daily or weekly basis sufficient to
meet reasonably foreseeable redemptions in light of its obligations under section
22(e) of the Act and any commitments the fund has made to shareholders;
(x)
Require the board of directors of each money market fund to adopt procedures
providing for periodic stress testing of the money market fund’s ability to
maintain a stable net asset value per share based on certain hypothetical events, a
report of the testing results to the board, and an assessment by the fund’s adviser
of the fund’s ability to withstand the events that are reasonably likely to occur
within the following year;
(xi)
Limit money market funds to investing in repurchase agreements collateralized by
cash items or Government securities in order to obtain special treatment under the
diversification provisions of rule 2a-7;
(xii)
Require that the money market fund’s board of directors or its delegate evaluate
the creditworthiness of the counterparty, regardless of whether the repurchase
agreement is collateralized fully;
(xiii)
Require money market funds to post monthly portfolio information on their
websites; and
(xiv)
Require that a money market fund’s board determine, on an annual basis, that the
fund (or its transfer agent) has the capacity to redeem and sell securities at prices
that do not correspond to the fund’s stable net asset value.
We also are proposing to amend rule 17a-9 to permit a money market fund to sell a
portfolio security that has defaulted (other than an immaterial default unrelated to the financial
condition of the issuer) to an affiliated person for the greater of the security's amortized cost
158
value or market value (plus accrued and unpaid interest), even though the security continues to
be an eligible security. In addition, we are proposing to permit an affiliated person, for any
reason, to purchase any other portfolio security (e.g., an eligible security that has not defaulted)
from an affiliated money market fund for cash at the greater of the security’s amortized cost
value or market value, provided that such person promptly remits to the fund any profit it
realizes from the later sale of the security. Under the proposal, a money market fund whose
portfolio securities are purchased in reliance on rule 17a-9 would be required to provide notice of
the transaction to the Commission by e-mail.
We are also proposing to amend rule 30b1-5 to exempt money market funds from the
requirement to file their schedules of investments pursuant to Item 1 of Form N-Q, a quarterly
schedule of portfolio holdings of management investment companies. The proposed amendment
is intended to avoid unnecessarily duplicative disclosure obligations.
Finally, we are proposing two new rules. Proposed rule 22e-3 would exempt money
market funds from section 22(e) to permit them to suspend redemptions in order to facilitate an
orderly liquidation of fund assets. Rule 30b1-6 would mandate the monthly electronic filing in
XML-tagged format of valuation and other information about the risk characteristics of the
money market fund and each security in its portfolio.
Based on information in filings submitted to the Commission, we believe that there are
no money market funds that are small entities.417 For this reason, the Commission believes the
proposed amendments to rules 2a-7, 17a-9, and 30b1-5, and proposed rules 22e-3 and 30b1-6
under the Investment Company Act would not, if adopted, have a significant economic impact on
417
Under rule 0-10 under the Investment Company Act, an investment company is considered a
small entity if it, together with other investment companies in the same group of related
investment companies, has net assets of $50 million or less as of the end of its most recent fiscal
year.
159
a substantial number of small entities.
We encourage written comments regarding this certification. The Commission solicits
comment as to whether the proposed amendments to rules 2a-7, 17a-9, and 30b1-5, and proposed
rules 22e-3 and 30b1-6 could have an effect on small entities that has not been considered. We
request that commenters describe the nature of any impact on small entities and provide
empirical data to support the extent of such impact.
VIII. STATUTORY AUTHORITY
The Commission is proposing amendments to rule 2a-7 under the exemptive and
rulemaking authority set forth in sections 6(c), 8(b), 22(c), and 38(a) of the Investment Company
Act of 1940 [15 U.S.C. 80a-6(c), 80a-8(b), 80a-22(c), 80a-37(a)]. The Commission is proposing
amendments to rule 17a-9 pursuant to the authority set forth in sections 6(c) and 38(a) of the
Investment Company Act [15 U.S.C. 80a-6(c), 80a-37(a)]. The Commission is proposing rule
22e-3 pursuant to the authority set forth in sections 6(c), 22(e) and 38(a) of the Investment
Company Act [15 U.S.C. 80a-6(c), 80a-22(e), and 80a-37(a)]. The Commission is proposing
amendments to rule 30b1-5 and new rule 30b1-6 and Form N-MFP pursuant to authority set
forth in Sections 8(b), 30(b), 31(a), and 38(a) of the Investment Company Act [15 U.S.C.
80a-8(b), 80a-29(b), 80a-30(a), and 80a-37(a)].
List of Subjects
17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements, Securities.
TEXT OF PROPOSED RULES AND FORM
For reasons set out in the preamble, Title 17, Chapter II of the Code of Federal
Regulations is proposed to be amended as follows:
PART 270 – RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF
160
1940
1.
The authority citation for Part 270 continues to read, in part, as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-39, unless otherwise
noted.
*
2.
*
*
*
*
Section 270.2a-7 is revised to read as follows:
§ 270.2a-7 Money market funds.
(a)
Definitions.
(1)
Acquisition (or Acquire) means any purchase or subsequent rollover (but does not
include the failure to exercise a Demand Feature).
(2)
Amortized Cost Method of valuation means the method of calculating an
investment company's net asset value whereby portfolio securities are valued at the fund's
Acquisition cost as adjusted for amortization of premium or accretion of discount rather than at
their value based on current market factors.
(3)
Asset Backed Security means a fixed income security (other than a Government
security) issued by a Special Purpose Entity (as defined in this paragraph), substantially all of the
assets which consist of Qualifying Assets (as defined in this paragraph). Special Purpose Entity
means a trust, corporation, partnership or other entity organized for the sole purpose of issuing
securities that entitle their holders to receive payments that depend primarily on the cash flow
from Qualifying Assets, but does not include a registered investment company. Qualifying
Assets means financial assets, either fixed or revolving, that by their terms convert into cash
within a finite time period, plus any rights or other assets designed to assure the servicing or
timely distribution of proceeds to security holders.
161
(4)
Business Day means any day, other than Saturday, Sunday, or any customary
business holiday.
(5)
Collateralized Fully means “Collateralized Fully” as defined in § 270.5b-3(c)(1)
except that § 270.5b-3(c)(1)(iv)(C) and (D) shall not apply.
(6)
Conditional Demand Feature means a Demand Feature that is not an
Unconditional Demand Feature. A Conditional Demand Feature is not a Guarantee.
(7)
Conduit Security means a security issued by a Municipal Issuer (as defined in this
paragraph) involving an arrangement or agreement entered into, directly or indirectly, with a
person other than a Municipal Issuer, which arrangement or agreement provides for or secures
repayment of the security. Municipal Issuer means a state or territory of the United States
(including the District of Columbia), or any political subdivision or public instrumentality of a
state or territory of the United States. A Conduit Security does not include a security that is:
(i)
Fully and unconditionally guaranteed by a Municipal Issuer;
(ii)
Payable from the general revenues of the Municipal Issuer or other Municipal
Issuers (other than those revenues derived from an agreement or arrangement with a person who
is not a Municipal Issuer that provides for or secures repayment of the security issued by the
Municipal Issuer);
(iii)
Related to a project owned and operated by a Municipal Issuer; or
(iv)
Related to a facility leased to and under the control of an industrial or commercial
enterprise that is part of a public project which, as a whole, is owned and under the control of a
Municipal Issuer.
(8)
Daily Liquid Assets means:
(i)
Cash;
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(ii)
Direct obligations of the U.S. Government; or
(iii)
Securities that will mature or are subject to a Demand Feature that is exercisable
and payable within one Business Day.
(9)
Demand Feature means:
(i)
A feature permitting the holder of a security to sell the security at an exercise
price equal to the approximate amortized cost of the security plus accrued interest, if any, at the
time of exercise. A Demand Feature must be exercisable either:
(A)
At any time on no more than 30 calendar days’ notice;
(B)
At specified intervals not exceeding 397 calendar days and upon no more than 30
calendar days’ notice; or
(ii)
A feature permitting the holder of an Asset Backed Security unconditionally to
receive principal and interest within 397 calendar days of making demand.
(10)
Demand Feature Issued By A Non-Controlled Person means a Demand Feature
issued by:
(i)
A person that, directly or indirectly, does not control, and is not controlled by or
under common control with the issuer of the security subject to the Demand Feature (control
means "control" as defined in section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)); or
(ii)
A sponsor of a Special Purpose Entity with respect to an Asset Backed Security.
(11)
Eligible Security means:
(i)
A security issued by a registered investment company that is a money market
(ii)
A Government Security;
(iii)
A Rated Security with a remaining maturity of 397 calendar days or less that has
fund;
163
received a rating from the Requisite NRSROs in the highest short-term rating category (within
which there may be sub-categories or gradations indicating relative standing); or
(iv)
An Unrated Security that is of comparable quality to a security meeting the
requirements for a Rated Security in paragraph (a)(11)(iii) of this section, as determined by the
money market fund's board of directors; provided, however, that:
(A)
A security that at the time of issuance had a remaining maturity of more than 397
calendar days but that has a remaining maturity of 397 calendar days or less and that is an
Unrated Security is not an Eligible Security if the security has received a long-term rating from
any NRSRO that is not within the NRSRO's two highest long-term ratings categories (within
which there may be sub-categories or gradations indicating relative standing), unless the security
has received a long-term rating from the Requisite NRSROs in one of the two highest rating
categories;
(B)
An Asset Backed Security (other than an Asset Backed Security substantially all
of whose Qualifying Assets consist of obligations of one or more Municipal Issuers, as that term
is defined in paragraph (a)(7) of this section) shall not be an Eligible Security unless it has
received a rating from an NRSRO.
(v)
In addition, in the case of a security that is subject to a Demand Feature or
Guarantee:
(A)
The Guarantee has received a rating from an NRSRO or the Guarantee is issued
by a guarantor that has received a rating from an NRSRO with respect to a class of debt
obligations (or any debt obligation within that class) that is comparable in priority and security to
the Guarantee, unless:
(1)
The Guarantee is issued by a person that, directly or indirectly, controls, is
164
controlled by or is under common control with the issuer of the security subject to the Guarantee
(other than a sponsor of a Special Purpose Entity with respect to an Asset Backed Security);
(2)
The security subject to the Guarantee is a repurchase agreement that is
Collateralized Fully; or
(3)
The Guarantee is itself a Government Security; and
(B)
The issuer of the Demand Feature or Guarantee, or another institution, has
undertaken promptly to notify the holder of the security in the event the Demand Feature or
Guarantee is substituted with another Demand Feature or Guarantee (if such substitution is
permissible under the terms of the Demand Feature or Guarantee).
(12)
Event of Insolvency means "Event of Insolvency" as defined in § 270.5b-3(c)(2).
(13)
Floating Rate Security means a security the terms of which provide for the
adjustment of its interest rate whenever a specified interest rate changes and that, at any time
until the final maturity of the instrument or the period remaining until the principal amount can
be recovered through demand, can reasonably be expected to have a market value that
approximates its amortized cost.
(14)
Government Security means any "Government security" as defined in section
2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16)).
(15)
Guarantee means an unconditional obligation of a person other than the issuer of
the security to undertake to pay, upon presentment by the holder of the Guarantee (if required),
the principal amount of the underlying security plus accrued interest when due or upon default,
or, in the case of an Unconditional Demand Feature, an obligation that entitles the holder to
receive upon exercise the approximate amortized cost of the underlying security or securities,
plus accrued interest, if any. A Guarantee includes a letter of credit, financial guaranty (bond)
165
insurance, and an Unconditional Demand Feature (other than an Unconditional Demand Feature
provided by the issuer of the security).
(16)
Guarantee Issued By A Non-Controlled Person means a Guarantee issued by:
(i)
A person that, directly or indirectly, does not control, and is not controlled by or
under common control with the issuer of the security subject to the Guarantee (control means
"control" as defined in section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)); or
(ii)
A sponsor of a Special Purpose Entity with respect to an Asset Backed Security.
(17)
Institutional Fund means a money market fund whose board of directors
determines, no less frequently than once each calendar year, is intended to be offered primarily
to institutional investors or has the characteristics of such a fund, based on the:
(i)
Nature of the record owners of the fund’s shares;
(ii)
Minimum initial investment requirements; and
(iii)
Historical cash flows that have resulted or expected cash flows that would result
from purchases and redemptions.
(18)
Liquid Security means a security that can be sold or disposed of in the ordinary
course of business within seven calendar days at approximately its amortized cost.
(19)
NRSRO means any nationally recognized statistical rating organization, as that
term is defined in section 3(a)(62) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(62)), that is not an "affiliated person," as defined in section 2(a)(3)(C) of the Act (15
U.S.C. 80a-2(a)(3)(C)), of the issuer of, or any insurer or provider of credit support for, the
security.
(20)
Penny-Rounding Method of pricing means the method of computing an
investment company's price per share for purposes of distribution, redemption and repurchase
166
whereby the current net asset value per share is rounded to the nearest one percent.
(21)
Rated Security means a security that meets the requirements of paragraphs
(a)(21)(i) or (ii) of this section, in each case subject to paragraph (a)(21)(iii) of this section:
(i)
The security has received a short-term rating from an NRSRO, or has been issued
by an issuer that has received a short-term rating from an NRSRO with respect to a class of debt
obligations (or any debt obligation within that class) that is comparable in priority and security
with the security; or
(ii)
The security is subject to a Guarantee that has received a short-term rating from
an NRSRO, or a Guarantee issued by a guarantor that has received a short-term rating from an
NRSRO with respect to a class of debt obligations (or any debt obligation within that class) that
is comparable in priority and security with the Guarantee; but
(iii)
A security is not a Rated Security if it is subject to an external credit support
agreement (including an arrangement by which the security has become a Refunded Security)
that was not in effect when the security was assigned its rating, unless the security has received a
short-term rating reflecting the existence of the credit support agreement as provided in
paragraph (a)(21)(i) of this section, or the credit support agreement with respect to the security
has received a short-term rating as provided in paragraph (a)(21)(ii) of this section.
(22)
Refunded Security means "Refunded Security" as defined in § 270.5b-3(c)(4).
(23)
Requisite NRSROs means:
(i)
Any two NRSROs that have issued a rating with respect to a security or class of
debt obligations of an issuer; or
(ii)
If only one NRSRO has issued a rating with respect to such security or class of
debt obligations of an issuer at the time the fund acquires the security, that NRSRO.
167
(24)
Retail Fund means any money market fund that the board of directors has not
determined within the calendar year is an Institutional Fund under paragraph (c)(5)(v) of this
section.
(25)
Single State Fund means a Tax Exempt Fund that holds itself out as seeking to
maximize the amount of its distributed income that is exempt from the income taxes or other
taxes on investments of a particular state and, where applicable, subdivisions thereof.
(26)
Tax Exempt Fund means any money market fund that holds itself out as
distributing income exempt from regular federal income tax.
(27)
Total Assets means, with respect to a money market fund using the Amortized
Cost Method, the total amortized cost of its assets and, with respect to any other money market
fund, the total market-based value of its assets.
(28)
Unconditional Demand Feature means a Demand Feature that by its terms would
be readily exercisable in the event of a default in payment of principal or interest on the
underlying security or securities.
(29)
United States Dollar-Denominated means, with reference to a security, that all
principal and interest payments on such security are payable to security holders in United States
dollars under all circumstances and that the interest rate of, the principal amount to be repaid,
and the timing of payments related to such security do not vary or float with the value of a
foreign currency, the rate of interest payable on foreign currency borrowings, or with any other
interest rate or index expressed in a currency other than United States dollars.
(30)
Unrated Security means a security that is not a Rated Security.
(31)
Variable Rate Security means a security the terms of which provide for the
adjustment of its interest rate on set dates (such as the last day of a month or calendar quarter)
168
and that, upon each adjustment until the final maturity of the instrument or the period remaining
until the principal amount can be recovered through demand, can reasonably be expected to have
a market value that approximates its amortized cost.
(32)
Weekly Liquid Assets means:
(i)
Cash;
(ii)
Direct obligations of the U.S. Government; or
(iii)
Securities that will mature or are subject to a Demand Feature that is exercisable
and payable within five Business Days.
(b)
Holding Out and Use of Names and Titles.
(1)
It shall be an untrue statement of material fact within the meaning of section 34(b)
of the Act (15 U.S.C. 80a-33(b)) for a registered investment company, in any registration
statement, application, report, account, record, or other document filed or transmitted pursuant to
the Act, including any advertisement, pamphlet, circular, form letter, or other sales literature
addressed to or intended for distribution to prospective investors that is required to be filed with
the Commission by section 24(b) of the Act (15 U.S.C. 80a-24(b)), to hold itself out to investors
as a money market fund or the equivalent of a money market fund, unless such registered
investment company meets the conditions of paragraphs (c)(2), (c)(3), (c)(4) and (c)(5) of this
section.
(2)
It shall constitute the use of a materially deceptive or misleading name or title
within the meaning of section 35(d) of the Act (15 U.S.C. 80a-34(d)) for a registered investment
company to adopt the term "money market" as part of its name or title or the name or title of any
redeemable securities of which it is the issuer, or to adopt a name that suggests that it is a money
market fund or the equivalent of a money market fund, unless such registered investment
169
company meets the conditions of paragraphs (c)(2), (c)(3), (c)(4), and (c)(5) of this section.
(3)
For purposes of this paragraph, a name that suggests that a registered investment
company is a money market fund or the equivalent thereof shall include one that uses such terms
as "cash," "liquid," "money," "ready assets" or similar terms.
(c)
Share Price Calculations.
The current price per share, for purposes of distribution, redemption and repurchase, of
any redeemable security issued by any registered investment company ("money market fund" or
"fund"), notwithstanding the requirements of section 2(a)(41) of the Act (15 U.S.C. 80a-2(a)(41))
and of §§ 270.2a-4 and 270.22c-1 thereunder, may be computed by use of the Amortized Cost
Method or the Penny-Rounding Method; provided, however, that:
(1)
Board Findings. The board of directors of the money market fund shall determine,
in good faith, that it is in the best interests of the fund and its shareholders to maintain a stable
net asset value per share or stable price per share, by virtue of either the Amortized Cost Method
or the Penny-Rounding Method, and that the money market fund will continue to use such
method only so long as the board of directors believes that it fairly reflects the market-based net
asset value per share. The board shall annually determine in good faith that the fund (or its
transfer agent) has the capacity to redeem and sell securities issued by the fund at a price based
on the current net asset value per share pursuant to § 270.22c-1. Such capacity shall include the
ability to redeem and sell securities at prices that do not correspond to a stable net asset value or
price per share.
(2)
Portfolio Maturity. The money market fund shall maintain a dollar-weighted
average portfolio maturity appropriate to its objective of maintaining a stable net asset value per
share or price per share; provided, however, that the money market fund will not:
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(i)
Acquire any instrument with a remaining maturity of greater than 397 calendar
(ii)
Maintain a dollar-weighted average portfolio maturity that exceeds 60 calendar
days;
days; or
(iii)
Maintain a dollar-weighted average portfolio maturity that exceeds 120 calendar
days, determined without reference to the exceptions in paragraph (d) of this section regarding
interest rate readjustments.
(3)
Portfolio Quality.
(i)
General. The money market fund shall limit its portfolio investments to those
United States Dollar-Denominated securities that the fund’s board of directors determines
present minimal credit risks (which determination must be based on factors pertaining to credit
quality in addition to any rating assigned to such securities by an NRSRO) and that are at the
time of Acquisition Eligible Securities.
(ii)
Securities Subject to Guarantees. A security that is subject to a Guarantee may be
determined to be an Eligible Security based solely on whether the Guarantee is an Eligible
Security.
(iii)
Securities Subject to Conditional Demand Features. A security that is subject to a
Conditional Demand Feature (“Underlying Security”) may be determined to be an Eligible
Security only if:
(A)
The Conditional Demand Feature is an Eligible Security;
(B)
At the time of the Acquisition of the Underlying Security, the money market
fund's board of directors has determined that there is minimal risk that the circumstances that
would result in the Conditional Demand Feature not being exercisable will occur; and
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(1)
The conditions limiting exercise either can be monitored readily by the fund, or
relate to the taxability, under federal, state or local law, of the interest payments on the security;
or
(2)
The terms of the Conditional Demand Feature require that the fund will receive
notice of the occurrence of the condition and the opportunity to exercise the Demand Feature in
accordance with its terms; and
(C)
The Underlying Security or any Guarantee of such security (or the debt securities
of the issuer of the Underlying Security or Guarantee that are comparable in priority and security
with the Underlying Security or Guarantee) has received either a short-term rating or a long-term
rating, as the case may be, from the Requisite NRSROs within the NRSROs' highest short-term
or long-term rating categories (within which there may be sub-categories or gradations indicating
relative standing) or, if unrated, is determined to be of comparable quality by the money market
fund's board of directors to a security that has received a rating from the Requisite NRSROs
within the NRSROs' highest short-term or long-term rating categories, as the case may be.
(4)
Portfolio Diversification.
(i)
Issuer Diversification. The money market fund shall be diversified with respect to
issuers of securities Acquired by the fund as provided in paragraphs (c)(4)(i) and (c)(4)(ii) of this
section, other than with respect to Government Securities and securities subject to a Guarantee
Issued By A Non-Controlled Person.
(A)
Taxable and National Funds. Immediately after the Acquisition of any security, a
money market fund other than a Single State Fund shall not have invested more than five percent
of its Total Assets in securities issued by the issuer of the security; provided, however, that such
a fund may invest up to twenty-five percent of its Total Assets in the securities of a single issuer
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for a period of up to three Business Days after the Acquisition thereof; Provided, further, that the
fund may not invest in the securities of more than one issuer in accordance with the foregoing
proviso in this paragraph at any time.
(B)
Single State Funds. With respect to seventy-five percent of its Total Assets,
immediately after the Acquisition of any security, a Single State Fund shall not have invested
more than five percent of its Total Assets in securities issued by the issuer of the security.
(ii)
Issuer Diversification Calculations. For purposes of making calculations under
paragraph (c)(4)(i) of this section:
(A)
Repurchase Agreements. The Acquisition of a repurchase agreement may be
deemed to be an Acquisition of the underlying securities, provided the obligation of the seller to
repurchase the securities from the money market fund is Collateralized Fully and the fund’s
board of directors has evaluated the seller’s creditworthiness.
(B)
Refunded Securities. The Acquisition of a Refunded Security shall be deemed to
be an Acquisition of the escrowed Government Securities.
(C)
Conduit Securities. A Conduit Security shall be deemed to be issued by the person
(other than the Municipal Issuer) ultimately responsible for payments of interest and principal on
the security.
(D)
Asset Backed Securities.
(1)
General. An Asset Backed Security Acquired by a fund (“Primary ABS”) shall be
deemed to be issued by the Special Purpose Entity that issued the Asset Backed Security;
provided, however:
(i)
Holdings of Primary ABS. Any person whose obligations constitute ten percent or
more of the principal amount of the Qualifying Assets of the Primary ABS (“Ten Percent
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Obligor”) shall be deemed to be an issuer of the portion of the Primary ABS such obligations
represent; and
(ii)
Holdings of Secondary ABS. If a Ten Percent Obligor of a Primary ABS is itself a
Special Purpose Entity issuing Asset Backed Securities (“Secondary ABS’), any Ten Percent
Obligor of such Secondary ABS also shall be deemed to be an issuer of the portion of the
Primary ABS that such Ten Percent Obligor represents.
(2)
Restricted Special Purpose Entities. A Ten Percent Obligor with respect to a
Primary or Secondary ABS shall not be deemed to have issued any portion of the assets of a
Primary ABS as provided in paragraph (c)(4)(ii)(D)(1) of this section if that Ten Percent Obligor
is itself a Special Purpose Entity issuing Asset Backed Securities (“Restricted Special Purpose
Entity”), and the securities that it issues (other than securities issued to a company that controls,
or is controlled by or under common control with, the Restricted Special Purpose Entity and
which is not itself a Special Purpose Entity issuing Asset Backed Securities) are held by only one
other Special Purpose Entity.
(3)
Demand Features and Guarantees. In the case of a Ten Percent Obligor deemed
to be an issuer, the fund shall satisfy the diversification requirements of paragraph (c)(4)(iii) of
this section with respect to any Demand Feature or Guarantee to which the Ten Percent Obligor's
obligations are subject.
(E)
Shares of Other Money Market Funds. A money market fund that Acquires
shares issued by another money market fund in an amount that would otherwise be prohibited by
paragraph (c)(4)(i) of this section shall nonetheless be deemed in compliance with this section if
the board of directors of the Acquiring money market fund reasonably believes that the fund in
which it has invested is in compliance with this section.
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(iii)
Diversification Rules for Demand Features and Guarantees. The money market
fund shall be diversified with respect to Demand Features and Guarantees Acquired by the fund
as provided in paragraphs (c)(4)(iii) and (c)(4)(iv) of this section, other than with respect to a
Demand Feature issued by the same institution that issued the underlying security, or with
respect to a Guarantee or Demand Feature that is itself a Government Security.
(A)
General. Immediately after the Acquisition of any Demand Feature or Guarantee
or security subject to a Demand Feature or Guarantee, a money market fund, with respect to
seventy-five percent of its Total Assets, shall not have invested more than ten percent of its Total
Assets in securities issued by or subject to Demand Features or Guarantees from the institution
that issued the Demand Feature or Guarantee, subject to paragraph (c)(4)(iii) (B) of this section.
(B)
Demand Features or Guarantees Issued by Non-Controlled Persons.
Immediately after the Acquisition of any security subject to a Demand Feature or Guarantee, a
money market fund shall not have invested more than ten percent of its Total Assets in securities
issued by, or subject to Demand Features or Guarantees from the institution that issued the
Demand Feature or Guarantee, unless, with respect to any security subject to Demand Features
or Guarantees from that institution (other than securities issued by such institution), the Demand
Feature or Guarantee is a Demand Feature or Guarantee Issued By A Non-Controlled Person.
(iv)
Demand Feature and Guarantee Diversification Calculations.
(A)
Fractional Demand Features or Guarantees. In the case of a security subject to a
Demand Feature or Guarantee from an institution by which the institution guarantees a specified
portion of the value of the security, the institution shall be deemed to guarantee the specified
portion thereof.
(B)
Layered Demand Features or Guarantees. In the case of a security subject to
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Demand Features or Guarantees from multiple institutions that have not limited the extent of
their obligations as described in paragraph (c)(4)(iv)(A) of this section, each institution shall be
deemed to have provided the Demand Feature or Guarantee with respect to the entire principal
amount of the security.
(v)
Diversification Safe Harbor. A money market fund that satisfies the applicable
diversification requirements of paragraphs (c)(4) and (c)(6) of this section shall be deemed to
have satisfied the diversification requirements of section 5(b)(1) of the Act (15 U.S.C. 80a5(b)(1)) and the rules adopted thereunder.
(5)
Portfolio Liquidity.
(i)
Liquid Securities. The money market fund shall limit its portfolio investments to
cash and securities that at the time of Acquisition are Liquid Securities.
(ii)
General Liquidity Requirement. The money market fund shall hold Daily Liquid
Assets and Weekly Liquid Assets sufficient to meet reasonably foreseeable shareholder
redemptions in light of the fund’s obligations under section 22(e) of the Act (15 U.S.C.
80a-22(e)) and any commitments the fund has made to shareholders.
(iii)
Minimum Daily Liquidity Requirement. A money market fund shall not Acquire
any security other than a Daily Liquid Asset if, immediately after the Acquisition, a Retail Fund
would have invested less than five percent of its Total Assets, and an Institutional Fund would
have invested less than ten percent of its Total Assets, in Daily Liquid Assets. This provision
shall not apply to Tax Exempt Funds.
(iv)
Minimum Weekly Liquidity Requirement. A money market fund shall not Acquire
any security if, immediately after the Acquisition, a Retail Fund would have invested less than
fifteen percent of its Total Assets, and an Institutional Fund would have invested less than thirty
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percent of its Total Assets, in Weekly Liquid Assets.
(v)
Annual Board Determination. The board of directors of each money market fund
shall determine no less than once each calendar year whether the fund is an Institutional Fund for
purposes of meeting the minimum liquidity requirements set forth in paragraphs (c)(5)(iii) and
(iv) of this section.
(6)
Demand Features and Guarantees Not Relied Upon. If the fund's board of
directors has determined that the fund is not relying on a Demand Feature or Guarantee to
determine the quality (pursuant to paragraph (c)(3) of this section), or maturity (pursuant to
paragraph (d) of this section), or liquidity of a portfolio security, and maintains a record of this
determination (pursuant to paragraphs (c)(10)(ii) and (c)(11)(vi) of this section), then the fund
may disregard such Demand Feature or Guarantee for all purposes of this section.
(7)
Downgrades, Defaults and Other Events.
(i)
Downgrades.
(A)
General. In the event that the money market fund's investment adviser (or any
person to whom the fund's board of directors has delegated portfolio management
responsibilities) becomes aware that any Unrated Security held by the money market fund has,
since the security was Acquired by the fund, been given a rating by any NRSRO below the
NRSRO's highest short-term rating category, the board of directors of the money market fund
shall reassess promptly whether such security continues to present minimal credit risks and shall
cause the fund to take such action as the board of directors determines is in the best interests of
the money market fund and its shareholders.
(B)
The reassessment required by paragraph (c)(7)(i)(A) of this section shall not be
required if the fund disposes of the security (or it matures) within five Business Days.
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(ii)
Defaults and Other Events. Upon the occurrence of any of the events specified in
paragraphs (c)(7)(ii)(A) through (D) of this section with respect to a portfolio security, the
money market fund shall dispose of such security as soon as practicable consistent with
achieving an orderly disposition of the security, by sale, exercise of any Demand Feature or
otherwise, absent a finding by the board of directors that disposal of the portfolio security would
not be in the best interests of the money market fund (which determination may take into
account, among other factors, market conditions that could affect the orderly disposition of the
portfolio security):
(A)
The default with respect to a portfolio security (other than an immaterial default
unrelated to the financial condition of the issuer);
(B)
A portfolio security ceases to be an Eligible Security;
(C)
A portfolio security has been determined to no longer present minimal credit
risks; or
(D)
An Event of Insolvency occurs with respect to the issuer of a portfolio security or
the provider of any Demand Feature or Guarantee.
(iii)
Notice to the Commission. The money market fund shall promptly notify the
Commission by electronic mail directed to the Director of Investment Management or the
Director’s designee, of any:
(A)
Default with respect to one or more portfolio securities (other than an immaterial
default unrelated to the financial condition of the issuer) or an Event of Insolvency with respect
to the issuer of the security or any Demand Feature or Guarantee to which it is subject, where
immediately before default the securities (or the securities subject to the Demand Feature or
Guarantee) accounted for 1/2 of 1 percent or more of a money market fund's Total Assets, the
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money market fund shall promptly notify the Commission of such fact and the actions the money
market fund intends to take in response to such situation; or
(B)
Purchase of a security from the fund by an affiliated person in reliance on
§ 270.17a-9 of this section, and the reasons for such purchase.
(iv)
Defaults for Purposes of Paragraphs (c)(7)(ii) and (iii). For purposes of
paragraphs (c)(7)(ii) and (iii) of this section, an instrument subject to a Demand Feature or
Guarantee shall not be deemed to be in default (and an Event of Insolvency with respect to the
security shall not be deemed to have occurred) if:
(A)
In the case of an instrument subject to a Demand Feature, the Demand Feature has
been exercised and the fund has recovered either the principal amount or the amortized cost of
the instrument, plus accrued interest; or
(B)
The provider of the Guarantee is continuing, without protest, to make payments as
due on the instrument.
(8)
Required Procedures: Amortized Cost Method. In the case of a money market
fund using the Amortized Cost Method:
(i)
General. In supervising the money market fund's operations and delegating
special responsibilities involving portfolio management to the money market fund's investment
adviser, the money market fund's board of directors, as a particular responsibility within the
overall duty of care owed to its shareholders, shall establish written procedures reasonably
designed, taking into account current market conditions and the money market fund's investment
objectives, to stabilize the money market fund's net asset value per share, as computed for the
purpose of distribution, redemption and repurchase, at a single value.
(ii)
Specific Procedures. Included within the procedures adopted by the board of
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directors shall be the following:
(A)
Shadow Pricing. Written procedures shall provide:
(1)
That the extent of deviation, if any, of the current net asset value per share
calculated using available market quotations (or an appropriate substitute that reflects current
market conditions) from the money market fund's amortized cost price per share, shall be
calculated at such intervals as the board of directors determines appropriate and reasonable in
light of current market conditions;
(2)
For the periodic review by the board of directors of the amount of the deviation as
well as the methods used to calculate the deviation; and
(3)
For the maintenance of records of the determination of deviation and the board's
review thereof.
(B)
Prompt Consideration of Deviation. In the event such deviation from the money
market fund's amortized cost price per share exceeds 1/2 of 1 percent, the board of directors shall
promptly consider what action, if any, should be initiated by the board of directors.
(C)
Material Dilution or Unfair Results. Where the board of directors believes the
extent of any deviation from the money market fund's amortized cost price per share may result
in material dilution or other unfair results to investors or existing shareholders, it shall cause the
fund to take such action as it deems appropriate to eliminate or reduce to the extent reasonably
practicable such dilution or unfair results.
(D)
Stress Testing. Written procedures shall provide for:
(1)
The periodic testing, at such intervals as the board of directors determines
appropriate and reasonable in light of current market conditions, of the money market fund’s
ability to maintain a stable net asset value per share based upon specified hypothetical events,
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that include, but are not limited to, a change in short-term interest rates, an increase in
shareholder redemptions, a downgrade of or default on portfolio securities, and the widening or
narrowing of spreads between yields on an appropriate benchmark the fund has selected for
overnight interest rates and commercial paper and other types of securities held by the fund;
(2)
A report on the results of such testing to be provided to the board of directors at
its next regularly scheduled meeting, which report shall include the date(s) on which the testing
was performed and the magnitude of each hypothetical event that would cause the deviation of
the money market fund’s net asset value calculated using available market quotations (or
appropriate substitutes which reflect current market conditions) from its net asset value per share
calculated using amortized cost to exceed ½ of 1 percent; and
(3)
An assessment by the fund’s adviser of the fund’s ability to withstand the events
(and concurrent occurrences of those events) that are reasonably likely to occur within the
following year.
(9)
Required Procedures: Penny-Rounding Method. In the case of a money market
fund using the Penny-Rounding Method, in supervising the money market fund's operations and
delegating special responsibilities involving portfolio management to the money market fund's
investment adviser, the money market fund's board of directors undertakes, as a particular
responsibility within the overall duty of care owed to its shareholders, to assure to the extent
reasonably practicable, taking into account current market conditions affecting the money market
fund's investment objectives, that the money market fund's price per share as computed for the
purpose of distribution, redemption and repurchase, rounded to the nearest one percent, will not
deviate from the single price established by the board of directors.
(10)
Specific Procedures: Amortized Cost and Penny-Rounding Methods. Included
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within the procedures adopted by the board of directors for money market funds using either the
Amortized Cost or Penny-Rounding Methods shall be the following:
(i)
Securities for Which Maturity is Determined by Reference to Demand Features.
In the case of a security for which maturity is determined by reference to a Demand Feature,
written procedures shall require ongoing review of the security's continued minimal credit risks,
and that review must be based on, among other things, financial data for the most recent fiscal
year of the issuer of the Demand Feature and, in the case of a security subject to a Conditional
Demand Feature, the issuer of the security whose financial condition must be monitored under
paragraph (c)(3)(iv) of this section, whether such data is publicly available or provided under the
terms of the security's governing documentation.
(ii)
Securities Subject to Demand Features or Guarantees. In the case of a security
subject to one or more Demand Features or Guarantees that the fund's board of directors has
determined that the fund is not relying on to determine the quality (pursuant to paragraph (c)(3)
of this section), maturity (pursuant to paragraph (d) of this section) or liquidity of the security
subject to the Demand Feature or Guarantee, written procedures shall require periodic evaluation
of such determination.
(iii)
Adjustable Rate Securities Without Demand Features. In the case of a Variable
Rate or Floating Rate Security that is not subject to a Demand Feature and for which maturity is
determined pursuant to paragraphs (d)(1), (d)(2) or (d)(4) of this section, written procedures shall
require periodic review of whether the interest rate formula, upon readjustment of its interest
rate, can reasonably be expected to cause the security to have a market value that approximates
its amortized cost value.
(iv)
Asset Backed Securities. In the case of an Asset Backed Security, written
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procedures shall require the fund to periodically determine the number of Ten Percent Obligors
(as that term is used in paragraph (c)(4)(ii)(D) of this section) deemed to be the issuers of all or a
portion of the Asset Backed Security for purposes of paragraph (c)(4)(ii)(D) of this section;
Provided, however, written procedures need not require periodic determinations with respect to
any Asset Backed Security that a fund's board of directors has determined, at the time of
Acquisition, will not have, or is unlikely to have, Ten Percent Obligors that are deemed to be
issuers of all or a portion of that Asset Backed Security for purposes of paragraph (c)(4)(ii)(D) of
this section, and maintains a record of this determination.
(11)
Record Keeping and Reporting.
(i)
Written Procedures. For a period of not less than six years following the
replacement of such procedures with new procedures (the first two years in an easily accessible
place), a written copy of the procedures (and any modifications thereto) described in paragraphs
(c)(7) through (c)(10) and (e) of this section shall be maintained and preserved.
(ii)
Board Considerations and Actions. For a period of not less than six years (the
first two years in an easily accessible place) a written record shall be maintained and preserved
of the board of directors' considerations and actions taken in connection with the discharge of its
responsibilities, as set forth in this section, to be included in the minutes of the board of directors'
meetings.
(iii)
Credit Risk Analysis. For a period of not less than three years from the date that
the credit risks of a portfolio security were most recently reviewed, a written record of the
determination that a portfolio security presents minimal credit risks and the NRSRO ratings (if
any) used to determine the status of the security as an Eligible Security shall be maintained and
preserved in an easily accessible place.
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(iv)
Determinations With Respect to Adjustable Rate Securities. For a period of not
less than three years from the date when the determination was most recently made, a written
record shall be preserved and maintained, in an easily accessible place, of the determination
required by paragraph (c)(10)(iii) of this section (that a Variable Rate or Floating Rate Security
that is not subject to a Demand Feature and for which maturity is determined pursuant to
paragraphs (d)(1), (d)(2) or (d)(4) of this section can reasonably be expected, upon readjustment
of its interest rate at all times during the life of the instrument, to have a market value that
approximates its amortized cost).
(v)
Determinations with Respect to Asset Backed Securities. For a period of not less
than three years from the date when the determination was most recently made, a written record
shall be preserved and maintained, in an easily accessible place, of the determinations required
by paragraph (c)(10)(iv) of this section (the number of Ten Percent Obligors (as that term is used
in paragraph (c)(4)(ii)(D) of this section) deemed to be the issuers of all or a portion of the Asset
Backed Security for purposes of paragraph (c)(4)(ii)(D) of this section). The written record shall
include:
(A)
The identities of the Ten Percent Obligors (as that term is used in paragraph
(c)(4)(ii)(D) of this section), the percentage of the Qualifying Assets constituted by the securities
of each Ten Percent Obligor and the percentage of the fund's Total Assets that are invested in
securities of each Ten Percent Obligor; and
(B)
Any determination that an Asset Backed Security will not have, or is unlikely to
have, Ten Percent Obligors deemed to be issuers of all or a portion of that Asset Backed Security
for purposes of paragraph (c)(4)(ii)(D) of this section.
(vi)
Evaluations with Respect to Securities Subject to Demand Features or
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Guarantees. For a period of not less than three years from the date when the evaluation was
most recently made, a written record shall be preserved and maintained, in an easily accessible
place, of the evaluation required by paragraph (c)(10)(ii) (regarding securities subject to one or
more Demand Features or Guarantees) of this section.
(vii)
Reports and Assessments with Respect to Stress Testing. For a period of not less
than six years (the first two years in an easily accessible place), a written copy of the report
required under paragraph (c)(8)(ii)(D)(2) of this section and a written record of the assessment
required under paragraph (c)(8)(ii)(D)( 3) of this section shall be maintained and preserved.
(viii) Inspection of Records. The documents preserved pursuant to this paragraph
(c)(11) shall be subject to inspection by the Commission in accordance with section 31(b) of the
Act (15 U.S.C. 80a-30(b)) as if such documents were records required to be maintained pursuant
to rules adopted under section 31(a) of the Act (15 U.S.C. 80a-30(a)). If any action was taken
under paragraphs (c)(7)(ii) (with respect to defaulted securities and events of insolvency) or
(c)(8)(ii) (with respect to a deviation from the fund's share price of more than 1/2 of 1 percent) of
this section, the money market fund will file an exhibit to the Form N-SAR (17 CFR 274.101)
filed for the period in which the action was taken describing with specificity the nature and
circumstances of such action. The money market fund will report in an exhibit to such Form any
securities it holds on the final day of the reporting period that are not Eligible Securities.
(12)
Public Disclosure of Valuations. The money market fund shall post on its
website, for a period of not less than twelve months, beginning no later than the second business
day of the month, the fund’s schedule of investments, as prescribed by rules 12-12 – 12-14 of
Regulation S-X [17 CFR 210.12.-12 – 12-14], as of the last business day of the prior month.
(d)
Maturity of Portfolio Securities.
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For purposes of this section, the maturity of a portfolio security shall be deemed to be the
period remaining (calculated from the trade date or such other date on which the fund's interest in
the security is subject to market action) until the date on which, in accordance with the terms of
the security, the principal amount must unconditionally be paid, or in the case of a security called
for redemption, the date on which the redemption payment must be made, except as provided in
paragraphs (d)(1) through (d)(8) of this section:
(1)
Adjustable Rate Government Securities. A Government Security that is a
Variable Rate Security where the variable rate of interest is readjusted no less frequently than
every 397 calendar days shall be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate. A Government Security that is a Floating Rate Security
shall be deemed to have a remaining maturity of one day.
(2)
Short-Term Variable Rate Securities. A Variable Rate Security, the principal
amount of which, in accordance with the terms of the security, must unconditionally be paid in
397 calendar days or less shall be deemed to have a maturity equal to the earlier of the period
remaining until the next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
(3)
Long-Term Variable Rate Securities. A Variable Rate Security, the principal
amount of which is scheduled to be paid in more than 397 calendar days, that is subject to a
Demand Feature, shall be deemed to have a maturity equal to the longer of the period remaining
until the next readjustment of the interest rate or the period remaining until the principal amount
can be recovered through demand.
(4)
Short-Term Floating Rate Securities. A Floating Rate Security, the principal
amount of which, in accordance with the terms of the security, must unconditionally be paid in
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397 calendar days or less shall be deemed to have a maturity of one day.
(5)
Long-Term Floating Rate Securities. A Floating Rate Security, the principal
amount of which is scheduled to be paid in more than 397 calendar days, that is subject to a
Demand Feature, shall be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
(6)
Repurchase Agreements. A repurchase agreement shall be deemed to have a
maturity equal to the period remaining until the date on which the repurchase of the underlying
securities is scheduled to occur, or, where the agreement is subject to demand, the notice period
applicable to a demand for the repurchase of the securities.
(7)
Portfolio Lending Agreements. A portfolio lending agreement shall be treated as
having a maturity equal to the period remaining until the date on which the loaned securities are
scheduled to be returned, or where the agreement is subject to demand, the notice period
applicable to a demand for the return of the loaned securities.
(8)
Money Market Fund Securities. An investment in a money market fund shall be
treated as having a maturity equal to the period of time within which the Acquired money market
fund is required to make payment upon redemption, unless the Acquired money market fund has
agreed in writing to provide redemption proceeds to the investing money market fund within a
shorter time period, in which case the maturity of such investment shall be deemed to be the
shorter period.
(e)
Delegation.
The money market fund's board of directors may delegate to the fund's investment
adviser or officers the responsibility to make any determination required to be made by the board
of directors under this section (other than the determinations required by paragraphs (c)(1)
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(board findings); (c)(7)(ii) (defaults and other events); (c)(8)(i) (general required procedures:
Amortized Cost Method); (c)(8)(ii)(A) (shadow pricing), (B) (prompt consideration of
deviation), and (C) (material dilution or unfair results); and (c)(9) (required procedures: PennyRounding Method) of this section) provided:
(1)
Written Guidelines. The Board shall establish and periodically review written
guidelines (including guidelines for determining whether securities present minimal credit risks
as required in paragraph (c)(3) of this section) and procedures under which the delegate makes
such determinations:
(2)
Oversight. The Board shall take any measures reasonably necessary (through
periodic reviews of fund investments and the delegate's procedures in connection with
investment decisions and prompt review of the adviser's actions in the event of the default of a
security or Event of Insolvency with respect to the issuer of the security or any Guarantee to
which it is subject that requires notification of the Commission under paragraph (c)(7)(iii) of this
section) to assure that the guidelines and procedures are being followed.
3.
Section 270.17a-9 is revised to read as follows:
§ 270.17a-9 Purchase of certain securities from a money market fund by an
affiliate, or an affiliate of an affiliate.
The purchase of a security from the portfolio of an open-end investment company
holding itself out as a money market fund by any affiliated person or promoter of or principal
underwriter for the money market fund or any affiliated person of such person shall be exempt
from Section 17(a) of the Act (15 U.S.C. 80a-17(a)); provided that:
(a)
In the case of a portfolio security that has ceased to be an Eligible Security (as
defined in § 270.2a-7 (a)(11), or has defaulted (other than an immaterial default unrelated to the
financial condition of the issuer):
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(1)
The purchase price is paid in cash; and
(2)
The purchase price is equal to the greater of the amortized cost of the security or
its market price (in each case, including accrued interest).
(b)
In the case of any other portfolio security:
(1)
The purchase price meets the requirements of paragraph (a)(1) and (2) of this
section; and
(2)
In the event that the purchaser thereafter sells the security for a higher price than
the purchase price paid to the money market fund, the purchaser shall promptly pay to the fund
the amount by which the subsequent sale price exceeds the purchase price paid to the fund.
4.
Section 270.22e-3 is added to read as follows:
§ 270.22e-3 Exemption for liquidation of money market funds.
(a)
A registered open-end management investment company or series thereof
(“fund”) that is regulated as a money market fund under § 270.2a-7 is exempt from the
requirements of section 22(e) of the Act (15 U.S.C. 80a-22(e)) if:
(1)
The fund’s current price per share calculated pursuant to § 270.2a-7(c) is less than
the fund’s stable net asset value or price per share;
(2)
The fund’s board of directors, including a majority of directors who are not
interested persons of the fund, has approved the liquidation of the fund; and
(3)
The fund, prior to suspending redemptions, notifies the Commission of its
decision to liquidate and suspend redemptions, by electronic mail directed to the attention of the
Director of the Division of Investment Management or his designee.
(b)
Any fund that owns, pursuant to section 12(d)(1)(E) of the Act (15 U.S.C.
80a-12(d)(1)(E)), shares of a money market fund that has suspended redemptions of shares
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pursuant to paragraph (a) of this section also is exempt from the requirements of section 22(e) of
the Act. A fund relying on the exemption provided in this paragraph must promptly notify the
Commission that it has suspended redemptions in reliance on this section. Notification under
this paragraph shall be made by electronic mail directed to the attention of the Director of the
Division of Investment Management or his designee.
(c)
For the protection of fund shareholders, the Commission may issue an order to
rescind or modify the exemption provided by this section as to that fund, after appropriate notice
and opportunity for hearing in accordance with section 40 of the Act (15 U.S.C. 80a-39).
5.
Section 270.30b1-5 is revised to read as follows:
§ 270.30b1-5 Quarterly report.
Every registered management investment company, other than a small business
investment company registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), shall file a
quarterly report on Form N-Q (§§ 249.332 and 274.130 of this chapter) not more than 60 days
after the close of the first and third quarters of each fiscal year. A registered management
investment company that has filed a registration statement with the Commission registering its
securities for the first time under the Securities Act of 1933 is relieved of this reporting
obligation with respect to any reporting period or portion thereof prior to the date on which that
registration statement becomes effective or is withdrawn. A registered management investment
company regulated as a money market fund under § 270.2a-7 is relieved of the reporting
obligation required pursuant to Item 1 of Form N-Q.
6.
Section 270.30b1-6 is added to read as follows:
§ 270.30b1-6 Monthly report for money market funds.
Every registered open-end management investment company, or series thereof, that is
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regulated as a money market fund under § 270.2a-7 must file with the Commission a monthly
report of portfolio holdings on Form N-MFP no later than the second business day of each
month.
PART 274—FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY
ACT OF 1940
7.
The authority citation for Part 274 continues to read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a-8,
80a-24, 80a-26, and 80a-29, unless otherwise noted.
8.
Section 274.201 and Form N-MFP are added to read as follows:
§ 274.201
Form N-MFP, Portfolio Holdings of Money Market Funds
This form shall be used by registered management investment companies that are
regulated as money market funds under § 270.2a-7 of this chapter to file reports pursuant to
§ 270.30b1-6 of this chapter not later than two business days after the end of each month.
Note: The text of Form N-MFP will not appear in the Code of Federal Regulations.
FORM N-MFP
MONTHLY SCHEDULE OF PORTFOLIO HOLDINGS
OF MONEY MARKET FUNDS
Form N-MFP is to be used by open-end management investment companies, or series
thereof, that are regulated as money market funds under § 270.2a-7 (“money market funds”), to
file reports with the Commission, not later than the second business day of each month, pursuant
to rule 30b1-6 under the Investment Company Act of 1940 (17 CFR 270.30b1-6). The
Commission may use the information provided on Form N-MFP in its regulatory, disclosure
review, inspection, and policymaking roles.
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GENERAL INSTRUCTIONS
A.
Rule as to Use of Form N-MFP
Form N-MFP is the public reporting form that is to be used for monthly reports of money
market funds under section 30(b) of the Investment Company Act of 1940 (the “Act”) and rule
30b1-6 of the Act (17 CFR 270.30b1-6). Form N-MFP must be filed no later than the second
business day of each month, and will contain certain information about the money market fund
and its portfolio holdings as of the last business day of the preceding month.
B.
Application of General Rules and Regulations
The General Rules and Regulations under the Act contain certain general requirements
that are applicable to reporting on any form under the Act. These general requirements should
be carefully read and observed in the preparation and filing of reports on this form, except that
any provision in the form or in these instruction shall be controlling.
C.
Filing of Form N-MFP
A money market fund must file Form N-MFP no later than the second business day of
each month, in accordance with rule 232.13 of Regulation S-T. Form N-MFP must be filed
electronically using the Commission’s EDGAR system.
D.
Paperwork Reduction Act Information
A registrant is not required to respond to the collection of information contained in Form
N-MFP unless the Form displays a currently valid Office of Management and Budget (“OMB”)
control number. Please direct comments concerning the accuracy of the information collection
burden estimate and any suggestions for reducing the burden to the Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. The OMB has
reviewed this collection of information under the clearance requirements of 44 U.S.C. 3507.
192
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-MFP
MONTHLY SCHEDULE OF PORTFOLIO HOLDINGS
OF MONEY MARKET FUNDS
Date of Filing:
Report for [Month, Day, Year]
Name and Address of Fund or Portfolio Filing This Report:
CIK Number:
SEC File Number:
EDGAR Series Identifier:
Number of share classes offered:
Check here if Amendment [ ]
Amendment Number:
Is this an Initial Filing? [Y/N]
Is this a Final Filing? [Y/N]
Is the fund liquidating? [Y/N]
Is the fund merging with another fund? [Y/N]
If so, please identify the other fund by name, SEC File Number, and
EDGAR Series Identifier.
Is the fund being acquired by another fund? [Y/N]
If so, please identify the acquiring fund by name, SEC File Number, and
EDGAR Series Identifier.
193
Part I: Information about the Fund
Item 1.
Name of Investment Adviser.
a. SEC file number of Investment Adviser.
Item 2.
Name of Sub-Adviser. If a fund has multiple sub-advisers, disclose the name
of all sub-advisers to the fund.
a. SEC file number of Sub-Adviser. Disclose the SEC file number of each
sub-adviser to the fund.
Item 3.
Independent Auditor.
Item 4.
Administrator.
Item 5.
Transfer Agent.
a. SEC file number of Transfer Agent.
Item 6.
Minimum initial investment.
Item 7.
Is this a feeder fund? [Y/N]
a. If this is a feeder fund, identify the master fund.
b. SEC File Number of the master fund.
Item 8.
Is this a master fund? [Y/N]
a. If this is a master fund, identify all feeder funds.
b. SEC File Number of each feeder fund.
Item 9.
Is this portfolio primarily used to invest cash collateral? [Y/N]
Item 10.
Is this portfolio primarily used to fund variable accounts? [Y/N]
194
Item 11.
Category. Indicate whether the money market fund is a Treasury,
Government/Agency, Prime, Tax-Free National, or Tax-Free State Fund.
Item 12.
Total value of the portfolio at cost, to the nearest hundredth of a cent.
Item 13.
Net value of other assets and liabilities, to the nearest hundredth of a cent.
Item 14.
Net asset value per share for purposes of distributions, redemptions, and
repurchase, to the nearest hundredth of a cent.
Item 15.
Net shareholder flow activity for the month ended (subscriptions less
redemptions).
Item 16.
Dollar weighted average maturity. Calculate the dollar weighted average
maturity of portfolio securities, based on the time remaining until the next
interest rate re-set.
Item 17.
Dollar weighted average life maturity. Calculate the dollar weighted average
maturity of portfolio securities based on final legal maturity or demand
feature.
Item 18.
7-day gross yield. Based on the 7 days ended on the last day of the prior
month, calculate the Fund’s yield by determining the net change, exclusive of
capital changes and income other than investment income, in the value of a
hypothetical pre-existing account having a balance of one share at the
beginning of the period and dividing the difference by the value of the account
at the beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7) with the resulting yield figure
carried to at least the nearest hundredth of one percent. The 7-day gross yield
195
should not reflect a deduction of shareholders fees and fund operating
expenses.
Part 2: Schedule of Portfolio Securities. For each security held by the money market
fund, please disclose the following:
Item 19.
The name of the issuer.
Item 20.
CIK number of the issuer.
Item 21.
The title of the issue.
Item 22.
The CUSIP.
Item 23.
Other unique identifier (if the instrument does not have a CUSIP).
Item 24.
The category of investment. Please indicate the category that most closely
identifies the instrument from among the following: Treasury Debt;
Government Agency Debt; Variable Rate Demand Notes; Other Municipal
Debt; Financial Company Commercial Paper; Asset Backed Commercial
Paper; Certificate of Deposit; Structured Investment Vehicle Notes; Other
Notes; Treasury Repurchase Agreements; Government Agency Repurchase
Agreements; Other Repurchase Agreements; Insurance Company Funding
Agreements; Investment Company; Other Instrument.
Item 25.
Rating. Please indicate whether the security is a 1st tier security, unrated, or
no longer eligible.
Item 26.
Requisite NRSROs.
a.
Identify each Requisite NRSRO.
196
b.
For each Requisite NRSRO, disclose the credit rating given by the
Requisite NRSRO.
Item 27.
The maturity date as determined under rule 2a-7. Disclose the maturity date,
taking into account the maturity shortening provisions of rule 2a-7.
Item 28.
The final legal maturity date.
Item 29.
Is the maturity date extendable? [Y/N]
Item 30.
Does the security have a credit enhancement? [Y/N]
Item 31.
For each credit enhancement, disclose:
a. The type of credit enhancement.
b. The identity of the credit enhancement provider.
c. The credit rating of the credit enhancement provider.
Item 32.
Does the security have an insurance guarantee? [Y/N]
Item 33.
For each insurance guarantee provider, disclose:
a. The identity of the insurance guarantee provider.
b. The credit rating of the insurance guarantee provider.
Item 34.
Does the security have a liquidity provider? [Y/N]
Item 35.
For each liquidity provider, disclose:
a. The identity of the liquidity provider.
b. The credit rating of the liquidity provider.
197
Item 36.
The principal amount of the security.
Item 37.
The current amortized cost, to the nearest hundredth of a cent.
Item 38.
Is this a Level 1, Level 2, or Level 3 security, or Other? Please explain how
the security was valued. Level 1 securities are valued based on quoted prices
in active markets for identical securities. Level 2 securities are valued based
on other significant observable inputs (including quoted prices for similar
securities, interest rates, prepayment speeds, credit risks, etc.). Level 3
securities are valued based on significant unobservable inputs (including the
fund’s own assumptions in determining the fair value of investments). See
Statement of Financial Accounting Standards Board No. 157, “Fair Value
Measurement.”
Item 39.
The percentage of the money market fund’s gross assets invested in the
security, to the nearest hundredth of one percent.
Item 40.
Explanatory notes. Please disclose any other information that may be material
to other disclosure in the Form.
By the Commission.
Elizabeth M. Murphy
Secretary
Dated: June 30, 2009
| File Type | application/pdf |
| File Title | Proposed Rule: Money Market Fund Reform |
| Subject | 17 CFR Parts 270 and 274, Release No. IC-28807, File No. S7-11-09, RIN 3235-AK33, Date: 2009-06-30 |
| Author | US SEC |
| File Modified | 2009-06-30 |
| File Created | 2009-06-30 |