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Part III
Securities and
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17 CFR Parts 270 and 274
Money Market Fund Reform; Final Rule
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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations
SECURITIES AND EXCHANGE
COMMISSION
Company Act of 1940 (‘‘Investment
Company Act’’ or ‘‘Act’’).1
17 CFR Parts 270 and 274
Table of Contents
[Release No. IC–29132; File Nos. S7–11–
09, S7–20–09]
RIN 3235–AK33
Money Market Fund Reform
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AGENCY: Securities and Exchange
Commission.
ACTION: Final rule.
SUMMARY: The Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’) is
adopting amendments to certain rules
that govern money market funds under
the Investment Company Act of 1940.
The amendments will tighten the risklimiting 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
maximum weighted average maturity of
portfolio holdings, and improving the
quality of portfolio securities; require
money market funds to report their
portfolio holdings monthly to the
Commission; and permit a money
market fund that has ‘‘broken the buck’’
(i.e., re-priced its securities below $1.00
per share), or is at imminent risk of
breaking the buck, to suspend
redemptions to allow for the orderly
liquidation of fund assets. The
amendments are designed to make
money market funds more resilient to
certain short-term market risks, and to
provide greater protections for investors
in a money market fund that is unable
to maintain a stable net asset value per
share.
DATES: The rules, rule amendments, and
form are effective May 5, 2010. The
expiration date for 17 CFR 270.30b1–6T
is extended from September 17, 2010 to
December 1, 2010. Compliance dates are
discussed in Section III of the
SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT:
Office of Regulatory Policy, at (202)
551–6792, Division of Investment
Management, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–8549.
SUPPLEMENTARY INFORMATION: The
Commission is adopting amendments to
rules 2a–7 [17 CFR 270.2a–7], 17a–9 [17
CFR 270.17a–9] and 30b1–6T [17 CFR
270.30b1–6T], new rules 22e–3 [17 CFR
270.22e–3] and 30b1–7 [17 CFR
270.30b1–7], and new Form N–MFP [17
CFR 274.201] under the Investment
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I. Background
II. Discussion
A. Portfolio Quality
1. Second Tier Securities
2. Eligible Securities
3. Asset Backed Securities
B. Portfolio Maturity
1. Weighted Average Maturity
2. Weighted Average Life
3. Maturity Limit for Government
Securities
C. Portfolio Liquidity
1. General Liquidity Requirement
2. Limitation on Acquisition of Illiquid
Securities
3. Minimum Daily and Weekly Liquidity
Requirements
4. Stress Testing
D. Repurchase Agreements
E. Disclosure of Portfolio Information
1. Public Web site Posting
2. Reporting to the Commission
3. Phase-Out of Weekly Reporting by
Certain Funds
F. Processing of Transactions
G. Exemption for Affiliate Purchases
1. Expanded Exemptive Relief
2. New Reporting Requirement
H. Fund Liquidation
III. Compliance Dates
IV. Paperwork Reduction Act Analysis
V. Cost Benefit Analysis
VI. Competition, Efficiency, and Capital
Formation
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority
Text of Rules, Rule Amendments, and Form
I. Background
On June 30, 2009, the Commission
issued a release proposing new rules
and rule amendments governing the
operation of money market funds.2
Money market funds are open-end
management investment companies that
are registered under the Investment
Company Act. They invest in highquality, short-term debt instruments
such as commercial paper, Treasury
bills and repurchase agreements. Money
market funds pay dividends that reflect
prevailing short-term interest rates and,
unlike other investment companies,
maintain a stable net asset value per
share (or ‘‘NAV’’), typically $1.00 per
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, are to Title 17, Part 270 of the Code of
Federal Regulations [17 CFR 270]. References to
‘‘current’’ rules relate to rules in their current form
[17 CFR Part 270 (2009 version)], and references to
‘‘amended’’ rules relate to rules as they will be
amended by this Release.
2 Money Market Fund Reform, Investment
Company Act Release No. 28807 (June 30, 2009) [74
FR 32688 (July 8, 2009)] (‘‘Proposing Release’’). All
references to ‘‘proposed’’ rules relate to rules as
proposed in the Proposing Release.
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share. Money market funds have over
$3.3 trillion dollars in assets under
management, and comprise over 30
percent of the assets of registered
investment companies.3
All money market funds are subject to
rule 2a–7 under the Investment
Company Act. Rule 2a–7, among other
things, facilitates money market funds’
ability to maintain a stable net asset
value per share by permitting them to
use the amortized cost method of
valuation and the penny-rounding
method of pricing.4 But for rule 2a–7,
the Investment Company Act and our
rules would require a money market
fund to calculate its current net asset
value per share by valuing portfolio
securities at their current value (‘‘markto-market’’).5
Under the amortized cost method,
portfolio securities generally are valued
at cost plus any amortization of
premium or accumulation of discount.
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 their
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.6 Therefore, the
rule permits money market funds to
value portfolio securities at their
amortized cost so long as the deviation
between the portfolio’s amortized cost
3 See Investment Company Institute, Trends in
Mutual Fund Investing, Nov. 2009, available at
http://www.ici.org/research/stats/trends/
trends_11_09.
4 Current rule 2a–7(a)(2) defines the amortized
cost method as the method of calculating an
investment company’s net asset value per share (or
‘‘NAV’’) 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. 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
current rule 2a–7(a)(18).
5 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).
6 See Valuation of Debt Instruments and
Computation of Current Price Per Share by Certain
Open-End Investment Companies (Money Market
Funds), Investment Company Act Release No.
13380 (July 11, 1983) [48 FR 32555 (July 18, 1983)]
(‘‘1983 Adopting Release’’) at nn.3–7 and
accompanying text; 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. 12206 (Feb. 1, 1982) [47 FR 5428 (Feb. 5, 1982)]
at nn.3–4 and accompanying text.
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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.7
To reduce the likelihood of a material
deviation occurring between the
amortized cost value of a portfolio and
its market-based value, the rule contains
several conditions (which we refer to as
‘‘risk-limiting conditions’’) that limit the
fund’s exposure to certain risks, such as
credit, currency, and interest rate risks.8
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-tomarket net asset value of the portfolio.9
If there is a difference of more than onehalf of one 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.’’ 10
As discussed in significant detail in
the Proposing Release, during 2007–
2008 money market funds were exposed
to substantial losses, first as a result of
exposure to debt securities issued by
structured investment vehicles (‘‘SIVs’’),
7 See amended rule 2a–7(c)(1), (c)(8)(ii)(B)–(C)
(requiring, among other things, that the fund’s
board of directors promptly consider what action,
if any, should be taken if the deviation between the
money market fund’s current market value and the
fund’s amortized cost price per share exceeds 1⁄2 of
1%).
8 For example, the current 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’’). A fund, moreover, may
only invest a limited portion of its portfolio in
securities rated in the second highest rating
category. See current rule 2a–7(c)(3). The current
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
current rule 2a–7(c)(2).
9 See current rule 2a–7(c)(7) (requiring that such
shadow pricing be calculated at such intervals as
the board of directors determines appropriate and
reasonable in light of current market conditions).
10 See current 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. Current rule 2a–7(c)(7)(ii)(C).
See 1983 Adopting Release, supra note 6, at nn.51–
52 and accompanying text.
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and then as a result of the default of
debt securities issued by Lehman
Brothers Holdings Inc. (‘‘Lehman
Brothers’’). All but one of the funds that
were exposed to losses from SIV and
Lehman Brothers securities obtained
support of some type from their advisers
or other affiliated persons, which
absorbed the losses or provided a
guarantee covering a sufficient amount
of losses to prevent the fund from
breaking the buck. The Reserve Primary
Fund, which held a $785 million
position in Lehman Brothers debt,
ultimately did not have a sponsor with
sufficient resources to support it, and on
September 16, 2008 the fund announced
that it would re-price its securities at
$0.97 per share.11 It subsequently
suspended redemptions as of September
17, 2008.12
The cumulative effect of these events,
when combined with general turbulence
in the financial markets, led to a run
primarily on institutional taxable prime
money market funds, which contributed
to severe dislocations in short-term
credit markets and strains on the
businesses and institutions that obtain
funding in those markets.13 During the
week of September 15, 2008, investors
withdrew approximately $300 billion
from taxable prime money market
funds, or 14 percent of the assets held
in those funds.14 In the final two weeks
11 See Proposing Release, supra note 2, at n.44
and accompanying text. The Reserve Primary Fund
distributed the bulk of its assets, and investors have
received more than $0.98 on the dollar. See Press
Release, SEC, Reserve Primary Fund Distributes
Assets to Investors (Jan. 29, 2010) available at
http://www.sec.gov/news/press/2010/2010-16.htm.
12 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. 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).
13 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’’). See also 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.
14 See Investment Company Institute, Report of
the Money Market Working Group, at 62 (Mar. 17,
2009), available at http://www.ici.org/pdf/
ppr_09_mmwg.pdf (‘‘ICI Report’’) (analyzing data
from iMoneyNet); see also Investment Company
Institute, Money Market Mutual Fund Assets
Historical Data, available at http://www.ici.org/pdf/
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of September 2008, money market funds
reduced their holdings of top-rated
commercial paper by $200.3 billion, or
29 percent.15
On September 19, 2008, the U.S.
Department of the Treasury (‘‘Treasury
Department’’) and the Board of
Governors of the Federal Reserve
System (‘‘Federal Reserve Board’’)
announced an unprecedented
intervention in the short-term markets.
The Treasury Department 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.16 This
program has now expired.17 The Federal
Reserve Board announced the creation
of its Asset-Backed Commercial Paper
Money Market Mutual Fund Liquidity
Facility (‘‘AMLF’’), through which it
extended credit to U.S. banks and bank
holding companies to finance their
purchases of high-quality asset backed
commercial paper from money market
funds.18 These programs were effective
in containing the run on institutional
prime money market funds and
providing additional liquidity to money
market funds.19
mm_data_2010.pdf (‘‘ICI Mutual Fund Historical
Data’’).
15 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.
16 See Press Release, Treasury Department,
Treasury Announces Guaranty Program for Money
Market Funds (Sept. 19, 2008), available at
http://www.treas.gov/press/releases/hp1147.htm.
The Program insured investments in money market
funds, to the extent of their shareholdings as of
September 19, 2008, if the fund chose to participate
in the Program. 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 permitted a
participating fund to suspend redemptions if it
broke the buck and liquidated under the terms of
the Program. See Temporary Exemption for
Liquidation of Certain Money Market Funds,
Investment Company Act Release No. 28487 (Nov.
20, 2008) [73 FR 71919 (Nov. 26, 2008)].
17 See Press Release, U.S. Department of the
Treasury, Treasury Announces Expiration of
Guarantee Program for Money Market Funds (Sept.
18, 2009), available at http://www.treas.gov/press/
releases/tg293.htm. The Program expired on
September 19, 2009, and rule 22e–3T expired on
October 18, 2009.
18 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 expired on
February 1, 2010. See Press Release, Federal
Reserve Board, FOMC Statement (Jan. 27, 2010),
available at http://www.federalreserve.gov/
newsevents/press/monetary/20100127a.htm.
19 During the week ending September 18, 2008,
taxable institutional money market funds
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The severity of the problems
experienced by money market funds
during 2007 and 2008 prompted us to
review our regulation of money market
funds. We sought to better understand
how we might revise rule 2a–7 to reduce
the susceptibility of money market
funds to runs and reduce the
consequences of a run on fund
shareholders. Our staff consulted
extensively with staff from other
members of the President’s Working
Group on Financial Markets. We talked
to many market participants, and
reviewed a report from a ‘‘Money Market
Fund Working Group’’ assembled by the
Investment Company Institute (‘‘ICI
Report’’), which recommended a number
of changes.20
Our June 2009 proposals were the
product of that review and were, we
explained, a first step to addressing
regulatory concerns we identified. They
were designed to make money market
funds more resilient and less likely to
break a buck as a result of disruptions
such as those that occurred in the fall
of 2008. They would give us better tools
to oversee money market funds. If a
money market fund did break a buck,
they would facilitate an orderly
liquidation in order to protect fund
shareholders and help contain adverse
effects on the capital markets and other
money market funds. In addition,
throughout the Proposing Release we
requested comment on additional
regulatory changes aimed at further
strengthening the stability of money
market funds.
We received approximately 120
comments on the rule, including
approximately 45 comments from
investment companies and their
representatives, 22 from debt security
issuers, and 30 from individuals,
including investors and academics. The
comment letters reflected a wide variety
of views on most of the topics discussed
in the Proposing Release. The
investment companies generally
supported those aspects of the proposal
that were similar to those recommended
in the ICI Report.21 Most of them
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. By the end of the week after the
announcement, however, 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.
20 ICI Report, supra note 14.
21 See, e.g., Comment Letter of T. Rowe Price
Associates, Inc. (Sept. 8, 2009) (‘‘T. Rowe Price
Comment Letter’’); Comment Letter of UBS Global
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strongly objected to changes that would
affect the stable net asset value that
today is the principal characteristic of a
money market fund.22 Most debt
security issuers who wrote to us
objected to changes designed to increase
the credit quality of money market fund
portfolios by precluding funds from
investing in second tier securities (as
defined by the rule).23 Many fund
commenters pointed to the historical
stability of funds and urged us to be
modest in our changes to rule 2a–7.24
Some others, however, pointed to the
near-cataclysmic events of September
2008 in supporting more substantial
changes.25
As we stated in the Proposing Release,
we recognize that the events of 2007–
2008 raise the question of whether
further changes to the regulatory
structure governing money market funds
may be warranted. Accordingly, in the
Proposing Release we requested
comment on additional, more
fundamental regulatory changes, some
of which we recognized could transform
the business and regulatory model on
which money market funds have been
operating for more than 30 years.26 For
example, we requested comment on
whether money market funds should
move to the ‘‘floating net asset value’’
used by other open-end investment
companies.27 We received over 75
comment letters addressing this issue.
We have continued to explore possible
more significant changes to the
regulation of money market funds in
light of these comments and through the
staff’s work with members of the
President’s Working Group. We expect
Asset Management (Americas) Inc. (Sept. 8, 2009);
Comment Letter of The Vanguard Group, Inc. (Aug.
19, 2009) (‘‘Vanguard Comment Letter’’).
22 See, e.g., Comment Letter of BlackRock Inc.
(Sept. 4, 2009) (‘‘BlackRock Comment Letter’’);
Comment Letter of the Dreyfus Corporation (Sept.
8, 2009) (‘‘Dreyfus Comment Letter’’); Comment
Letter of Goldman Sachs Asset Management, L.P.
(Sept. 8, 2009) (‘‘Goldman Sachs Comment Letter’’).
23 See, e.g., Comment Letter of American Electric
Power Company, Inc. (Sept. 8, 2009) (‘‘Am. Elec. P.
Comment Letter’’); Comment Letters of the U.S.
Chamber of Commerce and Joint Treasurer
Signatories (Sept. 3 & Sept. 24, 2009) (‘‘Chamber/
Tier 2 Issuers Comment Letter’’); Comment Letter of
Dominion Resources Services, Inc. (Sept. 8, 2009)
(‘‘Dominion Res. Comment Letter’’).
24 See, e.g., Comment Letter of Fidelity
Investments (Aug. 24, 2009) (‘‘Fidelity Comment
Letter’’); T. Rowe Price Comment Letter; Comment
Letter of USAA Investment Management Company
(Sept. 8, 2009) (‘‘USAA Comment Letter’’).
25 See, e.g., Comment Letter of Deutsche
Investment Management Americas Inc. (Aug. 31,
2009) (‘‘Deutsche Comment Letter’’); Comment
Letter of Jeffrey N. Gordon, Professor of Law,
Columbia Law School (Sept. 9, 2009); Comment
Letter of John R. Jay, CFA (Sept. 8, 2009).
26 See Proposing Release, supra note 2, at Section
III.
27 See id. at Section III.A.
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to issue a release addressing these issues
and proposing further reform to money
market fund regulation.
II. Discussion
Today we are adopting the
amendments we proposed last June to
the rules governing money market
funds, with several changes made in
response to the comments we received.
As described below in more detail, we
believe these amendments will make
money market funds more resilient and
less likely to break the buck. They will
further limit the risks money market
funds may assume by, among other
things, requiring them to increase the
credit quality of fund portfolios and to
reduce the maximum weighted average
maturity of their portfolios, and by
requiring for the first time that all
money market funds maintain liquidity
buffers that will help them withstand
sudden demands for redemptions. The
rule amendments require fund managers
to stress test their portfolios against
potential economic shocks such as
sudden increases in interest rates, heavy
redemptions, and potential defaults.
They provide investors with more
timely, relevant information about fund
portfolios to hold fund managers more
accountable for the risks they take. They
will improve our ability to oversee
money market funds. And finally, they
provide a means to wind down the
operations of a fund that does break the
buck or suffers a run, in an orderly way
that is fair to the fund’s investors and
reduces the risk of market losses that
could spread to other funds. We believe
that these reforms collectively will
better protect money market fund
investors in times of financial market
turmoil and lessen the possibility that
the money market fund industry will
not be able to withstand stresses similar
to those experienced in 2007–08. Thus,
we believe that each of the rules and
rule amendments we are adopting is
necessary or appropriate in the public
interest and consistent with the
protection of investors and the policies
and purposes of the Investment
Company Act.28
A. Portfolio Quality
Rule 2a–7 limits a money market fund
to investing in securities that are, at the
time of their acquisition, ‘‘eligible
securities,’’ which means that securities
must have been rated in either of the
two highest short-term debt ratings
categories from the relevant NRSROs or
are comparable to securities that have
28 See section 6(c) of the Investment Company Act
(under which rule 22e–3 and amendments to rules
2a–7 and 17a–9 are adopted).
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been so rated in these categories.29
Before a fund may invest in an ‘‘eligible
security,’’ a fund’s board of directors (or
its delegate) must also determine that
the security presents minimal credit
risks, which must be based on factors
pertaining to credit quality in addition
to any rating assigned to a security.30
We are amending rule 2a–7 to reduce
the amount of credit risk a money
market fund may assume by limiting the
securities in which money market funds
may invest. We are also amending
provisions of rule 2a–7 that address how
NRSRO ratings are used in the rule.
1. Second Tier Securities
We are amending rule 2a–7 to further
limit money market funds’ investments
in ‘‘second tier securities.’’ 31 Under the
amendments, we are reducing
permissible money market fund
investments in second tier securities by
(i) lowering the permitted percentage of
a fund’s ‘‘total assets’’ that may be
invested in second tier securities from
five percent to three percent and (ii)
lowering the permitted concentration of
its total assets in second tier securities
of a single issuer from the greater of one
percent or $1 million to one-half of one
percent.32 In addition, money market
funds will not be permitted to acquire
any second tier security with a
remaining maturity in excess of 45
days.33
Last June, we proposed to prohibit
money market funds from acquiring
second tier securities, based on our
analysis of the risks that these securities
can pose to money market funds. We
noted that second tier securities trade in
thinner markets, generally have a
weaker credit quality profile, and
exhibited credit spreads that widened
more dramatically than those of first tier
securities during the 2008 financial
turmoil.34 During times of financial
29 Amended
rule 2a–7(a)(12) (eligible security).
rule 2a–7(c)(3)(i) (portfolio quality).
31 Second tier securities are eligible securities
that, if rated, have received other than the highest
short-term term debt rating from the requisite
NRSROs or, if unrated, have been determined by
the fund’s board of directors to be of comparable
quality. See amended rule 2a–7(a)(24) (defining
‘‘second tier security’’); amended rule 2a–7(a)(23)
(defining ‘‘requisite NRSROs’’).
32 See amended rule 2a–7(c)(3)(ii) (portfolio
quality—second tier securities); amended rule 2a–
7(c)(4)(i)(C) (portfolio diversification—second tier
securities); amended rule 2a–7(a)(27) (defining
‘‘total assets’’).
33 See amended rule 2a–7(c)(3)(ii) (portfolio
quality—second tier securities).
34 See Proposing Release, supra note 2, at Section
II.A.1. See also Thomas K. Hahn, Commercial Paper
(Federal Reserve Bank of Richmond, Economic
Quarterly Vol. 79/2, Spring 1993), at Fig. 4
(showing historical spreads between A–1/P–1
commercial paper and A–2/P–2 commercial paper
between 1974 and 1992, including the tendency of
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market stress, we understand that these
securities tend to become illiquid and
sell in the secondary market, if at all,
only at prices substantially discounted
from their amortized cost value.35 This
additional risk created by the credit and
liquidity profile of second tier securities
increases the possibility that a fund
holding these securities could break the
buck in times of financial market
turmoil, with a detrimental impact on
fund investors.
Commenters were evenly divided
between those supporting our proposed
elimination of money market funds’
ability to acquire second tier securities
and those against our proposal. In
general, most money market fund
sponsors who commented supported
elimination,36 while most issuers of
second tier securities who commented
opposed elimination.37 Those
supporting elimination argued that it
would be an effective way to increase
the safety of money market funds and
would reduce the likelihood that a fund
would break the buck. Some
commenters noted that the money
market funds they manage have not
acquired second tier securities
historically 38 because of second tier
issuers’ weaker credit profiles, smaller
issuer program sizes, and lower market
liquidity.39 A few commenters noted
that eliminating money market funds’
ability to acquire second tier securities
should result in minimal market
such spreads to spike shortly before and during
recessions); Comment Letter of the Investment
Company Institute (Sept. 8, 2009) (‘‘ICI Comment
Letter’’) (noting that the market for Tier 2
commercial paper is less deep with fewer issuers
than the Tier 1 market).
35 See, e.g., Comment Letter of Invesco AIM
Advisors, Inc. (Sept. 4, 2009) (‘‘Invesco Aim
Comment Letter’’) (noting that it has historically
avoided the second tier market due to, among other
factors, the less overall market liquidity of second
tier securities); ICI Comment Letter. See also
Proposing Release, supra note 2, at Section II.A.1
for a discussion of the wider credit spreads of
second tier securities during the fall of 2008,
indicating the extent to which such securities
traded at a discounted price.
36 See, e.g., Comment Letter of Bankers Trust
Company, N.A. (Aug. 28, 2009) (‘‘Bankers Trust
Comment Letter’’); BlackRock Comment Letter;
Comment Letter of Charles Schwab Investment
Management, Inc. (Sept. 4, 2009) (‘‘Charles Schwab
Comment Letter’’); Dreyfus Comment Letter;
Vanguard Comment Letter. But see Comment Letter
of Federated Investors, Inc. (Sept. 8, 2009)
(‘‘Federated Comment Letter’’); Fidelity Comment
Letter (opposing elimination).
37 See, e.g., Comment Letter of the American
Securitization Forum (Sept. 8, 2009) (‘‘Am. Securit.
Forum Comment Letter’’); Comment Letter of the
U.S. Chamber of Commerce, Center for Capital
Markets Competitiveness (Sept. 8, 2009) (‘‘Chamber
Comment Letter’’); Dominion Res. Comment Letter;
Comment Letter of XTO Energy Inc. (Sept. 3, 2009)
(‘‘XTO Energy Comment Letter’’).
38 See, e.g., Dreyfus Comment Letter; Invesco Aim
Comment Letter.
39 See, e.g., Invesco Aim Comment Letter.
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disruption because money market funds
currently hold small amounts of such
securities.40
Commenters that opposed the
proposal disagreed that second tier
securities significantly increase risk at
money market funds,41 argued that a
complete ban would not be justified on
a cost-benefit basis,42 and stated that a
ban would have a material adverse
impact on second tier security issuers.43
Some commenters noted that in a report
of default rates through 2006, second
tier securities have default rates
substantially similar to those of first tier
securities.44 These commenters also
noted that rating agencies require that
second tier security issuers establish
backup liquidity lines of credit
providing 100 percent coverage for any
issuance.45 Several commenters agreed
40 See, e.g., ICI Comment Letter; Comment Letter
of TD Asset Management (Sept. 8, 2009) (‘‘TDAM
Comment Letter’’).
41 See, e.g., Comment Letter of the Association for
Financial Professionals (Sept. 8, 2009) (‘‘Assoc. Fin.
Professionals Comment Letter’’); Chamber/Tier 2
Issuers Comment Letter; Dominion Res. Comment
Letter.
42 See, e.g., Comment Letter of Fund Democracy
and the Consumer Federation of America (Sept. 8,
2009) (‘‘CFA/Fund Democracy Comment Letter’’);
Chamber Comment Letter; Dominion Res. Comment
Letter. But see TDAM Comment Letter (stating that
the benefits of eliminating second tier securities
will far outweigh any disadvantages).
43 See, e.g., Chamber Comment Letter; Dominion
Res. Comment Letter; Comment Letter of Treasury
Strategies, Inc. (Sept. 8, 2009) (‘‘Treasury Strategies
Comment Letter’’).
44 Chamber Comment Letter; Chamber/Tier 2
Issuers Comment Letter. These commenters were
citing the following study: Moody’s Investors
Service, Short-Term Corporate and Structured
Finance Rating Transition Rates, 1972–2006 (June
2007), available at http://www.moodys.com/cust/
content/content.ashx?source=staticcontent/
free%20pages/regulatory%20affairs/documents/
st_corp_and_struc_transition_rates_06_07.pdf
(showing, for example, a default rate for P–1 rated
commercial paper over a 365 day time horizon of
0.02% versus a default rate for P–2 rated
commercial paper of 0.10% over the same time
horizon).
45 We note, however, that commenters did not
discuss conditions under which those issuers
would not be permitted to draw on those backup
liquidity facilities. It is our understanding that such
backup liquidity facilities typically do not provide
a full backstop of liquidity support because they
contain conditions limiting an issuer’s ability to
draw on the facility if the issuer has experienced
a ‘‘material adverse change,’’ which would often
occur if the financial situation of the issuer had
declined due to financial market or other economic
turmoil. See also Hahn, supra note 34 (stating that
backup lines of credit generally will not be useful
for a firm whose operating and financial condition
has deteriorated to the point where it is about to
default on its short-term liabilities because credit
agreements often contain ‘‘material adverse change’’
clauses that allow banks to cancel credit lines if the
financial condition of the firm changes
significantly); Pu Shen, Why Has the Nonfinancial
Commercial Paper Market Shrunk Recently?,
Federal Reserve Bank of Kansas City Economic
Review, at 69 (First Quarter 2003) (stating that
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with our statement in the Proposing
Release that second tier securities were
not the direct cause of strains on money
market funds during the 2007–2008
period.46 A few stated that banning the
acquisition of second tier securities
would reduce diversification of money
market fund portfolio holdings and thus
increase risk, noting in particular that a
greater percentage of second tier
security issuers are not financial
institutions, compared to first tier
security issuers.47
Commenters also asserted that
prohibiting the acquisition of second
tier securities would have unintended
consequences for the capital markets.
They stated that it might discourage
investors other than money market
funds from investing in second tier
securities, causing a more substantial
reduction in the issuance of second tier
securities.48 Some argued that if second
commercial paper backup facilities are only meant
to provide emergency assistance for short-term
liquidity difficulties and not to enhance the credit
quality of issues); Standard & Poor’s, 2008
Corporate Criteria: Commercial Paper, at 3 (Apr. 15,
2008) (‘‘Given the size of the CP market, backup
facilities could not be relied on with a high degree
of confidence in the event of widespread
disruption.’’).
46 See, e.g., Chamber/Tier 2 Issuers Comment
Letter; Federated Comment Letter; Fidelity
Comment Letter.
47 See, e.g., Treasury Strategies Comment Letter;
USAA Comment Letter; XTO Energy Comment
Letter. We note that while a greater percentage of
second tier security issuers do appear to be nonfinancial companies, there are a much greater
number of non-financial first tier issuers and thus
it is not clear that money market funds would not
be able to achieve sufficient diversification in their
portfolio holdings even if limited to acquiring first
tier securities. The Chamber/Tier 2 Issuers
Comment Letter also states that prohibiting money
market funds from acquiring second tier securities
would ‘‘cut the pool of potential issuers by 43%’’
(emphasis added). Any diversification is not driven
only by the number of potential issuers, however.
It is also determined by the amount of money
market fund assets that can be actually allocated to
different issuers. For example, while there are over
200 P–2 rated commercial paper programs, only
approximately half of these programs are active in
issuing any commercial paper and only 16
programs have an average quarterly outstanding
issuance in excess of $500 million. See American
Securit. Forum Comment Letter. In addition, during
the market turmoil of 2007 and 2008, second tier
securities did not exhibit less risky or
countervailing economic metrics relevant to money
market funds maintaining a stable net asset value
compared to first tier securities. See Proposing
Release, supra note 2, at Section II.A.1, at n.98 and
accompanying text and chart. In fact, AA-rated nonfinancial commercial paper did exhibit significantly
greater price stability than A2/P2-rated nonfinancial commercial paper during the fall of 2008.
See Federal Reserve Board, Commercial Paper Data,
available at http://www.federalreserve.gov/
DataDownload/Choose.aspx?rel=CP (‘‘Federal
Reserve Commercial Paper Data’’). See also V.V.
Chari, L. Christiano & P. Kehoe, Facts and Myths
about the Financial Crisis of 2008, Federal Reserve
Bank of Minneapolis Working Paper 666, at Fig. 7B
(Oct. 2008).
48 See, e.g., Chamber Comment Letter; Dominion
Res. Comment Letter; Treasury Strategies Comment
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tier issuers are not able to issue
sufficient commercial paper, they will
be forced to borrow more from banks,
which is a less flexible and more costly
alternative that will increase borrowing
costs.49 Finally, two commenters stated
that a complete ban on the acquisition
of second tier securities by money
market funds might have a negative
effect on those issuers of first tier
securities that are viewed as presenting
a higher risk of being downgraded,
because money market funds may elect
not to invest in those securities out of
concern that the securities might soon
become second tier securities.50
The focus of our concerns is and must
be on the risk to money market funds
and their shareholders from their
investments in second tier securities.
While, as commenters noted,51 second
tier securities do not appear to be
subject to substantially greater default
risk than first tier securities they present
Letter. Commenters asserted that eliminating money
market funds’ ability to acquire second tier
securities might have a substantially greater adverse
impact on second tier issuers, and thus potentially
on capital formation because other investors in
second tier securities or lesser quality first tier
securities might avoid investment in those
securities as a result of our rule amendments.
Investor behavior in this regard is difficult to
predict. It is equally likely that investors in second
tier paper would demand higher yields, increasing
issuers’ financing costs. As discussed below,
however, we are not precluding money market
funds from investing in second tier securities.
Accordingly, we do not need to reach a conclusion
on this matter.
49 See, e.g., Am. Elec. P. Comment Letter;
Chamber/Tier 2 Issuers Comment Letter; Dominion
Res. Comment Letter; XTO Energy Comment Letter.
We note that money market funds hold a relatively
low percentage of outstanding second tier
commercial paper. See Bank of America Merrill
Lynch, Tier-2 US Commercial Paper Market Update
(Oct. 15, 2009) (attached to the Am. Securit. Forum
Comment Letter) (indicating that over 75% of Tier2 commercial paper is held by insurance firms,
corporations and banks, and that only 11% is held
by the asset management industry, which would
include money market funds as well as other
mutual funds and asset managers).
50 Fidelity Comment Letter; USAA Comment
Letter. Two other commenters suggested that the
Commission should consider the effect of banning
the acquisition of second tier securities on taxexempt money market funds, and in particular
single-State funds. See Dreyfus Comment Letter;
Federated Comment Letter. As discussed further in
the cost benefit analysis section of this Release,
based on our review of money market fund
portfolios in September 2008, very few money
market funds, including tax-exempt funds, will be
impacted by our amendments relating to second tier
securities. The greatest potential impact on taxexempt funds will be the 45-day maturity limitation
for acquisition of second tier securities. Given the
prevalence of variable rate demand notes among
municipal securities, however, we believe that taxexempt funds should be able to effectively manage
the 45-day maturity limit without a substantial
impact. Accordingly, we do not believe that a
special accommodation for tax-exempt money
market funds is required with respect to second tier
securities.
51 See supra note 44 and accompanying text.
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greater credit spread risk and trade in
thinner markets,52 all of which can lead
to greater price volatility and illiquidity
in times of market stress.53 While these
characteristics may not pose the same
degree of risk to money market funds as
the likelihood that a security could
default and become worthless, they can
adversely affect money market funds’
ability to maintain a stable net asset
value. This is particularly the case given
money market funds’ narrow margin for
deviation between the mark-to-market
value of their assets and the amortized
cost value of those assets, and the
significant negative impact on money
market funds and their investors if a
fund breaks the buck.
Several commenters asserted that
there are high-quality second tier
securities available and that money
market funds conducting a thorough
credit risk analysis may conclude that
certain second tier securities provide a
higher yield than first tier securities
while still maintaining a risk profile
consistent with investment objectives
for money market fund investment.54 In
these circumstances, investment in
higher yielding second tier securities
may benefit fund investors. These
commenters suggested that, given these
benefits, it may be more appropriate for
52 A few commenters argued that the increase in
spreads of Tier 2 commercial paper over Tier 1
commercial paper during the fall of 2008 was due
to the Federal Reserve Board’s announcement of its
creation of the Commercial Paper Funding Facility
(CPFF) on October 7, 2008, which only supported
issuance of 90-day Tier 1 commercial paper. See
Chamber Comment Letter; Chamber/Tier 2 Issuers
Comment Letter; Dominion Res. Comment Letter.
We note, however, that spreads between Tier 1 and
Tier 2 commercial paper widened significantly (by
well over 300 basis points) immediately after the
bankruptcy of Lehman Brothers was announced on
September 14, 2008—well before the CPFF was
announced on October 7. See Federal Reserve
Commercial Paper Data, supra note 47 (comparing
AA and A2/P2 rated 30-day and 60-day
nonfinancial commercial paper rates).
53 We note that second tier securities are also
more likely to be downgraded than first tier
securities. See Moody’s Investors Service, ShortTerm Corporate and Structured Finance Rating
Transition Rates, supra note 44, cited in Chamber/
Tier 2 Issuers Comment Letter (showing that for
each time period, commercial paper with a P–2
rating had a greater percentage chance of being
downgraded than commercial paper with a P–1
rating, and that this gap widened over time—for
example, P–2 rated commercial paper had a 1.09%
chance of being downgraded over a 60-day period
compared to a 0.72% chance of P–1 commercial
paper being downgraded (a 0.37% difference); P–2
rated commercial paper had a 2.07% chance of
being downgraded over a 120-day period compared
to a 1.46% chance of P–1 commercial paper being
downgraded (a 0.61% difference); and P–2 rated
commercial paper had a 4% chance of being
downgraded over a 270-day period compared to a
3.18% chance of P–1 commercial paper being
downgraded (a 0.82% difference)).
54 See, e.g., Fidelity Comment Letter; Comment
Letter of Thrivent Mutual Funds (Sept. 8, 2009)
(‘‘Thrivent Comment Letter’’).
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us to preserve money market funds’
ability to invest in second tier securities,
but to a reduced degree.55
In light of these considerations, we
believe that it is not necessary to
prohibit money market funds from
acquiring second tier securities. Instead,
we believe that a better approach is to
further limit money market funds’
exposure to the risks presented by
second tier securities. We expect that
this treatment will both satisfy our
policy objectives, as further discussed
below, while mitigating some of the
possible negative consequences noted
by commenters that could result from
eliminating money market funds’ ability
to acquire second tier securities. This
approach is reflected in three
amendments we are adopting to rule 2a–
7.
First, as suggested by some
commenters,56 we are reducing the
amount of second tier securities that
money market funds can acquire from
five to three percent of their total assets,
in order to reduce money market funds’
aggregate exposure to the risks posed by
second tier securities.57 We are
concerned that a limit of less than three
percent could be equivalent to
eliminating money market funds’ ability
to acquire second tier securities because
we understand that investing in second
tier securities requires an additional
amount of credit analysis.58
55 See, e.g., Federated Comment Letter
(suggesting, as an alternative to eliminating money
market funds’ ability to acquire second tier
securities, further limitations including reducing
the percentage of fund assets permitted to be
invested in second tier securities and limiting the
final maturity of permissible second tier securities).
See also, e.g., Am. Elec. P. Comment Letter; Fidelity
Comment Letter; USAA Comment Letter (each
suggesting, as an alternative to eliminating money
market funds’ ability to acquire second tier
securities, limiting the final maturity of permissible
second tier securities to 90 days).
56 See Federated Comment Letter; Comment
Letter of the Sargent Shriver National Center on
Poverty Law (Jul. 13, 2009) (‘‘Shriver Poverty Law
Ctr. Comment Letter’’). These commenters did not
suggest a particular percentage level to which the
permissible aggregate amount of second tier
securities that could be acquired should be reduced.
57 The amendments apply the new limit on
second tier securities holdings to all money market
funds, including tax-exempt funds. See amended
rule 2a–7(c)(3). Current rule 2a–7 limits tax-exempt
funds’ holdings of second tier securities only with
respect to conduit securities (i.e., securities issued
by a municipal issuer involving an arrangement or
agreement entered into with a person other than the
issuer that provides for or secures repayment of the
security). See current rule 2a–7(c)(3)(ii)(B).
58 In light of our decision not to prohibit the
acquisition of second tier securities and after review
of comments we received, we are persuaded that
the current requirements regarding the rating
standards in rule 2a–7 for certain long-term
securities with remaining maturities of less than
397 days (‘‘stub securities’’) are sufficient. We
proposed to permit money market funds to acquire
only those stub securities that had received a long-
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Accordingly, money market funds may
not be willing to incur the costs of this
additional credit analysis if they could
only acquire second tier securities in
amounts unlikely to make a meaningful
contribution to fund yields.
Second, we are reducing the amount
of second tier securities of any one
issuer that a money market fund can
acquire from one percent of the fund’s
total assets or $1 million (whichever is
greater), to one-half of one percent of the
fund’s total assets.59 We requested
comment in the Proposing Release on
whether the issuer diversification
limitations under rule 2a–7 should be
further reduced and, if so, to what
level.60 Most commenters focused their
response on whether there should be a
general increase in the diversification
limits under rule 2a–7 for all eligible
securities. Many argued against an
increase because it would require funds
to invest in securities of lower credit
quality in order to increase the number
of issuers of portfolio securities and
satisfy the greater diversification
requirement.61 One commenter,
however, recommended that funds not
be able to acquire more than one-half of
term rating in the highest two categories rather than
the highest three categories, as permitted under the
current rule. See current rule 2a–7(a)(10(ii)A).
Commenters largely opposed our proposal asserting
that standards associated with long-term ratings
referenced in the current rule generally are
correlated with the standards associated with the
highest categories of short-term ratings. See
BlackRock Comment Letter; Charles Schwab
Comment Letter; ICI Comment Letter.
59 Amended rule 2a–7(c)(4)(i)(C). The limitation
also applies to tax-exempt funds, which under the
current rule are only subject to the issuer
diversification requirement with respect to conduit
securities that are second tier. We also are
amending rule 2a–7(c)(4)(i)(B) to prohibit each
‘‘single State fund’’ from acquiring more than 1⁄2 of
1% of its total assets in second tier securities. We
also discussed modification to the guarantor and
demand feature diversification provisions under
rule 2a–7 in Section II.D of the Proposing Release.
In addition to the reduction in the ability of money
market funds to acquire second tier securities of any
particular issuer, we are proportionately reducing
by half the ability of a money market fund to
acquire ‘‘demand features’’ or ‘‘guarantees’’ of a
single issuer that are second tier securities from 5%
to 2.5% of the money market fund’s total assets. See
amended rule 2a–7(c)(4)(iii)(B). We believe that this
reduction will provide appropriate protection to
money market funds against exposure to any
particular guarantor or demand feature provider.
We do not believe that we need to reduce this
limitation to 1⁄2 of 1%, as we are doing with other
individual second tier issuer exposures, because in
these cases a security holder has recourse to both
the security issuer and the issuer of the demand
feature or guarantee, and thus there is a lesser
chance that an individual company’s default or
distress will adversely impact the security. We
received no comments on this aspect of the
Proposing Release.
60 See Proposing Release, supra note 2, at Section
II.D.
61 See, e.g., Charles Schwab Comment Letter;
Invesco Aim Comment Letter.
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one percent of their assets in second tier
securities of any particular issuer as a
method of limiting money market funds’
exposure to the risks of second tier
securities.62
We are adopting this commenter’s
suggestion because we believe the
limitation will enhance the resilience of
money market funds. It should decrease
the likelihood that the default of, or
significant distress experienced by, any
particular second tier issuer alone will
cause a money market fund to break the
buck. While a money market fund can
break the buck due to simultaneous
stresses across its portfolio, it also can
break the buck due to a sudden decline
in the market-based price of a particular
security in its portfolio, as was the case
with respect to securities of Lehman
Brothers during September 2008.63 In
addition, unlike in the case of imposing
a one-half of one percent diversification
limitation on all issuers held in a money
market fund’s portfolio, given the other
limitations on holdings of second tier
securities that we are adopting today, a
diversification limitation of one-half of
one percent that applies only to second
tier securities should not require money
market funds to invest in a substantially
greater number of issuers, and thus
should not expose the fund to investing
in securities of lower credit quality.64 In
sum, we believe this tightened
limitation on exposure to any particular
second tier security issuer will provide
additional protection to the stability of
money market funds.
Third, we are limiting money market
funds to acquiring second tier securities
with remaining maturities of 45 days or
less.65 Several commenters urged us to
adopt this approach to limiting money
market funds’ exposure to risk from
second tier securities.66 The risks of
62 See Comment Letter of James J. Angel,
Professor of Finance, Georgetown University (Sept.
8, 2009). Two other commenters also generally
supported greater restrictions on money market
funds’ ability to acquire securities of any particular
issuer. See Shriver Poverty Law Ctr. Comment
Letter; Comment Letter of C. Stephen Wesselkamper
(Sept. 3, 2009) (‘‘C. Wesselkamper Comment
Letter’’).
63 See supra text accompanying note 11.
64 Under the current rule, a taxable money market
fund could invest the greater of 1% or $1 million
of its assets in second tier securities of a single
issuer. Under the amendments we are adopting
today, a money market fund maximizing its
investment ability in second tier securities and
trying to concentrate its holdings in as few issuers
as possible would hold securities of six different
second tier security issuers, rather than five second
tier issuers under the current rule.
65 Amended rule 2a–7(c)(3)(ii). We requested
comment on this approach in the Proposing
Release. See Proposing Release, supra note 2, at
Section II.A.1.
66 See, e.g., Am. Elec. P. Comment Letter; Fidelity
Comment Letter; USAA Comment Letter (all
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second tier securities discussed above
can be substantially limited by
restricting the length of time that a
money market fund is exposed to the
risks of that particular security.
Securities of shorter maturity will pose
less credit spread risk and liquidity risk
to the fund because there is a shorter
period of credit exposure and a shorter
period until the security will mature
and pay cash. Moreover, second tier
securities with shorter maturities are
less likely to be downgraded.67 In
recognition of the role that a shorter
maturity can play in reducing second
tier securities’ risk, the market typically
has demanded that such securities be
issued at shorter maturities than first
tier securities.68 We believe that limiting
the risk arising out of second tier
securities through limiting their
permissible maturity is appropriate and
that a 45-day maturity limit will provide
additional protection to investors
without causing undue market
disruption.69
suggesting that permissible second tier security
maturities be limited to a 90-day maximum);
Thrivent Comment Letter (suggesting that
permissible second tier security maturities be
limited to a 45-day maximum). Given the need for
money market funds to adjust quickly to changes
in market risk to avoid breaking the buck (and given
that based on historical experience second tier
securities are unlikely to be issued with a 90-day
maturity limit), we believe that a 45-day maturity
limit is more prudent than a 90-day maturity limit.
67 See Moody’s Investors Service, Short-Term
Corporate and Structured Finance Rating
Transition Rates, supra note 44 (showing that P–2
rated commercial paper had a 98.79% chance of
being rated P–2 or higher over a 30-day period, but
a 96.31% chance of being rated P–2 or higher over
a 90-day period, and a 92.75% chance of
maintaining this rating level over a 180-day period).
68 For example, the average maturity of
outstanding non-asset backed second tier
commercial paper as of November 20, 2009 was
25.6 days compared to 52.2 days for non-asset
backed first tier commercial paper. See Federal
Reserve Board, Average Maturity by Category for
Outstanding Commercial Paper, available at http://
www.federalreserve.gov/releases/cp/maturity.htm
(last visited Dec. 2009). The Federal Reserve Board
also has reported that during each of 2007, 2008,
and 2009, on average over 96% of non-financial A2/
P2 commercial paper had a maturity of 40 days or
less at issuance. See Federal Reserve Board, Volume
Statistics for Commercial Paper, A2/P2
Nonfinancial, available at http://
www.federalreserve.gov/releases/cp/
volumestats.htm (last visited Dec. 2009).
69 One commenter asserted that because so little
of second tier commercial paper currently is issued
with a maturity of greater than 45 days, imposing
a maturity limitation of 45 days on second tier
securities eligible for money market fund
investment would have little effect on a fund’s
overall exposure to credit risk. See ICI Comment
Letter. We disagree. It is true that in recent years,
second tier commercial paper has been issued
largely at maturities of less than 45 days. See supra
note 68. This fact may mean that there will be less
cost impact from our amendments limiting money
market funds to acquiring second tier securities
with maturities of 45 days or less. It does not mean,
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We believe that the above
combination of limitations on money
market funds’ ability to acquire second
tier securities will achieve an
appropriate balance between reducing
the risk that money market funds will
not be able to maintain a stable price per
share and allowing fund investors to
benefit from the higher returns that
limited exposure to second tier
securities can provide.
2. Eligible Securities
We are amending rule 2a–7 to require
that the board of directors of each
money market fund (i) designate four or
more NRSROs, any one or more of
whose short-term credit ratings the fund
would look to under the rule in
determining whether a security is an
eligible security, and (ii) determine at
least once each calendar year that the
designated NRSROs issue credit ratings
that are sufficiently reliable for that
use.70 In addition, funds must identify
the designated NRSROs in the fund’s
statement of additional information
(‘‘SAI’’).71 Under the amendments, funds
may, but are not required to, consider
(or monitor) the ratings of other
NRSROs under other provisions of the
rule.72
As we have stated on several
occasions, we are concerned with the
authority that references to NRSRO
ratings in our rules have given certain
rating agencies, and whether such
references have inadvertently placed an
‘‘official seal of approval’’ on ratings that
could adversely affect the quality of due
diligence and investment analysis.73
however, that this historical maturity distribution
will hold true in the future, and that money market
funds will not seek in the future to invest in longer
term second tier securities to achieve a higher yield,
which would expose money market funds to the
higher risks associated with longer term second tier
securities.
70 Amended rule 2a–7(a)(11)(i). As under the
definition of ‘‘NRSRO’’ in current rule 2a–7, a
designated NRSRO may not be an affiliated person
of the issuer of, or any insurer or provider of credit
support for, the security. Amended rule 2a–
7(a)(11)(ii). The definition of ‘‘designated NRSRO’’
incorporates the definition of NRSRO in section
3(a)(62) of the Securities Exchange Act of 1934
(‘‘Exchange Act’’) [15 U.S.C. 78c(a)(62)]. Amended
rule 2a–7(a)(11).
71 Amended rule 2a–7(a)(11)(iii) (requiring the
fund to disclose in its SAI its designated NRSROs
and any limitations with respect to the fund’s use
of such designation). See Part B of Form N–1A. In
addition, funds must identify designated NRSROs
in Form N–MFP with respect to each of the fund’s
portfolio securities. See infra Section II.E.2.
72 See infra notes 116–118, 121 and
accompanying text.
73 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 Proposing Release’’); References to
Ratings of Nationally Recognized Statistical Rating
Organizations, Investment Company Act Release
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The debt crisis of 2007–2008 also has
given us concern about the reliability of
these ratings.74 Accordingly, we asked
in the Proposing Release and in 2008 in
a separate release whether we should
eliminate or alter our use of ratings by
NRSROs in rule 2a–7.75
The Proposing Release requested
comment on alternative approaches.
One approach would have eliminated
any references to ratings in rule 2a–7,
the effect of which would be to
eliminate the floor established by the
‘‘eligible security’’ requirement and rely
entirely on fund boards (and their
delegates) to determine whether
investment in a security involved
minimal credit risks. An alternative
approach would have maintained
references to credit ratings in the rule,
but shifted responsibility to fund boards
to determine at least annually which
NRSROs were sufficiently reliable for
the fund to use to determine whether a
security is an eligible security that could
be considered for investment. Among
other things, we requested comment on
the minimum number of credit rating
agencies we should require that a board
designate for this purpose.
Each time we have solicited
comments, a substantial majority of
commenters has strongly supported
retaining the references to NRSRO
ratings in the rule.76 Among other
reasons, commenters argued that using
credit ratings as a floor for credit quality
limits money market fund advisers from
taking greater risks that could weaken
the rule’s risk limiting conditions and
thus the protection of investors.77 Many
urged us instead to address the ‘‘root
causes’’ of ratings failures rather than
remove the safety net provided by the
No. 28939 (Oct. 5, 2009) [74 FR 52358 (Oct. 9,
2009)] (‘‘NRSRO References Adopting Release’’).
74 See NRSRO References Proposing Release,
supra note 73, at text following n.6.
75 See Proposing Release, supra note 2, at text
following n.110; NRSRO References Proposing
Release, supra note 73, at Section III.A.
76 See, e.g., Comment Letter of Calvert Group, Ltd.
(Sept. 8, 2009) (‘‘Calvert Comment Letter’’);
Federated Comment Letter; ICI Comment Letter. See
also Comment Letter of the American Bar
Association (Committee on Federal Regulation of
Securities and Committee on Securitization and
Structured Finance) (Sept. 12, 2008) (available in
File No. S7–19–08); Comment Letter of the
Institutional Money Market Funds Association
(Sept. 5, 2008) (available in File No. S7–19–08);
Comment Letter of the Securities Industry and
Financial Markets Association (Dec. 8, 2009)
(available in File No. S7–19–08). Comment letters
submitted in File No. S7–19–08 are available on the
Commission’s Web site at: http://www.sec.gov/
comments/s7-19-08/s71908.shtml.
77 See, e.g., Dreyfus Comment Letter; ICI
Comment Letter; Comment Letter of J.P. Morgan
Asset Management (Sept. 8, 2009) (‘‘J.P. Morgan
Asset Mgt. Comment Letter’’). See also Proposing
Release, supra note 2, at nn.108–110 and
accompanying text.
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credit ratings requirements of the rule.78
Some disputed suggestions that
inclusion of ratings in rule 2a–7
encourages fund managers to over-rely
on the ratings, pointing to provisions in
the rule that specifically require
independent analysis by fund
managers.79 One commenter argued that
NRSRO ratings provide ‘‘an additional,
independent check on the investment
manager’s judgment.’’ 80 By acting as a
floor, the commenter argued, these
ratings keep all money market funds
operating at or above the same level,81
and they restrain any particular money
market fund from taking (and exposing
investors to) greater risks than other
competing money market funds in order
to gain a competitive advantage in a
highly yield-sensitive market.82
Only a few commenters have
supported removing references to
NRSRO ratings.83 These commenters
78 See, e.g., Comment Letter of the Northern
Funds and Northern Institutional Funds—
Independent Trustees (Sept. 8, 2009) (‘‘Northern
Funds Indep. Trustees Comment Letter’’); Comment
Letter of the Tamarack Funds Trust (Sept. 8, 2009)
(‘‘Tamarack Funds Comment Letter’’). See also
Comment Letter of Charles Schwab & Co., Inc.
(Sept. 5, 2008) (available in File No. S7–19–08);
Comment Letter of Dechert LLP (Sept. 5, 2008)
(available in File No. S7–19–08); Comment Letter of
Realpoint (Aug. 14, 2008) (available in File No. S7–
19–08). We have recently adopted rule amendments
designed to improve our regulation and oversight of
NRSROs, which help address the integrity of their
rating procedures and methodologies. See
Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, Exchange Act
Release No. 61050 (Nov. 23, 2009) [74 FR 63832
(Dec. 4, 2009)]; Amendments to Rules for Nationally
Recognized Statistical Rating Organizations,
Exchange Act Release No. 59342 (Feb. 2, 2009) [74
FR 6456 (Feb. 9, 2009)]; Oversight of Credit Rating
Agencies Registered as Nationally Recognized
Statistical Rating Organizations, Exchange Act
Release No. 55857 (June 5, 2007) [72 FR 33564 (June
18, 2007)].
79 See ICI Comment Letter; TDAM Comment
Letter.
80 See ICI Comment Letter.
81 See, e.g., Comment Letter of State Street Global
Advisors (Sept. 8, 2009) (‘‘State Street Comment
Letter’’); Vanguard Comment Letter.
82 See ICI Comment Letter. See also J.P. Morgan
Asset Mgt. Comment Letter; Comment Letter of
Stradley Ronon Stevens & Young, LLP (Sept. 8,
2009) (‘‘Stradley Ronon Comment Letter’’).
83 See Comment Letter of James B. Burnham,
Business School Professor, Duquesne University
(Aug. 27, 2009) (‘‘J. Burnham Comment Letter’’);
Comment Letter of Moody’s Investors Service (Sept.
8, 2009) (‘‘Moody’s Comment Letter’’); Comment
Letter of James L. Nesfield (Jul. 4, 2009) (‘‘J. Nesfield
Comment Letter’’); Comment Letter of the Shadow
Financial Regulatory Committee (Sept. 14, 2009)
(‘‘Shadow FRC Comment Letter’’); Comment Letter
of John M. Winters, CFA (Jul. 23, 2009). See also
Comment Letter of Professor Lawrence J. White
(Sept. 5, 2008) (available in File No. S7–19–08);
Comment Letter of Professor Frank Partnoy (Sept.
5, 2008) (available in File No. S7–19–08); Comment
Letter of the Government Finance Officers
Association (Sept. 5, 2008) (available in File No.
S7–19–08); Comment Letter of the Financial
Economists Roundtable (Dec. 1, 2008) (available in
File No. S7–19–08).
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principally asserted that removing
credit ratings references would prevent
fund boards and advisers from
overreliance on NRSRO ratings and
encourage advisers to make
independent decisions about whether a
security presents a credit risk.84 Other
commenters, however, countered that
eliminating NRSRO ratings from the
rule would do nothing to prevent a fund
manager from being highly dependent
upon NRSRO ratings in making its
minimal credit risk determination.85
Commenters did, however, largely
support the approach of allowing funds
to designate a minimum number of
NRSROs that the fund would look to
under rule 2a–7 in determining whether
a security is an eligible security. They
asserted that NRSRO designation would
encourage competition among NRSROs
to achieve designation and reduce the
cost of subscribing to all NRSROs’
ratings.86 They also noted that this
approach would permit funds to focus
better on standards, methods, and
current ratings levels developed by
designated NRSROs.87 Several
commenters expressed concern,
however, that requiring designation of
only three NRSROs would result in
funds designating the three largest
NRSROs, which could further entrench
their market dominance.88 Other
commenters stated that designating
NRSROs could disadvantage small
NRSROs with well-developed
capabilities regarding certain
investments and suggested that the fund
should have flexibility to rely on the
particular NRSROs it determines have
the best expertise to evaluate a
particular security.89 Some commenters,
while supporting designation of
NRSROs, asserted that fund boards are
unprepared to make such
determinations and urged that fund
advisers be given the responsibility.90
The Commission is committed to
reevaluating the use of NRSRO ratings
in our rules. Recently we eliminated
references to NRSRO ratings in several
rules where we concluded that they
were no longer warranted as serving
their intended purposes and where the
elimination was consistent with the
protection of investors.91 Today, as
discussed in more detail below, we are
eliminating the only provision in rule
2a–7 that limits money market funds to
investing in a type of security only if it
is rated.92 We continue to work to
further the goals of the Credit Rating
Agency Reform Act in order to improve
the quality and reliability of securities
ratings.93
We have found no evidence that
suggests that over-reliance on NRSRO
ratings contributed to the problems that
money market funds faced during the
debt crisis. Our staff closely examined,
for example, why some money market
funds held securities issued by certain
SIVs that became distressed in 2007.
The staff exams appear to indicate that
the minimal creditworthiness
evaluations of SIVs made by advisers to
funds that held those SIVs differed from
the evaluations made by advisers to
funds that did not invest in those SIVs
in the emphasis the advisers gave to
particular elements of the analysis.94
Had fund managers relied too heavily
on credit rating agencies, we would
have expected to see far more funds
84 See J. Burnham Comment Letter; Moody’s
Comment Letter; J. Nesfield Comment Letter;
Shadow FRC Comment Letter. One commenter
asserted that transparency of portfolio holdings was
a better approach than using references to NRSRO
ratings. J. Nesfield Comment Letter. We note that
we are amending rule 2a–7 to require money market
funds to disclose information about their portfolio
holdings each month on their Web sites. See infra
Section II.E.1.
85 Stradley Ronon Comment Letter (removing the
references would not prevent advisers from relying
too heavily on NRSRO ratings under their own
internal credit risk analysis).
86 See, e.g., Federated Comment Letter; Fidelity
Comment Letter; ICI Comment Letter.
87 See Am. Securit. Forum Comment Letter.
88 See, e.g., Comment Letter of DBRS Limited
(Sept. 8, 2009) (‘‘DBRS Comment Letter’’); Comment
Letter of Wells Fargo Funds Management, LLC
(Sept. 8, 2009) (‘‘Wells Fargo Comment Letter’’).
Three of the 10 NRSROs registered with the
Commission issued approximately 97% of all
outstanding ratings across all categories reported to
the Commission for 2008. See SEC, Annual Report
on Nationally Recognized Statistical Rating
Organizations (Sept. 2008) at 10.
89 See Tamarack Funds Comment Letter; TDAM
Comment Letter.
90 See Comment Letter of the American Bar
Association (Committee on Federal Regulation of
Securities) (Sept. 9, 2009) (‘‘ABA Comment Letter’’);
Comment Letter of the Mutual Fund Directors
Forum (Sept. 8, 2009) (‘‘MFDF Comment Letter’’);
Comment Letter of Northern Funds and Northern
Institutional Funds (Sept. 8, 2009) (‘‘Northern
Funds Comment Letter’’).
91 See NRSRO References Adopting Release,
supra note 73.
92 Compare amended rule 2a–7(a)(12) with
current rule 2a–7(a)(10)(i)(B).
93 See, e.g., Proposed Rules for Nationally
Recognized Statistical Rating Organizations,
Exchange Act Release No. 61051 (Nov. 23, 2009) [74
FR 63866 (Dec. 4, 2009)] (proposing rule
amendments and a new rule requiring each NRSRO
to: (1) Furnish an annual report describing the steps
taken by the firm’s designated compliance officer
during the fiscal year with respect to certain
compliance matters; (2) disclose additional
information about sources of revenues on Form
NRSRO; and (3) make publicly available
information about revenues of the NRSRO
attributable to persons paying the NRSRO for the
issuance or maintenance of a credit rating).
94 See Proposing Release, supra note 2, at note
135.
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holding Lehman Brothers commercial
paper when it defaulted than we did.95
The current provisions of rule 2a–7
were designed to prevent excess
reliance on credit rating agencies.96
Under rule 2a–7, adequate ratings alone
do not provide a basis for eligibility. As
we have noted before, a determination
that a security is an eligible security is
a necessary but not sufficient finding in
order for a fund to acquire the
security.97 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.’’ 98 Thus, credit
ratings provide an important but not
exclusive input into the investment
decision-making process, 99 and the
unreliability or low quality of ratings
issued by one or more NRSROs can (and
should) be addressed by an investment
adviser providing a thorough analysis of
the security to determine if it involves
minimal credit risks. The use of these
ratings provides an independent
perspective on the creditworthiness of
short-term securities that we have
considered, in part, when determining
whether to exercise our exemptive
authority to permit money market funds
to use the amortized cost method of
valuation.100
This is not to say, however, that we
are content with the current approach of
95 See Fitch: Market Challenges Offer ‘Lessons’ for
Rated Money Market Funds, Business Wire (Oct. 1,
2008) (‘‘Most funds were able to eliminate or
minimize their exposure to securities issued by
SIVs and Lehman Brothers by limiting their
absolute exposures and/or taking measures to scale
back their risk as the credit picture deteriorated.’’).
See Bloomberg Terminal Database, LEH (Equity)
CRPR (historical short-term credit ratings for credit
rating agencies, including Moody’s and Fitch,
indicate that these agencies did not downgrade
their ratings of Lehman Brothers debt before the
company filed for bankruptcy); Bob Ivry, Mark
Pittman & Christine Harper, Sleep-At-Night-Money
Lost in Lehman Lesson Missing $63 Billion,
Bloomberg (Sept. 8, 2009), available at http://
www.bloomberg.com/apps/
news?pid=email_en&sid=aLhi.S5xkemY (historical
short-term credit ratings for Moody’s and Fitch
indicate that these credit rating agencies did not
downgrade their ratings of Lehman Brothers debt
before the company filed for bankruptcy); David
Segal, The Silence of the Oracle, New York Times
(Mar. 18, 2009) (noting Moody’s rated Lehman
Brothers’ debt A2 before the firm’s bankruptcy).
96 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’’) at Section II.A.
97 See, e.g., id. at text accompanying n.18.
98 Current rule 2a–7(c)(3)(i).
99 See 1991 Adopting Release, supra note 96, at
Section II.A.
100 See 1983 Adopting Release, supra note 6, at
paragraphs following n.31.
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rule 2a–7. Any one of the growing
number of NRSROs, regardless of its
expertise in rating short-term securities
of the type held by money market funds,
could have deemed a security unfit for
a money market fund to acquire or,
conversely, deemed a security to be
eligible for investment by a money
market fund. To address this concern,
we are adopting amendments to rule
2a–7 that shift responsibility to money
market fund boards for deciding which
NRSROs they will use in determining
whether a security is an eligible security
for purposes of the rule.
The amendments are designed, among
other things, to foster greater
competition among NRSROs to produce
the most reliable ratings in order to
obtain designation by money market
fund boards. Accordingly, we believe
this approach will improve the utility of
the rule’s use of NRSRO ratings as
threshold investment criteria, and is
consistent with the goals of Congress in
passing the Credit Rating Agency
Reform Act.101
NRSROs that the fund will use to
determine, among other things, whether
a security is an eligible security.103
Several commenters expressed concern
that permitting funds to designate only
three NRSROs (which was
recommended by the ICI Report) would
simply embrace the current market for
ratings, which is dominated by three
rating agencies.104 We share these
commenters’ concerns and thus are
requiring funds to designate at least four
NRSROs, an approach recommended by
commenters as a way to foster
competition among NRSROs to develop
a specialized service of providing shortterm ratings to money market funds and
improve independent credit ratings for
purposes of the rule.105 We also believe
that the designation of at least four
NRSROs will allow funds to designate
smaller NRSROs that specialize in rating
particular investments.
Under the amendments, a fund could
designate an NRSRO with respect to
short-term credit ratings for only certain
types of issuers or securities.106 This
a. Number of Designated NRSROs
Under amended rule 2a–7, each
money market fund must designate in
its registration statement 102 at least four
stickering the fund’s prospectus for each change in
designation would be too costly. See Federated
Comment Letter. We believe that the identity of
each designated NRSRO is not essential information
for investors, but that some investors may find it
useful, and therefore are requiring it in the SAI. See
generally Form N–1A at General Instruction C.2(b)
(noting that the purpose of the SAI is to provide
additional information about a fund that is not
necessary to be in the prospectus but that some
investors may find useful).
103 Amended rule 2a–7(a)(11). A fund may
designate only credit rating agencies that are
registered as NRSROs with the Commission under
the Exchange Act and the rules adopted under those
provisions. See section 15E of the Exchange Act [15
U.S.C. 78o–7]; 17 CFR 240.17g–1. In response to our
request for comment, one commenter recommended
permitting designation of unregistered credit rating
agencies on the grounds that this could promote
competition. See Moody’s Comment Letter. Two
commenters opposed designation of an unregistered
credit rating agency, and one of these commenters
argued that the potential for introducing underresearched data into the marketplace could disrupt
the orderly functioning of markets. See DBRS
Comment Letter; Invesco Aim Comment Letter. In
light of the enhanced disclosure obligations and
ongoing rulemaking initiatives designed to improve
the quality and reliability of ratings issued by
registered NRSROs, we are maintaining the
requirement that only credit rating agencies
registered as NRSROs with the Commission may be
designated under the rule. See, e.g., supra note 93.
104 See, e.g., DBRS Comment Letter; Wells Fargo
Comment Letter; C. Wesselkamper Comment Letter.
105 See DBRS Comment Letter; Fidelity Comment
Letter. In response to our request for comment on
the appropriate number of NRSROs a board should
designate, another commenter requested we require
funds to designate at least five NRSROs as a way
to encourage new entrants to the market. See
Federated Comment Letter. See also Proposing
Release, supra note 2, at text following n.113 and
at n.117 and accompanying text (requesting
comment).
106 Amended rule 2a–7(a)(11)(i)(A) (providing
that a money market fund’s board of directors may
designate an NRSRO whose short-term credit
ratings with respect to any obligor or security or
101 See Senate Committee on Banking, Housing,
and Urban Affairs, Credit Rating Agency Reform
Act of 2006, S. Rep. 109–326, at 1 (2006) (‘‘Senate
Report No. 109–326’’) (‘‘The purpose of the ‘Credit
Rating Agency Reform Act’ * * * is to improve
ratings quality for the protection of investors and
in the public interest by fostering accountability,
transparency, and competition in the credit rating
industry.’’). In 2007, pursuant to the Credit Rating
Agency Reform Act, we adopted rules to implement
a program for registration and Commission
oversight of NRSROs (‘‘NRSRO Rules’’). Oversight of
Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations,
Exchange Act Release No. 55857 (June 5, 2007) [72
FR 33564 (June 18, 2007)] (‘‘NRSRO Rules Adopting
Release’’). Our rule amendments regarding NRSROs
have been designed, among other things, to foster
greater competition among NRSROs and to
encourage more of them to enter the market. See,
e.g., Amendments to Rules for Nationally
Recognized Statistical Rating Organizations,
Exchange Act Release No. 61050 (Nov. 23, 2009) [74
FR 63832 (Dec. 4, 2009)], at nn.1–3 and
accompanying text (citing Senate Report No. 109–
326, at 1).
102 The fund must disclose the designated
NRSROs, including any limitations with respect to
the fund’s use of such designation, in the fund’s
SAI. Amended rule 2a–7(a)(11)(iii). In response to
our request for comment on whether to require
disclosure of designated NRSROs in money market
funds’ SAI, see Proposing Release, supra note 2, at
text accompanying n.115, several commenters
suggested we require disclosure of designated
NRSROs in the fund’s registration statement. See,
e.g., Fidelity Comment Letter (recommending
disclosure in the fund’s SAI); Invesco Aim
Comment Letter (same); ICI Comment Letter
(recommending disclosure in the fund’s prospectus
or Web site). In contrast, one commenter objected
to disclosure of designated NRSROs in the fund’s
registration statement on the grounds that investors
do not consider this information to be material and
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would allow a fund, for example, to
designate an NRSRO that specializes in
securities issued by insurance
companies or banks.107 This approach,
which was supported by several of the
commenters,108 may further encourage
new entrants among NRSROs that fund
managers might not otherwise consider
designating due to lack of confidence in
ratings outside the NRSROs’ areas of
expertise.
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b. Board Designation and Annual
Determination
The amendments require each money
market fund’s board of directors to
designate the NRSROs on which the
fund will rely for purposes of the rule.
In addition, the board must determine at
least once each calendar year that each
designated NRSRO issues credit ratings
that are sufficiently reliable for such
use.109 Before designating an NRSRO
and before making its annual
determination, a board should have the
benefit of the adviser’s evaluation
regarding the quality of the NRSRO’s
short-term ratings.110 We would
anticipate that the board’s designations
and annual determinations would be
based on recommendations of the fund
adviser and its credit analysts, who
would have evaluated each NRSRO
based on their experiences in addition
to any information provided by the
NRSRO. We would expect the adviser’s
annual evaluation to be based, among
other things, on an examination of the
methodology an NRSRO uses to rate
securities, including the risks they
measure, and the NRSRO’s record with
respect to the types of securities in
which the fund invests, including asset
backed securities.111 The reliability of a
particular obligors or securities will be used by the
fund to determine whether a security is an eligible
security).
107 A fund that has designated an NRSRO to use
in determining the eligibility of insurance
company-issued securities need not review or
monitor any class of ratings that the NRSRO issued
with respect to other securities or their issuers in
which the fund may invest. A fund adviser (under
delegated authority) would be free (but not
required) to consider these ratings in determining
whether the non-insurance company-issued
security (or its issuer) presents minimal credit risks.
Amended rule 2a–7(c)(3)(i).
108 See DBRS Comment Letter; Moody’s Comment
Letter; Wells Fargo Comment Letter.
109 Amended rule 2a–7(a)(11)(i). We are requiring
funds to perform the annual determination once
each calendar year to simplify compliance so that
a fund is not in violation of the rule if the board’s
determination occurs soon after the year
anniversary of the previous determination.
110 Fund boards may, however, also find an
NRSRO’s record with respect to long-term securities
to be helpful in evaluating the overall quality of the
organization.
111 See Moody’s Comment Letter (advocating that
any board designation be ‘‘based on the board’s
assessment of ratings’ attributes, such as quality,
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newly registered NRSRO could be
evaluated based upon the quality and
relevant experience of the personnel
conducting the rating. Even with the
recommendations of the fund adviser,
we recognize that ultimately, a board’s
determination whether an NRSRO’s
ratings are ‘‘sufficiently reliable’’ for use
in determining whether a security is an
eligible security will be a matter of
judgment.
Many commenters expressed concern
that a money market fund’s board of
directors does not have the necessary
expertise to designate NRSROs, and
urged that we delegate the authority to
fund advisers to make the
designation.112 A number of these
commenters seem to assume that we
would require fund boards to engage in
the type of analysis that we expect the
adviser will provide the board for its
consideration. We believe that it will be
useful for boards to consider the
designation of NRSROs, a role not
unlike the role that many boards play in
approving other matters of substantial
significance to the operation of the
fund.113 Board designation and
determination (at least once a calendar
year) will serve as a check on fund
comparability and historical performance.’’). We
have recently adopted rule amendments relating to
NRSROs that should help fund advisers and their
credit analysts in performing their evaluations. Our
amendments require NRSROs, among other things,
to disclose information about their ratings
methodology, experience and performance. For
example, NRSROs must disclose in their
applications their ratings experience, performance
in assessing the creditworthiness of securities and
obligors, procedures and methodologies used in
determining credit ratings, the types of conflicts
NRSROs face and how they manage those conflicts,
and the qualifications of the NRSRO’s credit
analysts. See Items 6, 7 and Exhibits 1, 2, 6, 7, 8
of Form NRSRO. In addition, NRSROs currently are
required to disclose on a public Web site a random
sample of 10% of the ratings histories of issuer paid
ratings in each class of credit ratings for which the
NRSRO is registered and has issued 500 or more
issuer paid credit ratings. Rule 17g–2(a)(8) and (d)
[17 CFR 240.17g–2(a)(8) and (d)]. In June of this
year, these public disclosures will have to include
ratings action histories for all credit ratings initially
determined on or after June 26, 2007. See
Amendments to Rules for Nationally Recognized
Statistical Ratings Organizations, Exchange Act
Release No. 61050 (Nov. 23, 2009) [74 FR 63832
(Dec. 4, 2009)] at text following n.19 and
compliance date.
112 See, e.g., ABA Comment Letter; MFDF
Comment Letter; Northern Funds Comment Letter.
These commenters responded to our discussion of
this approach in the Proposing Release. See
Proposing Release, supra note 2, at text following
n. 118.
113 See, e.g., amended rule 2a–7(c)(8) (requiring
the fund’s board of directors to establish procedures
to stabilize the fund’s NAV, including procedures
providing for, among other things, the board’s
periodic review of the fund’s shadow price, the
methods used for calculating shadow price, and
what action, if any, the board should initiate if the
fund’s shadow price exceeds amortized cost by
more than 1⁄2 of 1%).
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managers that may have conflicts of
interest in selecting an NRSRO from
which the manager seeks a rating for the
fund (in order to facilitate marketing the
fund),114 or an NRSRO that may
accommodate the fund’s investment in
higher yielding, riskier securities.115
c. Operation of the Rule
Once a board has designated the
NRSROs, the fund could look to the
designated NRSROs whenever it has to
consider credit ratings under rule 2a–7
unless and until the board changes the
designation.116 A fund must look to
only the designated NRSROs to
determine whether the security is an
eligible security, a rated security,117 and
whether it is a first tier or a second tier
114 See
Wells Fargo Comment Letter.
Moody’s Comment Letter (noting that the
more narrowly defined the categories of ratings for
which a designation can be obtained, the ‘‘easier it
could be for mutual funds to game the system, e.g.,
by dropping an NRSRO from its list of designated
NRSROs for a particular class of ratings because the
NRSRO has introduced a more conservative ratings
methodology.’’).
116 We have changed the term from ‘‘NRSRO’’ to
‘‘designated NRSRO’’ throughout the rule each time
it is used. As a consequence, changes in the fund’s
designated NRSROs may affect the ability of the
fund to purchase a new security or roll over a
current holding, and may require the fund to
reassess promptly whether the security continues to
present minimal creditworthiness and dispose of a
current holding. This is because a new designation
of an NRSRO (or a removal of a designated NRSRO)
is now treated under the rule as the equivalent of
a credit event requiring the fund board or adviser
to consider the rating of the newly designated
NRSRO (or preclude the consideration of a formerly
designated NRSRO). For example, if a fund acquires
an unrated security (i.e., a security (or its issuer)
that does not have a short-term rating from a
designated NRSRO) that the fund considered to be
equivalent to a first tier security and the fund
thereafter designates a new NRSRO that has rated
the security as a second tier security, the fund must
then treat the security as a second tier security. The
fund would not be required to dispose of the
security (although it would be required to perform
a credit assessment, which might prompt it to
dispose of the security) even if the position in the
security exceeds the fund’s limits on second tier
securities, because compliance with the limits on
second tier securities is determined immediately
after the fund acquires the security. See amended
rule 2a–7(c)(3)(ii); 2a–7(c)(4)(i)(C). The fund could
only roll over the position to the extent that
immediately after the rollover the fund would meet
the rule’s limits on second tier securities. See
amended rule 2a–7(a)(1) (defining ‘‘acquisition’’ to
include a rollover of a position in security).
117 Amended rule 2a–7(a)(23) (defining the term
‘‘requisite NRSROs’’). For purposes of determining
whether a rated security is an eligible security and
a first tier security, rule 2a–7 requires the fund to
determine whether the security (or its issuer) has
received a short-term rating from the requisite
NRSROs. Amended rule 2a–7(a)(12)(i). Under the
amended rule, the requisite NRSROs must be drawn
from the designated NRSROs. Amended rule 2a–
7(a)(23). Thus, for example, a security that is rated
as a first tier security by two NRSROs, only one of
which is a designated NRSRO, and as a second tier
security by another designated NRSRO, is a splitrated security and thus a second tier security. Id.
115 See
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security.118 Under the amendments, a
security is an unrated security if neither
the security nor its issuer has received
a short-term rating from any of the
designated NRSROs.119 Accordingly,
before investing in the security, the fund
adviser must make a determination that
the security is of comparable quality to
a rated security.120 After a money
market fund acquires a security, the
fund manager must monitor only the
ratings of designated NRSROs to
determine whether a change in those
ratings requires the board to reassess
promptly whether the security
continues to present minimal credit
risks or to dispose of a portfolio security
that is no longer an eligible security.121
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3. Asset Backed Securities
We are amending rule 2a–7 to
eliminate a requirement that an asset
backed security (‘‘ABS’’) be rated by at
least one NRSRO in order to be an
eligible security that a money market
fund may acquire.122 As a consequence,
funds may acquire an unrated asset
backed security that otherwise meets the
requirements of rule 2a–7, including
those requirements that apply to
unrated securities.123
In 1996, we limited funds to investing
in rated ABSs because we thought that
NRSROs played a beneficial role in
118 Amended rule 2a–7(a)(12) (defining ‘‘eligible
security’’); amended rule 2a–7(a)(14) (defining ‘‘first
tier security’’); and amended rule 2a–7(a)(24)
(defining ‘‘second tier security’’).
119 Amended rule 2a–7(a)(30) (defining ‘‘unrated
security’’ by reference to amended rule 2a–7(a)(21),
which defines a ‘‘rated security’’ as, among other
things, a security that has received or been issued
by an issuer that has received a short-term rating
by a designated NRSRO).
120 Amended rule 2a–7(a)(12) (defining ‘‘eligible
security’’).
121 Amended rule 2a–7(c)(7)(i)(A) (requiring a
fund’s board of directors to reassess promptly
whether the security continues to present minimal
credit risks and cause the fund to take action if: (i)
The security ceases to be a first tier security because
it no longer has the highest rating from the requisite
NRSROs or, in the case of an unrated security, the
board determines it is no longer of comparable
quality to a first tier security, or (ii) the security is
an unrated security or second tier security and the
fund’s investment adviser (or portfolio manager)
becomes aware since acquisition of the security that
any designated NRSRO has given it a rating below
the designated NRSRO’s second highest short-term
rating); amended rule 2a–7(c)(7)(ii)(B) (requiring a
fund to dispose of a security that ceases to be an
eligible security as soon as practicable consistent
with achieving an orderly disposition of the
security, 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).
122 We are thus amending current rule 2a–
7(a)(10)(ii) to eliminate paragraph (B) and renumber
paragraph 2a–7(a)(10)(ii)(A) as 2a–7(a)(12)(ii).
123 See, e.g., amended rule 2a–7(a)(12)(ii);
(c)(3)(iv)(C); (c)(7)(i)(A)(1). As under the current
rule, if an asset backed security is a rated security,
it will be required to satisfy the rule’s ratings
criteria. Amended rule 2a–7(a)(12)(i).
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assuring that assets underlying an ABS
were properly valued and would
support the cash flows required to fund
the ABS, and we were concerned that
fund advisers may not be in as good a
position to perform the legal, structural,
and credit analysis that the rating
agencies performed.124 As discussed in
the Proposing Release, NRSROs rapidly
downgraded ABSs from their status as
first tier securities over a short time
period during 2007–2008.125 The
NRSROs thus did not seem to play a
role in buttressing the minimal credit
risk analysis of fund management
sufficient to warrant a requirement that
all ABSs be rated to be eligible for
money market fund investment. We
would otherwise have expected a
slower, more orderly downgrading
process for these ABSs, which would
have permitted money market funds to
gradually roll off the paper.
We received only a few comments on
this approach.126 One NRSRO
commenter supported removing this
requirement.127 Two urged us to keep
the ratings requirement for ABSs,128 and
one of those asserted that ratings ‘‘under
appropriate criteria’’ enhance the
liquidity of ABSs and provide credit
and structural expertise and research
that benefit investors.129 As noted
above, we do not believe that NRSRO
ratings of ABSs served this function
during the 2007–2008 turmoil in the
ABS marketplace, and we no longer
believe that the provision of rule 2a–7
that has required such ratings for all
ABSs is warranted as serving its
intended purpose, and thus we are
eliminating this requirement.130
124 Revisions
to Rules Regulating Money Market
Funds, Investment Company Act Release No. 21837
(Mar. 21, 1996) [61 FR 13956 (Mar. 28, 1996)] at
Section II.E.4; Revisions to Rules Regulating Money
Market Funds, Investment Company Act Release
No. 19959 (Dec. 17, 1993) [58 FR 68585 (Dec. 28,
1993)] (‘‘1993 Proposing Release’’) at nn.110–112
and accompanying text.
125 See Proposing Release, supra note 2, at
Section II.A.4. See also Standard & Poor’s, Global
Structured Finance Default and Transition Study—
1978–2008: Credit Quality of Global Structured
Securities Fell Sharply in 2008 Amid Capital
Market Turmoil (Feb. 25, 2009), available at http://
www2.standardandpoors.com/portal/site/sp/en/ca/
page.article/3,3,3,0,1204847668460.html (showing
greater default rate and significantly greater
downgrades in structured finance securities).
126 We also solicited comment generally on
whether, and if so how, we should amend rule 2a–
7 to generally address the risks presented by ABSs.
We received a number of comments in response to
this request, and will consider them in developing
further amendments to rule 2a–7.
127 See Moody’s Comment Letter.
128 See Am. Securit. Forum Comment Letter;
Shriver Poverty Law Ctr. Comment Letter.
129 See Am. Securit. Forum Comment Letter.
130 See Statement of Lawrence J. White, SEC
Roundtable to Examine Oversight of Credit Rating
Agencies at 2 (Apr. 15, 2009) (initial ratings on
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We do note, however, that as part of
the minimal credit risk analysis that any
money market fund must conduct before
investing in an ABS, the board of
directors (or its delegate) should: (i)
Analyze the underlying ABS assets to
ensure that they are properly valued and
provide adequate asset coverage for the
cash flows required to fund the ABS
under various market conditions; (ii)
analyze the terms of any liquidity or
other support provided by the sponsor
of the ABS; and (iii) otherwise perform
the legal, structural, and credit analyses
required to determine that the particular
ABS involves appropriate risks for the
money market fund.131
B. Portfolio Maturity
We are adopting amendments to rule
2a–7 to further restrict the maturity
limitations on a money market fund’s
portfolio in order to reduce the exposure
of money market fund investors to
certain risks, including interest rate risk,
spread risk, and liquidity risk. First, we
are reducing the maximum weighted
average portfolio maturity permitted by
the rule from 90 days to 60 days.
Second, we are adopting a 120-day limit
on the weighted average life of a money
market fund’s portfolio, which will limit
the portion of a fund’s portfolio that
could be held in longer term adjustablerate securities. Finally, we are deleting
a provision in the rule that permitted
certain money market funds to acquire
Government securities with extended
maturities of up to 762 calendar days.
1. Weighted Average Maturity
We are amending rule 2a–7 to require
that each money market fund maintain
a dollar-weighted average portfolio
maturity (WAM) appropriate to its
objective of maintaining a stable net
asset value or price per share, but in no
case greater than 60 days.132 We believe
that such a limit on the maximum WAM
will result in money market funds that
are more resilient to changes in interest
rates that may be accompanied by other
market shocks, and thus reduce the
likelihood of a run and better protect
money market fund investors. As we
explained in the Proposing Release, a
portfolio weighted towards securities
with longer maturities increases the
fund’s exposure to interest rate risk,
amplifies spread risk, and decreases the
bonds securitized from subprime residential
mortgages ‘‘proved to be excessively optimistic’’—
especially for the bonds based on mortgages
originated in 2005 and 2006).
131 See 1993 Proposing Release, supra note 124,
at nn.108–111 and preceding and accompanying
text.
132 See amended rule 2a–7(c)(2).
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ability of a fund to pay redeeming
shareholders.133
Most commenters that addressed this
proposal supported further reducing the
maximum WAM of fund portfolios in
order to reduce the funds’ exposure to
related risk. Those commenters were
divided between those supporting the
60-day maximum WAM that we
proposed 134 and those supporting a
reduction to 75 days.135 Other
commenters argued for no reduction at
all (i.e., leaving the limit at 90 days).136
Commenters supporting a maximum
WAM limitation of 60 days believed
that such a reduction would be
appropriate to increase the stability and
liquidity of money market funds 137 and
would reduce funds’ exposure to
interest rate risk.138 One asserted that a
60-day limitation is appropriate as it
prioritizes a money market fund’s safety
and liquidity over yield.139
Commenters supporting a maximum
WAM of 75 days argued that such a
limitation would achieve the
Commission’s goal of reducing funds’
exposure to interest rate risk while
providing funds with sufficient
flexibility to invest in high quality
securities when shorter term
investments are scarce.140 Some
expressed concern about whether a 60day WAM would reduce a money
market fund’s ability to generate
sufficient yield.141 Still others argued
that a shorter WAM could make some
money market funds more risky because
of the alternative investment strategies
they might employ as a result.142
133 See Proposing Release, supra note 2, at
Section II.B.1.
134 See, e.g., Goldman Sachs Comment Letter;
Comment Letter of the Institutional Money Market
Funds Association (Sept. 8, 2009) (‘‘IMMFA
Comment Letter’’); Northern Funds Indep. Trustees
Comment Letter.
135 See, e.g., Charles Schwab Comment Letter;
Comment Letter of GE Asset Management
Incorporated (Sept. 8, 2009) (‘‘GE Asset Mgt.
Comment Letter’’); T. Rowe Price Comment Letter.
136 See, e.g., State Street Comment Letter;
Comment Letter of Victory Capital Management
(Sept. 8, 2009) (‘‘Victory Cap. Mgt. Comment
Letter’’); Wells Fargo Comment Letter.
137 See Tamarack Funds Comment Letter.
138 See TDAM Comment Letter.
139 See Invesco Aim Comment Letter.
140 See, e.g., Charles Schwab Comment Letter; GE
Asset Mgt. Comment Letter; ICI Comment Letter.
141 See, e.g., Charles Schwab Comment Letter;
Comment Letter of Crane Data LLC and Money
Fund Intelligence (Aug. 31, 2009) (‘‘Crane Data
Comment Letter’’); T. Rowe Price Comment Letter.
142 One commenter noted that a WAM limitation
longer than 60 days would allow a fund to improve
the credit profile of its portfolio by substituting
longer term Government securities for shorter term
corporate securities. See BlackRock Comment
Letter. Another commenter argued that a reduction
would lead to fund portfolios with a ‘‘barbelled’’
maturity structure in which the fund balanced the
low yield offered by the large amount of very short-
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Finally, two commenters opposing any
change in the maximum WAM
permitted by rule 2a–7 argued that
liquidity risk to funds is more
appropriately limited by other aspects of
our amendments to rule 2a–7, and that
the resulting reduction in yield would
‘‘homogenize’’ money market funds to
such an extent that investors may be
driven to invest in unregulated funds,
thus increasing systemic risk.143
We believe that the maximum WAM
permissible for money market funds
should be reduced to 60 days in order
to reduce the likelihood of funds
breaking the buck. The increased
resilience to simultaneous stresses from
interest rate and other risks that a
money market fund would achieve
through a maximum WAM of 60 days is
significant. A fund with a 90-day WAM
could withstand an instantaneous
change in interest rates of 200 basis
points before breaking the buck.144 In
contrast, a fund with a WAM of 60 days
could withstand an interest rate change
of 300 basis points without breaking the
buck.145 Although an interest rate
change of such a magnitude may be
unlikely to occur,146 funds must also be
term securities it would be required to hold with
an offsetting amount of riskier longer term
securities, which could increase the riskiness of
fund portfolios. See Comment Letter of Waddell &
Reed/Ivy Fund Portfolio Managers (Sept. 8, 2009)
(‘‘Waddell & Reed Comment Letter’’). Another stated
that higher risk issuers tend to be limited to issuing
shorter maturity securities, so a shorter WAM
limitation could increase a fund’s credit risk profile.
See Wells Fargo Comment Letter.
143 See Fidelity Comment Letter; State Street
Comment Letter. Several commenters also asserted
that any reduction in WAM would increase issuers’
reliance on short-term funding, also increasing
systemic risk. See, e.g., Am. Securit. Forum
Comment Letter; State Street Comment Letter; Wells
Fargo Comment Letter.
144 See Fidelity Comment Letter.
145 Our staff supplemented stress test analysis
conducted by commenters with more data points
and stress scenarios to illustrate the impact on a
money market fund’s net asset value per share from
multiple stresses on that fund’s portfolio. A fund
with a 75-day WAM could withstand an interest
rate change of less than 250 basis points without
breaking the buck. We note that these scenarios also
represent the most conservative scenarios because
they assume that the money market fund started
with a market-based net asset value of $1.00. It is
our understanding that at any point in time, a large
number of money market funds will not start from
a market-based net asset value of $1.00—many will
start with a market-based net asset value of less
than a dollar and thus a smaller interest rate change
will cause the funds to break the buck.
146 Interest rate shocks of a 300 basis point
magnitude over a relatively short period of time
have occurred, although not since the late 1970s.
See Federal Reserve Bank of New York, Historical
Changes of the Target Federal Funds and Discount
Rates, 1971 to present, available at http://
www.newyorkfed.org/markets/statistics/dlyrates/
fedrate.html. In low interest rate environments
(such as today), a shock in interest rates could occur
if the Federal Reserve determines to raise interest
rates quickly, for example, to stave off inflation as
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able to withstand multiple shocks
occurring simultaneously, such as those
that occurred in September 2008 when
there was a simultaneous increase in
LIBOR rates and widening spreads due
to credit deterioration and liquidity
pressures, together with extraordinary
redemptions.147
A fund with a lower WAM has
significantly greater protection in the
circumstances described above. For
example, a fund with a 90-day WAM
facing a change in credit spreads of 50
basis points and redemptions of 10
percent would break the buck with an
interest rate change of a little more than
100 basis points.148 Greater shocks from
an even larger increase in spreads or
redemptions would only lessen that
interest rate cushion—last fall increases
in spreads and redemptions were
considerably above this level.149 A fund
with a 60-day WAM would be in a
better position to withstand multiple
shocks without breaking the buck than
if it maintained a 90-day or 75-day
WAM.150
We disagree with those commenters
that asserted that a reduction of
maximum permissible WAM would
have a significant adverse effect on
money market funds’ investment
strategies or yield. We have not
observed such adverse effect in funds
with WAMs below 60 days or a greater
tendency to invest in riskier short-term
the economy recovers or to strengthen the U.S.
dollar.
147 See Proposing Release, supra note 2, at nn.47–
48, 53, 63, 66–67 and accompanying text. See also
infra note 178 (discussing the increase in LIBOR
during the financial crisis). Many money market
fund portfolio holdings at the time were tied to
LIBOR.
148 This assumes a weighted average life
limitation of 120 days. A fund with a 75-day WAM
could withstand a 50 basis point increase in credit
spreads across its portfolio, 10% redemptions, and
an increase in interest rates of 125 basis points
before breaking the buck, assuming a 120-day
weighted average life.
149 In addition, we note that spreads have
widened to significant degrees in the past. See, e.g.,
Benjamin N. Friedman & Kenneth N. Kuttner, Why
Does the Paper-Bill Spread Predict Real Economic
Activity?, NBER Working Paper No. 3879, at Fig.1
(Oct. 1991) (showing historical spreads for 6-month
commercial paper over 6-month Treasury bill rates
from 1959 to 1990).
150 Based on staff review of various stress test
scenarios, a fund with a 60-day WAM could
withstand a 50 basis point increase in credit
spreads across its portfolio, 10% redemptions, and
an increase in interest rates of over 150 basis points
before breaking the buck, again assuming a
weighted average life limitation of 120 days. Others
have recognized that exposure to multiple stresses
may call for a lower WAM. See, e.g., Standard &
Poor’s, Fund Ratings Criteria: Market Price
Exposure, at 3 (2007), available at http://
www2.standardandpoors.com/spf/pdf/events/
MMX709.pdf (stating that money market funds with
a greater liquidity risk due to a smaller asset size
or shareholder composition may need to maintain
a lower WAM than 60 days).
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securities or to follow riskier portfolio
strategies to increase yield. These funds
do not appear to have had great
difficulties in creating portfolios that
generated competitive yields and
attracted investors.151 Indeed, many
domestic money market funds currently
limit their WAM to a maximum of 60
days voluntarily, a limit they likely
would have discontinued if they had
experienced the management or
competitive difficulties suggested by
commenters.152 No commenter reported
to us that any of these funds were doing
so. We acknowledge that one
consequence of our amendments may be
to further ‘‘homogenize’’ fund portfolios
as managers have fewer avenues to
acquire yield by exposing the funds to
risk, but we believe that the level of
potential homogenization is justified to
reduce the risk to investors that a money
market fund will break the buck. In
addition, we are not persuaded by
comments that a likely consequence of
a shortened maximum WAM will be
riskier portfolios. Accordingly, we are
adopting the 60-day WAM limitation as
proposed.
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2. Weighted Average Life
We are adopting, as proposed, a
requirement that limits the dollarweighted average life to maturity of a
151 Similarly, European stable value money
market funds do not appear to have had these
difficulties. As the Institutional Money Market
Fund Association (IMMFA) notes in its comment
letter, IMMFA funds (which manage a significant
amount of stable value money market fund assets
in Europe) have been required to maintain a
maximum WAM of 60 days since 2002. The recent
proposals by the European Union’s Committee of
European Securities Regulators to create common
requirements for European money market funds
would impose a maximum 60-day WAM for shortterm money market funds. See Committee of
European Securities Regulators Consultation Paper,
A Common Definition of European Money Market
Funds, CESR/09–850 (Oct. 20, 2009), available at
http://www.cesr.eu/
index.php?page=consultation_details&id=151.
152 For some time and through various interest
rate and market environments a large portion of
domestic money market funds have maintained a
maximum WAM of less than 60 days. According to
data provided by the ICI, from January 1998 through
April 2009, even the 75th percentile of prime
money market funds has maintained an average
WAM of 53 days and the 90th percentile of prime
money market funds has maintained an average
WAM of 65 days. Investment Company Institute,
Average Maturity of Taxable Prime Money Market
Funds, 1998–2009, available at http://www.sec.gov/
comments/s7-11-09/s71109-14.htm. The 75th
percentile of these funds only reported a WAM in
excess of 60 days on 8 monthly occasions out of the
136 monthly time periods reported. We also note
that to obtain a top rating from an NRSRO, money
market funds must maintain a WAM of no greater
than 60 days. According to the iMoneyNet Money
Market Fund Analyzer Database, as of November
17, 2009, 61% of money market fund assets were
held in funds that were top rated by at least one
NRSRO and 34% of money market funds had a top
rating from at least one NRSRO.
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money market fund’s portfolio to 120
calendar days.153 Unlike weighted
average maturity, the weighted average
life (or ‘‘WAL’’) of a portfolio is
measured without reference to any rule
2a–7 provision that otherwise permits a
fund to shorten the maturity of an
adjustable-rate security by reference to
its interest rate reset dates.154 The WAL
limitation thus restricts the extent to
which a fund can invest in longer term
securities that may expose a fund to
spread risk.155
We proposed the WAL limitation
because we were concerned that the
traditional WAM limitation of rule 2a–
7 does not require that a manager of a
money market fund limit the spread risk
associated with longer term adjustablerate securities.156 These securities are
153 See amended rule 2a–7(c)(2)(iii). This
limitation will apply to all money market funds
(including taxable and tax-exempt funds).
154 The Fidelity Comment Letter, the Comment
Letter of HighMark Capital Management, Inc. (Sept.
8, 2009) (‘‘HighMark Capital Comment Letter’’), and
the ICI Comment Letter requested that the
Commission amend rule 2a–7 to specify how cash
balances held by money market funds would be
treated under the WAM and WAL limitations. For
purposes of the WAM and WAL limitations, cash
balances have a maturity of one day. The Tamarack
Funds Comment Letter also suggested that the
Commission address extendible notes. For purposes
of the WAM and WAL limitations, in calculating
the final legal maturity of a security extendible at
the option of the issuer the security should be
deemed fully extended. See amended rule 2a–7(d)
(final maturity is determined with reference to the
time at which a fund will unconditionally receive
payment); see also Revisions to Rules Regulating
Money Market Funds, Investment Company Act
Release No. 21837 (Mar. 21, 1996) [61 FR 13956
(Mar. 28, 1996)] at n. 151 and accompanying text
(discussing the unconditional right to receive
payment with respect to demand features).
155 See Morgan Stanley, Weighted Average Life:
Enhancing Money Market Fund Transparency
(2009), available at http://www.morganstanley.com/
msamg/msimintl/docs/en_US/common/comm/
200907_mm_update.pdf (‘‘[Morgan Stanley
Investment Management is] introducing WAL to
supplement our WAM reporting. The WAL
calculation is based on a security’s stated final
maturity date or, when relevant, the date of the next
demand feature when the fund may receive
payment of principal and interest (such as a put
feature). Accordingly, WAL reflects how a portfolio
would react to deteriorating credit (widening
spreads) or tightening liquidity conditions. We
believe that when viewed alongside WAM, the
supplemental WAL disclosure will provide
investors with a further degree of insight into our
portfolios’ structure.’’).
156 For example, if the market perceived an
issuer’s credit risk as deteriorating, the spreads on
that issuer’s 30-day floating-rate securities would
likely widen to a lesser extent than the spreads on
that issuer’s 397-day floating-rate securities because
the longer term securities have a much longer
exposure to the issuer’s credit risk (assuming
neither security had a Demand Feature). Because
the WAM limitation allows the use of interest rate
reset dates to shorten the maturity of a security,
each of the 397-day floating-rate securities and the
30-day floating-rate securities would be considered
to have a maturity of one day. In contrast, under
the WAL limitation we are today adopting each
adjustable-rate security without a Demand Feature
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more sensitive to credit spreads than
short-term securities with final
maturities equal to the reset date of the
longer term security.157 The WAL
limitation will provide an extra layer of
protection for funds and their
shareholders against spread risk,
particularly in volatile markets. We
proposed a 120-day limit as a prudent
limit recommended to us in the ICI
Report and one that we understand is
currently used by some money market
fund managers.158 We requested
comment on whether a higher or lower
WAL limitation would be more
appropriate.
Twenty-one commenters supported
adding a WAL limit to the rule.159 One
large money market fund manager, for
example, described the WAL as ‘‘a very
prudent addition to the rule that,
combined with the minimum liquidity
requirements * * * represents an
important and substantive risk
reduction in the permissible
construction of a money fund
portfolio.’’ 160 Another acknowledged
that ‘‘the risk that such a security will
begin to deviate significantly from its
Amortized Cost increases with its
maturity,’’ and agreed that ‘‘the new 120day WAL limit should control this
risk.’’161
Two commenters generally opposed a
WAL limitation.162 One urged us to
consider, instead, revising the maturityshortening provisions of rule 2a–7 to
require money market funds to measure
the maturity of adjustable-rate securities
by reference to their final legal maturity
date rather than the date at which the
interest rate resets.163 Such a change
would have a maturity equal to its final legal
maturity. As a result, if spreads on these securities
widen to different degrees due to changing market
perceptions of credit risk or liquidity, the WAL
limitation will capture these different risk
exposures.
157 See Proposing Release, supra note 2, at
Section II.B.2.
158 See, e.g., HighMark Capital Comment Letter
(‘‘We have been calculating a WAL for years and
believe it will more appropriately reflect the total
interest rate and spread risk of a portfolio.’’). See
also JPMorgan Prime Money Market Fund Quarterly
Fact Sheet (Dec. 31, 2009), available at https://
www.jpmorganfunds.com/cm/BlobServer/FS-PMMP.PDF?blobcol=urldata&blobtable=
MungoBlobs&blobkey=id&blobwhere=
1158572105887&blobheader=
application%2FPDF&blobheadername1=ContentDisposition&ssbinary=true&blobheadervalue1=
inline;filename=FS-PMM-P.PDF (showing the
fund’s WAL over the previous year).
159 See, e.g., Bankers Trust Comment Letter;
Goldman Sachs Comment Letter; Northern Funds
Trustees Comment Letter.
160 See BlackRock Comment Letter.
161 See Federated Comment Letter.
162 See Thrivent Comment Letter; USAA
Comment Letter.
163 See USAA Comment Letter. Amended rule 2a–
7(d) allows money market funds to shorten the
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would dramatically reduce the ability of
money market funds to invest in floating
rate securities, and as we discuss below,
such a reduction may be
unnecessary.164 Another commenter
asserted that the WAL limitation was
unnecessarily restrictive of prime retail
funds and disagreed with our
assessment of the spread risk posed by
floating-rate Government securities.165
The commenter, however, offered no
explanation of why the exposure to
spread risk would have less harmful
consequences for a prime retail fund
than for other types of funds and thus
be of less concern.
Most commenters supported the
proposed WAL limit of 120 days,166
which the ICI comment letter described
as ‘‘flexible enough even during ‘normal’
market conditions to not unduly restrict
a fund’s ability to offer a diversified
portfolio of short-term, high quality debt
securities.’’167 Four commenters
supported a WAL with a longer term,
with two of these commenters
suggesting a longer WAL for government
money market funds than for other
money market funds.168 One of these
commenters argued that the spread risk
associated with Government floatingrate securities is different from the
spread risk associated with nonGovernment securities.169 Another
commenter only supported a WAL
limitation applicable to Government
securities with maturities of more than
two years, arguing that applying a 120day WAL to all adjustable-rate
Government securities would disrupt
the short-term debt markets and hinder
maturity of an adjustable-rate portfolio security for
purposes of the WAM limitation by referring to the
security’s interest rate reset date, rather than the
final legal maturity of the security, if the security
has a final maturity of 397 days or less (for
corporate securities) or an interest rate that adjusts
no less frequently than every 397 days for
Government securities.
164 This comment also implies that rule 2a–7
should only have a WAL limitation (and not a
separate WAM limitation). We believe that the
WAM and WAL limitations address different risks
(with the WAM primarily aimed at limiting interest
rate risk and the WAL primarily aimed at limiting
spread risk) and thus believe having both
limitations in rule 2a–7 protects money market
funds and their investors.
165 See Thrivent Comment Letter.
166 See, e.g., BlackRock Comment Letter; Invesco
Aim Comment Letter; Comment Letter of Ridge
Worth Capital Management, Inc. (‘‘RidgeWorth
Comment Letter’’).
167 ICI Comment Letter.
168 See Fidelity Comment Letter (supporting a
150-day WAL for government money market funds
and a 120-day WAL for all other money market
funds); Victory Cap. Mgt. Comment Letter
(supporting a 150-day WAL); C. Wesselkamper
Comment Letter (supporting a 180-day WAL for
government money market funds and a 150-day
WAL for all other money market funds); Wells
Fargo Comment Letter (supporting a 180-day WAL).
169 See Fidelity Comment Letter.
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the ability of Government security
issuers to meet internal funding
needs.170
On balance, we conclude that 120
days is an appropriate length of time for
the WAL limitation. A WAL limitation
of, for example, 90 days appears to be
unnecessarily restrictive to money
market funds because it could
significantly constrain the range of highquality, short-term debt securities in
which money market funds may invest,
particularly when combined with our
new minimum liquidity
requirements.171 Such a short WAL
limitation also may provide spread risk
protection beyond what is reasonably
necessary to enhance the stability of
money market funds. For a money
market fund to break the buck while
maintaining a WAL of 90 days, average
spreads on all securities in the fund’s
portfolio would have to widen beyond
200 basis points.172 Other securities
held by money market funds may not
simultaneously face such spread
widening even if the commercial paper
market is under stress.173 Accordingly,
protection across an entire money
market fund portfolio against spread
widening of the magnitude experienced
in the commercial paper market during
the fall of 2008 may be unnecessary.
On the other hand, we are not
convinced that a WAL significantly
longer than 120 days would be
appropriate for a money market fund
that is seeking to maintain a stable net
170 See Comment Letter of Fannie Mae (Sept. 3,
2009) (‘‘Fannie Mae Comment Letter’’). One
commenter also argued that a 120-day WAL would
limit Government security issuers’ ability to meet
their funding needs. See Fidelity Comment Letter.
171 One commenter stated that the Commission
should not impose a WAL shorter than 120 days,
asserting that a shorter limitation would be
unnecessarily restrictive and limit a fund’s ability
to maintain a diversified portfolio of high quality
short-term debt securities. See Charles Schwab
Comment Letter. No commenters supported a
shorter WAL than 120 days.
172 This assumes that there are no other
simultaneous shocks to the fund’s portfolio from
redemption pressures or otherwise. In order to
evaluate commenters’ discussion about the
appropriate length of time for a WAL limitation in
the context of the shocks a money market fund
might face, we again referred to stress test scenarios.
173 Such spread widening even in commercial
paper has been rare and commercial paper typically
only comprises a portion of money market funds’
portfolios. Spreads between 3-month commercial
paper and the 3-month Treasury bill widened to
approximately 300 basis points at the height of the
financial crisis in the fall of 2008 and widened
similarly in the mid-1970s, but otherwise have
rarely widened by 200 basis points in the last 50
years. This analysis is based on commercial paper
spread data contained in Bradley T. Ewing, Gerald
J. Lynch & James E. Payne, Monetary Volatility and
the Paper-Bill Spread, in Progress in Economics
Research (2006), at p. 58, supplemented with data
from Bloomberg on spreads between yields of 3month commercial paper and the 3-month Treasury
bill.
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asset value. For example, with a 150-day
WAL, a money market fund would
break the buck with a spread widening
of just over 120 basis points (assuming
no other simultaneous stresses on the
fund’s portfolio).174 Historically,
commercial paper spreads, for example,
have widened to that extent fairly
frequently.175 Given this limited
resilience to spread widening, and given
that a money market fund would break
the buck even earlier if any other shocks
to the fund’s portfolio occurred
simultaneously, we have determined
not to adopt a longer WAL, such as a
150- or 180-day WAL. We note that the
European Union’s Committee of
European Securities Regulators has also
recently proposed requiring that shortterm money market funds adhere to a
maximum 120-day WAL.176
Finally, we are not providing for a
longer WAL for money market funds
that primarily invest in Government
securities. While some commenters
asserted that adjustable-rate
Government securities have a more
benign credit risk profile,177 they are
still exposed to widening interest rate
spreads to the same extent as nonGovernment securities and, as we noted
in the Proposing Release, spreads on
certain adjustable-rate Government
securities did widen during the fall of
174 This is based on our staff’s analysis of stress
test scenarios.
175 See Ewing et al., supra note 173, at 58.
176 See Committee of European Securities
Regulators Consultation Paper, A Common
Definition of European Money Market Funds, CESR/
09–850 (Oct. 20, 2009), available at http://
www.cesr.eu/
index.php?page=consultation_details&id=151. In
addition, Europe’s Institutional Money Market
Fund Association (IMMFA) recently has adopted
changes to its code of conduct that will require
IMMFA money market funds to adhere to a
maximum 120-day WAL. See IMMFA Code of
Practice, at Section 40, available at http://
www.immfa.org/About/Codefinal.pdf.
We also note that the rating agencies have taken
varied approaches to limiting the WAL of rated
money market funds. Fitch has adopted revised
ratings requirements limiting top-rated money
market funds to a WAL of 120 days, but allowing
longer WALs for lesser rated money market funds.
See Fitch Ratings, Global Money Market Fund
Rating Criteria (Oct. 5, 2009), available at http://
www.fitchratings.com/creditdesk/reports/
report_frame.cfm?rpt_id=470368. Standard & Poor’s
has proposed more restrictive requirements that
would limit top-rated money market funds to a
WAL of 90 days, subject to upward adjustment to
no more than 120 days depending on the extent of
Government securities in the money market fund’s
portfolio. See Standard & Poor’s, Principal Stability
Fund Rating Criteria (Jan. 5, 2010), available at
http://www2.standardandpoors.com/spf/pdf/
events/FITcon11410RFC.pdf.
177 See, e.g., Fidelity Comment Letter. But see
BlackRock Comment Letter (recent events have
shown that spread relationships can be variable for
agency securities); Wells Fargo Comment Letter
(credit spreads on Government securities widened
to a significant degree in 2008).
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2008.178 In addition, many prime money
market funds also hold a sizeable
portion of Government securities (and
may hold even more Government
securities after the adoption of rule 2a–
7’s new liquidity requirements). Given
this fact, allowing government money
market funds to have a longer WAL
solely because they hold more
Government securities than prime funds
do, does not appear to us to be an
approach that treats the risks attendant
to longer term, adjustable-rate
Government securities equally, and thus
appears inappropriate.
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3. Maturity Limit for Government
Securities
The Commission is deleting a
provision of rule 2a–7 that has
permitted a fund that relied 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.179
As we noted in the Proposing
Release,180 we are unaware of any
money market fund that currently relies
solely on the penny-rounding method of
pricing, and none that holds fixed-rate
Government securities with remaining
maturities of two years, which would
involve the assumption of a substantial
amount of interest rate risk. We received
one comment on this topic, which
supported the change.181 Accordingly,
we are adopting this change as
proposed.182
178 See Proposing Release, supra note 2, at
Section II.B.2. We understand that many floatingrate securities issued by Federal agencies and
outstanding during the financial crisis had rates
tied to LIBOR. As noted in the Proposing Release,
the ‘‘TED’’ spread (the difference between the U.S.
Treasury Bill rate and LIBOR) reached a high of 463
basis points on October 10, 2008. See id., at n.67.
We understand that most adjustable-rate
Government securities held by money market funds
had a final maturity of two years or less and thus
limiting the WAL limitation to adjustable-rate
Government securities with final maturities greater
than two years would not address these securities’
spread risk.
179 See current rule 2a–7(c)(2)(ii). In a conforming
change, we also are amending as proposed 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 the rule has permitted. See amended rule 2a–
7(d)(1).
180 See Proposing Release, supra note 2, at
Section II.B.3.
181 See BlackRock Comment Letter.
182 We also requested comment in the Proposing
Release on whether we should impose a limitation
on the maximum final legal maturity of adjustablerate Government securities that money market
funds are permitted to acquire. We received only
two comments on this proposal. One commenter
encouraged us to constrain any limitation on
adjustable-rate Government securities with a final
legal maturity in excess of two years. See Fannie
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C. Portfolio Liquidity
We are amending rule 2a–7 to require
that money market funds maintain a
sufficient degree of liquidity necessary
to meet reasonably foreseeable
redemption requests and reduce the
likelihood that a fund will have to meet
redemptions by selling portfolio
securities into a declining market. As
discussed in the Proposing Release,
money market funds generally have a
higher and less predictable volume of
redemptions than other open-end
investment companies.183 Their ability
to maintain a stable net asset value will
depend, in part, on their ability to
convert portfolio holdings to cash to pay
redeeming shareholders without having
to sell them at a loss. The liquidity of
fund portfolios became a critical factor
in permitting them to absorb very heavy
redemption demands in the fall of 2008
when the secondary markets for many
short-term securities seized up.
Commenters generally agreed with
our analysis of the liquidity needs of
money market funds. They emphasized
the importance of liquidity for money
market funds and their ability to meet
shareholder redemptions.184 Several
also acknowledged the need to place
outside limits on the risks money
market funds may take.185 Most
commenters supported amending the
rule to impose more robust liquidity
requirements, but many disagreed with
our specific proposals.186 Some asserted
that the proposed requirements might
negatively affect funds’ ability to
manage their portfolios, place excessive
Mae Comment Letter. Another asserted that the
WAL limitation provided a sufficient limitation on
the risks posed by long-term adjustable-rate
Government securities. See Federated Comment
Letter. We are aware that WAL creates some
limitation of this risk, but that even with a 120-day
WAL limitation, a fund would still have some
ability to acquire longer term adjustable-rate
Government securities. No commenters provided us
with any data on the extent of adjustable-rate
Government securities outstanding from time to
time. Two commenters indicated that these
securities experienced variable spreads during the
financial crisis. See BlackRock Comment Letter;
Wells Fargo Comment Letter. In the future, we may
reconsider whether to limit the maximum maturity
of adjustable-rate Government securities that can be
held by money market funds after obtaining
additional data.
183 See Proposing Release, supra note 2, at n.172
and accompanying text.
184 See, e.g., Comment Letter of the Securities
Industry and Financial Markets Association (Sept.
8, 2009) (‘‘SIFMA Comment Letter’’); State Street
Comment Letter.
185 See, e.g., Federated Comment Letter; Comment
Letter of the Independent Directors Council (Sept.
8, 2009) (‘‘IDC Comment Letter’’).
186 See, e.g., State Street Comment Letter
(opposing a general liquidity standard and different
minimum liquidity thresholds for retail and
institutional funds); Invesco Aim Comment Letter
(same).
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burdens on the board of directors, and
affect the markets of some portfolio
securities.187 Others argued that the
proposals are not sufficient to meet
money market funds’ liquidity
concerns.188
After reviewing the comments, and
based on our analysis of redemption
activity during the 2008 run on money
market funds, we are amending rule 2a–
7 to add three new provisions,
substantially as proposed, which
address different aspects of portfolio
liquidity.189 Together, we believe they
will result in money market funds that
are better able to absorb large amounts
of redemptions.
1. General Liquidity Requirement
We are amending rule 2a–7, as
proposed, to require that each money
market fund hold securities that are
sufficiently liquid to meet reasonably
foreseeable shareholder redemptions in
light of its obligations under section
22(e) of the Act and any commitments
the fund has made to shareholders (the
‘‘general liquidity requirement’’).190
Depending upon the volatility of its
cash flows (particularly shareholder
redemptions), this new provision may
require a fund to maintain greater
liquidity than would be required by the
daily and weekly minimum liquidity
requirements set forth in the rule and
discussed below.
Most commenters who addressed this
proposal supported the addition of a
general liquidity requirement.191 They
agreed that funds should be required to
assess appropriate levels of liquidity
above the minimums set forth in the
rule.192 Some commenters, however,
expressed concerns that the proposed
requirement was too vague,193 or was
187 See, e.g., Fidelity Comment Letter; ICI
Comment Letter; Shadow FRC Comment Letter.
188 See, e.g., Fund Democracy/CFA Comment
Letter (requesting that the Commission mandate
private liquidity insurance for money market
funds); HighMark Capital Comment Letter
(suggesting a private liquidity bank or that Treasury
continue to provide emergency liquidity as possible
solutions to address liquidity concerns); Vanguard
Comment Letter (asserting that the proposed rule
does not address liquidity risk arising from factors
other than size of accounts, such as geographical
concentration of the shareholders); Waddell & Reed
Comment Letter (recommending some type of
permanent backstop be available to money market
funds); Wells Fargo Comment Letter (suggesting the
Federal Reserve set up a secured lending facility to
serve as a lender of last resort).
189 See Proposing Release, supra note 2, at
Section II.C.1–2.
190 Amended rule 2a–7(c)(5).
191 See, e.g., ICI Comment Letter; Northern Funds
Indep. Trustees Comment Letter; Tamarack Funds
Comment Letter.
192 See, e.g., Federated Comment Letter; ICI
Comment Letter.
193 See, e.g., Charles Schwab Comment Letter;
Dreyfus Comment Letter. We note, however, that
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unnecessary in light of the minimum
daily and weekly liquidity
requirements.194 We disagree. Funds
will have different liquidity needs that
we cannot sufficiently anticipate and
codify in a rule beyond the minimums
we are adopting today.195 Therefore, we
believe it is incumbent upon the
management of each fund and its board
of directors to evaluate the fund’s
liquidity needs and to protect the fund
and its shareholders from the harm that
can occur from failure to properly
anticipate and provide for those needs.
To comply with this general liquidity
requirement, we would expect money
market fund managers to consider
factors that could affect the fund’s
liquidity needs, including
characteristics of a money market fund’s
investors and their likely
redemptions.196 For example, some
shareholders may have regularly
recurring liquidity needs, such as to
meet monthly or more frequent payroll
requirements. Others may have liquidity
needs that are associated with particular
annual events, such as holidays or tax
payment deadlines. A fund also would
need to consider the extent to which it
may require greater liquidity at certain
times when investors’ liquidity needs
may coincide. In addition, a volatile or
more concentrated shareholder base
would require a fund to maintain greater
liquidity than a stable shareholder base
consisting of thousands of retail
investors.197
similar general requirements in rule 2a–7 have not
hampered fund managers. See, e.g., current rule 2a–
7(c)(2) (requiring a money market fund to maintain
a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable
net asset value per share or price per share). Thus,
we do not share commenters’ concerns that the
general liquidity standard could expose a money
market fund to liability based on hindsight review
of the fund’s subjective determinations and market
events.
194 See, e.g., TDAM Comment Letter. Another
commenter asserted that money market funds are
already subject to this requirement under section
22(e) of the Act. See State Street Comment Letter.
The general liquidity requirement, together with
rule 2a–7’s specific obligations related to illiquid
securities and daily and weekly liquid assets,
identifies the liquidity obligations that are specific
to money market funds.
195 For example, suggestions that we require each
fund to maintain sufficient liquidity to meet
redemptions by the largest shareholders seem
inadequate because they assume that only those
shareholders will redeem. See Stradley Ronon
Comment Letter; SIFMA Comment Letter.
196 See Proposing Release, supra note 2, at text
following n.205.
197 See Thrivent Comment Letter (suggesting that
we approach portfolio liquidity on the basis of
concentration among a fund’s shareholders). In
determining the amount of liquidity available to
meet the requirements of rule 2a–7, funds should
not consider the fund’s ability to access overdraft
protection, lines of credit, and inter-fund borrowing
arrangements. See Federated Comment Letter
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Thus, to comply with rule 2a–7, as
amended, money market funds should
adopt policies and procedures designed
to assure that appropriate efforts are
undertaken to identify risk
characteristics of shareholders.198 In
other words, fund boards should make
sure that the adviser is monitoring and
planning for ‘‘hot money.’’ In their
consideration of these procedures and
in the oversight of their implementation,
fund boards should appreciate that, in
some cases, fund managers’ interests in
attracting additional fund assets may be
in conflict with their overall duty to
manage the fund in a manner consistent
with maintaining a stable net asset
value.199 We urge directors to consider
the need for establishing guidelines that
address this conflict.
As some commenters noted,
identification of these risks may be more
challenging when share ownership is
less transparent because the shares are
held in omnibus accounts.200 Funds
may seek access to information about
the investors who hold their interests
through omnibus accounts in addition
to considering information about the
omnibus accounts, including their
aggregate historical redemption patterns
(suggesting that we adopt the opposite approach).
A fund that borrowed to satisfy redemptions would
leverage its holdings, thus amplifying the risk of
shareholder losses if the fund eventually broke the
buck.
198 Upon adoption of these amendments, such
policies and procedures are, we believe, required
under rule 38a–1 under the Investment Company
Act (the ‘‘compliance rule’’). Although two
commenters suggested that the requirement to
adopt the policies and procedures should be
incorporated in rule 2a–7, we do not see a reason
to duplicate the requirements for policies and
procedures encompassed in the compliance rule.
See Dreyfus Comment Letter; Comment Letter of
Fifth Third Asset Management, Inc. (Sept. 8, 2009)
(‘‘Fifth Third Comment Letter’’). One commenter
recommended that ‘‘know your customer’’ policies
apply only to shareholders whose redemptions (in
their entirety) would have a material impact on the
fund’s ability to satisfy redemptions. Stradley
Ronon Comment Letter. See also SIFMA Comment
Letter. Another commenter argued that the relevant
shareholder characteristics should be limited to
clearly defined parameters such as historical net
flows. See RidgeWorth Comment Letter. We are not
identifying specific characteristics that should be
addressed in a fund’s policies and procedures
because we believe that money market funds are in
a better position to do so. For example, concurrent
redemptions of several shareholders may have a
material effect on a fund’s ability to satisfy
redemptions even if the shareholders’ individual
redemptions alone would not have such an effect.
Nor are we setting limits as to the scope of the
policies and procedures because different money
market funds may have different needs in this
regard.
199 See Proposing Release, supra note 2, at n.180
and accompanying text.
200 See, e.g., Comment Letter of the Coalition of
Mutual Fund Investors (Sept. 10, 2009) (‘‘CMFI
Comment Letter’’); HighMark Capital Comment
Letter.
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10075
and the account recordholder’s ability to
redeem the entire account.201
2. Limitation on Acquisition of Illiquid
Securities
We are amending rule 2a–7 to further
limit a money market fund’s
investments in illiquid securities (i.e.,
securities that cannot be sold or
disposed of in the ordinary course of
business within seven days at
approximately the value ascribed to
them by the money market fund).202
Under the amended rule, a money
market fund cannot acquire illiquid
securities if, immediately after the
acquisition, the fund would have
invested more than five percent of its
total assets in illiquid securities.203
In light of the risk that liquid assets
would become illiquid thereby
impairing the ability of a money market
fund to meet redemption demands, we
proposed to prohibit funds from
acquiring securities that were, at the
time of their acquisition, already
illiquid. Many fund commenters
objected, arguing such a limitation
could preclude them from investing in
certain high quality illiquid securities in
which money market funds have
historically invested,204 make it more
difficult for tax-exempt funds to
construct a well-diversified, high
quality portfolio,205 and prevent funds
from investing in new types of securities
that are illiquid until a market for them
has been established.206 Others asserted
that a ban may be unnecessary in light
201 Some commenters argued that we should
require greater transparency of investments held
through financial intermediaries to allow funds to
better monitor client profiles. See, e.g., BlackRock
Comment Letter; CMFI Comment Letter. Funds may
seek to access this information in contractual
arrangements with their financial intermediaries.
202 We have construed section 22(e) of the
Investment Company Act, which requires registered
investment companies to satisfy redemption
requests within seven days, to restrict a money
market fund from investing more than 10% of its
assets in illiquid securities. See 1983 Adopting
Release, supra note 6, at nn.37–38 and
accompanying text; Acquisition and Valuation of
Certain Portfolio Instruments by Registered
Investment Companies (Mar. 12, 1986) [51 FR 9773
(Mar. 21, 1986)], at n.21 and accompanying text;
Proposing Release, supra note 2, at n.171 and
accompanying text.
203 Amended rule 2a–7(c)(5)(i).
204 These include, among other securities, term
repurchase agreements, some time deposits, and
insurance company funding agreements. See, e.g.,
Am. Bankers Assoc. Comment Letter; Comment
Letter of New York Life Investments (Sept. 14,
2009); Comment Letter of Promontory Interfinancial
Network, LLC (Sept. 8, 2009); Wells Fargo Comment
Letter.
205 See Stradley Ronon Comment Letter; Wells
Fargo Comment Letter.
206 See, e.g., Deutsche Comment Letter; Stradley
Ronon Comment Letter; USAA Comment Letter.
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of the new daily and weekly liquidity
standards.207
These comments persuaded us that
prohibiting funds from acquiring any
illiquid securities may have undesirable
consequences for money market funds.
Instead, we are further limiting the
circumstances under which a money
market fund may acquire illiquid
securities. Under the amended rule, a
fund cannot acquire an illiquid security
if, after the purchase, more than five
percent of the fund’s total assets would
consist of illiquid securities.208 Several
commenters suggested that we lower the
existing 10 percent limit as an
alternative to our proposal.209 We are
reducing by half the existing limit in
order to strike a balance between our
concern regarding liquidity risk, i.e., a
fund’s ability to satisfy redemption
demands if it is holding illiquid
securities, and funds’ concerns that they
retain some ability to make investments
in high quality illiquid securities.
We are also amending the rule to
define the term ‘‘illiquid security’’ as a
security that cannot 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. At the suggestion of commenters,
we would not treat as illiquid a security
that could not be sold at amortized
cost.210
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3. Minimum Daily and Weekly
Liquidity Requirements
The Commission is adopting new
liquidity requirements that mandate
each money market fund maintain a
portion of its portfolio in cash and
securities that can readily be converted
207 See, e.g., Charles Schwab Comment Letter;
TDAM Comment Letter.
208 Amended rule 2a–7(c)(5)(i).
209 See Federated Comment Letter; J.P. Morgan
Asset Mgt. Comment Letter; Vanguard Comment
Letter; Wells Fargo Comment Letter (all
recommending a 5% percent limit). See also TDAM
Comment Letter (recommending that we reduce the
existing limit). Other commenters argued that we
should maintain the 10% limit. See, e.g., Charles
Schwab Comment Letter; Deutsche Comment Letter.
210 See amended rule 2a–7(a)(19). See, e.g.,
Charles Schwab Comment Letter; Wells Fargo
Comment Letter. The proposed rule defined ‘‘liquid
security’’ with reference to the security’s ‘‘amortized
cost value.’’ See proposed rule 2a–7(a)(18). Under
the amended rule, a money market fund using the
amortized cost method will be able to treat as liquid
a security that the fund can sell at a price that
deviates from the security’s amortized cost value, as
long as the price approximates the market-based
value that the fund has ascribed to the security for
purposes of determining its shadow price. Because
the market-based value assigned by a money market
fund to its securities is the measure that ultimately
justifies the fund’s use of a stable net asset value,
a money market fund should treat as illiquid any
security that cannot be sold at a price
approximating such market-based value. See 1983
Adopting Release, supra note 6, at n.37 and
paragraphs following n.39.
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into cash. More specifically, we are
amending rule 2a–7 to require all
taxable money market funds to hold at
least 10 percent of their total assets in
‘‘daily liquid assets’’ and all money
market funds to hold at least 30 percent
of their total assets in ‘‘weekly liquid
assets.’’211 A money market fund must
comply with the daily and weekly
liquidity standards at the time each
security is acquired.212
As we explained in the Proposing
Release, current liquidity standards
applicable to money market funds
presume that a fund is able to find a
buyer of its securities.213 Our new
approach would include as a ‘‘daily
liquid asset’’ or ‘‘weekly liquid asset’’
only cash or securities that can readily
be converted to cash (as discussed
below). Thus, a fund should be able to
use those assets to pay redeeming
shareholders even in market conditions
(such as those that occurred in
September and October 2008) in which
money market funds cannot rely on a
secondary or dealer market to provide
immediate liquidity.
Commenters who addressed the issue
largely supported the introduction of
daily and weekly liquidity standards.214
One large sponsor of money market
funds asserted that it ‘‘recognize[d] that
a meaningful and sustained level of
liquidity has the potential to ease
concerns of investors and may be useful
for unforeseen events.’’215 Another
agreed that ‘‘mandating liquidity
requirements will bolster investor
confidence in the ability of money
market funds to sustain prolonged
redemption pressures with increased
211 See amended rule 2a–7(c)(5)(ii)-(iii). See also
amended rule 2a–7(a)(8) (defining ‘‘daily liquid
assets’’); 2a–7(a)(32) (defining ‘‘weekly liquid
assets’’); infra notes 229–243 and accompanying
text. ‘‘Total assets’’ means with respect to a money
market fund using the amortized cost method, the
total amortized cost of its assets and, with respect
to any other money market fund, the total marketbased value of its assets. See amended rule 2a–
7(a)(27).
212 See amended rule 2a–7(a)(8); 2a–7(a)(32). One
commenter recommended that the minimum
liquidity standards apply on an ongoing basis,
which could require money market funds with
holdings that fall below the requirements to sell
securities in order to meet the requisite daily and
weekly liquid asset thresholds. See Fund
Democracy/CFA Comment Letter. We do not agree
with such an approach. A money market fund
whose portfolio does not meet the minimum daily
or weekly liquidity standards is not in violation of
the rule, but may not acquire any assets other than
daily or weekly liquid assets. See Dreyfus Comment
Letter (requesting that the standards incorporate
some flexibility to allow funds not to comply with
them under unforeseeable circumstances).
213 See Proposing Release, supra note 2, at
Section II.C.2.
214 See, e.g., Calvert Comment Letter; Vanguard
Comment Letter.
215 J.P. Morgan Asset Mgmt. Comment Letter.
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levels of immediate cash on hand, both
on a daily and weekly basis.’’216 One
commenter, however, urged us to rely
solely on the general liquidity
requirement, arguing that requiring a
minimum requirement would require
unnecessary levels of liquidity at times
that will not be sufficient during a
severe market crisis.217
Markets can become illiquid very
rapidly in response to events that
money market fund managers may not
anticipate. The failure of a single fund
to anticipate such conditions may lead
to a run of the sort we saw in September
2008 affecting all or many funds. We
think it would be ill-advised to rely
solely on the ability of managers to
anticipate liquidity needs, which may
arise from events the money market
fund manager cannot anticipate or
control. We acknowledge our minimum
standards alone may not establish
sufficient liquidity to allow funds to
meet every liquidity crisis, which is
why we also are adopting a general
liquidity requirement (discussed above)
to supplement the minimum
requirements.
Distinguishing between Retail and
Institutional Funds. In the Proposing
Release, we observed that institutional
money market funds need (and typically
maintain) greater portfolio liquidity.
These funds had substantially greater
redemption pressure on them in the fall
of 2008. During the four-week period
ending October 8, 2008, prime
institutional funds (or share classes)
experienced 30 percent net outflows
compared to only 4.6 percent outflows
of prime retail funds, according to data
compiled by the ICI.218 Consequently,
we proposed to impose substantially
lower liquidity requirements on retail
funds because the higher thresholds
appeared unnecessary and would have
resulted in higher costs on them in
terms of lower yields. For example,
instead of 30 percent ‘‘weekly liquid
assets,’’ we proposed to require that
216 Invesco
Aim Comment Letter.
Wells Fargo Comment Letter. See also T.
Rowe Price Comment Letter (the weekly liquidity
standard is overly restrictive in light of the daily
liquidity standard and other proposed changes to
rule 2a–7).
218 See ICI, Money Market Mutual Fund Assets
Historical Data, available at http://www.ici.org/pdf/
mm_data_2010.pdf. See also Proposing Release,
supra note 2, at n.63 and accompanying text. The
Proposing Release also noted that on September 17,
2008, approximately 4% of prime retail money
market funds (or share classes) 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%. Proposing Release, supra note 2, at n.185.
217 See
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retail prime money market funds
maintain 15 percent ‘‘weekly liquid
assets.’’ We proposed to require that
each money market fund’s board make
an annual determination whether a fund
was an institutional fund (and thus
subject to the higher liquidity
requirements) based on the nature of
record owners of shares, minimum
initial investment requirements, and
cash flows from purchases and
redemptions.219
Most commenters representing money
market funds argued against drawing
such a regulatory distinction, asserting
that there are inherent difficulties in
determining the difference between the
two types of funds within a generally
applicable definition.220 Commenters
asserted that many money market funds
include both types of shareholders, and
even if one could distinguish a fund
with an institutional rather than a retail
shareholder base, not all shareholders
behave in the same manner and present
the same liquidity challenges as their
peers.221 Others expressed concern that
the fund’s board is not in the best
position to make these
determinations.222 The difficulty in
drawing bright lines led some
commenters to express concern with the
competitive consequences that might
result when fund boards of directors
come to different conclusions.223
219 See proposed rule 2a–7(a)(17) (defining
‘‘institutional fund’’); Proposing Release, supra note
2, at Section II.C.2.a-b.
220 See, e.g., BlackRock Comment Letter; Goldman
Sachs Comment Letter; ICI Comment Letter;
Comment Letter of TCW Investment Management
Company (Sept. 4, 2009); Vanguard Comment
Letter. A few commenters expressed support for the
distinction. See, e.g., Dreyfus Comment Letter;
Fidelity Comment Letter; USAA Comment Letter.
221 See, e.g., GE Asset Mgt. Comment Letter;
SIFMA Comment Letter; State Street Comment
Letter. Many also argued that the nature of the
financial intermediary record owner does not
always correspond to the behavior of the ultimate
investor. See, e.g., T. Rowe Price Comment Letter;
Vanguard Comment Letter. A few commenters
objected for other reasons. See Comment Letter of
the Committee of Annuity Insurers (Sept. 8, 2009)
(‘‘Committee Ann. Insur. Comment Letter’’) (the
characterization as retail or institutional would be
confusing for investors); J.P. Morgan Asset Mgt.
Comment Letter (retail investors would suffer if
they invested in an institutional fund through an
omnibus account or a money market fund lost its
retail status because of institutional investments in
the fund); Comment Letter of Russell Investment
Management Company (Sept. 8, 2009) (‘‘Russell Inv.
Comment Letter’’) (money market funds would
incur substantial costs to monitor and enforce the
distinction); Waddell & Reed Comment Letter (the
distinction is punitive for retail money market
funds, which have a less concentrated shareholder
base).
222 See, e.g., IDC Comment Letter; Comment
Letter of the New York City Bar Association (Sept.
8, 2009) (‘‘NYC Bar Assoc. Comment Letter’’).
223 See, e.g., Comment Letter of FAF Advisors
(Sept. 9, 2009) (‘‘FAF Advisors Comment Letter’’) (in
the absence of clear guidelines, boards would likely
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We anticipated these concerns and
requested comment on alternative
approaches. One commenter suggested
that we treat as institutional a fund that
has any class which offers same day
liquidity to shareholders.224 We are
uncertain, however, whether
institutional investors will be willing to
migrate to funds that offer next day
liquidity in order to obtain additional
yield, and if they did our purpose in
drawing the distinction would be
defeated. We have similar concerns that
institutional investors might invest in
retail funds that are defined with
respect to minimum initial account
sizes or maximum expense ratios, as
suggested by other commenters.225 The
suggestion that the distinction be based
on average account size raises different
concerns, including the appropriate size
for this measure and whether it should
be based on total assets in omnibus
accounts or in the accounts of the
underlying shareholders.226
Taking into account the comments
and after further consideration, we have
not identified an effective way at this
time to distinguish between types of
money market funds to achieve our
purpose. Therefore, we have determined
to apply the same minimum liquidity
standards to both institutional and retail
money market funds.227 We believe the
compelling need to limit the liquidity
risk of money market funds before
another run occurs is reason not to
further distinguish retail from
institutional money market funds. We
intend, however, to consider revisiting
our determination to apply the same
minimum liquidity standards to all
money market funds and reevaluate
whether there is a workable objective
definition that would accurately
identify funds with lower liquidity
needs and thus justify applying lower
minimum standards to them.228
characterize funds with largely the same
shareholder base differently); Goldman Sachs
Comment Letter (the distinction would create an
incentive to characterize a fund as retail so that the
fund would be subject to the lower standard); IDC
Comment Letter (a board might take a conservative
approach and identify more funds as institutional
at the expense of the funds’ shareholders).
224 See Fidelity Comment Letter. See also Charles
Schwab Comment Letter; Waddell & Reed Comment
Letter.
225 See HighMark Capital Comment Letter; T.
Rowe Price Comment Letter.
226 See Waddell & Reed Comment Letter. Similar
concerns would arise if we used the definition the
ICI uses for its analysis of retail money market share
classes, i.e., those ‘‘offered primarily to individuals
with moderate-sized accounts.’’ See http://
www.ici.org/my_ici/mmf_developments/
faqs_money_funds.
227 See amended rule 2a–7(c)(5)(ii)–(iii).
228 One commenter suggested that we impose
different minimum liquidity standards for
government and non-government money market
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10077
New Daily and Weekly Minimum
Liquidity Requirements. We are
adopting the higher minimum liquidity
thresholds we proposed for all money
market funds. Under the final rule, (i)
no taxable money market fund can
acquire any security other than a daily
liquid asset if, immediately after the
acquisition, the fund would have
invested less than 10 percent of its total
assets in daily liquid assets, and (ii) no
money market fund can acquire any
security other than a weekly liquid asset
if, immediately after the acquisition, the
fund would have invested less than 30
percent of its total assets in weekly
liquid assets.229 We proposed these
liquidity levels based on the levels of
cash and overnight repurchase
agreements that we believe reflect the
liquidity needs of money market funds
with institutional investors or other
investors with similar liquidity
needs.230
A few commenters supported our
proposed levels for daily and weekly
liquid assets, but most supported the
lower levels recommended in the ICI
Report of five percent of portfolios in
daily liquid assets and 20 percent of
portfolios in weekly liquid assets.231
Commenters argued that when
combined with our other proposals,
these thresholds would provide
sufficient protection to investors.232
They also suggested that the lower
levels strike an appropriate balance of
improving funds’ liquidity while
providing sufficient flexibility to allow
portfolio managers to meet the
challenges of different market
conditions.233
funds. See C. Wesselkamper Comment Letter. We
believe this is unnecessary, however, given that
most Government money market funds have
sufficient holdings of Treasury securities and
Government agency discount notes to satisfy the
rule’s requirements for daily and weekly liquid
assets. See amended rule 2a–7(a)(8) (defining ‘‘daily
liquid assets’’); 2a–7(a)(32) (defining ‘‘weekly liquid
assets’’).
229 Amended rule 2a–7(c)(5)(ii)–(iii).
230 See Proposing Release, supra note 2, at n.191
and accompanying and following text.
231 See, e.g., FAF Advisors Comment Letter;
Invesco Aim Comment Letter. Others recommended
different standards. See Crane Data Comment Letter
(5% daily and 15% weekly liquidity for all money
market funds); Fifth Third Comment Letter (10%
daily liquidity and 25% weekly liquidity for all
money market funds); J.P. Morgan Asset Mgt.
Comment Letter (5% daily liquidity for taxable
money market funds and 20% weekly liquidity for
all money market funds); Vanguard Comment Letter
(weekly liquidity requirement for institutional
funds should not exceed 25%).
232 See Dreyfus Comment Letter ($119 billion
redeemed in institutional funds during the week of
September 17, 2008 represented 5% of institutional
fund assets as reported by iMoneyNet on August 5,
2009); FAF Advisors Comment Letter; Goldman
Sachs Comment Letter.
233 See Invesco Aim Comment Letter.
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We are concerned that the lower
minimum liquidity levels suggested by
commenters would be insufficient to
establish an adequate liquidity floor for
money market funds in the event of a
crisis such as we experienced in
September 2008. The five percent daily
liquidity level would have been
insufficient to satisfy redemptions in
one-fifth of prime institutional funds (or
share classes) on each of three days
during the week of September 15, and
the 20 percent weekly liquidity level
would have been insufficient to address
outflows in more than a quarter of those
funds during that week.234 We would be
concerned if such a large portion of
money market funds had to increase
their liquidity quickly in response to
sudden market turmoil at the same time
the overall market experiences a flight
to liquidity.235 As we noted above, one
fund’s inability to satisfy redemption
requests may lead to a run on other
money market funds.236 Accordingly,
we believe that the floor we establish for
minimum liquidity requirements must
be sufficiently high to allow most
money market funds to manage their
liquidity risk in a crisis, particularly
when they may experience significant
redemption requests on successive
days.237 For this reason, we have
234 On September 17, 2008, approximately 25% of
prime institutional money market funds
experienced outflows greater than 5% of total
assets; on September 18, 2008, approximately 30%
of prime institutional money market funds
experienced outflows greater than 5%; and on
September 19, 2008, approximately 22% of prime
institutional money market funds experienced
outflows greater than 5%. As noted in the
Proposing Release, during that week, approximately
27% of prime institutional money market funds
experienced redemptions of more than 20% of
assets, and 22% had outflows greater than 25%.
This is based on analysis of data from the
iMoneyNet Money Fund Analyzer Database.
Proposing Release, supra note 2, at n.185.
235 As of January 20, 2010, assets in taxable
institutional share classes represented
approximately 63% of the total assets of money
market funds, and assets in prime institutional
share classes represented approximately 37% of the
total assets of money market assets. See ICI, Money
Market Mutual Fund Assets, available at http://
www.ici.org/research/stats/mmf/mm_01_21_10.
236 See supra text following note 217.
237 In support of its proposed lower liquidity
levels, the ICI stated that the 5% daily and 20%
weekly thresholds ‘‘would have met the demands of
a large majority of the prime funds with at least one
institutional share class’’ and noted that between
September 10 through 24, 52% of these funds had
outflows of less than 5 percent, and 22 percent
experienced outflows of between 5% and 20% of
assets, which would have been covered by the
thresholds recommended by the ICI Report. Under
the ICI’s analysis, however, one quarter of prime
money market funds would not have been covered
by the thresholds recommended by the ICI Report,
which as discussed above, we believe is too large
a proportion that might have to increase liquidity
quickly in response to sudden severe economic
stress. We are not considering the redemption levels
of the week following September 19, when the
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adopted the higher liquidity thresholds,
under which we estimate that
approximately 90 percent of retail and
institutional funds would have been
able to satisfy the level of redemption
demands during individual days as well
as the week of greatest redemption
pressure in the fall of 2008 (September
15–19).238 At the same time, we
appreciate commenters’ concerns that
the proposed liquidity thresholds would
limit funds’ flexibility to meet the
challenges of different market
conditions. In order to address those
concerns as well as our concerns
regarding liquidity risk, the
amendments preserve funds’ ability to
invest in a limited amount of illiquid
securities, which is designed to permit
funds some flexibility in dealing with
varying market conditions.239
Tax-Exempt Money Market Funds. As
proposed, the final rule excludes taxexempt money market funds from the
daily liquidity requirements.240 Several
commenters supported the proposal,
noting that these funds cannot engage in
repurchase agreements and the supply
of tax-exempt securities with daily
demand features is extremely limited.241
One commenter, however, argued that
tax-exempt funds are subject to daily
redemptions and should be subject to
the required minimum.242 Based on the
comments we received, we continue to
believe that the different nature of the
markets for tax-exempt securities
justifies exempting tax-exempt money
Treasury Department adopted the Guarantee
Program, because we have no basis to estimate what
the redemptions would have been had the Treasury
not adopted the Program. We also note that another
commenter that provided specific information on
redemption flows, a large sponsor of money market
funds, reported in its comment letter that on
September 17, redemptions in its money market
funds exceeded 5% and during the week of
September 15, redemptions in the funds exceeded
20%. Federated Comment Letter.
238 See Proposing Release, supra note 2, at n.201
and accompanying text. The 9% of institutional
money market funds that had redemptions
exceeding 30% of assets in the week after The
Reserve Fund broke the buck accounted for 10.9%
of all institutional funds’ total assets as of
September 15, 2008. We estimate that under the
minimum liquidity standards we are adopting more
retail funds would have been able to satisfy the
level of redemption demands than would have
institutional funds. During the week ending
September 19, 2008, 3% of retail funds experienced
outflows greater than 30%. This is based on
analysis of data from the iMoneyNet Money Fund
Analyzer Database.
239 See supra Section II.C.2 (limitations on
illiquid securities).
240 See Proposing Release, supra note 2, at
nn.198–99 and accompanying text.
241 See, e.g., Federated Comment Letter; ICI
Comment Letter.
242 See Fidelity Comment Letter.
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market funds from the daily liquidity
requirements.243
Definition of Daily and Weekly Liquid
Assets. As discussed above, the new
daily and weekly liquidity requirements
are designed to ensure that a money
market fund has the legal right to
receive cash within one or five business
days so that a fund may more easily
satisfy redemption requests during
times of market stress.244 Like our
proposal, the final definition of ‘‘daily
liquid assets’’ includes cash (including
demand deposits), Treasury securities,
and securities (including repurchase
agreements) for which a money market
fund has a legal right to receive cash in
one business day.245 Our proposed
definition of ‘‘weekly liquid assets’’
included the same assets (except that
the fund would have had to have the
right to receive cash in five business
days rather than one).246 We proposed
to include Treasury securities regardless
of their maturity in the liquidity baskets
because they have been the most liquid
assets during times of market stress.247
Indeed, we understand that the ‘‘flight to
liquidity’’ that happens during times of
uncertainty makes it easy to sell
Treasury securities in even large
quantities.248
Commenters supported our inclusion
of Treasury securities, but many argued
that we should include additional
securities.249 In particular, a number of
243 We understand that most of the portfolios
consist of longer term floating and variable-rate
securities with seven-day demand features from
which the fund obtains much of its liquidity, and
that they are unlikely to have investment
alternatives that would permit them to meet a daily
liquidity requirement. See Proposing Release, supra
note 2, at n.199 and accompanying text.
244 See supra note 213 and accompanying and
following text.
245 Amended rule 2a–7(a)(8) (defining ‘‘daily
liquid asset’’ to mean (i) cash; (ii) direct obligations
of the U.S. Government; and (iii) securities that will
mature or are subject to a demand feature that is
exercisable and payable within one business day).
246 Proposed rule 2a–7(a)(32).
247 U.S. Treasury securities were highly liquid
during the market turmoil in 2008. See, e.g., FRB
Open Market Committee Oct. 28–29 Minutes, supra
note 13, at 5; Minutes of the Federal Open Market
Committee, Federal Reserve Board, Dec. 15–16,
2008, at 4, available at http://
www.federalreserve.gov/monetarypolicy/files/
fomcminutes20081216.pdf.
248 See, e.g., Francis A. Longstaff, The Flight-toLiquidity Premium in U.S. Treasury Bond Prices, 77
J. Bus. 511 (July 2004).
249 See, e.g., Comment Letter of the Federal Home
Loan Banks (Sept. 8, 2009) (‘‘FHLB Comment
Letter’’) (include Federal Home Loan Bank discount
notes); RidgeWorth Comment Letter (include fixedrate agency discount notes with maturities of 95
days or less); Victory Cap. Mgmt. Comment Letter
(include fixed-rate agency discount notes with
maturities of 397 days or less). See also Dreyfus
Comment Letter (include bank time deposits);
Fidelity Comment Letter (include shares of other
money market funds). Both shares of money market
funds and bank time deposits, which some
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commenters argued that we should also
include agency notes (i.e., direct
obligations of Federal government
agencies and government-sponsored
enterprises) as daily or weekly liquid
assets or in both liquid asset baskets.250
We are persuaded, based on the
comments we received, that the market
for very short-term agency notes is
likely to be sufficiently liquid under
stressful market conditions to treat them
as weekly liquid assets. Therefore,
amended rule 2a–7 includes agency
discount notes with remaining
maturities of 60 days or less in the
definition of weekly liquid assets.251
Our decision to include these
securities is based on our consideration
of the relative liquidity of agency
discount notes during times of extreme
market stress.252 We compared average
daily yields for the two weeks before
and the two weeks after the Lehman
Brothers bankruptcy on September 15,
2008. Between these periods, the yields
for 30-day Treasury bills fell 75 percent
while yields for 30-day and 60-day
agency discount notes remained
essentially the same.253 The yields for
commenters advocated we specifically include in
the rule text, fall within the definitions of daily and
weekly liquid assets if they satisfy the applicable
maturity terms.
250 See, e.g., Comment Letter of the Capital
Management of the Carolinas (Sept. 4, 2009) (‘‘Cap.
Mgt. Carolinas Comment Letter’’) (include discount
notes with maturity of 397 days or less as daily
liquid assets); Fidelity Comment Letter (include
discount notes with maturity of 397 days or less as
both daily and weekly liquid assets); ICI Comment
Letter (include fixed-rate agency discount notes
with maturity of 397 days or less as weekly liquid
assets); C. Wesselkamper Comment Letter (include
in daily and weekly liquid assets Government
securities with fixed rates or fixed rate Government
securities maturing in no more than 60 days). One
commenter also expressed concern about the
supply of assets that would qualify as daily or
weekly liquid assets. See Fidelity Comment Letter.
251 Amended rule 2a–7(a)(32) (defining ‘‘weekly
liquid assets’’ to mean (i) cash; (ii) direct obligations
of the U.S. Government; (iii) Government securities
issued by a person controlled or supervised by and
acting as an instrumentality of the Government of
the United States pursuant to authority granted by
the Congress of the United States, that are issued
at a discount to the principal amount to be repaid
at maturity and have a remaining maturity of 60
days or less; and (iv) securities that will mature or
are subject to a demand feature that is exercisable
and payable within five business days).
252 Commenters who advocated including agency
discount notes in the liquid asset baskets stressed
the depth of liquidity in the secondary markets for
these securities. See, e.g., Charles Schwab Comment
Letter; ICI Comment Letter; SIFMA Comment Letter;
FHLB Comment Letter (comment limited to Federal
Home Loan Bank discount notes).
253 Between these periods, 30-day Treasury bill
average daily yields fell from 1.53% to 0.39%; 30day agency discount note average daily yields held
constant at 2.14%; and 60-day agency discount note
average daily yields increased from 2.25% to
2.27%. See Bloomberg Terminal Database, US 30–
Day T–Bill USGB030Y (Index); Agency Discount
Note 30 Day Yield AGDN030Y (Index); Agency
Discount Note 60 Day Yield AGDN060Y (Index).
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other money market assets increased
over the same periods. For example, the
average daily yield for 90-day agency
discount notes increased four percent;
while the yield for 30-day first tier
financial securities increased 23
percent.254 Transaction volume in
agency discount notes increased over
this time period,255 which suggests to us
that money market funds were able to
sell their shorter maturity agency
discount notes at amortized cost or
higher prices.
4. Stress Testing
We are adopting amendments to 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.256 Almost all of the
commenters who addressed this matter
supported requiring stress testing of
fund portfolios,257 although several
suggested changes from our proposal.258
Under the amended rule, a fund must
adopt procedures that provide for the
periodic testing of the fund’s ability to
maintain a stable net asset value per
share based upon certain hypothetical
We note that in September 2008, the Federal
Reserve’s Open Market Trading Desk purchased
discount notes issued by Fannie Mae, Freddie Mac,
and the Federal Home Loan Banks in order to
support market functioning. See Press Release,
Federal Reserve Bank of New York, Statement
Regarding Planned Purchases of Agency Debt (Sept.
19, 2008), available at http://www.newyorkfed.org/
markets/operating_policy_080919.html. Data
concerning the purchases are available at the
Federal Reserve Bank of New York’s Permanent
Open Market Operations Historical Search
webpage, available at http://www.newyorkfed.org/
markets/pomo/display/
index.cfm?fuseaction=showSearchForm.
254 Average daily yields on 90-day agency
discount notes increased from 2.35% to 2.45%. See
Bloomberg, Agency Discount Note 90 Day Yield
AGDN090Y (Index). In addition, average daily
yields on 30-day first tier financial securities
increased from 2.40% to 2.96% and average daily
yields on 30-day first tier non-financial securities
increased from 2.03% to 2.16%. See Federal
Reserve Commercial Paper Data, supra note 47
(select rates from the preformatted data package
menu and follow the instructions to reformat the
date range and download). Average daily yields on
60-day first tier financial securities increased from
2.57% to 2.99% and average daily yields on 60-day
first tier non-financial securities increased from
2.03% to 2.19%. See id.
255 See Federal Reserve Bank of New York,
Primary Dealer Statistics, available at http://
www.newyorkfed.org/markets/gsds/search.cfm.
256 See amended rule 2a–7(c)(10)(v).
257 See, e.g., J.P. Morgan Asset Mgt. Comment
Letter; Tamarack Funds Comment Letter. But see C.
Wesselkamper Comment Letter (stress testing
should be an adviser’s best practice).
258 At the suggestions of some commenters, we
have made the stress testing requirement applicable
to all money market funds that employ either the
amortized cost method of valuing portfolio
securities or the penny-rounding method of pricing
fund shares. See Federated Comment Letter; TDAM
Comment Letter. We believe that few, if any, money
market funds will be affected by this change.
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events. These include an increase in
short-term interest rates, an increase in
shareholder redemptions, a downgrade
of or default on portfolio securities, 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.259 Commenters differed on
whether we should specify details for
stress testing in addition to these
hypothetical events.260 Because
different tests may be appropriate for
different market conditions and
different money market funds, we
believe that the funds are better
positioned to design and modify their
stress testing systems and have not
included more specific criteria in the
rule.261
The amendment requires the testing
to be done at such intervals as the fund
board of directors determines
appropriate and reasonable in light of
current market conditions.262 This is the
same approach that rule 2a–7 takes with
respect to the frequency of shadow
pricing.263 The rule does not, however,
specifically require the board to design
the portfolio stress testing, as may have
been suggested by our proposing
259 Amended
rule 2a–7(c)(10)(v)(A).
e.g., Charles Schwab Comment Letter
(opposing more specific tests in the rule); State
Street Comment Letter (same); RidgeWorth
Comment Letter (requesting that the Commission
more clearly define feasible stress testing
requirements); TDAM Comment Letter (same).
261 See Federated Comment Letter (different types
of money market funds should have different stress
testing procedures); Invesco Aim Comment Letter
(‘‘each investment adviser should have the
discretion to determine the appropriate
assumptions and hypothetical events for which to
test.’’). As discussed above, amended rule 2a–7’s
new liquidity requirements require money market
funds to evaluate their liquidity needs based on
their shareholder base. See supra note 195 and
preceding and accompanying text. Money market
funds should also incorporate this element in their
stress testing procedures as appropriate. See
Thrivent Comment Letter.
262 Amended rule 2a–7(c)(10)(v)(A). Commenters
differed in their views on the appropriate intervals
for testing. See, e.g., J.P. Morgan Asset Mgt.
Comment Letter (monthly or even more frequently);
HighMark Comment Letter (quarterly under normal
market conditions); Shriver Poverty Law Ctr.
Comment Letter (same). We believe that a fund’s
board of directors is best positioned to choose the
appropriate frequency under different conditions.
We urge funds to adopt thresholds for testing
frequency based, in part, on the amount of the
deviation of the funds market-based net asset value
per share from its amortized cost value per share
similar to many funds’ thresholds for more frequent
shadow pricing. Thus, we would expect that if a
fund’s shadow net asset value per share decreased
to less than $0.9975, the fund would conduct stress
tests at least every week, even if the fund stress tests
less frequently under normal conditions. More
frequent testing would likely allow the fund to
better understand and manage the risks to which
the fund and its shareholders are exposed.
263 Amended rule 2a–7(c)(8)(ii)(A)(1).
260 See,
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release.264 We agree with the many
commenters that asserted that the board
may not have sufficient expertise to
construct appropriate stress tests for a
fund.265 Each board may, of course,
consider the extent to which it wishes
to become involved in design of the
stress tests.
The rule also requires that the board
receive a report of the results of the
stress testing at its next regularly
scheduled meeting, as proposed, and
more frequently, if appropriate, in light
of the results.266 We have added the
requirement for more frequent reporting
in light of results because we believe
that the board should be apprised of test
results when they indicate that the
magnitude of hypothetical events
required to cause the fund to break a
buck (such as changes in interest rates
or shareholder redemptions or a
combination of factors) is slight when
compared with actual conditions.
As proposed, the 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.267 The report
also must include 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.268 Finally, as proposed,
264 See Proposing Release, supra note 2, at text
following n.209.
265 See, e.g., ABA Comment Letter; HighMark
Capital Comment Letter; IDC Comment Letter.
266 Amended rule 2a–7(c)(10)(v)(B). We disagree
with commenters that recommended that the
adviser report to the board only annually and on
an exception basis. See, e.g., Stradley Ronon
Comment Letter; Tamarack Funds Comment Letter;
T. Rowe Price Comment Letter. We believe that
regular reports will allow the board more effectively
to monitor the fund’s ability to withstand
hypothetical events that alone or in combination
would cause the fund to break the buck. In the
Proposing Release, we asked whether we should
impose minimum liquidity requirements based on
the results of a particular stress test. See Proposing
Release, supra note 2, at text following n.216.
Commenters were divided on this issue. See
Fidelity Comment Letter (against); Bankers Trust
Comment Letter (in favor); Shriver Poverty Law Ctr.
(same). As discussed above, we expect that money
market funds take into consideration the results of
their stress testing in assessing their liquidity needs
under the general liquidity requirement of rule 2a–
7(c)(5). See supra note 261.
267 Amended rule 2a–7(c)(10)(v)(B)(1).
268 Amended rule 2a–7(c)(10)(v)(B)(2). We do not
agree with commenters who argued that advisers
should not be required to provide an assessment of
a fund’s ability to withstand events that are
reasonably likely to occur within the following
year. See Charles Schwab Comment Letter;
Federated Comment Letter; Stradley Ronon
Comment Letter; Vanguard Comment Letter. The
rule does not require advisers to predict the future
in order to determine which hypothetical events to
use in stress testing (and we recognize that advisers
will not always be correct in their assessments of
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funds are required to maintain records
of the stress testing for six years, the
first two years in an easily accessible
place.269
D. 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. We
are adopting, as proposed, two
amendments to rule 2a–7 that affect
fund investments in repurchase
agreements for purposes of rule 2a–7’s
diversification provisions.270
First, we are limiting money market
funds to investing in repurchase
agreements collateralized by cash items
or Government securities in order to
obtain special treatment of those
investments under the diversification
provisions of rule 2a–7.271 This change
is designed to reduce the risk that a
money market fund would experience
losses upon the sale of collateral in the
event of a counterparty’s default.272
Most commenters who addressed our
proposal supported it.273 Commenters
which events are reasonably likely to occur within
the following year). Instead, the provision is
designed to provide to the board some context
within which to evaluate the assessment on the
magnitude of each hypothetical event that would
cause the fund to break the buck. See Proposing
Release, supra note 2, at text following n.211.
269 Amended rule 2a–7(c)(11)(vii).
270 Amended rule 2a–7(c)(4)(ii)(A); Proposing
Release, supra note 2, at Section II.E.
271 Amended rule 2a–7(a)(5) (defining the term
‘‘collateralized fully’’). The special treatment allows
money market funds to consider the acquisition of
the repurchase agreement as an acquisition of the
underlying collateral for diversification purposes.
See Proposing Release, supra note 2, at n.228 and
accompanying text. Under the new rule, securities
with the highest rating, or unrated securities of
comparable credit quality, will no longer be
acceptable collateral. Compare amended rule 2a–
7(a)(5) with current rule 2a–7(a)(5).
272 See Proposing Release, supra note 2, at n.229
and accompanying text.
273 See Bankers Trust Comment Letter; BlackRock
Comment Letter; HighMark Capital Comment
Letter; RidgeWorth Comment Letter. Two
commenters opposed the proposal. Wells Fargo
made a number of arguments based on the premise
that the change will prevent money market funds
from investing in repurchase agreements
collateralized by non-government securities. The
rule, however, does not restrict funds from
investing in repurchase agreements. Instead, it
limits the circumstances under which a fund may
look through the repurchase agreement to the
underlying collateral for diversification purposes. A
money market fund will continue to be able to
invest in repurchase agreements collateralized by
other types of assets, although the securities will
not be eligible for special treatment under the
diversification provisions. Another commenter
asserted that the limitation is unnecessary if a fund
evaluates the creditworthiness of the counterparty
or if it adequately values the collateral in light of
rule 2a–7(c)’s minimal credit risk determination.
See Am. Securit. Forum Comment Letter. As
discussed above and in the Proposing Release, we
are adopting this provision to protect against
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also confirmed our understanding that
many managers of money market funds
already look through only those
repurchase agreements that are
collateralized by Government securities
or cash instruments.274
Second, we are reinstating the
requirement that the money market
fund’s board of directors or its delegate
evaluate the creditworthiness of the
repurchase agreement’s counterparty in
order for the fund to take advantage of
the special look-through treatment
under rule 2a–7’s diversification
provisions.275 The effect of this
amendment is to require a fund adviser
to determine that the counterparty is a
creditworthy institution, separate and
apart from the value of the collateral
supporting the counterparty’s obligation
under the repurchase agreement.276
We are not adopting an approach
suggested by some of the commenters
that the evaluation of a repurchase
agreement should be limited to the
credit risk determination already
required by rule 2a–7(c)(3) with regard
to the purchase of any security.277 That
circumstances in which the fund may be unable to
obtain its collateral or the full value of that
collateral.
274 See Federated Comment Letter (Federated has
never relied on the diversification look-through
approach for repurchase agreements collateralized
by non-government securities); ICI Comment Letter
(ICI members typically adopt the look-through
approach only for repurchase agreements
collateralized by cash items and government
securities). See also Fitch Ratings, Money Market
Funds Special Report, U.S. Prime Money Market
Funds: Managing Portfolio Composition to Address
Credit and Liquidity Risks (Aug. 14, 2009) (‘‘Fitch
Report’’), at 6 available at http://
www.fitchratings.com/creditdesk/reports/
report_frame.cfm?rpt_id=462366 (reporting that
after the end of 2008 ‘‘a number of advisors to Fitchrated U.S. prime money market funds * * *
significantly amended their investment policies
with respect to repurchase agreements
counterparties and collateral schedules’’; the
amendments include, among others, ‘‘[r]educed
acceptance of repurchase agreement collateral other
than U.S. Treasury and agency securities’’).
275 See amended rule 2a–7(c)(4)(ii)(A). We
eliminated the requirement in 2001. See Proposing
Release, supra note 2, at nn.230–33 and
accompanying text. Three commenters specifically
supported the change. See BlackRock Comment
Letter; HighMark Capital Comment Letter; Shriver
Poverty Law Ctr. Comment Letter.
276 A number of commenters argued that the
evaluation should not be the board’s responsibility.
See, e.g., IDC Comment Letter; Comment Letter of
the North Carolina Capital Management Trust—
Independent Trustees (Sept. 8, 2009). We note that
rule 2a–7(e) allows a board to delegate the
creditworthiness evaluation to the fund’s
investment adviser or officers, under guidelines and
procedures that the board establishes and reviews.
277 Three commenters argued that the proposed
creditworthiness evaluation is unnecessary because
it is already an element of the minimal credit risk
determination that a fund makes pursuant to rule
2a–7(c)(3). See Federated Comment Letter; ICI
Comment Letter; IDC Comment Letter. Two other
commenters recommended that the applicable
standard be the minimal credit risk evaluation. See
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approach would not require a fund to
evaluate separately the creditworthiness
of the counterparty in order to take
advantage of the special look-through
treatment for diversification purposes.
Under that approach, the fund’s
evaluation of a repurchase agreement
could be based primarily or exclusively
on the quality of the collateral. As we
explained in the Proposing Release, in
the midst of a market disruption caused
by the default of a counterparty, a
money market fund may find it difficult
to protect fully its collateral without
incurring losses.278 The amendment is
designed to avoid such losses by
requiring money market funds to
evaluate the creditworthiness of the
counterparty in order to limit exposure
to less creditworthy institutions.
E. Disclosure of Portfolio Information
1. Public Web Site Posting
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We are amending rule 2a–7 to require
money market funds to disclose
information about their portfolio
holdings each month on their Web sites.
The disclosure will provide greater
transparency of portfolio information in
a manner convenient for most investors.
The amendment is designed to give
investors a better understanding of the
current risks to which the fund is
exposed, strengthening their ability to
exert influence on risk-taking by fund
advisers.
Commenters generally supported
requiring money market funds to post
portfolio information monthly, although
several urged us to revise the
amendments in certain ways.279 The
amendments we are today adopting are
substantially similar to those we
proposed, with modifications to (i) The
information required to be disclosed, (ii)
the time within which a fund must post
its portfolio holdings information, and
(iii) the length of time a fund must
maintain the information on its Web
site. We discuss each of these
modifications below.
Information Required to be Disclosed.
As proposed, the amendments to rule
2a–7 would have required a fund to
disclose the fund’s schedule of
investments, as prescribed by rules 12–
12 through 12–14 of Regulation S–X,280
identifying, among other things, the
issuer, the title of the issue, the
principal amount, the interest rate, the
Fidelity Comment Letter; Stradley Ronon Comment
Letter.
278 Proposing Release, supra note 2, at n.233 and
accompanying text.
279 See, e.g., Assoc. for Fin. Professionals
Comment Letter; SIFMA Comment Letter; Vanguard
Comment Letter.
280 17 CFR 210.12–12—12–14.
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maturity date, and the current amortized
cost of the security.281 Several
commenters asserted that requiring the
information specified in rules 12–12
through 12–14 of Regulation S–X would
include information that would not be
helpful to investors. They urged us
instead to require information about
money market fund portfolios that
would better fit the needs of investors
seeking information relevant to their
investment decisions.282 For example,
some commenters noted that under the
proposed amendments a fund would be
required to classify and subtotal
securities by industry, provide detailed
restricted securities disclosures, and
provide detailed information regarding
repurchase agreement counterparties
and collateral. One also noted that
under the proposal funds may be
required to provide certain notes
required by generally accepted
accounting principles (‘‘GAAP’’), as
many funds do for filings on Form N–
Q.283 Commenters asserted that these
requirements would unnecessarily
complicate the disclosure, be of little
interest or benefit to investors, be
difficult to comply with, and would
impose a significant additional burden
on money market funds. They suggested
modifying the disclosure requirements
to exclude some of the detail.284
We are revising the information about
portfolio holdings that funds must
disclose on their Web sites. Instead of
referring to Regulation S–X as we
proposed, we are listing in rule 2a–
7(c)(12) the information that funds must
disclose.285 These revisions more
closely tailor the required information
to the needs of money market fund
investors and others who seek
information about fund holdings
through Internet Web sites. For
example, rule 12–12 of Regulation S–X
requires funds to disclose the subtotal of
each category of investments,
subdivided by business grouping or
investment type. We agree with
commenters who argued that this level
of detail, although appropriate for
financial statements, is unnecessary in a
fund’s Web site disclosures to
investors.286 For investors who may
prefer to obtain the more detailed
information, it will continue to be
available in money market funds’
quarterly Form N–CSR and Form N–Q
filings.287 As discussed below, detailed
information also will be available on a
fund’s filings on Form N–MFP.288
As amended, rule 2a–7(c)(12) will
require funds to disclose monthly with
respect to each security held: (i) The
name of the issuer; (ii) the category of
investment (e.g., Treasury debt,
government agency debt, asset backed
commercial paper, structured
investment vehicle note); (iii) the CUSIP
number (if any); (iv) the principal
amount; (v) the maturity date as
determined under rule 2a–7 for
purposes of calculating weighted
average maturity; (vi) the final maturity
date, if different from the maturity date
previously described; (vii) coupon or
yield; and (viii) the amortized cost
value.289 In addition, the amendments
require funds to disclose their overall
weighted average maturity and weighted
281 Proposed rule 2a–7(c)(12). As discussed
below, all of these enumerated items are required
under amended rule 2a–7(c)(12).
282 See, e.g., BlackRock Comment Letter; GE Asset
Mgt. Comment Letter; Invesco Aim Comment Letter.
283 See ICI Comment Letter.
284 See, e.g., BlackRock Comment Letter; Fidelity
Comment Letter; ICI Comment Letter.
285 Rules 12–12 through 12–14 of Regulation
S–X require, and the proposed rule amendments
would have required, in addition to the information
required by rule 2a –7(c)(12), the following
information, which we believe is not critical to be
made available to investors on money market fund
Web sites: (i) The subtotals for each category of
investments, subdivided by business grouping or
investment type, with their percentage value
compared to net assets; (ii) for repurchase
agreements, showing for each, among other things,
the date of the agreement, the total amount to be
received upon repurchase, the repurchase date, and
a description of the securities that are subject to the
repurchase agreement; (iii) for restricted securities
(1) as to each such issue (a) The acquisition date,
(b) the carrying value per unit of investment at date
of related balance sheet, and (c) the cost of such
securities, (2) as to each issue acquired during the
year preceding the date of the related balance sheet,
the carrying value per unit of investment of
unrestricted securities of the same issuer at (a) The
day the purchase price was agreed to, (b) the day
on which an enforceable right to acquire such
securities was obtained, and (c) the aggregate value
of all restricted securities and the percentage which
the aggregate value bears to net assets; (iv) the
aggregate gross unrealized appreciation for all
securities in which there is an excess of value over
tax cost; (v) the aggregate gross unrealized
depreciation for all securities in which there is an
excess of tax cost over value; (vi) the net unrealized
appreciation or depreciation; (vii) the aggregate cost
of securities for Federal income tax purposes; (viii)
disclosure of investments in non-securities; (ix) the
amount of equity in net profit and loss for the
period; and (x) the dollar amount of dividends or
interest in investments in affiliates.
286 See supra note 282.
287 Money market funds must provide a full
schedule of their portfolio holdings in quarterly
filings to the Commission, within 60 days after the
end of the quarter. 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).
288 See infra Section II.E.2.
289 Amended rule 2a–7(c)(12)(ii). We have added
disclosure of the security’s CUSIP number as an
item of the web disclosure, which is designed to
help users identify the securities in the fund’s
portfolio. We proposed and are adopting CUSIP
number reporting on Form N–MFP, and
commenters did not object to this reporting. See
infra note 306 and accompanying text.
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average life maturity of their
portfolios.290 The information required
is substantially the same as was
proposed but eliminates some of the
details required by Regulation S–X, to
which investors will continue to have
access in the fund’s quarterly filings.291
Time of Posting Information on Web
site. The amended rule requires funds to
post the portfolio information, current
as of the last business day of the
previous month, no later than the fifth
business day of the month.292 Under the
proposed amendments, a fund would
have been required to post the portfolio
information on its Web site no later than
the second business day of the
month.293 We have extended the time in
response to commenters that asserted
that the second business day deadline
would not provide funds with enough
time to compile, review, and post the
required portfolio information
accurately.294
Maintenance of Information on the
Web site. Portfolio information must be
maintained on the fund’s Web site for
no less than six months after posting.295
290 Amended rule 2a–7(c)(12)(i). We proposed to
require that funds disclose this information on
Form N–MFP, which we indicated we intended to
make public. Some commenters also recommended
we include these disclosure items in funds’ Web
site disclosures. See Assoc. Fin. Professionals
Comment Letter; BlackRock Comment Letter;
Fidelity Comment Letter.
291 As discussed above, the proposed
amendments to rule 2a–7 would have required
money market funds to disclose on their Web sites
their monthly schedule of investments in
accordance with rules 12–12 to 12–14 of Regulation
S–X. To avoid unnecessarily duplicative disclosure
obligations, we also proposed to amend rule 30b1–
5 to exempt money market funds from Item 1 of
Form N–Q, which similarly requires funds to
disclose their schedule of investments in
accordance with rules 12–12 to 12–14 of Regulation
S–X in quarterly filings with the Commission.
Because we have revised the Web site disclosure
requirement not to include certain items in rules
12–12 to 12–14 of Regulation S–X, the disclosure
requirements of rule 2a–7 and Item 1 of Form N–
Q are no longer duplicative. As a result, we are not
adopting the proposed amendments to rule 30b1–
5.
292 Amended rule 2a–7(c)(12).
293 Proposed rule 2a–7(c)(12).
294 See, e.g., BlackRock Comment Letter; Charles
Schwab Comment Letter; T. Rowe Price Comment
Letter; Vanguard Comment Letter. One commenter
estimated that compliance with the proposed
second business day deadline would cost $1.5
million initially and $220,000 annually. See
Fidelity Comment Letter. The recommended
deadlines submitted by commenters ranged from 5
business days to 15 or 30 business days after the
end of each month. In light of the modifications we
are making to the information that must be posted
on the fund’s Web site, as discussed above, we
believe that lengthening the deadline to five
business days should provide funds sufficient time
to compile, review, and post the portfolio holding
information accurately. We also note that a five
business day deadline will typically mean seven
calendar days and, when holidays intervene, eight
calendar days.
295 Amended rule 2a–7(c)(12). The amended rule
also requires funds to provide a link to a Securities
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We have reduced the maintenance
period from the proposed twelve
months in response to commenters.296
Many commenters stated that the
proposed twelve-month maintenance
period was too long.297 Half of these
commenters recommended a six-month
period, asserting that historical portfolio
holdings information could be obtained
from publicly available semi-annual
filings with the Commission.298 Other
commenters recommended that no
historical data be maintained on a
fund’s Web site at all.299 We believe that
it is important for investors to be able
to compare current holdings
information with previous holdings
information from which they (or others
analyzing the data) may discern trends.
However, because historical portfolio
holdings information is available to
investors in semi-annual filings to the
Commission, we have determined to
reduce the maintenance period to six
months.300
2. Reporting to the Commission
We are adopting a new rule requiring
money market funds to provide the
Commission a monthly electronic filing
of more detailed portfolio holdings
information. The information will
permit us to create a central database of
money market fund portfolio holdings,
which will enhance our oversight of
money market funds and our ability to
respond to market events.301 As
discussed further below, the
information will also be made public on
a delayed basis.
and Exchange Commission Web page where a user
may obtain access to the fund’s most recent 12
months of publicly available filings on Form N–
MFP. Amended rule 2a–7(c)(12)(iii).
296 Proposed rule 2a–7(c)(12).
297 See Comment Letter of Clearwater Analytics,
LLC (Sept. 7, 2009) (‘‘Clearwater Comment Letter’’);
Comment Letter of Data Communique´ (Sept. 8,
2009) (‘‘Data Communique´ Comment Letter’’);
Dreyfus Comment Letter; Fidelity Comment Letter;
Fifth Third Comment Letter; GE Asset Mgt.
Comment Letter; SIFMA Comment Letter; T. Rowe
Price Comment Letter.
298 See Dreyfus Comment Letter; Fifth Third
Comment Letter; SIFMA Comment Letter; T. Rowe
Price Comment Letter.
299 See Clearwater Comment Letter; Data
Communique´ Comment Letter (investors ‘‘only
interested in the most recent data’’); Fidelity
Comment Letter; GE Asset Mgt. Comment Letter.
300 Two commenters stated that retaining
portfolio holdings information on a fund’s Web site
for no more than six months would be consistent
with the current requirements for portfolio holdings
of open-end management investment companies.
See Fifth Third Comment Letter; T. Rowe Price
Comment Letter.
301 As we explained in the Proposing Release, our
current information on money market portfolio
holdings is limited to quarterly reports filed with
us which, due to the high turnover rate of portfolio
securities, quickly become stale. See Proposing
Release, supra note 2, at Section II.F.2.
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New rule 30b1–7 requires money
market funds to report portfolio
information on new Form N–MFP. We
received 49 comment letters on the
proposed rule and form, most of which
supported enhancing our oversight
capabilities. Many of these commenters
suggested technical modifications, a
number of which we are adopting, as
discussed below.302 The rule and form
that we are adopting today are
substantially similar to what we
proposed.303
Information. Money market funds
must report on Form N–MFP, with
respect to each portfolio security held
on the last business day of the prior
month, the following items: 304 (i) The
name of the issuer; (ii) the title of the
issue, including the coupon or yield; 305
(iii) the CUSIP number; 306 (iv) the
category of investment (e.g., Treasury
debt, government agency debt, asset
backed commercial paper, structured
investment vehicle note, repurchase
agreement 307); (v) the NRSROs
302 See, e.g., Charles Schwab Comment Letter;
Stradley Ronon Comment Letter; Tamarack Funds
Comment Letter.
303 In September 2009, we adopted interim final
temporary rule 30b1–6T. Disclosure of Certain
Money Market Fund Portfolio Holdings, Investment
Company Act Release No. 28903 (Sept. 18, 2009)
[74 FR 48376 (Sept. 23, 2009)] (‘‘Rule 30b1–6T
Release’’). We therefore have adopted proposed rule
30b1–6 as rule 30b1–7. The portfolio securities
information that money market funds currently
must report each quarter (pursuant to rule 30b1–5)
is less timely and 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 Item 1 of Form N–Q [17 CFR
274.130] and Item 6 of Form N–CSR [17 CFR
274.128] (requiring funds to include a schedule of
investments as set forth in rule 12–12 through 12–
14 of Regulation S–X [17 CFR 210.12–12—12–14]).
304 We have revised the form’s general
instructions to clarify that a filer may amend the
form at any time. See Form N–MFP at General
Instruction A.
305 We understand that the title of an issue
typically includes the coupon or yield of the
instrument, and we have revised Item 27 to require
this information, if applicable.
306 Item 20 of proposed Form N–MFP would have
required a fund to disclose the CIK of the issuer.
Several commenters suggested that the form not
require the issuer’s CIK because the CIK is not a
widely used identifier for money market
instruments and is not generally maintained by
money market funds. See, e.g., Dreyfus Comment
Letter; Federated Comment Letter; SIFMA Comment
Letter. Form N–MFP, as adopted, only requires the
issuer’s CIK number if the security does not have
a CUSIP number and the issuer has a CIK. Item 28
and Item 30 of Form N–MFP. If the security does
not have a CUSIP number, the fund must provide
a unique identifier for the security if there is one.
Item 29 of Form N–MFP.
307 For repurchase agreements we are also
requiring funds to provide additional information
regarding the underlying collateral. Item 32 of Form
N–MFP. This information would have been
required under our proposed amendments to rule
2a–7 regarding the Web site disclosure of portfolio
holdings. Although we continue to believe that the
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designated by the fund, the credit
ratings given by each NRSRO, and
whether each security is first tier,
second tier, unrated, or no longer
eligible; (vi) the maturity date as
determined under rule 2a–7, taking into
account the maturity shortening
provisions of rule 2a–7(d); (vii) the final
legal maturity date, taking into account
any maturity date extensions that may
be effected at the option of the issuer;
(viii) whether the instrument has certain
enhancement features; 308 (ix) the
principal amount; (x) the current
amortized cost value; 309 (xi) the
percentage of the money market fund’s
assets invested in the security; 310 (xii)
whether the security is an illiquid
security (as defined in amended rule
2a–7(a)(19)); 311 and (xiii) ‘‘Explanatory
information is important to understanding the risks
associated with a repurchase agreement and should
be readily available to investors who seek it, we
agree with commenters who asserted that that level
of detail may not be necessary on the Web site
disclosure. Fidelity Comment Letter (‘‘detailed
information regarding repurchase agreement
counterparties and collateral’’ is contained across
multiple systems); ICI Comment Letter.
Accordingly, we have added the disclosure
requirement to Form N–MFP.
308 At the suggestion of one commenter, we are
incorporating defined terms from amended rule 2a–
7 into Form N–MFP. See Federated Comment
Letter. The form requires a fund to report: (i)
Whether the instrument has a ‘‘demand feature’’ (as
defined in amended rule 2a–7(a)(9)); (ii) the identity
of the issuer of the demand feature; (iii) the
designated NRSRO(s) for the demand feature or its
provider; (iv) the credit rating provided by each
designated NRSRO, if any; (v) whether the
instrument has a ‘‘guarantee’’ (as defined in
amended rule 2a–7(a)(17)); (vi) the identity of the
guarantor; (vii) the designated NRSRO(s) for the
guarantee or guarantor; (viii) the credit rating
provided by each designated NRSRO, if any; (ix)
whether the instrument has any other
enhancements (i.e., other than a demand feature or
guarantee); (x) the type of enhancement; (xi) the
identity of the enhancement provider; (xii) the
designated NRSRO(s) for the enhancement or
enhancement provider; and (xiii) the credit rating
provided by each designated NRSRO, if any. See
Items 37–39 of Form N–MFP.
309 Under Item 37 of proposed Form N–MFP, a
fund would have had to provide the amortized cost
of a security to the nearest hundredth of a cent.
Commenters pointed out that fund accounting
systems carry costs of securities in whole cents, and
recommended that funds therefore be required to
report the amortized cost to the nearest cent. See,
e.g., Dreyfus Comment Letter; ICI Comment Letter;
State Street Comment Letter. We therefore have
revised the form to require the amortized cost of
each portfolio security to the nearest cent. Item 41
of Form N–MFP.
310 Under Item 39 of proposed Form N–MFP, a
fund would have had to disclose the percentage of
gross assets invested in the security. We have
revised the form to require that funds disclose the
percentage of net assets invested in the security
(Item 42 of Form N–MFP) to conform to existing
disclosure requirements. See rule 12–12 of
Regulation S–X.
311 See Item 44 of Form N–MFP. We have added
this disclosure requirement at the suggestion of one
commenter who believed that it would be useful for
us to know if different funds have taken different
positions regarding the liquidity of a commonly
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notes.’’ 312 Form N–MFP also requires
funds to report to us information about
the fund,313 including information
about the fund’s risk characteristics
such as the dollar weighted average
maturity of the fund’s portfolio and its
seven-day gross yield.314
held security. See Federated Comment Letter.
Conversely, we are not adopting proposed Item 38,
which would have required funds to disclose
whether the inputs used in determining the value
of the securities are Level 1, Level 2, or Level 3, if
applicable. See Financial Accounting Standards
Board, Statement of Financial Accounting
Standards No. 157, ‘‘Fair Value Measurement,’’
available at http://www.fasb.org/cs/
BlobServer?blobcol=urldata&blobtable=
MungoBlobs&blobkey=id&blobwhere=
1175818754924&blobheader=application%2Fpdf.
Commenters explained that industry practice is to
categorize all securities valued through reference to
amortized cost as Level 2. See, e.g., Dreyfus
Comment Letter; ICI Comment Letter. We
understand that industry practice is to determine
the value of an illiquid security using Level 3
inputs. Requiring funds to disclose whether a
security is illiquid will provide comparable
information regarding the classification of the
security.
312 See Item 43 of Form N–MFP. This item
permits funds to add miscellaneous information
that may be material to other disclosure in the form.
313 As proposed, many of the items would have
been disclosed with regard to each series of the
fund. As adopted, however, we are requiring that
funds provide some of this information with regard
to each class of the fund, where relevant (e.g.,
minimum initial investment and flow activity). We
believe that class-specific information about these
items will be more useful for analysis. We also
understand that funds typically maintain this
information with regard to each class of the fund.
For example, funds are required to disclose classspecific information about net assets and flow
activities in financial statements. See Rules 6–04
and 6–09 of Regulation S–X. Therefore we do not
believe that requiring certain information on a class
basis will be any more burdensome than what we
proposed. See also Clearwater Comment Letter
(suggesting that total net asset value should be
disclosed on a class-level basis).
314 We also have revised or augmented some of
the disclosure items of Form N–MFP. In addition
to the seven-day gross yield, the form as adopted
requires the fund’s seven-day net yield for each
class as calculated under Item 26(a)(1) of Form N–
1A. Item 24 of Form N–MFP. Item 15 of proposed
Form N–MFP would have required that a fund
provide its net shareholder flow activity for the
month ended. As adopted, Form N–MFP requires
the net shareholder flow information for each class
and also requires the fund to provide the gross
subscriptions and redemptions for the month from
which the net shareholder flow is calculated. Item
23 of Form N–MFP. Item 9 of proposed Form N–
MFP would have required a fund to indicate if the
fund was primarily used to invest cash collateral.
One commenter stated that the term ‘‘cash
collateral’’ is ambiguous (it could include corporate
trust accounts and escrows as well as collateral for
securities loans or over-the-counter derivatives) and
that it would be difficult for a fund to know when
it is being used ‘‘primarily’’ for these investments.
See Federated Comment Letter. As adopted, Form
N–MFP does not require this information. Items 12–
14 of proposed Form N–MFP would have required
certain assets and liabilities information to the
nearest hundredth of a cent. We have slightly
revised these items to conform to accounting
conventions and added an item for the net assets
of the class. Items 13–16 and 21–22 of Form N–
MFP. In addition, in response to commenters’
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10083
Money market funds also must report
on Form N–MFP the market-based
values of each portfolio security 315 and
the fund’s market-based net asset value
per share, with separate entries for
values that do and do not take into
account any capital support agreements
into which the fund may have
entered.316 When we proposed Form
N–MFP, we solicited comment on
requiring funds to report market-based
values, including the value of any
capital support agreement, on the
form.317 Two commenters supported
requiring money market funds to report
market-based values to the
Commission.318 Other commenters
objected to the public disclosure of
market-based values.319 We have
decided to require market-based
information in the monthly reports,
because it will assist us in our
understanding of fund portfolio
valuation practices as well as the
potential risks associated with a fund,
e.g., a fund that has a market-based net
asset value that suggests that it may be
at risk of breaking the buck. The
information regarding capital support
agreements will help show the extent to
which the funds’ valuations depend on
external support agreements.
Public availability. Under rule 30b1–
7, the information contained in the
portfolio reports that money market
funds file with the Commission on Form
N–MFP will be available to the public
60 days after the end of the month to
which the information pertains.320
Although the portfolio information and
other information reported to the
Commission on Form N–MFP is not
assertion that fund accounting systems only carry
costs in whole cents, Form N–MFP as adopted
requires this information to the nearest cent. Id.
315 See Items 45–46 of Form N–MFP. It should be
noted that Form N–MFP requires the total marketbased value of each portfolio security, not the perunit price of the security.
316 See Item 18 (shadow NAV of the series) and
Item 25 of Form N–MFP (shadow NAV of each
class).
317 See Proposing Release, supra note 2, at
paragraph accompanying n.253.
318 See Fund Democracy/CFA Comment Letter
(‘‘We strongly support the SEC’s proposal to require
that additional information be filed with the
Commission on a temporarily confidential basis. It
is critical that the Commission be able to gauge the
stability of the MMF industry on an ongoing basis.
* * * We believe strongly that the values at which
MMFs are carrying portfolio securities is the most
important piece of information for monitoring
potential liquidity problems.’’); Tamarack Funds
Comment Letter.
319 See, e.g., ABA Comment Letter; Dreyfus
Comment Letter; Goldman Sachs Comment Letter;
Tamarack Funds Comment Letter.
320 Rule 30b1–7(b). As discussed above, money
market fund portfolio information will be required
to be posted on fund Web sites within five business
days after the end of the month. See supra notes
292–294 and accompanying text.
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primarily designed for individual
investors, we anticipate that many
investors, as well as academic
researchers, financial analysts, and
economic research firms, will use this
information to study money market
fund holdings and evaluate their risk.
Their analyses may help other investors
and regulators better understand risks in
money market fund portfolios.321
Therefore we believe that it is important
to make this information publicly
available.
In the Proposing Release, we stated
that we expected to make the
information filed on Form N–MFP
available to the public on a delayed
basis, and we also requested comment
on whether the rule should require
funds to report, and therefore disclose to
the public, the market-based valuations
of the portfolio securities and of the net
asset value of the fund.322 As discussed
further below, commenters’ objections
to public availability of the information
collected on Form N–MFP generally fell
into two categories—the competitive
effects of portfolio information and the
potentially de-stabilizing effects of
market-based value information. We
address each objection in turn.
First, some commenters objected to
the disclosure of information filed on
Form N–MFP because of its competitive
effects on funds or fund managers.
Three commenters argued that the
information to be provided on the form
is proprietary, sensitive, or confidential
in nature.323 Others expressed concern
that making the information public
could result in ‘‘investor confusion.’’ 324
Two other commenters, however,
supported making Form N–MFP
information available to the public on a
delayed basis.325 One of them
emphasized the positive effect that
public disclosure can have on portfolio
management practices.326
321 See Proposing Release, supra note 2, at
paragraph accompanying n.245. See also Clearwater
Comment Letter (‘‘[R]egular disclosure will also
allow third-party analytics and reporting providers
to make meaningful comparisons of money funds
and highlight certain characteristics that are of
interest to investors and the market generally.’’).
322 We stated that we intended to make Form N–
MFP information public two weeks after the filing
of the form. See Proposing Release, supra note 2,
at paragraph accompanying n.245.
323 See BlackRock Comment Letter; Federated
Comment Letter; T. Rowe Price Comment Letter.
324 See, e.g., Fidelity Comment Letter; GE Asset
Mgt. Comment Letter; Vanguard Comment Letter.
Some commenters stated that the monthly fund
Web site postings would provide sufficient
transparency for investors. See, e.g., Fifth Third
Comment Letter; ICI Comment Letter; Vanguard
Comment Letter.
325 See Fund Democracy/CFA Comment Letter;
Comment Letter of J.P. Morgan Investor Services Co.
(Sept. 4, 2009).
326 See Fund Democracy/CFA Comment Letter.
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We believe commenters overstated the
competitive risks for money market
funds of public access to the fund’s
information. As we discussed in the
Proposing Release, the risks of trading
ahead of funds are severely curtailed in
the context of money market funds,
because of the short-term nature of
money market fund investments and the
restricted universe of eligible portfolio
securities.327 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.
Because 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 by
investors. Moreover, most funds
currently disclose their current
portfolios on their Web sites, and much
of the information contained in Form
N–MFP is already available through
other publicly available filings with the
Commission, albeit on a less frequent
basis.328
Second, many commenters objected to
the disclosure of the market-based
values of portfolio securities and of fund
net asset value per share, because of the
possible destabilizing effects on money
market funds. These commenters stated
that disclosure of market-based values
would result in investor confusion and
alarm that could result in redemption
requests that exacerbate pricing
deviations.329 One commenter
supported the disclosure of marketbased net asset values, stating that the
disclosure could provide discipline to
managers operating their funds near the
level of breaking the buck, and would
level the informational playing field for
327 See Proposing Release, supra note 2, at n.379
and accompanying and following text; ICI Report,
supra note 14, at 93 (‘‘Because of the specific
characteristics of money market funds and their
holdings * * * the frontrunning concerns are far
less significant for this type of fund. For example,
money market funds’ holdings are by definition
very short-term in nature and therefore would not
lend themselves to frontrunning by those who may
want to profit by trading in a money market fund’s
particular holdings. Rule 2a–7 also restricts the
universe of Eligible Securities to such an extent that
frontrunning, to the extent it exists at all, tends to
be immaterial to money market fund
performance.’’).
328 As noted above, money market funds must
provide a full schedule of their portfolio holdings
in quarterly filings to the Commission. See supra
note 287.
329 See, e.g., ABA Comment Letter; T. Rowe Price
Comment Letter; USAA Comment Letter
(redemptions might lead to greater volatility in cash
flows and increase the instability of the fund). In
addition, one commenter stated that the investor
confusion might result in additional costs for funds
due to the need to answer investor inquiries. See
Dreyfus Comment Letter.
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less sophisticated investors.330 Another
commenter supported only the public
disclosure of market-based portfolio
securities values.331
We appreciate the risks that are
involved with the real-time public
disclosure of a fund’s market-based
portfolio and net asset values. Money
market funds normally pay redeeming
shareholders $1.00 per share even if
their market-based net asset value is less
than $1.00. These redemptions can hurt
the fund’s remaining shareholders
because the realized and unrealized
losses are spread across fewer shares,
further depressing the fund’s marketbased net asset value. If enough
shareholders redeem shares under these
conditions, the fund, absent a capital
contribution by its investment adviser
or another person, can break the buck,
causing remaining shareholders to
receive less than $1.00 per share. We
believe that many institutional investors
are currently well aware of this
dynamic. If more shareholders
understand the mechanical relationship
between shareholder redemptions and
market-based net asset value, the
disclosure of a market-based net asset
value below $1.00 might precipitate a
run on the fund. If one fund were to fail
for this reason, runs might develop in
other money market funds, even those
with relatively high market-based net
asset values.
Notwithstanding these risks, we
believe that shareholders will benefit
from knowing the monthly marketbased net asset values of money market
funds.332 We anticipate that the public
availability of these values will help
investors make better informed
decisions about whether to invest, or
maintain their investments, in money
market funds. This disclosure will
indicate the extent to which the fund is
managing its portfolio to achieve its
fundamental objective of maintaining a
stable net asset value. In addition, if
market-based prices indicate significant
risks in a fund’s portfolio, investors,
advisers and others can have a more
meaningful dialogue with the fund’s
manager about such risks and any plans
the fund manager may have to address
any discounts between the market-based
net asset value and the stable net asset
value. This type of dialogue already
330 See
Shadow FRC Comment Letter.
Clearwater Comment Letter.
332 Adequate disclosure to investors is a
fundamental principle of the Commission’s
regulatory mandate. See, e.g., section 1(b), 1(b)(1) of
the Investment Company Act (‘‘[N]ational public
interest and the interests of investors are adversely
affected * * * when investors purchase, pay for,
exchange, * * * sell, or surrender securities issued
by investment companies without adequate,
accurate, and explicit information * * *.’’).
331 See
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takes place between sophisticated
investors and funds that disclose
portfolio information on a current basis.
These sophisticated, often institutional,
investors have the resources to estimate
current market values and make
purchase and redemption decisions on
the basis of information that, in the past,
has been beyond the reach of most retail
investors.
As a collateral effect, we expect that
the public disclosure of monthly
market-based net asset values may have
the effect of discouraging a fund’s
portfolio manager from taking risks that
might reduce the fund’s market-based
net asset value.333 We also anticipate
that such disclosure may lead to greater
cash flows into funds that have a
smaller discount from the $1.00 NAV
(or less historical volatility in that
discount). This disclosure, which will
provide values that include and exclude
the effect of any capital support
agreements, might also have the effect of
encouraging funds that have affiliates to
request financial support or other
appropriate measures as soon as
problems develop. Such support or
other measures could provide greater
stability to money market funds.
Nevertheless, we understand
commenters’ concerns that the
disclosure of certain fund information,
including market-based values, might
result in investor confusion and alarm,
at least in the short term, that could
result in redemption requests that
exacerbate pricing deviations.334 In
response to these and other concerns
discussed above, we are delaying the
public availability of the information
filed on Form N–MFP for 60 days after
the end of the reporting period.335 This
60-day delay in public availability
mirrors the current 60-day lag under
other rules between the end of a fund’s
reporting period and the public filing of
portfolio information with the
Commission.336 In addition, funds
currently are required to file twice a
year a public report that includes the
fund’s market-based net asset value,
within 60 days after the end of the
reporting period.337
333 See Fund Democracy/CFA Comment Letter
(‘‘[G]reater transparency should provide a strong
incentive for funds to avoid the excessively risky
practices that lead to instability and encourage
redemption.’’).
334 See supra note 329 and accompanying text.
335 Rule 30b1–7(b).
336 Funds are required to file each quarter with
the Commission portfolio holdings reports, which
are available to the public, within 60 days after the
end of the quarter. See supra note 287.
337 Money market funds currently must disclose
their mark-to-market net asset value per share, to
four decimals, twice a year in their Form N–SAR
filings [17 CFR 274.101]. See Sub-Item 74W of Form
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We anticipate that, during the 60 days
between the end of the reporting period
and public availability of the
information, funds will take steps to
resolve issues that may raise concerns
with investors and analysts. In addition,
because money market fund portfolios
have a limited maturity, many of the
portfolio securities will have matured
by the time the information is released
to the public. Thus we expect that the
60-day delay will ameliorate many of
the risks associated with public
disclosure. We also expect that, over
time, investors and analysts will become
more accustomed to the information
disclosed about fund portfolios, and
thus there may be less need in the future
to require a 60-day delay between the
end of the reporting period and the
public availability of the information.
We therefore may revisit in a
subsequent release whether to retain the
same (or any) delay in public
availability of this information.
Timing. Each money market fund
must submit Form N–MFP
electronically to the Commission within
five business days after the end of each
month.338 Under the proposed rule, a
fund would have been required to file
Form N–MFP with the Commission no
later than two business days after the
end of each month. Commenters
asserted that the second business day
deadline would not have provided
funds enough time to compile, review,
and file the requested portfolio
information accurately.339
In response to commenters, we are
delaying the mandatory filing date for
several months after the effective date of
the amendments, to permit money
market funds to develop systems
necessary to collect and submit the
portfolio information on Form N–
MFP.340 Thus, the first mandatory filing
N–SAR. Form N–SAR must be filed with the
Commission no later than the 60th day after the end
of the fiscal period for which the report is being
prepared. See General Instruction C to Form N–
SAR. Information supplied on Form N–SAR is
publicly available on EDGAR and in the public files
of the Commission. See General Instruction A to
Form N–SAR.
338 See rule 30b1–7.
339 See, e.g., BlackRock Comment Letter; Dreyfus
Comment Letter; Vanguard Comment Letter. The
recommended deadlines submitted by commenters
ranged from five business days to 15 to 30 business
days. We are providing for an extended
implementation period before compliance with rule
30b1–7 is required, as discussed below, during
which time funds will be able to build or update
systems to compile the data and file the new form,
test those systems, and possibly participate in the
voluntary compliance program. Therefore, we
believe that lengthening the deadline to five
business days should provide funds sufficient time
to compile, review, and file Form N–MFP
accurately.
340 Several commenters requested that the
Commission allow funds at least six months before
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10085
will be due on December 7, 2010, for
holdings as of the end of November
2010. For approximately two months
before the first mandatory filing, our
staff will accept the submission of trial
data so that money market funds may
voluntarily make (non-public) electronic
submissions with us. We anticipate that
these submissions will help money
market funds gain experience collecting
and submitting the information, and we
will use these submissions and the
experiences of the funds to make
technical adjustments to our systems
and provide any guidance. Because of
the possibility of errors or mistakes in
the information submitted, we do not
intend to make the trial data public.
Method of filing. As proposed, Form
N–MFP must be filed electronically
through the Commission’s EDGAR
system in an eXtensible Markup
Language (‘‘XML’’) tagged data format.341
We understand that money market
funds already maintain most of the
information that will be filed on the
form, and therefore the main
requirement for funds will be the
tagging of the data and filing of the
reports with the Commission.342 Some
commenters recommended that the
Commission require that Form N–MFP
be filed in an eXtensible Business
Reporting Language (‘‘XBRL’’) format.343
Although XBRL may allow for more
comparative analysis or more
opportunities for manipulation of data
than XML allows, we believe that the
data required by Form N–MFP will be
clearly defined and often repetitive from
one month to the next, and therefore the
XML format will provide us with the
necessary information in the most
timely and cost-effective manner.344
mandatory compliance with the new reporting
requirement on Form N–MFP. See, e.g., FAF
Advisors Comment Letter; ICI Comment Letter; J.P.
Morgan Asset Mgt. Comment Letter.
341 We anticipate that the XML interactive data
file will 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.
342 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 Form N–MFP may encourage standardization
across the industry, resulting in cost savings for
money market funds.
343 See, e.g., Comment Letter of the American
Institute of Certified Public Accountants (Sept. 8,
2009); Comment Letter of EDGAR Online, Inc. (July
23, 2009); Comment Letter of XBRL US (Sept. 8,
2009). Most commenters were neutral on the
submission format for Form N–MFP. See, e.g.,
Clearwater Comment Letter; Fund Democracy/CFA
Comment Letter; ICI Comment Letter.
344 The XBRL format would require a longer
period for implementation by the Commission and
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Over time we expect these filings will
become highly automated and involve
minimal costs.
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3. Phase-Out of Weekly Reporting by
Certain Funds
We are adopting as final rule 30b1–
6T, the temporary rule that requires the
weekly filing of portfolio information by
money market funds in certain
circumstances. As adopted, the only
change to the rule is the expiration date.
Rule 30b1–6T will expire on December
1, 2010, which corresponds with the
first filing of portfolio information
required by new rule 30b1–7.
In September 2009, we adopted rule
30b1–6T.345 The rule requires any
money market fund that has a marketbased net asset value per share below
$0.9975 to provide the Commission
with weekly portfolio and valuation
information. The information required
by the rule is similar to the information
money market funds participating in the
Treasury Department’s Guarantee
Program were required to provide under
similar circumstances.346 We requested
comments on the rule when we adopted
it, but received none.347
Rule 30b1–6T originally would have
expired one year after we adopted it,
i.e., on September 17, 2010.348 The
information that rule 30b1–7, which we
are adopting today, will require all
money market funds to file on a
monthly basis subsumes the information
that funds with lower market-based
NAVs were required to file under rule
30b1–6T. Therefore we are phasing out
the latter rule, but are extending its
expiration date so that we will continue
to receive weekly reports until the
monthly reporting requirements of rule
30b1–7 are mandatory. After that time,
our monitoring of information filed by
money market funds on Form N–MFP,
as well as notifications of purchases of
certain assets from funds in reliance on
rule 17a–9 should enable our staff to
funds, and would entail additional costs. However,
the XBRL format derives from and is compatible
with the XML format. Moreover, to the extent
possible, we intend to follow the naming
convention for the XBRL-tagging of the Schedule of
Investments in the voluntary filer program. See
Interactive Data for Mutual Fund Risk/Return
Summary, Investment Company Act Release No.
28617 (Feb. 11, 2009) [74 FR 7748 (Feb. 19, 2009)].
If the Commission determines at a future date to
require the filing of Form N–MFP in an XBRL
format, the Commission and funds might benefit
from their experience with their existing XML
technology.
345 See Rule 30b1–6T Release, supra note 303. We
adopted the rule on an interim final basis. See id.
at Section II.C.
346 See rule 30b1–6T(b)(3). See also supra note
16.
347 See Rule 30b1–6T Release, supra note 303, at
Section III.
348 Rule 30b1–6T(d).
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identify, and analyze information from,
money market funds that exhibit signs
of distress and the need for further
monitoring.349
Because the compliance date for filing
monthly portfolio information on Form
N–MFP is December 7, 2010, we are
amending rule 30b1–6T so that it
expires on December 1, 2010. The last
date that funds will be required to file
information under rule 30b1–6T
therefore will be on November 30, 2010.
F. Processing of Transactions
We are amending rule 2a–7,
substantially as proposed, to require
that a fund (or its transfer agent) have
the capacity to redeem and sell its
securities at a price based on the fund’s
current net asset value per share,
including the capacity to sell and
redeem shares at prices that do not
correspond to the stable net asset value
or price per share.350 This amendment
will require that shareholder
transactions be processed in an orderly
manner, even under circumstances that
require a fund to ‘‘break a dollar.’’351
Other types of mutual funds already
have this ability to process transactions
at varying prices.
Several commenters supported the
proposed amendment, noting that it is
important that funds be able to redeem
shareholders at prices based on the
current net asset value of the fund.352
Some commenters expressed concerns
about the costs for funds to modify their
systems under the amendment.353 We
noted when we proposed the
amendment that, because funds are
already obligated to redeem at a price
other than the stable net asset value per
share, there should be no new cost
associated with the requirement that
funds (or their transfer agents) have
systems that can meet these
requirements.354 It is the responsibility
349 See infra Section II.G.2 (notification provision
under amended rule 2a–7 concerning purchases
undertaken in reliance on rule 17a–9).
350 Amended rule 2a–7(c)(13).
351 Once a fund has broken a dollar, the fund
could no longer use penny-rounding method of
pricing or 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 6, at n.6 and accompanying text. Thus, a fund
whose market-based net asset value was determined
to be $0.994 would, upon ceasing to use the
amortized cost method of valuation, begin to
redeem shares at $0.994 (rather than at $0.990). See
generally id.
352 See, e.g., Dreyfus Comment Letter; Fund
Democracy/CFA Comment Letter; MFDF Comment
Letter.
353 See, e.g., Federated Comment Letter;
RidgeWorth Comment Letter.
354 See Proposing Release, supra note 2, at
Section V.A.6 (cost benefit analysis).
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of money market funds, as issuers of
redeemable securities, to be able to
satisfy redemption requests within
seven days after tender of the securities,
even if a fund has re-priced its net asset
value at a price other than its stable net
asset value per share.355 Based on our
recent experience, we believe it is
unlikely that a fund that breaks the
dollar would be able to satisfy
redemption requests within seven days
if it did not already have the capacity to
process redemptions at prices other than
the stable net asset value.356 To the
extent that funds incur costs in meeting
the new requirement, we believe the
benefits to shareholders justify those
costs, which we discuss in detail in the
cost benefit section below.357
When we proposed the amendment,
we proposed to require that the fund’s
board of directors determine that the
fund has the capacity to sell and redeem
securities at the current net asset
value.358 We asked for comments on the
board’s role, and specifically whether
the rule should require that the fund
simply have the ability to process
transactions at the fund’s current net
asset value without a specific board
determination.359 Some commenters
preferred that the board not be required
to make such a determination, arguing
that the determination is operational in
nature and more appropriate for the
fund’s investment adviser or chief
compliance officer to make.360 We agree
that the focus of the rule should be on
the fund’s ability to process
transactions, rather than on the board’s
determination regarding that ability,
because the issue is operational in
nature and need not directly involve the
board. We have therefore revised the
rule accordingly.361
Some commenters raised the issue of
whether the rule applies to third-party
intermediaries, i.e., whether it requires
third parties to have the capacity to
355 See
section 22(e) of the Act.
we noted in the Proposing Release, the
inability of one money market fund in 2008 to be
able to process securities at prices other than $1.00
per share impeded its ability to distribute assets
during its liquidation. See Proposing Release, supra
note 2, at n.262 and accompanying text. Even if a
fund were to break a dollar, decide to liquidate, and
suspend redemptions in reliance on new rule 22e3 that we are adopting today, see infra Section II.H,
the fund’s ability to process redemptions at prices
other than the stable net asset value is necessary to
facilitate the orderly liquidation of the fund.
357 See infra Section V.
358 Proposed rule 2a–7(c)(1) (last two sentences).
359 See Proposing Release, supra note 2, at text
following n.263.
360 See, e.g., Federated Comment Letter; MFDF
Comment Letter; NYC Bar Assoc. Comment Letter.
361 As adopted, the new requirement is paragraph
(c)(13) of amended rule 2a–7, titled ‘‘Processing of
Transactions.’’
356 As
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process transactions in a money market
fund at prices other than the fund’s
stable net asset value.362 The rule by its
terms applies only to money market
funds and their transfer agents. We note,
however, that intermediaries themselves
typically have separate obligations to
investors with regard to the distribution
of proceeds received in connection with
investments made or assets held on
behalf of those investors.363
Several commenters requested that, if
the Commission adopted the rule
amendment, it provide ample time for
money market funds to change their
systems to accommodate purchases and
redemptions at the current net asset
value.364 We have established a
compliance date of October 31, 2011,
which is approximately 18 months after
the effective date of the rule
amendments, and more than 20 months
after adoption of the amendments. This
compliance period is designed to enable
funds and those who act on their behalf
sufficient time to come into full
compliance with the amended rule.
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G. Exemption for Affiliate Purchases
The Commission is adopting an
amendment to rule 17a–9 under the
Investment Company Act to expand the
circumstances under which certain
affiliated persons can purchase portfolio
securities from a money market fund.365
362 See, e.g., Tamarack Funds Comment Letter
(requesting that the Commission clarify that funds
‘‘are not responsible for ensuring that intermediaries
have the capacity to effect share transactions at
other than $1.00’’); Russell Inv. Comment Letter
(stating that the proposed rule amendment would
not apply to intermediaries); see also ICI Comment
Letter (‘‘proposed amendments are silent with
respect to * * * similar systems changes for brokerdealers, banks, insurance companies, trusts, 401(k)
recordkeepers, and others that process such
amendments’’). Some commenters raised concerns
about the costs that third parties might bear to
revise their computer systems to have the capacity
to accommodate purchases and redemptions of
money market fund shares at prices other than the
fund’s stable net asset value. See, e.g., ICI Comment
Letter.
363 Cf. rule 15c3–3(e)(3) under the Securities
Exchange Act [17 CFR 240.15c3–3(e)(3)] (requiring
broker-dealers to periodically re-compute the value
of bank accounts held on behalf of broker-dealer
customers); rule 15c3–2 under the Securities
Exchange Act [17 CFR 240.15c3–2] (prohibiting a
broker-dealer from using proceeds from free credit
balances unless the proceeds are payable on
demand of the customer). See also Gilman v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 404 N.Y.S.2d
258, 262 (N.Y. Sup. Ct. 1978) (holding that after an
investment is sold and proceeds belonging to the
customer come into the broker’s possession, the
broker becomes a fiduciary with respect to those
proceeds and may not consciously use them to the
detriment of his customer and for his own benefit).
364 See, e.g., Federated Comment Letter
(requesting at least one year); ICI Comment Letter
(requesting at least two and a half years); SIFMA
Comment Letter (requesting an ‘‘adequate period of
time’’).
365 Rule 17a–9 provides an exemption from
section 17(a) of the Act to permit affiliated persons
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The amendment permits money market
funds to dispose of distressed securities
(e.g., securities depressed in value as a
result of market conditions) quickly
during times of market stress. The
Commission is also adopting a related
amendment to rule 2a–7, which requires
funds to report all such transactions to
the Commission.
1. Expanded Exemptive Relief
We are adopting the amendment to
rule 17a–9, as proposed. The
amendment expands the exemption
provided by the rule from the Act’s
prohibition on affiliated transactions to
permit affiliated persons to purchase
from a money market fund a portfolio
security that has defaulted,366 but that
continues to be an eligible security, as
long as the conditions of the rule
governing the purchase price are
satisfied.367 These conditions require
that the purchase price is paid in cash
and is equal to the greater of the
security’s amortized cost or its market
value, including accrued interest.368
We are adding a new provision to the
rule that will more broadly permit
affiliated persons, under the same
conditions as discussed above, to
purchase other portfolio securities from
an affiliated money market fund, for any
reason, provided that such person
promptly remits to the fund any profit
of a money market fund to purchase distressed
portfolio securities from the fund. 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), if the
purchase price is equal to the greater of the
security’s amortized cost or market value (in each
case, including accrued interest). For convenience,
in this Release we refer to all of the persons who
would otherwise be prohibited by section 17(a)(2)
from purchasing securities of a money market fund
as ‘‘affiliated persons.’’ ‘‘Affiliated person’’ is defined
in section 2(a)(3) of the Act.
366 The rule excludes an immaterial default
unrelated to the financial condition of the issuer,
which would make the rule unavailable in the case
of 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
Proposing Release, supra note 2, at n.272. Other
provisions of rule 2a–7 currently except immaterial
defaults unrelated to the financial condition of the
issuer. See amended rule 2a–7(c)(7)(ii)(A).
367 See amended rule 17a–9(a). Previously, the
exemption was available only for the purchase of
a portfolio security that was no longer an ‘‘eligible
security.’’ This could occur, for example, when a
security’s ratings are downgraded. As we explained
in the Proposing Release, 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. See
Proposing Release, supra note 2, at n.269 and
accompanying text.
368 See amended rule 17a–9(a)(1)–(2).
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10087
it realizes from the later sale of the
security.369 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. Therefore, as proposed, we
have added the ‘‘claw back’’ requirement
to eliminate incentives for fund advisers
and other affiliated persons to buy
securities for reasons other than
protecting fund shareholders from
potential future losses.
Commenters supported the proposed
amendment, agreeing that it would
provide money market fund advisers
with important flexibility to manage
fund assets for the benefit of all
shareholders during volatile periods.370
One commenter opposed the proposed
amendment out of concern that the
expansion of the rule may exacerbate
the unwarranted expectation of some
shareholders that advisers will take
whatever steps are necessary to
financially support the $1.00 share price
of their money market funds.371 While
we appreciate the commenter’s concern,
we do not believe that today’s action
will materially change shareholders’
perceptions about money market funds
or the likelihood of sponsor support
during times of market turmoil. The
amendment simply extends the existing
rule to types of transactions that
historically have been permitted
through no-action assurances obtained
from the Commission’s staff because the
staff believed they were in the best
interest of the fund’s shareholders.372
The amendment to rule 17a–9 that we
are adopting today is intended to enable
advisers to address acute credit or
liquidity problems in a money market
fund portfolio by purchasing securities
from the fund that would be difficult or
impossible to sell on the open market at
or near their amortized cost. We have
crafted the conditions of the rule,
including the pricing conditions and the
new claw back provision, to protect
shareholders’ interests and prevent
overreaching by advisers. Our staff’s
experience is that, under such
circumstances, these transactions
appear to be fair and reasonable and in
the best interests of fund
shareholders.373 Moreover, we believe
that the alternative of funds obtaining
no-action assurances from the
Commission staff for these transactions,
369 See
amended rule 17a–9(b)(1)–(2).
e.g., Dreyfus Comment Letter; Vanguard
Comment Letter.
371 See Federated Comment Letter.
372 See Proposing Release, supra note 2, at
nn.270–71 and preceding, accompanying, and
following text.
373 See Proposing Release, supra note 2, at text
following n.271.
370 See,
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The Commission is adopting new rule
22e–3, which exempts money market
funds from section 22(e) of the Act to
permit them to suspend redemptions
and postpone payment of redemption
proceeds in order to facilitate an orderly
liquidation of the fund. The rule permits
a fund to suspend redemptions and
payment of redemption proceeds if (i)
The fund’s board, including a majority
of disinterested directors, determines
that the deviation between the fund’s
amortized cost price per share and the
market-based net asset value per share
may result in material dilution or other
unfair results, (ii) the board, including
a majority of disinterested directors,
irrevocably has approved the
liquidation of the fund, and (iii) the
fund, prior to suspending redemptions,
notifies the Commission of its decision
to liquidate and suspend
redemptions.378 The new rule replaces
rule 22e–3T, a temporary rule that
provided a similar exemption for money
market funds that participated in the
Treasury Department’s Guarantee
Program.379
Rule 22e–3 is intended to reduce the
vulnerability of investors to the harmful
effects of a run on the fund, and
minimize the potential for disruption to
the securities markets. Because the
suspension of redemptions may impose
hardships on investors who rely on their
ability to redeem shares, the conditions
of the rule limit the fund’s ability to
suspend redemptions to circumstances
that present a significant risk of a run on
the fund and potential harm to
shareholders. The rule is designed only
to facilitate the permanent termination
of a fund in an orderly manner. We are
revising one of the conditions of the
rule, which requires that the board
approve the liquidation of the fund, to
provide that the fund board must have
irrevocably approved the liquidation of
the fund.380
Commenters generally supported the
rule, which we are adopting largely as
374 Amended rule 2a–7(c)(7)(iii)(B). We have
clarified that not only purchases by affiliated
persons, but also purchases by promoters and
principal underwriters of a fund, and any affiliated
person of such persons, which are exempt under
rule 17a–9, must be reported to the Commission
under the provision. Compare amended rule 2a–
7(c)(7)(iii)(B) with proposed rule 2a–7(c)(7)(iii)(B).
375 See, e.g., BlackRock Comment Letter, Dreyfus
Comment Letter. One suggested that sales prices of
any securities purchased by the adviser pursuant to
rule 17a–9 be promptly reported to the fund’s board
of directors as well as to the Commission. Comment
Letter of the Independent Trustees of Fidelity Fixed
Income Funds (Sept. 8, 2009) (‘‘Fidelity Fixed
Income Indep. Trustees Comment Letter’’). We are
not extending the reporting provision to include
notification to fund boards because the provision is
intended to enable the Commission to monitor how
rule 17a–9 is being used. Nevertheless, we expect
that fund boards will want to know this information
and will request it.
376 See Fidelity Fixed Income Indep. Trustees
Comment Letter.
377 See amended rule 2a–7(c)(iii)(B).
378 Rule 22e–3(a). A fund that intends to be able
to rely on rule 22e–3 may also need to update its
prospectus to disclose the circumstances under
which it may suspend redemptions. See, e.g., Item
6 of Form N–1A (‘‘Purchase and Sale of Fund
Shares’’).
379 See Temporary Exemption for Liquidation of
Certain Money Market Funds, Investment Company
Act Release No. 28487 (Nov. 20, 2008) [73 FR 71919
(Nov. 26, 2008)]. The Treasury Department’s
Guarantee Program guaranteed that shareholders of
a participating money market fund would receive
the fund’s stable share price for each share owned
as of September 19, 2008, if the fund were to
liquidate under the terms of the Program. See supra
note 16 and accompanying text. The Program
expired on September 19, 2009, and rule 22e–3T
expired on October 18, 2009.
380 Rule 22e–3(a)(2). This revision is designed to
limit the availability of the rule to extraordinary
circumstances, by preventing a fund from invoking
the rule if the board determines to liquidate the
fund but subsequently revokes its determination,
which might, in effect, enable the fund to
temporarily suspend redemptions.
particularly during times of market
stress, is time consuming and
inefficient.
2. New Reporting Requirement
We also are adopting an amendment
to rule 2a–7 to 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 by electronic mail of
the transaction and the reasons for the
purchase.374 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
significant redemption requests and
wished to avoid a ‘‘fire sale’’ of assets to
satisfy such requests. The amendment is
intended to provide us with more
complete information about these
transactions and to alert us to potential
problems the fund may be experiencing.
All commenters who addressed the
proposed reporting requirement agreed
with the need to provide the
Commission with this information.375
At the suggestion of one,376 we have
modified the requirement to provide
that the notification must include the
price at which the transaction was
conducted and the amortized cost value
of the security (which will be different
if the market value is higher than the
amortized cost), which will help us
monitor whether the pricing conditions
of rule 17a–9 have been satisfied.377
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H. Fund Liquidation
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proposed.381 We have revised one of the
rule’s conditions in response to
commenters’ concerns. The proposed
rule conditioned its relief on a fund
breaking a dollar and re-pricing its
shares.382 Some commenters argued that
the rule should allow a fund to suspend
redemptions before it breaks a dollar.383
We are concerned that, without
appropriate limits, fund sponsors might
use the rule in the course of routine
liquidations. We also recognize,
however, that requiring a money market
fund to actually re-price its securities
may not be necessary in order to
warrant the suspension of redemptions.
Therefore, we have revised the rule’s
condition to require that the fund’s
board of directors, including a majority
of disinterested directors, determine
pursuant to rule 2a–7(c)(8)(ii)(C)384 that
the extent of the deviation between the
fund’s amortized cost price per share
and its shadow price may result in
material dilution or other unfair results
to investors or existing shareholders.385
In order to invoke the exemption,
therefore, the fund’s board must make
the same determination that it would
make if it were deciding to break a
dollar. We believe the revised condition
provides fund directors with the
appropriate amount of discretion to act
in the interest of shareholders.386
Paragraph (b) of rule 22e–3 allows a
conduit fund (i.e., a fund that invests in
a money market fund) to rely on the rule
if the money market fund in which it
invests has suspended redemptions
under the rule.387 We anticipated when
381 Commenters generally agreed that the rule
would facilitate fair and orderly liquidations to the
benefit of all fund shareholders. See, e.g., IDC
Comment Letter; MFDF Comment Letter.
382 Proposed rule 22e–3(a)(1).
383 See, e.g., ABA Comment Letter; ICI Comment
Letter; IMMFA Comment Letter.
384 Amended rule 2a–7(c)(8)(ii)(C) provides that,
if a money market fund’s board of directors believes
that the deviation between the fund’s amortized
cost price per share and its shadow price 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 practicable such
dilution or unfair results.
385 Rule 22e–3(a)(1).
386 Under the final rule, the exemption applies to
securities tendered for redemption but not yet
priced at the time the fund begins to rely on the
rule. Therefore, for example, if a shareholder
submits a redemption order at noon and the fund
decides to liquidate and suspend redemptions
pursuant to rule 22e–3 at 2:00 pm, the shareholder
would be entitled to receive only his or her pro rata
share of the fund’s liquidation proceeds. This is
also the case for shareholders who submitted
redemption orders after the last time as of which
the fund computed its net asset value and
shareholders who submitted redemption orders
after 2:00 pm.
387 Rule 22e–3(b) also requires that the conduit
fund promptly notify the Commission that it has
suspended redemptions in reliance on the rule.
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we proposed this provision that it
would be used principally by insurance
company separate accounts issuing
variable insurance contracts and by
funds participating in master-feeder
arrangements.388 At the suggestion of
one commenter who pointed out that
most insurance company separate
accounts are organized as unit
investment trusts rather than
management companies,389 we have
expanded the rule to include unit
investment trusts.390
Paragraph (c) of the rule provides that
the Commission may take certain steps
to protect shareholders. It permits the
Commission to rescind or modify the
relief provided by the rule (and thus
require the fund to resume honoring
redemptions) if, for example, a
liquidating fund has not devised, or is
not properly executing, a plan of
liquidation that protects fund
shareholders. Under this provision, the
Commission may modify the relief after
appropriate notice and opportunity for
hearing in accordance with section 40 of
the Act.391 Commenters did not address
this provision, and we are adopting it as
proposed.
One commenter recommended that
the rule not require prior notice to the
Commission.392 In light of the
seriousness of the consequences to
shareholders, we believe it is important
that the Commission receive prior
notice of a suspension of redemptions,
particularly when the burden of
providing such notice is minimal.393
Another commenter suggested that the
Commission require funds to disclose
their plan of liquidation as a condition
for suspending redemptions.394 We are
reluctant to impose such a requirement
because the time needed to formulate
such a plan may prevent fund boards
from acting in a timely fashion in the
case of an emergency, but we expect
that funds would promptly
communicate their plan of liquidation
to shareholders. Another commenter
recommended that the suspension
period be limited to 60 days.395 We have
not modified the final rule in response
388 See Proposing Release, supra note 2, at text
accompanying n.289.
389 See Committee Ann. Insur. Comment Letter.
390 Rule 22e–3(b) (providing relief to a ‘‘registered
investment company’’ rather than to a ‘‘fund,’’ or
‘‘registered open-end management investment
company,’’ as proposed).
391 Rule 22e–3(c).
392 See ABA Comment Letter.
393 In addition, these prior notices will, among
other things, help us to ascertain whether a fund
has erroneously invoked the rule in circumstances
for which it was not intended to be used (e.g., a
routine liquidation).
394 See Federated Comment Letter.
395 See Bankers Trust Comment Letter.
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to these comments because liquidations
will proceed differently depending on a
fund’s particular circumstances, and we
believe that fund management, under
the supervision of the board, is best able
to devise and execute a plan of
liquidation that is in the best interest of
fund shareholders. Furthermore, as
discussed above, the Commission will
retain authority under the rule to
rescind or modify the relief (after
appropriate notice and opportunity for
hearing) if we conclude, for example,
that a liquidating fund has not devised,
or is not properly carrying out, a plan
of liquidation that protects fund
shareholders.396
III. Compliance Dates
The amendments to rules 2a–7, 17a–
9 and 30b1–6T, and new rules 22e–3
and 30b1–7, and new Form N–MFP
become effective May 5, 2010. Unless
otherwise discussed below or in this
Release, the compliance date is the date
of effectiveness.
Some money market funds may have
policies that can be changed only if
authorized by a shareholder vote. For
example, a money market fund may
have a disclosed policy of maintaining
a WAM (i.e., weighted average maturity)
no greater than 90 days, which is less
restrictive than the amendment the
Commission is adopting today requiring
a money market fund to maintain a
WAM no greater than 60 days.397 The
Commission believes that, in those
circumstances where the existing policy
is less restrictive than the amendments
we are today adopting and does not
conflict with those amendments, a
money market fund would not need to
hold a shareholder vote under sections
8(b) or 13(a) of the Act merely to comply
with the amendments.398 Moreover, we
would not object if a fund were to
amend its registration statement to
reflect the fund’s compliance with the
amended rule pursuant to rule 485(b)
under the Securities Act of 1933, if
other changes in the fund’s posteffective amendment meet the
conditions for immediate effectiveness
under that rule.399
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securities owned, or terminate
repurchase agreements entered into, as
of the time of adoption of the
amendments to comply with the
requirements of the rule as amended.
Fund portfolios must meet the new
maximum WAM and WAL limits by
June 30, 2010.
B. Designation of NRSROs
Each fund must disclose the
designated NRSROs in its Statement of
Additional Information pursuant to
amended rule 2a–7(a)(11)(iii) no later
than December 31, 2010. This additional
time should permit fund boards of
directors to evaluate and designate
NRSROs without the need to call a
special board meeting. Fund boards are
free to take advantage of the rule
amendments any time after the effective
date.
C. Disclosure and Reporting of Portfolio
Information
Web site disclosure. The compliance
date for public Web site disclosure is
October 7, 2010. This should provide
each fund sufficient time to revise its
information and other systems to ensure
that required information is accurately
posted and maintained on its Web site.
Reporting to the Commission. All
money market funds must begin filing
information on Form N–MFP pursuant
to rule 30b1–7 no later than December
7, 2010. This compliance date is
designed to permit money market funds
to develop systems necessary to collect
and submit the portfolio information on
Form N–MFP. Funds filing information
with the Commission pursuant to rule
30b1–6T will no longer be required to
file this information after December 1,
2010.
Beginning October 7, 2010, our staff
will be able to receive trial data from
funds, on a voluntary basis, pursuant to
the requirements of rule 30b1–7. We
will use these voluntary submissions
and the experiences of funds during this
period to make adjustments to our filing
system and provide guidance to funds.
We do not intend to make these
submissions public.400
A. Portfolio Requirements
D. Processing of Transactions
Except as indicated below, the
compliance date for amendments to rule
2a–7 related to portfolio quality,
maturity, liquidity, and repurchase
agreements, is May 28, 2010. Funds are
not required to dispose of portfolio
Funds must comply with the new
requirement to be able to process
transactions at prices other than stable
net asset value no later than October 31,
2011, which is more than 20 months
396 See supra note 391 and accompanying
paragraph.
397 See supra Section II.B.1.
398 15 U.S.C. 80a–8(b), 80a–13(a).
399 17 CFR 230.485(b).
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400 We do not intend to make public the
information submitted to us on Form N–MFP as
trial data before the mandatory compliance date
because of the possibility of errors in the
information submitted. See supra text following
note 339.
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after adoption of the amendments.401
This compliance period is designed to
enable funds and those who act on their
behalf sufficient time to come into full
compliance with the amended rule.
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IV. Paperwork Reduction Act Analysis
Certain provisions of the amendments
to rules 2a–7 and 30b1–6T, new rules
22e–3 and 30b1–7, and Form N–MFP
under the Investment Company Act
contain ‘‘collections of information’’
within the meaning of the Paperwork
Reduction Act of 1995 (‘‘PRA’’).402 The
titles for the existing collections of
information that are affected by the rule
amendments are: ‘‘Rule 2a–7 under the
Investment Company Act of 1940,
Money market funds’’ (OMB Control No.
3235–0268), ‘‘Rule 30b1–6T under the
Investment Company Act of 1940,
Weekly portfolio report for certain
money market funds’’ (OMB Control No.
3235–0652), and ‘‘Rule 38a–1 under the
Investment Company Act of 1940,
Compliance procedures and practices of
registered investment companies’’ (OMB
Control No. 3235–0586). The titles for
the new collections of information are:
‘‘Rule 22e–3 under the Investment
Company Act of 1940, Exemption for
liquidation of money market funds,’’
‘‘Rule 30b1–7 under the Investment
Company Act of 1940, Monthly report
for money market funds,’’ and ‘‘Form N–
MFP under the Investment Company
Act of 1940, Portfolio Holdings of
Money Market Funds.’’ We published
notice soliciting comments on the
collection of information requirements
in the Proposing Release and submitted
the proposed 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
under the control numbers 3235–0268
(rule 2a–7), 3235–0654 (rule 22e–3), and
3235–0653 (rule 30b1–6 and Form N–
MFP). OMB has approved the collection
of information pursuant to rule 30b1–6T
under the control number 3235–0652.
Our 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. 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.
401 See supra text accompanying and following
note 364.
402 44 U.S.C. 3501–3521.
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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
amending rule 2a–7 in several respects.
Our amendments revise portfolio
quality and maturity requirements;
introduce liquidity requirements;
require money market fund boards to
adopt procedures providing for periodic
stress testing of the fund’s portfolio;
require funds to disclose monthly on
their Web sites information on portfolio
securities; and finally, require money
market funds to have the capability to
redeem and issue their securities at
prices other than the fund’s stable net
asset value per share.403 Several of the
amendments create new collection of
information requirements. The
respondents to these collections of
information will be money market funds
or their advisers, as noted below.
1. Designation of NRSROs
Under the amendments to rule 2a–7,
money market funds will be required to
disclose designated NRSROs (including
any limitation in the use of the
designated NRSRO) in their SAI,404
which constitutes a collection of
information. Compliance with this
disclosure requirement will be
mandatory for any fund that holds itself
out as a money market fund in reliance
on rule 2a–7. This information will not
be kept confidential. The disclosures are
intended to provide investors and third
party analysts with information on
NRSROs that money market funds will
look to when they have to consider
credit ratings under rule 2a–7, which
may be relevant to investors in choosing
among funds. Many money market
funds currently discuss credit rating
agencies in their registration statements
describing threshold credit ratings for
portfolio investments, and often specify
NRSROs that rate instruments of the
type the fund purchases. We anticipate
that adding one or two sentences to the
discussion identifying designated
NRSROs (and any limitations on the use
of a designated NRSRO) will not result
in additional hourly burdens or printing
costs beyond those currently approved
in the existing collection of information
titled ‘‘Form N–1A under the Securities
Act of 1933 and under the Investment
Company Act of 1940, registration
statement of open-end management
403 See
supra Section II.A–F.
rule 2a–7(a)(11)(iii).
404 Amended
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investment companies’’ (OMB Control
No. 3235–0307).
2. Portfolio Liquidity
As discussed above, the amended rule
includes a general liquidity
requirement, under which each money
market fund must hold securities that
are sufficiently liquid to meet
foreseeable shareholder redemptions in
light of its obligations under section
22(e) of the Act and any commitments
the fund has made to shareholders. We
also noted that in order to comply with
this provision in amended rule 2a–7
under the compliance rule, we expect
that money market funds will adopt
policies and procedures designed to
assure that appropriate efforts are
undertaken to identify risk
characteristics of the fund’s
shareholders.405 We anticipate that
these policies and procedures may add
additional burdens to those currently
approved in the existing collection of
information under rule 38a–1 under the
Investment Company Act. Based on
commenters’ views, we assume that
money market funds currently monitor
and manage daily net flows in and out
of the funds,406 and in doing so, monitor
the risk characteristics and likely
redemptions of certain shareholders,
which is a factor we would expect funds
to consider under the general liquidity
requirement in the amended rule. We
believe, however, that many, if not
most, funds may have to document the
procedures they adopt for the
compliance rule. For purposes of this
PRA analysis, we estimate that funds
would incur a one-time average burden
of 8 hours to document policies and
procedures to identify risk
characteristics of the fund’s investors. In
addition, staff estimates that the board
of directors (as a whole) would take 1
hour to review and adopt these policies
and procedures. Amortized over a 3 year
period, this would be an annual burden
per fund complex of 3 hours. We believe
that these characteristics would be
applicable to and documented on behalf
of all money market funds in a fund
complex, and we estimate that 163 fund
complexes with money market funds are
subject to rule 2a–7. Accordingly, we
estimate that the total additional burden
to document these policies would be
1467 hours.407 Amortized over a 3-year
period, the estimated annual hourly
burden would be 489 hours for all
405 See
supra note 198 and accompanying text.
Dreyfus Comment Letter; RidgeWorth
Comment Letter.
407 This estimate is based on the following
calculation: (8 + 1) hours × 163 fund complexes =
1467 hours.
406 See
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money market fund complexes.408 We
believe that any ongoing burdens to
reevaluate the need for changes in the
policies and procedures would be
incorporated in the current estimated
burdens for rule 38a–1.
3. Stress Testing
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We are requiring, substantially as
proposed, that a money market fund’s
board of directors 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.409 The
rule requires the board to determine the
frequency of testing. The procedures
must provide for a report of the testing
results to be submitted to the board of
directors at its next regularly scheduled
meeting, or sooner if appropriate based
on the results. The report must include
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.410
Compliance with the new reporting
requirement is mandatory for any fund
that holds itself out as a money market
fund and uses either the amortized cost
method of valuing portfolio securities or
the penny-rounding method of pricing
fund shares. When provided to the
Commission in connection with staff
examinations or investigations, the
information will be kept confidential to
the extent permitted by law.
We anticipate that stress testing will
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 of not
maintaining a stable net asset value, and
actions the adviser may need to take to
408 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.
409 See supra Section II.C.4. These events include,
without limitation, 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.
See amended rule 2a–7(c)(10)(v)(A).
410 Amended rule 2a–7(c)(10)(v)(B). The report to
the board must include the dates on which the
testing was performed and the magnitude of each
hypothetical event that would cause the deviation
of the money market fund’s net asset value
calculated using available market quotations (or
appropriate substitutes that reflect current market
conditions) from its net asset value per share
calculated using amortized cost to exceed 1⁄2 of 1%.
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mitigate the possibility of the fund
breaking the buck.411
Commission staff believes that in light
of the events of the fall of 2008, most,
if not all, money market funds currently
conduct some stress testing of their
portfolios as a matter of routine fund
management and business practice.412
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 might
not.413 Some funds that currently
conduct testing may be required to
include additional hypothetical events
under the amended rule. These funds
likely provide regular reports of the test
results to senior management. We
assumed, however, that currently 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 stress
testing procedures will be developed for
all the money market funds in a fund
complex by the fund adviser, and will
address appropriate variations for
individual money market funds within
the complex.414 Staff estimates that it
will take a portfolio risk analyst an
average of 22 hours initially to draft
procedures documenting the complex’s
stress testing, and 3 hours for the board
of directors (as a whole) to consider and
adopt the written procedures.415 We
411 See Proposing Release, supra note 2, at text
following n.212.
412 Commenters corroborated our staff’s belief.
See, e.g., State Street Comment Letter; T. Rowe
Price Comment Letter. The estimates of hour
burdens and costs provided in the PRA and cost
benefit analyses in the Proposing Release were
based on staff discussions with representatives of
money market funds and on the experience of
Commission staff. We did not receive any comment
on the estimates and assumptions with respect to
stress testing included in the analysis in our
proposal. Accordingly, we have not modified any
of those assumptions and estimates other than as
necessary in light of the new requirement included
in the amended rule.
413 See TDAM Comment Letter (noting that
testing Treasury funds for downgrades or defaults
would be unnecessary).
414 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.
415 We have added 1 hour to the estimate of 21
hours in the Proposing Release to account for
drafting procedures on when additional reports
must be provided to the board based on the results
of stress testing.
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therefore estimate that the total burden
to draft these procedures initially will
be 4075 hours.416 Amortized over a
three-year period, this will result in an
average annual burden of 8.33 hours for
an individual fund complex and a total
of 1358 hours for all fund complexes.417
Staff estimates that a risk analyst will
also 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 will spend 1 hour to
consider and adopt the revisions, for a
total annual burden of 1141 hours.418
As noted above, each report to the
board of directors will include an
assessment by the fund’s adviser of the
fund’s ability to withstand reasonably
likely hypothetical events in the coming
year. Staff estimates that it will take on
average: (i) 10 hours of portfolio
management time to draft each report to
the board and 2 hours of an
administrative assistant’s time to
compile and copy the report (for a total
of 12 hours), and (ii) 15 hours for the
fund adviser to provide its assessment.
Under normal circumstances, the report
must be provided at the next scheduled
board meeting, and we estimate that the
report and the adviser’s assessment will
cover all money market funds in a
complex. We assume that funds will
conduct stress tests no less than
monthly. With an average of 6 board
meetings each year, we estimate that the
annual burden for regularly scheduled
reports would be 162 hours for an
individual fund complex.419 Under the
final rule, a report must be provided
earlier if appropriate in light of the
results of the test. Staff estimates that as
a result of unanticipated changes in
market conditions or other events, stress
testing results are likely to prompt
additional reports on average four times
each year.420 Thus, we estimate these
416 This estimate is based on the following
calculation: (22 hours + 3 hours) × 163 fund
complexes = 4075 hours.
417 These estimates are based on the following
calculations: (22 + 3) ÷ 3 = 8.33 hours; 8.33 × 163
fund complexes = 1357.79 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.
418 This estimate is based on the following
calculation: (6 hours (analyst) + 1 hour (board)) ×
163 fund complexes = 1141 hours.
419 This estimate is based on the following
calculation: (10 hours + 2 hours + 15 hours) × 6
meetings = 162 hours.
420 We anticipate that in many years there will be
no need for special reports, but that in a year in
which there is severe market stress, a fund may
report to the board weekly for a period of 3 to 6
months. Such reporting would generate 9 to 18
reports in addition to the regular monthly reports.
Assuming that this type of event may occur once
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reports would result in an additional
108 hours for an individual fund
complex each year.421 We estimate the
total annual burden for all fund
complexes would be 44,010 hours.422
The amended rule requires a money
market fund to retain records of the
reports on stress tests for at least 6 years
(the first two in an easily accessible
place).423 The retention of these records
is necessary to allow the staff during
examinations of funds to determine
whether a fund is in compliance with
the stress test requirements. We estimate
that the burden will be 10 minutes per
fund complex per report to retain these
records for a total annual burden of 272
hours for all fund complexes.424
Thus, we estimate that for the three
years following adoption, the average
annual burden resulting from the stress
testing requirements will be 287 hours
for each fund complex with a total of
46,781 hours for all fund complexes.425
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4. Repurchase Agreements
We are adopting, as proposed,
amendments affecting a money market
fund’s ability to ‘‘look through’’ a
repurchase agreement for purposes of
rule 2a–7’s diversification provisions.426
One of these amendments is that a
money market fund will be able to look
through a repurchase agreement only if
the fund’s board of directors or its
delegate evaluates the counterparty’s
creditworthiness.427
Several commenters stated that
money market fund boards already
evaluate the credit quality of
counterparties in the course of making
an overall credit risk determination
under rule 2a–7(c)(3)(i).428 Because we
are adding a separate creditworthiness
evaluation in rule 2a–7(c)(4)(ii)(A),
funds will need to keep records of such
evaluations pursuant to rule 2a–
7(c)(11)(ii), which requires a money
every five years, and additional reports would be
generated for 6 months, a fund would produce an
average of four additional reports per year (18
additional reports ÷ 5 = 3.6 reports).
421 This estimate is based on the following
calculation: (10 hours + 2 hours + 15 hours) × 4 =
108 hours.
422 This estimate is based on the following
calculation: (162 hours + 108 hours) × 163 fund
complexes = 44,010 hours.
423 Amended rule 2a–7(c)(11)(vii).
424 This estimate is based on the following
calculation: 0.1667 hours × 10 reports × 163 fund
complexes = 271.7 hours.
425 These estimates are based on the following
calculations: 8.33 hours (draft procedures) + 7
hours (revise procedures) + 120 hours (10 reports)
+ 150 hours (10 assessments) + 1.67 hours (record
retention) = 287 hours; 287 hours × 163 complexes
= 46,781 hours.
426 See supra Section II.D; Proposing Release,
supra note 2, at Section II.E.
427 Amended rule 2a–7(c)(4)(ii)(A).
428 See supra note 277.
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market fund to retain a record of
considerations and actions under the
rule for at least 6 years (the first two in
an easily accessible place).429
Compliance with this recordkeeping
requirement is mandatory for all funds
that take advantage of the special lookthrough treatment for diversification
purposes. We estimate that the burden
to keep those records will be 2 hours per
fund complex, for a total annual burden
of 326 hours for all fund complexes.430
5. Public Web site Posting
The amendments require money
market funds to post monthly portfolio
information on their Web sites.431 We
believe that greater transparency of fund
portfolios will provide investors with a
better understanding of the fund’s
investment risks, and may allow
investors to exert influence on risktaking by fund advisers and thus reduce
the likelihood that a fund will break the
buck. Information will be posted on a
public Web site, and compliance with
this requirement is mandatory for any
fund that holds itself out as a money
market fund in reliance on rule 2a–7. In
the Proposing Release, Commission staff
estimated that there are approximately
750 money market funds that would be
affected by the amendments. In
addition, our staff noted that based on
interviews with industry
representatives, most money market
funds already post portfolio information
on their webpages at least quarterly.432
Commission staff also estimated 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
amendments. Staff estimated that a
money market fund would spend
approximately 24 hours of internal
money market fund staff time initially to
develop the Web page. Staff further
estimated 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.
rule 2a–7(c)(11)(ii).
estimate is based on the following
calculation: 2 hours × 163 fund complexes = 326
hours.
431 Amended rule 2a–7(c)(12).
432 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.
No commenters addressed the number
of money market funds that would be
affected by the proposal or the estimated
burden hours for developing,
maintaining and updating the webpage.
Although, as described above, we have
revised the proposed disclosure which
should result in less information being
required on a fund’s Web site,
Commission staff believes that the
number of money market funds is
currently 719 and that the hour burden
per fund remains the same as previously
estimated. Although it is possible that
the reduced information required might
result in a minimal decrease in the
amount of time required to develop,
maintain and update the webpage,
Commission staff believes that the
decrease would be negligible.
One commenter stated that the funds
that currently post portfolio holdings
information at least quarterly on their
Web sites would need, under the rule
amendments, to develop the capability
to retain previous months’ portfolio
holdings information on their Web sites,
resulting in an additional one-time
burden that Commission staff did not
include in its estimate in the Proposing
Release.433 Based on a review of some
of the current portfolio Web site
disclosure by some commenters and
follow-up discussions with some
commenters, Commission staff estimates
that 500 of the 575 funds that currently
post portfolio information on their
webpages at least quarterly will need to
develop this capability. Commission
staff further estimates that each of these
500 funds will spend 12 hours to
develop this capability, resulting in an
additional one-time burden for all such
funds of 6000 hours.434
Based on an estimate of 719 money
market funds posting their portfolio
holdings on their webpages, including
144 funds incurring start-up costs to
develop a webpage and 500 funds
incurring a one-time cost to develop the
capability to retain previous months’
portfolio holdings information on their
Web sites, we estimate that, in the
aggregate, the amendment will result in
a total of 37,664 average burden hours
for all money market funds for each of
the first three years.435
429 Amended
430 This
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433 See Data Communique
´ Comment Letter. Under
our proposal, funds would have been required to
maintain the portfolio holdings information on their
Web sites for at least 12 months. We are adopting
a 6-month maintenance period for portfolio holding
information.
434 The estimated 12 hours is one-half the time
that we estimated that a fund would need to set up
a new webpage (24 hours).
435 The estimate is based on the following
calculations. The staff estimates that 144 funds will
require a total of 3456 hours initially to develop a
webpage (144 funds × 24 hours per fund = 3456
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6. Reporting of Rule 17a–9 Transactions
We are amending 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 certain affiliated
persons in reliance on rule 17a–9 and to
explain the reasons for, and the
transaction price of, such purchase.436
The reporting requirement is designed
to assist Commission staff in monitoring
money market funds’ affiliated
transactions that otherwise would be
prohibited. The new collection of
information will 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 will not be kept
confidential.
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 163 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 will 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. We received no
comments on this estimate and have not
modified it. Given these estimates, the
total annual burden of this amendment
to rule 2a–7 for all money market funds
would be approximately 25 hours.437
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7. Total Burden
The currently approved burden for
rule 2a–7 is 310,983 hours. The
additional burden hours associated with
the proposed amendments to rule 2a–7
will increase the renewal estimate to
395,779 hours annually.438
hours) and 500 funds will require a total of 6000
hours initially to develop the capability to maintain
historical portfolio holding information (500 funds
× 12 hours per fund = 6000 hours). In addition, each
of the 719 funds would require 48 hours per year
to update and maintain the webpage, for a total of
34,512 hours per year (4 hours per month × 12
months = 48 hours per year; 48 hours per year ×
719 funds = 34,512). The average annual hour
burden for each of the first three years would thus
equal 37,664 hours (3456 + 6000 + (34,512 × 3) ÷
3).
436 See amended rule 2a–7(c)(7)(iii)(B).
437 The estimate is based on the following
calculation: (25 fund complexes × 1 hour) = 25
hours.
438 This estimate is based on the following
calculation: 310,983 hours (current burden) +
46,781 hours (stress testing) + 326 hours
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B. Rule 22e–3
Rule 22e–3 permits a money market
fund that has broken the buck, or is at
imminent risk of breaking the buck, to
suspend redemptions and postpone the
payment of proceeds pending boardapproved liquidation proceedings. The
rule also requires a money market fund
to provide prior notification to the
Commission of its decision to suspend
redemption and liquidate. Rule 22e–3 is
intended to facilitate an orderly
liquidation, reduce the vulnerability of
shareholders to the harmful effects of a
run on a fund, and minimize the
potential for market disruption. The
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 redemption. The
respondents to this information
collection would be money market
funds that break the buck, or are at
imminent risk of breaking the buck, and
elect to rely on the exemption afforded
by the rule. Respondents also will
include certain conduit funds that have
invested in money market funds that
suspended redemptions in reliance on
the rule. Compliance with the
notification requirement is mandatory
for funds and conduit funds that rely on
rule 22e–3, and the information will not
be kept confidential.
In the Proposing Release, Commission
staff estimated for purposes of the
Paperwork Reduction Act that, on
average, one money market fund would
break the buck and liquidate every six
years.439 The staff further estimated that
a fund would spend approximately one
hour of an in-house attorney’s time to
prepare and submit the notice. No
commenter addressed the estimated
number of money market funds that
would rely on the rule or the estimated
burden hours associated with
complying with the rule’s notification
requirement. The rule permits funds
that invest in a money market fund
pursuant to section 12(d)(1)(E) of the
Act (‘‘conduit funds’’) to rely on the
rule, and requires the conduit fund to
notify the Commission of its reliance on
the rule.440 The proposed rule would
have applied only to conduit funds that
are registered open-end management
investment companies, and in response
to one comment we have expanded the
provision to also permit conduit funds
(repurchase agreements) + 37,664 hours (Web site
posting) + 25 hours (reporting 17a–9 transactions)
= 395,779 hours.
439As noted above, only two money market funds
have broken the buck since the adoption of rule 2a–
7 in 1983.
440See rule 22e–3(b).
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10093
that are organized as unit investment
trusts to rely on the rule.441 The staff
estimates that there are a total of 780
conduit funds that may invest in money
market funds that suspend redemptions
in reliance on the rule, and that an
average of 10 conduit funds may invest
in any money market fund.442 Given
these estimates, the total annual burden
of proposed rule 22e–3 for all money
market funds and conduit funds would
be approximately 110 minutes.443
C. Monthly Reporting of Portfolio
Holdings
Rule 30b1–7 requires money market
funds to file electronically a monthly
report on Form N–MFP within five
business days after the end of each
month. The 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
form will be data-tagged in XML format
and filed through EDGAR. The
respondents to rule 30b1–7 will be
investment companies that are regulated
as money market funds under rule 2a–
7. Compliance with rule 30b1–7 is
mandatory for any fund that holds itself
out as a money market fund in reliance
on rule 2a–7. Responses to the
disclosure requirements will not be kept
confidential.
In the Proposing Release, Commission
staff estimated that 750 money market
funds would be required by proposed
rule 30b1–6 to file, on a monthly basis,
a complete Form N–MFP disclosing
certain information regarding the fund
and its portfolio holdings.444 No
commenters addressed this estimate.
For purposes of this PRA analysis, the
burden associated with the
requirements of rule 30b1–7 has been
included in the collection of
information requirements of Form
N–MFP.
Based on our experience with other
interactive data filings, we estimated in
the Proposing Release that money
market funds would require an average
of approximately 40 burden hours to
compile, tag, and electronically file the
required portfolio holdings information
441See
supra note 390 and accompanying text.
estimates are based on a review of
filings with the Commission.
443This estimate is based on the following
calculations: (1 hour ÷ 6 years) = 10 minutes per
year for each fund and conduit fund that is required
to provide notice under the rule. 10 minutes per
year × 11 (combined number of affected funds and
conduit funds) = 110 minutes.
444 As noted above, in September 2009 we
adopted interim final temporary rule 30b1–6T. In
order to minimize confusion over rule numbering,
we are adopting proposed rule 30b1–6 as rule
30b1–7.
442These
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for the first time and an average of
approximately 8 burden hours in
subsequent filings.445 Two commenters
asserted that the Commission’s
estimates did not include time to review
the information required in Form N–
MFP.446 While the estimate did include
time for the review of the information,
we nevertheless have increased our
estimate to include an additional 2
hours per filing for review of the
information to account for a full and
careful review of the information to be
filed. We now estimate that there are
719 money market funds and that they
will require an average of approximately
42 burden hours to compile (including
review of the information), tag and
electronically file the required portfolio
holdings information for the first time
and an average of approximately 10
burden hours in subsequent filings.
Based on these estimates, we estimate
the average annual burden over a threeyear period would be 131 hours per
money market fund.447 Based on an
estimate of 719 money market funds
submitting Form N–MFP in interactive
data format, each incurring 131 hours
per year on average, we estimate that, in
the aggregate, Form N–MFP would
result in 94,189 burden hours, on
445 See Proposing Release, supra note 2, at n.334
and accompanying text. 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.
446 See Data Communique
´ Comment Letter;
Comment Letter of Bowne & Co. Inc. (Oct. 29, 2009)
(‘‘Bowne Comment Letter’’). In addition, one
commenter asserted that the Commission’s estimate
of 128 burden hours per money market fund for the
first year (1 filing × 40 hours + 11 filings × 8 hours)
is far too low for subadvised funds. See Committee
Ann. Insur. Comment Letter. The commenter,
however, did not provide an estimate of the first
year burden hour for subadvised funds. As
explained below in our discussion of the effect the
rule and form will have on competition, we do not
believe that the one-time burden for subadvised
funds will be much different than the burden on
non-subadvised money market funds because the
information already should be readily available to
the subadviser and the lengthened time for filing
Form N–MFP (from the proposed two business days
to five business days after the end of each month)
should provide subadvisers with sufficient time to
send the information to the principal adviser
without having to invest in new infrastructure to
provide the information on a real-time basis. See
also infra Section VI.D.
447 The staff estimates that a fund will make 36
filings in three years. The first filing will require 42
hours and subsequent filings would require 10
hours each, for an average annual burden of 131
hours (1 filing × 42 hours = 42 hours; 35 filings ×
10 hours = 350 hours; 42 hours + 350 hours = 392
hours; 392 hours ÷ 3 years = 130.66 hours).
Thereafter, filers generally would not incur the
start-up burdens applicable to the first filing.
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average, for all money market funds for
each of the first three years.448
D. Weekly Reporting of Portfolio
Holdings
Rule 30b1–6T requires a money
market fund whose market-based net
asset value is less than $0.9975 to
electronically (i) notify the Commission
promptly and submit a portfolio
schedule within one business day, and
(ii) submit a portfolio schedule within
two business days after the end of each
week until such time as the fund’s
market-based net asset value equals or
exceeds $0.9975. The rule is intended to
facilitate our oversight of money market
funds. We are adopting as final rule
30b1–6T. As adopted, the only change
to the rule is the expiration date. Rule
30b1–6T will expire on December 1,
2010. The respondents to rule 30b1–6T
are investment companies that are
regulated as money market funds under
rule 2a–7. Compliance with the rule is
mandatory for any money market fund
whose market-based NAV is less than
$0.9975. Responses to the disclosure
requirements will be kept confidential.
We previously estimated, based on
past experience under the Guarantee
Program, that at any given time 10
money market funds will be required by
rule 30b1–6T to provide weekly reports
disclosing certain information regarding
the fund’s portfolio holdings.449 We
received no comments on our estimates.
We estimate that money market funds
will require an average of approximately
6 burden hours to compile and
electronically submit the initial required
portfolio holdings information, and an
average of approximately 4 burden
hours in subsequent reports.450 Based
on these estimates, we estimate the
annual burden will be 210 hours per
money market fund that is required to
provide the information.451 Based on an
estimate of 10 money market funds
submitting information under the rule,
we estimate that, in the aggregate, rule
448 This estimate is based on the following
calculation: 719 portfolios × 131 hours = 94,189
hours.
449 See Rule 30b1–6T Release, supra note 303, at
Section V.
450 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.
451 Because one report is required each week, a
fund would submit 52 reports in one year. The first
report would require 6 hours and subsequent
reports would require 4 hours each. The difference
between the hours is due to the fact that funds
generally would not incur the additional start-up
time applicable to the first report. The burden of the
reporting requirement would be 210 hours (1 report
× 6 hours = 6 hours, 51 reports × 4 hours = 204
hours, and 6 hours + 204 hours = 210 hours).
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30b1–6T will result in 2100 burden
hours for all money market funds
required to submit portfolio schedules.
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 amendments and new
rules. We received comments on the
Commission’s cost benefit analysis of
our proposed amendments to rule 2a–7
and on new rule 30b1–7 and Form N–
MFP, which are discussed below. The
Commission notes that no comments
addressed the Commission’s analysis of
the costs and benefits associated with
the proposed amendments to rule 17a–
9 and new rule 22e–3 contained in the
Proposing Release. We also received no
comments on the cost benefit analysis of
rule 30b1–6T. As discussed throughout
the release, although there are costs
associated with the rules, we think the
rules we are adopting will provide
significant benefits to the investing
public and money market funds. We
believe these benefits justify the costs.
A. Rule 2a–7
1. Second Tier Securities, Portfolio
Maturity, and Liquidity Requirements
We are adopting several changes to
the risk-limiting conditions of rule 2a–
7. While we believe that these changes
will impart substantial benefits to
money market funds, we recognize that
they also may also impose certain costs.
First, we are amending rule 2a–7 to
further restrict money market funds’
exposure to the risks presented by
second tier securities. Under the
amendments, money market funds will
not be permitted to acquire second tier
securities unless immediately after their
acquisition the money market fund
would not have invested (i) more than
three percent of its total assets in second
tier securities and (ii) more than 0.5
percent of its total assets in second tier
securities of any particular issuer.452 In
addition, money market funds will not
be permitted to acquire any second tier
security with a remaining maturity in
excess of 45 days.453
Second, we are changing rule 2a–7’s
portfolio maturity limits. We are
452 See amended rule 2a–7(c)(3)(ii) (portfolio
quality—second tier securities); amended rule 2a–
7(a)(27) (defining ‘‘total assets’’); amended rule 2a–
7(c)(4)(i)(C) (portfolio diversification—issuer
diversification—second tier securities). We also are
proportionately reducing by half the ability of a
money market fund to acquire ‘‘demand features’’ or
‘‘guarantees’’ of a single issuer that are second tier
securities from 5% to 2.5% of the money market
fund’s total assets. See amended rule 2a–
7(c)(4)(iii)(B) and discussion of our rationale for
making this change in note 59 supra.
453 See amended rule 2a–7(c)(3)(ii).
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reducing the maximum weighted
average maturity of a money market
fund permitted by rule 2a–7 from 90
days to 60 days.454 We also are adopting
a new 120-day maturity limitation on
the ‘‘weighted average life’’ of fund
portfolio securities that will limit the
portion of a fund’s portfolio that can be
held in longer term floating- or variablerate securities.455 This restriction will
require a fund to calculate the weighted
average maturity of its portfolio without
regard to interest rate reset dates.
Finally, we are deleting a provision in
rule 2a–7 that permitted 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.456
Under the amended rule, money market
funds cannot 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.457
Third, we are adopting new liquidity
requirements for money market funds.
In particular, we are amending rule 2a–
7 to (i) Require that each money market
fund hold securities that are sufficiently
liquid to meet reasonably foreseeable
shareholder redemptions in light of its
obligations under section 22(e) of the
Act and any commitments the fund has
made to shareholders; 458 (ii) further
limit a money market fund’s
investments in illiquid securities (i.e.
securities that cannot be sold or
disposed of in the ordinary course of
business within seven days at
approximately the value ascribed to
them by the money market fund); 459
and (iii) require a taxable money market
fund to hold at least 10 percent of its
total assets in ‘‘daily liquid assets’’ and
any money market fund to hold at least
30 percent of its total assets in ‘‘weekly
liquid assets.’’ 460
454 See
amended rule 2a–7(c)(2)(ii).
amended rule 2a–7(c)(2)(iii).
456 Compare amended rule 2a–7(c)(2)(i) with
current rule 2a–7(c)(2)(ii). In a conforming change,
we also are amending 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 previously permitted. See
amended rule 2a–7(d)(1).
457 See amended rule 2a–7(c)(2)(i); amended rule
2a–7(d)(1)–(5).
458 See amended rule 2a–7(c)(5).
459 See amended rule 2a–7(c)(5)(i). Under the
amended rule, a money market fund cannot acquire
illiquid securities if immediately after the
acquisition, the fund would have invested more
than five percent of its total assets in illiquid
securities.
460 See amended rule 2a–7(c)(5)(ii)-(iii). See also
amended rule 2a–7(a)(8) (defining ‘‘daily liquid
assets’’) and 2a–7(a)(32) (defining ‘‘weekly liquid
assets’’).
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455 See
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a. Benefits
We believe that the amendments to
rule 2a–7’s risk-limiting conditions are
likely to produce broad benefits for
money market fund investors. As
discussed in Sections II.A–C above,
commenters agreed that the proposed
rule 2a–7 amendments concerning
second tier securities, maturity, and
liquidity would benefit money market
funds and their investors.461 The
amendments should reduce money
market funds’ exposure to certain credit,
interest rate, spread, and liquidity risks.
For example, limiting money market
funds’ ability to acquire second tier
securities will decrease money market
funds’ exposure to credit, spread, and
liquidity risks. Reducing the maximum
weighted average maturity of money
market funds’ portfolios will further
decrease their interest rate sensitivity. It
also will increase their ability to
maintain a stable net asset value in the
face of multiple shocks to a money
market fund, such as a simultaneous
widening of spreads and increase in
redemptions, such as occurred during
the fall of 2008.462 Introducing the
weighted average life limitation on
money market funds’ portfolios will
limit credit spread risk and interest rate
spread risk to funds from longer term
floating- or variable-rate securities. In
addition, fund portfolios with a lower
WAM and a 120-day maximum WAL
will turn over more quickly, and the
fund will be better able to increase its
holdings of highly liquid securities in
the face of illiquid markets than funds
operating under a maximum 90-day
WAM limitation.
We believe that the new liquidity
requirements will decrease liquidity
risk. As discussed above, they are
designed to increase a money market
fund’s ability to withstand illiquid
markets by ensuring that the fund
further limits its acquisitions of illiquid
securities and that a certain percentage
of its assets are held in daily and weekly
liquid assets.463 Under the general
liquidity requirement, moreover, each
money market fund must assess its
liquidity needs on an ongoing basis and
take additional actions as appropriate in
order to manage its liquidity. Together,
these requirements should decrease the
likelihood that a fund would have to
realize losses from selling portfolio
461 See supra notes 36–40 and accompanying text;
notes 137–139 and accompanying text; notes 159–
161 and accompanying text; and notes 184–185 and
accompanying text.
462 See discussion in Section II.B.1 of this Release
for an example of the size of simultaneous shocks
that a money market fund could withstand with a
WAM of 90 days as opposed to a WAM of 60 days.
463 See supra Section II.C.
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10095
securities into an illiquid market to
satisfy redemption requests, which
could put pressure on the fund’s ability
to maintain a stable net asset value.464
The minimum daily and weekly
liquidity standards require a money
market fund to hold cash or securities
that can be readily converted to cash. In
certain circumstances, funds would be
required to increase the level of these
assets under the general liquidity
standard.465 We believe that these
requirements, rather than our traditional
notion of liquidity, which was based on
a fund’s ability to find a buyer of a
security, are more likely to enable
money market fund advisers to meet
their funds’ liquidity needs and adjust
the funds’ portfolios to increase
liquidity when needed.466
We believe that a reduction of these
credit, interest rate, spread, and
liquidity risks will better enable money
market funds to weather market
turbulence and maintain a stable net
asset value per share. The amendments
are designed to reduce the risk that a
money market fund will break the buck,
and thereby prevent losses to fund
investors. To the extent that money
market funds are more stable, they also
will reduce systemic risk to the capital
markets and provide a more stable
source of financing for issuers of shortterm credit instruments, thus promoting
capital formation. If money market
funds become more stable investments
as a result of the rule amendments, they
may attract further investment,
increasing their role as a source of
capital.
b. Costs
We recognize that our amendments
regarding second tier securities,
portfolio maturity, and liquidity will
impose costs on some money market
funds. For example, yields might
decrease in funds depending on their
current positions in second tier
securities, less liquid securities, and
longer term instruments because those
instruments typically offer above
average yields. We note that the yield
offered by a security is tied to its risk.
It is important to consider our rule
amendments’ impact on money market
fund yields in this context.
Second Tier Securities. We received
several comments on the estimated costs
of eliminating money market funds’
ability to acquire second tier securities.
One commenter stated that such an
elimination would cost a money market
fund 2 basis points in yield, assuming
464 See
id.
supra Section II.C.1.
466 See supra Section II.C.
465 See
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that this money market fund held 5
percent of its assets in second tier
securities.467 This commenter stated
that it believed that this cost would be
appropriate to strengthen the stability of
money market funds to weather
potential future liquidity and credit
crises and to promote investor
confidence. Several commenters agreed,
stating that they did not expect
elimination to lead to market
disruption.468 One commenter added
that given the small size of the second
tier securities market, the benefits of
elimination would far outweigh any
disadvantages.469
Another commenter stated that the
benefits of money market funds being
able to invest in second tier securities,
in terms of reducing portfolio
concentration in financial institution
securities and providing affordable
financing for second tier security
issuers, outweigh any potential
increased credit risk.470 This commenter
estimated that elimination of a money
market fund’s ability to acquire second
tier securities would cost it 3 basis
points in yield, again assuming that the
money market fund held a full 5 percent
of its assets in second tier securities.
Finally, a third commenter estimated
that elimination of money market funds’
ability to acquire second tier securities
would cost a retail money market fund
4–8 basis points in yield, a non-rated
institutional money market fund 2–4
basis points in yield, and a rated
institutional fund 1–3 basis points in
yield.471 This commenter assumed that
467 This number was obtained in discussions with
a commenter clarifying certain aspects of its
comment letter. See J.P. Morgan Asset Mgt.
Comment Letter.
468 ICI Comment Letter; TDAM Comment Letter;
Thrivent Comment Letter.
469 TDAM Comment Letter.
470 See Federated Comment Letter. As discussed
in Section II.A.1 of this Release, other commenters
also asserted that a complete ban on acquisition of
second tier securities would not be justified on a
cost-benefit basis, would have a material adverse
impact on second tier security issuers, would have
unintended effects on the capital markets, and
would increase borrowing costs for second tier
security issuers. We discuss these comments, and
provide our response, supra notes 41–53 and
accompanying and following text.
471 Fidelity Comment Letter. According to the
iMoneyNet Money Market Fund Analyzer Database,
as of November 17, 2009, 61% of money market
fund assets were held in funds that were top rated
by at least one NRSRO and 34% of money market
funds had a top rating from at least one NRSRO. In
order to retain a top rating, money market funds
must only hold first tier securities. According to
analysis of the iMoneyNet analyzer database, as of
December 1, 2009, approximately 48% of money
market funds were retail funds and 52% were
institutional funds. Accordingly, Fidelity’s
estimates result in a blended impact on money
market funds of (6 basis points × 48% retail funds)
+ (3 basis points × 34% non-rated institutional
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these money market funds held 5
percent of their assets in second tier
securities and 5 percent of their assets
in lower quality first tier assets, and that
all of these assets would not be held if
funds’ ability to acquire second tier
securities was eliminated.
As discussed above, we have
determined not to eliminate money
market funds’ ability to acquire second
tier securities, but instead are further
restricting this ability. This change from
our proposal should result in costs that
are less than estimated in the proposal
and less than commenters estimated for
full-scale elimination. We believe that
the 3 percent limitation on money
market funds’ ability to acquire second
tier securities will have a small impact
on money market funds.472 Based on
commenters’ estimates described above,
a reduction in a money market fund’s
investment in second tier securities
from 5 percent to 3 percent of its total
assets would reduce its yield on average
by approximately 1.2 basis points.473
However, very few money market funds
hold more than 3 percent of their total
assets in second tier securities, and even
fewer hold a full 5 percent. Our staff’s
review of money market fund portfolios
in September 2008 found that only 4
percent of money market funds held
more than 3 percent of their assets in
second tier securities. Accordingly, we
estimate that each of only 29 money
market funds 474 would face a reduction
of yield of 1.2 basis points as a result of
our amendments.
We also are further reducing the
ability of money market funds to acquire
second tier securities of any particular
issuer from the greater of 1 percent of
assets or $1 million to 0.5 percent of
assets. Based on our staff’s review of
money market fund portfolios in
September 2008, 8 percent of money
market funds held second tier securities
of any particular issuer in excess of 0.5
percent of the money market fund’s
assets. We expect that these money
market funds, however, will simply
reinvest this excess in the securities of
other second tier issuers and, therefore,
funds) + (2 basis points × 18% rated institutional
funds) = 4.3 basis points per fund.
472 As discussed above, we do not believe that
further limitations on money market funds’ ability
to acquire second tier securities will prevent their
ability to achieve diversification benefits. See supra
note 47 and accompanying text.
473 This estimate is based on averaging the 2 basis
point, 3 basis point, and 4.3 basis point estimates
from commenters for a reduction in second tier
securities investment from 5% to 0%,
proportionately adjusted to reflect a reduction in
investment from 5% to 3%.
474 This estimate is based on the following
calculation: 719 money market funds × 4% = 29
money market funds.
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that there will be no loss in fund yield
as a result of this restriction.475 Several
commenters argued that there are many
second tier security issuers worthy of
investment.476 If any of these money
market funds did not perform credit
analysis of a large enough group of
second tier security issuers, these funds
may incur some administrative costs in
tracking additional issuers.477
Finally, we are limiting money market
funds to only acquiring second tier
securities with a remaining maturity of
less than 45 days. According to Federal
Reserve data, in 2009, only 4 percent of
A2/P2 non-financial commercial paper
had a maturity of greater than 40 days
on issuance, and thus we do not expect
that the 45-day maturity limit will have
more than a negligible cost impact on
taxable money market funds.478 In
addition, based on our staff’s review of
tax-free money market fund portfolios in
September 2008, we estimate that very
few money market funds held second
tier municipal securities with a maturity
of greater than 45 days that were second
tier securities at the time of acquisition.
As a result, we do not expect that the
45-day maturity limit will have more
than a negligible cost impact on money
market funds.
WAM and WAL. Three commenters
provided cost estimates for a reduction
in the maximum weighted average
maturity for money market funds. One
commenter estimated that if all money
market funds had a WAM of 75 days
and reduced their WAM to 60 days, it
would cost each money market fund 2.5
to 3 basis points in yield.479 Similarly,
another commenter estimated that this
same reduction would cost each money
market fund 3 basis points in yield, and
a reduction in WAM from 90 days to 75
475 Commenters (for example, the Federated
Comment Letter and the Fidelity Comment Letter)
asserted that there are numerous quality second tier
security issuers. Because this limitation, when
combined with the 3% aggregate limitation on
acquisition of second tier securities, only limits
money market funds to holding a minimum of 6
second tier issuers if it were to maximize the
limitations (rather than 5 second tier issuers under
the current rule), we do not expect that money
market funds would have difficulty finding six
appropriate second tier security issuers in which to
invest.
476 See, e.g., Chamber/Tier 2 Issuers Comment
Letter; Federated Comment Letter; Fidelity
Comment Letter; USAA Comment Letter.
477 Based on discussions we had with certain
commenters clarifying certain aspects of their
comment letters, we understand that all of these
larger managers track sufficient second tier security
issuers that the 0.5% limitation per second tier
security issuer should not create additional costs
related to tracking additional issuers.
478 See Federal Reserve, Volume Statistics for
Commercial Paper, A2/P2 Nonfinancial, available
at http://www.federalreserve.gov/releases/cp/
volumestats.htm.
479 J.P. Morgan Asset Mgt. Comment Letter.
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days would also cost a money market
fund 3 basis points in yield.480 Finally,
a third commenter estimated that if all
money market funds had a WAM of 90
days and reduced their WAM to 60
days, it would cost each money market
fund 5 to 10 basis points in yield.481
According to these estimates, it would
cost a money market fund 5 to 10 basis
points in yield to reduce its WAM from
90 days to 60 days.
However, historically most money
market funds have not maintained a
WAM of more than 60 days. According
to data provided by the ICI, from
January 1998 through April 2009, even
the 75th percentile of prime money
market funds has maintained an average
WAM of 53 days and the 90th percentile
of prime money market funds has
maintained an average WAM of 65
days.482 As of November 17, 2009,
despite the historically low interest rate
environment in which money market
funds have tended to extend WAM
closer to the maximum limits to gain
additional yield, only 1.5 percent of
taxable money market funds reported a
WAM of more than 75 days (with most
of those having a WAM of only slightly
over 75 days) and only 15.5 percent
reported a WAM of 61–75 days (with
these funds having an average WAM of
68 days).483 We understand that most
money market funds like to have some
cushion by maintaining a WAM below
the permitted maximum, but we do not
believe that money market funds believe
that such a large cushion must always
be maintained. Rather, we believe that
many money market funds have
maintained lower WAMs than required
because they believed that it is prudent
management of their portfolio to do
so.484
Based on this data, on the WAMs of
taxable and prime money market funds
and on commenters’ estimates of the
impact of a reduction in WAM, we
estimate that 10 money market funds
will have to reduce their WAM from 78
days to 55 days at a cost of 6 basis
points per fund. We further estimate
that 70 money market funds will have
480 Federated
Comment Letter.
Comment Letter.
482 Investment Company Institute, Average
Maturity of Taxable Prime Money Market Funds,
1998–2009, available at http://www.sec.gov/
comments/s7-11-09/s71109-14.htm.
483 Based on data from the iMoneyNet Money
Market Fund Analyzer Database as of November 17,
2009. The WAMs of the funds with WAMs over 75
days were: 2 at 76 days, 1 at 77 days, and 3 at 78
days. Tax-free money market funds have WAMs
considerably lower (30% of money market funds
were tax-free as of December 8, 2009 according to
data from the iMoneyNet Money Market Fund
Analyzer Database).
484 See, e.g., supra notes 137–139 and
accompanying text.
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481 Fidelity
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to reduce their WAM from 68 days to 55
days at a cost of 2 basis points per fund.
Three commenters provided cost
estimates for a reduction in the
maximum weighted average life for
money market funds. One commenter
estimated that if all money market funds
had a WAL of 180 days and reduced
their WAL to 120 days, it would cost
each money market fund 2 to 4 basis
points in yield.485 Another commenter
estimated that a WAL reduction of 150
to 120 days would cost each money
market fund 1 to 3 basis points in
yield.486 Finally, a third commenter
estimated that if all money market funds
reduced their WAL to 120 days, it
would cost each money market fund 3
basis points in yield.487 According to
these estimates, it would cost a money
market fund 1 to 3 basis points in yield
to reduce its WAL from 150 days to 120
days.488 We estimate that two-thirds of
taxable money market funds and all taxfree money market funds already
maintain a WAL of 120 days or less and
thus will incur no cost in transitioning
to this amendment to rule 2a–7.489 We
485 J.P. Morgan Asset Mgt. Comment Letter and
subsequent Commission staff conversation with J.P.
Morgan staff breaking down the cost estimate in the
J.P. Morgan Asset Mgt. Comment Letter by each
proposed amendment to rule 2a–7.
486 Fidelity Comment Letter (focusing on
government money market funds).
487 Federated Comment Letter. The Federated
Comment Letter did not specify a WAL starting
point for its assumed reduction to a 120-day WAL.
Rather, it evaluated instruments that it believed
would likely be subject to greater demand or a
shorter maturity with a 120-day maximum WAL
requirement and estimated the increased cost to
money market funds from those securities becoming
more expensive as a result.
488 Based on discussions we had with certain
commenters clarifying certain aspects of their
comment letters, we do not believe that more than
a negligible number of money market funds are
maintaining a WAL of 180 days.
489 We are not aware of any data provider that
tracks the WAL of all money market funds (likely
because money market funds are not limited
currently in the weighted average life that they
must maintain). An analysis of the 16 largest, toprated, prime institutional money market funds
(representing 53% of all prime institutional money
market fund assets as of June 30, 2009) found that
of the 14 funds providing information on the final
maturities of their portfolio securities, all had a
WAL of under 120 days. See Capital Advisors
Group, How Safe are Prime Money Market Funds?
(Nov. 1, 2009), available at http://
web.capitaladvisors.com/whitepapers/How%20
Safe%20Are%20MMFs.pdf (‘‘CAG Report’’). This
information, combined with discussions we had
with certain commenters clarifying certain aspects
of their comment letters, leads us to estimate that
two thirds of money market funds currently are
maintaining a WAL of no greater than 120 days and
that the other third currently are maintaining a
WAL of no greater than 150 days. We also
understand that the majority of money market funds
currently are in compliance with the maximum
120-day WAL because of their voluntary
compliance with the recommendations contained in
the ICI Report. Because most securities held by taxfree money market funds have a demand feature
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10097
estimate that the other third of taxable
money market funds, or 163 funds,
maintain a maximum WAL of no greater
than 150 days and will incur on average
a cost of 2 basis points per fund to
reduce their WAL to 120 days.
Several commenters stated that the
new WAM limitation would reduce the
range of securities available for money
market fund investment and increase
demand for shorter term securities.490
No commenters provided any cost
estimate for this potential impact. If this
did occur, and if the increased demand
was not met with increased supply of
such securities, the new maturity
limitations could result in additional
incremental costs to money market
funds.
A few commenters also believed that
the amended maturity limitations would
increase security issuer costs because
they would have to issue shorter
maturity securities and assume greater
risk from having to roll over their
securities more frequently.491 No
commenters provided any cost estimate
for this potential impact. If security
issuer costs do increase as a result of the
amended maturity limitations and these
issuers as a consequence are unable to
obtain the same amount of financing, it
may have a negative impact on capital
formation.
General Liquidity Requirement. As
discussed above, the amended rule
includes a general liquidity
requirement, under which a fund’s
management and its board must
evaluate the funds’ liquidity needs and
protect shareholders from the harm that
can occur from the failure to properly
anticipate and provide for those needs.
We also noted that in order to comply
with this provision in amended rule 2a–
7 under the compliance rule, we expect
that money market funds would adopt
policies and procedures designed to
assure that appropriate efforts are
undertaken to identify risk
characteristics of the fund’s
shareholders.492 For purposes of the
PRA analysis, we estimated that each
fund complex would incur, on average,
9 hours to document, review, and adopt
policies and procedures for monitoring
the risk characteristics of money market
reducing the security’s maturity under the WAL
calculation to a very short duration, we understand
that tax-free money market funds do not have a
WAL greater than 120 days.
490 See, e.g., Charles Schwab Comment Letter; J.P.
Morgan Asset Mgt. Comment Letter; State Street
Comment Letter.
491 See, e.g., Fannie Mae Comment Letter; State
Street Comment Letter; Wells Fargo Comment
Letter.
492 See supra note 198 and accompanying text.
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fund investors.493 Based on this
estimate, we estimate that it would cost
a fund complex $6976 to document,
review, and adopt these policies and
procedures, for a total cost of
$1,137,000.494
Illiquid Securities. Two commenters
provided estimates with respect to the
proposed ban on purchases of illiquid
securities. One commenter estimated
that the proposed ban would decrease
money market funds’ yields from 2 to 6
basis points, assuming that the fund
holds 10 percent of its total assets in
illiquid securities.495 Another
commenter submitted that the ban on
illiquid securities would decrease yields
by 3 basis points.496 Based on
commenters’ estimates, a money market
fund that reduces its investments in
illiquid securities from 10 percent to 5
percent would reduce its yield on
average by 2 basis points.497
Our staff’s review of money market
funds’ portfolios in September 2008
found that 24 percent of funds reported
held any illiquid securities.498 Based on
the staff’s review as applied to the
current number of money market funds
(719),499 we estimate current money
market fund holdings of illiquid
securities as follows:
Percentage of
funds
Percentage of total assets represented by illiquid securities
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10 percent ................................................................................................................................................................
9 percent ..................................................................................................................................................................
8 percent ..................................................................................................................................................................
7 percent ..................................................................................................................................................................
6 percent ..................................................................................................................................................................
5 percent or less ......................................................................................................................................................
0.6
0.4
0.4
0.4
1.0
97.2
Number of
funds
4
3
3
3
7
698
Based on these estimated holdings,
staff makes the following estimates: 4
funds with 10 percent of assets invested
in illiquid securities will experience a
reduction in holdings of 5 percent and
a yield impact of 2 basis points; 500 3
funds with 9 percent of assets invested
in illiquid securities holdings will
experience a reduction in holdings of 4
percent and a yield impact of 1.6 basis
points; 501 3 funds with 8 percent of
assets invested in illiquid securities
holdings will experience a reduction in
holdings of 3 percent and a yield impact
of 1.2 basis points; 502 3 funds with 7
percent of assets invested in illiquid
securities holdings will experience a
reduction in holdings of 2 percent and
a yield impact of 0.8 basis points;503 7
funds with 6 percent of assets invested
in illiquid securities holdings will
experience a reduction in holdings of 1
percent and a yield impact of 0.4 basis
points.504
Daily Liquidity Requirements. Two
commenters specifically addressed the
proposed daily liquidity requirements.
Both commenters estimated that there
would be no yield impact as a result of
the proposed 10 percent threshold.505
Based on these comments, we assume
that the 10 percent daily minimum
liquidity standard we are adopting will
have no impact on money market funds’
yield.506
Weekly Liquidity Requirements. A few
commenters provided estimates on the
costs of the proposed weekly liquidity
requirements. One commenter estimated
that the yield impact of the proposed 30
percent weekly liquidity standard for
institutional funds would range from 15
to 20 basis points,507 while another
commenter estimated that the yield
impact would be 10 basis points.508 A
third commenter submitted that the
proposed 30 percent weekly liquidity
requirement would have a yield impact
of 9 basis points, but would have no
impact if the threshold was 20 percent
and included agency discount notes
with remaining maturities of 95 days or
less.509 None of these commenters
explained the baseline (i.e., the
percentage of weekly liquid assets
institutional funds currently hold) on
which their estimated impacts on yield
are based. A fourth commenter
estimated that if money market funds
had to increase their weekly liquid
assets by 10 percent, the yield impact
would be between 3 and 6 basis
points.510 Thus, commenters’ estimates
of the yield impact to institutional funds
of maintaining 30 percent of their
portfolio in weekly liquid assets ranged
493 See supra note 407 and accompanying and
preceding text.
494 These estimates are based on the following
calculations: 8 hours × $372/hour (for a senior
portfolio manager) = $2976; 1 hour × $4000 (for a
board of directors) = $4000; ($2976 + $4000) × 163
complexes = $1,137,088. The hourly wage used for
senior portfolio managers is from the SIFMA Report
on Management & Professional Salaries Data (Sept.
2008), modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses,
firm size, employee benefits, and overhead.
495 See Fidelity Comment Letter.
496 See Federated Comment Letter (without
specifying the assumed holdings of illiquid
securities).
497 The individual reduction in basis points is
calculated by taking the average of the estimated
range of 2 to 6 basis points ((2+6) ÷ 2 = 4 basis
points; 4 basis points ÷ 10% = 0.4 basis points per
1% reduction), proportionally adjusted to reflect an
adjustment in investment in illiquid securities from
10% to 5% (5 x 0.4 = 2).
498 We note that these holdings are likely to
include some securities that were not illiquid at
acquisition. Thus, our estimates on the impact of
reducing holdings of illiquid securities may be
higher than the impact that would be experienced
by some money market funds.
499 The number of money market funds is based
on Investment Company Institute, Trends in Mutual
Fund Investing, Oct. 2009, available at http://
www.ici.org/research/stats/trends/trends_10_09.
500 (10%¥5% (allowable amount remaining) =
5%). 5 × 0.4 basis points (basis point impact per
1%) = 2 basis points.
501 (9%¥5% (allowable amount remaining) =
4%). 4 × 0.4 basis points = 1.6 basis points.
502 (8%¥5% (allowable amount remaining) =
3%). 3 × 0.4 basis points = 1.2 basis points.
503 (7%¥5% (allowable amount remaining) =
2%). 2 × 0.4 basis points = 0.8 basis points.
504 (6%¥5% (allowable amount remaining) =
1%). 1 × 0.4 basis points = 0.4 basis points.
505 See Federated Comment Letter; Fidelity
Comment Letter.
506 Our understanding is that money market
funds’ current practice is to maintain approximately
10% of their portfolio in daily liquid assets. See
CAG Report, supra note 489; Fitch Report, supra
note 274, at 6 (Fitch-rated prime money market
funds’ aggregate exposure to sources of overnight
liquidity, including repurchase agreements, time
deposits and shares of other money market funds,
was approximately 15% of total assets for the sixmonth period ended on May 15, 2009).
507 See Fidelity Comment Letter (noting that
including agency discount notes with remaining
maturities of 397 days or less in weekly liquid
assets would have reduced this estimate by about
3 basis points for institutional money market
funds).
508 GE Asset Mgt. Comment Letter (arguing that
the requirement could cause a more pronounced
yield widening effect as a result of supply/demand
dynamics, i.e., there would be an increase in
demand for securities with 7-day maturities or less,
which would result in a corresponding decrease in
yield for such instruments; consequently, there
could also be a reduced demand for longer-dated
instruments, which would adversely impact the
short-term financing for issuers of such
instruments).
509 Federated Comment Letter.
510 J.P. Morgan Asset Mgt. Comment Letter and
subsequent Commission staff conversation with J.P.
Morgan staff breaking down the cost estimate in the
J.P. Morgan Asset Mgt. Comment Letter by each
proposed amendment to rule 2a–7.
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from 3 to 20 basis points.511 We have
averaged these estimates to determine
our estimated yield impact on
institutional funds of 1.025 basis points
per percentage increase in existing
assets that would have to be converted
to weekly liquid assets.512
We estimate that half of institutional
money market funds currently maintain
30 percent or more of their total assets
in weekly liquid assets and thus would
experience no reduction in yield as a
result of the weekly liquidity
requirement. We further estimate that 38
percent of institutional funds maintain
25 percent of their assets in weekly
liquid assets; 6 percent of institutional
funds maintain 20 percent of their assets
in weekly liquid assets and 6 percent of
institutional funds maintain 15 percent
of their assets in weekly liquid assets.513
Based on these estimates, we estimate
that 187 funds may experience no
impact, 142 funds may experience a
5.125 basis point impact on yield, 22
funds may experience a 10.25 basis
points, and 22 funds may experience a
15.375 basis point impact on yield.514
One commenter provided specific
estimates for the impact of the proposed
15 percent weekly liquid asset
requirement on retail money market
funds of between two and four basis
points.515 Assuming that the starting
point for these estimates was 10 percent
of investments in weekly liquid assets,
we estimate that the yield impact per
percentage increase to satisfy the weekly
511 We note that the range of these estimates is
likely to be lower if agency discount notes with
remaining maturities of less than 60 days are
included. We have not adjusted for that, however,
to maintain a conservative estimate.
512 Our estimate is based on an average of the
commenters’ estimated (or the midpoint of
commenters’ estimated) impacts of 17.5, 10, 9, and
4.5 basis points per 10% increase in weekly liquid
assets as proportionally adjusted: 1.75 + 1.0 + 0.9
+ 0.45 = 4.1; 4.1 basis points ÷ 4 = 1.025 basis point
increase. See notes 507–510 and accompanying
text.
513 While we are not aware of any data provider
that tracks the actual maturities of securities (as
opposed to WAM, which estimates the maturity of
floating rate notes based on the interest reset date
rather than actual maturity), we are able to provide
estimates based on the analysis of the Capital
Advisors Group that found that on or near
September 30, 2009, the 16 funds providing
information on their portfolio securities averaged
30% of assets in securities convertible to cash in 1
to 7 days. In addition, 8 (50%) had 7-day liquidity
of 30% or greater; 6 (38%) had 7-day liquidity of
25%–30%; 1 (6%) had liquidity of 20%–25%, and
1 (6%) had 7-day liquidity of 15%–20%. See CAG
Report, supra note 489. For purposes of our
estimates, we are assuming the funds in each
category held the lowest level of weekly liquid
assets in the category.
514 As noted above, there are currently 719 money
market funds, of which we estimate that 52% (374)
are institutional funds. See supra notes 471 and
499.
515 See Fidelity Comment Letter.
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17:23 Mar 03, 2010
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liquid asset requirement would be 0.6
basis points.516 We estimate that all
retail money market funds maintain 15
percent of their total assets in weekly
liquid assets.517 Based on this estimate,
we estimate that the average yield
impact for each retail money market
fund would be 9 basis points.518
Investors. The decreased yield that
some money market funds may offer as
a result of the amendments we are
adopting today may limit the range of
choices that individual money market
fund investors have to select their
desired level of investment risk. This
might cause some investors to shift their
assets to, among other places, bank
deposits or offshore or other enhanced
cash funds unregulated by rule 2a–7
that are able to offer a higher yield.519
Investors that choose to move to
unregulated products may have fewer
protections than they had in money
market funds regulated under rule 2a–
7. 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 risk520 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 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
516 This assumes an average of 3 basis points
proportionally adjusted for an increase of 5%. We
assume that the commenter based its estimate on an
increase from 10% holdings because as noted
above, we assume that all money market funds have
on average daily liquidity of at least 10% and the
commenter based its estimates on the proposed
weekly liquid asset requirement of 15% for retail
funds. See supra note 506 and accompanying text.
517 We believe that most retail money market
funds currently are in voluntary compliance with
the 20% weekly liquidity standard recommended
by the ICI Report, which would include agency
discount notes with original issue maturity of 95
days or less. The final rule permits agency discount
notes with remaining maturities of 60 days or less,
and we are conservatively estimating that retail
funds maintain an average of 15% of assets in
weekly liquid assets.
518 0.6 basis points x 15% = 9 basis points. This
estimate may be overstated because, as noted above,
we believe that most retail funds hold 20% of their
assets in weekly liquid assets, and thus would have
to convert a smaller percentage of assets to weekly
liquid assets.
519 Some commenters suggested this possibility.
See, e.g., Goldman Sachs Comment Letter; State
Street Comment Letter (making this comment with
respect to reducing the maximum permissible
WAM).
520 During the market events of 2007–2008,
investors redeemed substantial amounts of assets
from certain bond funds and offshore money market
funds. See ICI Report, supra note 14, at 106–07.
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10099
securities, or a larger percentage of
longer term securities.
Issuers. Our new 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 at previous
market rates of second tier securities,
less liquid securities, longer term
securities, or adjustable-rate securities
that money market funds determine to
no longer acquire because of the new
restrictions. Several commenters stated
that elimination of money market funds’
ability to acquire second tier securities
would increase issuers’ borrowing costs
and thus could increase the cost of
capital formation.521 No commenters
provided estimates of such costs.
As noted earlier in this section, we do
not believe that money market funds
currently hold a significant amount of
second tier securities or securities that
are illiquid at acquisition in excess of
the newly adopted limitations for these
securities. Thus, we expect that the
amendments’ impact on issuers of these
securities will be minimal. We also
know that few money market funds
maintain a WAM in excess of 60 days,
and we therefore believe that our new
WAM restriction will not have a
significant impact on issuers of longer
term securities.522 To the extent that the
new WAM limitation results 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 shortterm 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.
Finally, we estimate that one third of
taxable money market funds will have
to reduce the WAL of their portfolio,523
and thus it is possible that some
adjustable-rate security issuers will
need to shorten the maturities of some
of the securities they offer, which may
result in increased borrowing costs.524
In addition, the markets for longer term
securities may become less liquid if the
521 See, e.g., Am. Elec. P. Comment Letter;
Chamber/Tier 2 Issuers Comment Letter. But see ICI
Comment Letter (stating their belief that elimination
would have a manageable impact on second tier
security issuers).
522 See supra notes 482–483 and accompanying
text.
523 See supra note 489 and accompanying and
following text.
524 See supra note 491 and accompanying text for
comments asserting this possible negative impact.
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rule amendments cause issuance of
these instruments to decline.525
Government Securities. We do not
believe that eliminating the provision in
rule 2a–7 that allowed money market
funds relying solely on the pennyrounding method of pricing to hold
Government securities with remaining
maturities of up to 762 days will have
a material impact on money market
funds, investors, or issuers of longer
term Government securities because we
believe that substantially all money
market funds rely on the amortized cost
method of valuation, and not
exclusively on the penny-rounding
method of pricing, and thus are not
eligible to rely on this exception. We
received one comment on this proposal,
which stated that they were not aware
of any money market funds that relied
on the penny rounding method of
pricing.526
2. Designation of NRSROs
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The amendments to rule 2a–7 require
a money market fund’s board of
directors to designate at least four
NRSROs whose credit ratings the fund
will use in determining the eligibility of
portfolio securities under the rule and
that the board determines annually
issue credit ratings that are sufficiently
reliable for this use.527 In addition,
money market funds are required to
disclose designated NRSROs in their
registration statements.528
We anticipate that the requirement to
designate at least four NRSROs could
foster competition among NRSROs to
produce the most accurate ratings in
order to obtain designation by money
market fund boards. Several
commenters agreed that designating at
least three NRSROs could encourage
competition among NRSROs to achieve
designation by money market fund
boards.529 To the extent that
competition increases the reliability of
the credit ratings of designated NRSROs,
this could increase the efficiency of
fund managers in determining eligibility
of portfolio securities. Some
commenters expressed concern,
however, that a requirement to
designate at least three NRSROs could
result in fund boards designating only
the three largest NRSROs that issue
525 No
commenters addressed this possibility.
Comment Letter.
527 Amended rule 2a–7(a)(11) (defining the term
‘‘designated NRSRO’’).
528 Amended rule 2a–7(a)(11)(iii). The fund
would be required to make the disclosure in its SAI,
under Part B of Form N–1A [17 CFR 239.15A].
529 See, e.g., HighMark Capital Comment Letter;
Invesco Aim Comment Letter.
526 BlackRock
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most of the ratings,530 which could
result in decreased competition among
NRSROs. To address this concern, in
light of the Commission’s goal of
increasing competition among NRSROs,
we are requiring each fund to designate
at least four NRSROs. In addition,
requiring designation of four NRSROs
may encourage new NRSROs that issue
ratings specifically for money market
fund instruments to enter the market.
We recognize that the requirement to
designate and annually evaluate at least
four NRSROs will result in costs to the
fund.531 For the purposes of the PRA,
we estimate that the requirement that
money market funds disclose this
designation, including any limitations
on the use of the designations, in their
SAIs will not result in additional costs
for funds.532 We expect that boards will
designate NRSROs based on
recommendations from the fund’s
adviser and its credit analysts.
Similarly, we believe the board’s annual
determination regarding designated
NRSROs will be based on
recommendations from the adviser and
its credit analysts. Staff estimates that it
will take each fund’s board of directors
approximately 6 hours each year to
designate NRSROs and determine
whether the NRSROs ratings are
sufficiently reliable for such use. Based
on an hourly rate for the board of $4000,
we estimate that each money market
fund will incur $24,000 and all fund
complexes will incur $3.9 million
annually for the boards of directors to
initially designate and determine the
reliability and sufficiency of the
designated NRSROs’ credit ratings for
use in determining eligibility of
portfolio securities.533
We expect that fund advisers
currently evaluate the reliability of
NRSRO ratings and ratings criteria as
part of the credit analysis they perform
(under delegated authority from the
board) in determining the eligibility of
530 See DBRS Comment Letter; C. Wesselkamper
Comment Letter. We note that of the 10 registered
NRSROs, three issued over 97% of the ratings
across categories that NRSROs reported to the
Commission. See SEC, Annual Report on Nationally
Recognized Statistical Rating Organizations at 9
(Sept. 2009).
531 While we received comments regarding the
designation of NRSROs, none of the comments
discussed the costs of designation to funds or their
advisers.
532 See supra Section IV.A.1.
533 This estimate is based on the following
calculation: $24,000 × 163 (fund complexes) =
$3,912,000. We have estimated total costs for fund
complexes because we assume that boards of
directors will undertake to designate and determine
for all funds in the complex at the same time
(although boards may designate and make annual
determinations with respect to different NRSROs
for different money market funds).
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portfolio securities. We also assume that
this evaluation includes consideration
and internal documentation of whether
an NRSRO’s rating is sufficient for that
use. Accordingly, while we do not
anticipate that fund advisers will incur
additional time to prepare their
recommendations, we expect that fund
advisers will incur costs to draft those
recommendations in a presentation or
report for board review regarding
designation of NRSROs and the
sufficiency of designated NRSROs’
ratings. Staff estimates that the
investment adviser for each complex
will spend 6 hours annually to prepare
a report based on the adviser’s internal
review and documentation that
summarizes its recommendation with
respect to each NRSRO that may be
considered for designation and any
limits on the use of that NRSRO under
the rule at a cost per fund complex of
$1770 and a total cost of $288,510.534
As noted above, we understand that
money market fund advisers currently
evaluate NRSROs that rate securities in
which the fund invests. We also
understand that fund advisers monitor
NRSROs for potential downgrades of
portfolio securities. Prior to today’s
amendments, if the fund invested in
unrated or second tier securities, the
adviser had to monitor all NRSROs in
case there was a downgrade of a second
tier security or an unrated security
received a rating below one of the top
two categories.535 Thus, we do not
expect that limiting the number of
NRSROs that a fund must monitor to
four (or more, if the fund chooses) will
result in increased costs to fund
advisers to monitor NRSROs.
3. Stress Testing
As proposed, we are amending rule
2a–7 to require that a money market
fund’s board of directors adopt written
procedures that provide for the periodic
stress testing of each money market
fund’s portfolio.536 A fund’s board of
directors determines the frequency of
stress testing. The procedures must
require testing of the fund’s ability to
534 These estimates are based on the following
calculations: ($202/hour (intermediate portfolio
manager) × 3 hours) + ($388/hour (senior portfolio
manager) × 3 hours) = $1770; $1770 × 163 fund
complexes = $288,510. Hourly wages used for
purposes of the estimate of portfolio manager
salaries are from the SIFMA Report on Management
& Professional Salaries Data (Sept. 2008), modified
to account for an 1800-hour work-year and
multiplied by 2.93 to account for bonuses, firm size,
employee benefits and overhead.
535 See current rule 2a–7(c)(6)(i)(A)(2).
536 See supra Section II.C.4. We did not receive
any comment on the estimates and assumptions
included in our proposal. Accordingly, we have not
modified any of those estimates except to reflect the
new requirement included in the amended rule.
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maintain a stable net asset value per
share based upon certain hypothetical
events.537 The procedures also must
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, or more often as
appropriate in light of the results.538
The report must include 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.539
We anticipate that stress testing will
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
funds’ exposure to the risk that they
would break the buck, and actions the
advisers may need to take to mitigate
the possibility of the funds breaking the
buck.540 We believe that many funds
currently conduct stress testing as a
matter of routine fund management and
business practice.541 We anticipate,
however, that funds that do not
currently perform stress testing and
funds that may revise their procedures
in light of the amended rule will 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 of the testing and assessments
will provide money market fund boards
a better understanding of the risks to
which the fund is exposed.
We understand that today rigorous
stress testing is a best practice followed
by many money market funds.542 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
537 As proposed, the hypothetical events
described in the final rule include 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
amended rule 2a–7(c)(10)(v)(A).
538 Amended rule 2a–7(c)(10)(v)(B). The report
must include dates on which the testing was
performed and the magnitude of each hypothetical
event that would cause the deviation of the money
market fund’s net asset value, calculated using
available market quotations (or appropriate
substitutes that reflect current market conditions),
from its net asset value per share, calculated using
amortized cost, to exceed 1⁄2 of 1%. Amended rule
2a–7(c)(10)(v)(B)(1).
539 Amended rule 2a–7(c)(10)(v)(B)(2).
540 See supra note 411 and accompanying and
preceding text.
541 See Proposing Release, supra note 2, at
paragraph following n.358.
542 See id. at n.359 and accompanying text.
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management.543 Accordingly, staff
estimates that as a result of the new
requirement to adopt stress testing
procedures: (i) Funds that currently
conduct rigorous stress testing,
including tests for hypothetical events
listed in the amended rule (and
concurrent occurrences of those events),
will incur some costs to evaluate
whether their current test procedures
comply with the new requirement, but
will 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 amended rule, will
incur somewhat greater expenses to
revise those procedures in light of the
new requirement and maintain the
revised testing; and (iii) funds that do
not conduct stress testing will 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 being or
will 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
will require approximately 1 month for
2 risk management specialists and 2
systems analysts to develop stress test
procedures at a cost of approximately
$155,000, 22 hours for a risk
management specialist to draft the
procedures, and 3 hours of board of
directors’ time to adopt the procedures
for a total of approximately $173,000.544
Costs for fund complexes that will 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 will incur half the costs
of development, for a total of
approximately $96,000.545 Funds that
will not have to change their test
543 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. 17 CFR 270.0–10. See infra
note 636.
544 This estimate is based on the following
calculations: $275/hour × 280 hours (collectively, 2
senior risk management specialists) + $244/hour ×
320 hours (collectively, 2 senior systems analysts)
= $155,080; $275/hour (senior risk management
specialist) × 22 hours = $6050; $4000/hour × 3
hours = $12,000; $155,080 + $6050 + $12,000 =
$173,130.
545 This estimate is based on the following
calculation: ($155,080 × 0.5) (revise procedures) +
$6050 (draft procedures) + $12,000 (board approval)
= $95,590.
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10101
procedures will incur approximately
$20,000 to determine compliance with
the new requirement and to draft and
adopt the procedures.546 We also
anticipate that in light of the new
demand to develop stress testing
procedures, third parties will develop
programs that funds will be able to
purchase for less than our estimated
cost to develop the programs
themselves.
As with the development of stress test
procedures, the costs funds will 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 will 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 for routine reports, each
fund complex will incur costs of $3000
to provide a written report on the test
results to the board, $4000 to provide
the assessment in the report, and $10 to
retain records of the reports for a total
annual cost to a fund complex of
$42,000.547 As noted above, however,
the procedures must provide for
additional reports to the board as
appropriate based on testing results, and
we estimate that each fund complex will
incur costs of $28,000 for an average of
four of these reports each year.548 We
estimate that a portion of funds will
incur additional costs to perform stress
tests and update their procedures each
546 This estimate is based on the following
calculation: $275/hour (senior risk management
specialist) × 8 hours = $2200; $2200 + $6050 +
$12,000 = $20,250.
547 See supra note 419 and preceding,
accompanying, and following text. This estimate is
based on the following calculation: Report: $275/
hour × 10 hours (senior risk management specialist)
+ $62 × 2 hours (administrative assistant) = $2874;
Assessment: $275/hour × 15 hours (senior risk
management specialist) = $4125; Record retention:
$62/hour × 0.1667 hours (administrative assistant)
= $10.33; ($2874 + $4125 +$10) × 6 (board meetings
per year) = $42,054. Hourly wages used for
purposes of the estimate of administrative assistant
salaries are from the SIFMA Report on Management
& Professional Salaries Data (Sept. 2008), modified
to account for an 1800-hour work-year and
multiplied by 2.93 to account for bonuses, firm size,
employee benefits and overhead.
548 See supra note 420 and accompanying text.
This estimate is based on the following calculation:
($2874 (reports) + ($4125) (assessment) + $10
(recordkeeping)) × 4 = $28,036.
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year, up to a maximum of
approximately $149,000.549
For purposes of this cost benefit
analysis, Commission staff has
estimated that 25 percent of fund
complexes (or 41 complexes) will have
to develop stress test procedures, 50
percent (or 81) would have stress test
procedures, but have to revise those
procedures, and 25 percent of
complexes (or 41 complexes) will
review the procedures without having to
change them. Based on these estimates,
staff further estimates that the total onetime costs for fund complexes to
develop or refine existing stress test
procedures will be approximately $16
million.550 In addition, staff estimates
that the annual costs to all funds to
conduct stress tests, update test
procedures, provide reports to fund
boards, and retain records of the reports
will be approximately $24 million.551
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4. Repurchase Agreements
We are adopting, as proposed,
changes affecting a money market fund’s
ability to ‘‘look through’’ a repurchase
agreement for purposes of rule 2a–7’s
diversification provisions.552 Under the
amended rule, a money market fund
will be able to look through a
repurchase agreement only if it is
collateralized by cash items or
Government securities, and if the fund’s
board of directors or its delegate
evaluates the counterparty’s
creditworthiness.
The changes are designed to reduce
money market funds’ risks related to
repurchase agreement investments so
that funds will be better positioned to
weather market turbulence and
maintain a stable net asset value per
share. A money market fund that invests
in a repurchase agreement collateralized
by cash items or Government securities
is less likely to experience losses upon
the sale of collateral in the event of a
counterparty’s default.553 The
creditworthiness evaluation, moreover,
will diminish the risk that a money
549 This estimate is based on the following
calculations: Tests: $275/hour × 15 hours (senior
risk management specialist) + $244/hour × 20 hours
(senior systems analyst) = $9005; $9005 × 12
(monthly testing) + ($9005 × 4 additional
‘‘appropriate’’ testing) = $144,080; Update
procedures: $275/hour × 5 hours (senior risk
management specialist) + $4000/hour × 1 hour =
$5375; $144,080 + $5375 = $149,455.
550 This estimate is based on the following
calculation: (41 × $173,000) + (81 × $95,000) + (41
× $20,000) = $15,608,000.
551 This estimate is based on the following
calculation: (41 × $149,455) + (81 × $149,455 × 0.5)
+ (163 × $70,090 (reports, including assessments))
= $23,605,252.5.
552 See supra Section II.D; Proposing Release,
supra note 2, at Section II.E.
553 See supra note 272 and accompanying text.
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market fund in the first place enters into
a repurchase agreement with a
counterparty that subsequently defaults.
We believe that the costs associated
with these changes will be minimal. As
confirmed by commenters, most money
market funds typically do not look
through repurchase agreements
collateralized with securities other than
Government securities.554 Under the
amended rule, money market funds will
be able, as they have in the past, to
invest in such repurchase agreements,
although the funds will not be able to
look through the repurchase agreements
for purposes of rule 2a–7’s
diversification provisions.555
With regard to the new
creditworthiness evaluation, several
commenters stated that money market
funds already evaluate the credit quality
of counterparties under rule 2a–
7(c)(3).556 We estimate, therefore, that
investment advisers to only
approximately 20 percent of all 163
fund complexes are not currently
making such determinations. To the
extent that boards or their delegates, in
response to the amended rule, will make
determinations that they would not
otherwise make, those parties will
expend time and/or resources in making
those determinations. We estimate that,
if an investment adviser were to spend
10 hours a year making creditworthiness
determinations that it would not
otherwise make concerning repurchase
agreement counterparties, it would
spend approximately $2750 per year.557
Therefore the total cost to all money
market funds would be approximately
$90,750 per year.558 In addition to these
costs, we also estimated above, for
purposes of the Paperwork Reduction
Act, that funds might spend 2 hours per
year maintaining records concerning the
determinations made under the
amended rule.559 We estimate the
aggregate total costs associated with this
recordkeeping to be $20,212 per year.560
554 See
supra note 274 and accompanying text.
commenter has expressed the view that the
new diversification requirement will increase
money market funds’ cost of investing in
repurchase agreements.
556 As discussed above, three commenters argued
that the proposed creditworthiness evaluation is
unnecessary because it is already an element of the
minimal credit risk determination that a fund
makes pursuant to rule 2a–7(c)(3). See supra note
277.
557 This estimate is based on the following
calculation: $275/hour (senior risk management
specialist) × 10 hours = $2750.
558 This estimate is based on the following
calculation: $275/hour (senior risk management
specialist) × 10 hours × 33 fund complexes =
$90,750.
559 See supra Section IV.A.4.
560 This estimate is based on the following
calculation: $62/hour (administrative assistant) × 2
hours × 163 fund complexes = $20,212.
555 No
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5. Public Web site Posting
The amendments to rule 2a–7 require
money market funds to post monthly
portfolio information on their Web
sites.561 The rule amendments are
intended to provide shareholders with
timely information about the securities
held by the money market fund.
We anticipate that requiring funds to
post monthly portfolio information on
their Web sites will benefit investors by
providing them a better understanding
of their own risk exposure enabling
them to make better informed
investment decisions. The rule
amendments may thus instill more
discipline into portfolio management
and reduce the likelihood of a money
market fund breaking the buck.
The Web site posting requirement will
impose certain costs on funds. We
estimated in the Proposing Release that
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.562 We also estimated that all
money market funds would be required
to spend 4 hours of professional time to
maintain and update the Webpage each
month, at a total annual cost of $9888
per fund.563 We also stated that we
believe, however, that our estimates
may overstate the actual costs that
would be incurred to comply with the
Web site posting requirement because
many funds currently post their
portfolio holdings on a monthly, or
more frequent, basis.564 For purposes of
the cost benefit analysis in the
Proposing Release, Commission staff
estimated that 20 percent of money
market portfolios (150 portfolios) did
not post portfolio holdings information
on their Web sites.565 We requested
comment on these estimated costs in the
Proposing Release.566 One commenter
suggested that we may have
underestimated the costs associated
with the initial development of the Web
page, but also may have overestimated
the costs associated with the ongoing
561 Amended
rule 2a–7(c)(12).
Proposing Release, supra note 2, at n.374
and accompanying text. The staff estimated that a
webmaster at a money market fund would require
24 hours (at $206 per hour) to develop and review
the webpage (24 hours × $206 = $4944).
563 See Proposing Release, supra note 2, at n.375
and accompanying text. The staff estimated that a
webmaster would require 4 hours (at $206 per hour)
to maintain and update the relevant webpages on
a monthly basis (4 hours × $206 × 12 months =
$9888).
564 See Proposing Release, supra note 2, at n.376
and accompanying text.
565 See Proposing Release, supra note 2, at text
preceding n.377.
566 See Proposing Release, supra note 2, at
Section V.A.5.
562 See
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maintenance of Web site reporting.567
The commenter did not provide any
cost estimates. Commission staff
continues to believe that these cost
estimates are appropriate. In addition,
as discussed above, we have decided
not to require some of the information
required by Regulation S–X, which we
proposed that funds post on their Web
sites.568 We expect that eliminating the
mandatory posting of this information,
which we believe is not critical to be
made available to investors, will reduce
costs for funds and their advisers.569
One commenter, however, stated that
the cost estimates did not include the
cost for the 80 percent of money market
portfolios that currently post portfolio
holdings information at least quarterly
on their Web sites to develop the
capability to retain previous months’
portfolio holdings information on their
Web sites.570 Based on a review of some
of the commenters’ current portfolio
Web site disclosure and follow-up
discussions with some commenters,
Commission staff estimates that 500
funds will need to develop this
capability. Commission staff estimates
that each of these 500 funds will spend
approximately 12 hours, at a one-time
cost of $2472 per fund, to develop this
capability.571
Based on these estimates, we estimate
that the total initial costs for the Web
site disclosure will be $1,947,936.572 In
addition, we estimate that the annual
costs for all money market funds to
maintain and update their webpages
will be $7.1 million.573
In addition, monthly Web site
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
567 See
568 See
Clearwater Comment Letter.
supra note 285 and accompanying text.
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569 Id.
570 See Data Communique
´ Comment Letter. Under
our proposal, funds would have been required to
maintain the portfolio holdings information on their
Web sites for at least twelve months. We are
adopting a six-month maintenance period for
portfolio holding information.
571 The staff estimates that a Webmaster at a
money market fund would require 12 hours (at $206
per hour) to develop the capability to retain
previous months’ portfolio holdings information on
their Web sites as required by the rule (12 hours ×
$206 = $2472).
572 This calculation was based on the following
estimate: ($4944 × 144 portfolios) (cost to develop
webpage) + ($2472 × 500 portfolios) (cost to develop
capability to retain previous months’ portfolio
holdings information on existing Web sites) =
$1,947,936.
573 This calculation was based on the following
estimate: ($9888 × 719 portfolios) = $7,109,472.
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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.574 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 the
amended rule will be minimal.
Furthermore, as previously noted, most
money market fund portfolios (80
percent) already are posted on fund Web
sites at least quarterly.
6. Processing of Transactions
The amendments to rule 2a–7 require
a money market fund to have the
capacity to redeem and sell its securities
at a price based on the fund’s current
net asset value per share, including the
capacity to sell and redeem shares at
prices that do not correspond to the
stable net asset value or price per
share.575 As discussed above, the events
of fall 2008 revealed that some funds
had not implemented automated
systems to process redemptions at
prices other than the funds’ stable net
asset value per share. As a result,
transactions were processed manually,
which extended the time that investors
had to wait for the proceeds from their
redeemed shares. This experience
showed that funds that cannot
electronically process redemptions at
prices other than the funds’ stable net
asset value per share risk being unable
to meet their obligations to redeem
shares and pay redemption proceeds
within seven days, as required under
the Act.
The amendments to rule 2a–7 mitigate
the risk that money market funds would
not be able to meet these obligations in
the event the fund breaks a buck. These
amendments benefit shareholders
because they increase the likelihood
that shareholders will timely receive the
proceeds of their investments when a
fund breaks the buck.
Because funds have an existing
obligation to redeem at other than their
stable net asset value per share, we do
not believe that this amendment to rule
2a–7 imposes any additional costs on
574 See
ICI Report, supra note 14, at 93.
rule 2a–7(c)(13).
575 Amended
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funds or their transfer agents.576
Nonetheless, to the extent that funds
and transfer agents have to change their
systems, we estimated in the Proposing
Release that the total cost for a fund
complex would be $39,040.577 We
further estimated that one-third of the
fund complexes are not currently able to
redeem at prices other than stable net
asset value, and thus the total cost to all
money market funds would be
$2,225,280.578
Several commenters claimed that the
costs of changing the systems would
exceed our estimates.579 One
commenter estimated that the costs of
making the required changes to the core
transfer agent and ancillary systems
would total approximately $24 million
for ten fund complexes, representing 63
percent of money market fund assets,
and two of the three largest transfer
agent service providers.580 Based on
those figures, we have revised our
estimate to reflect that the total cost of
making the required systems changes for
all money market funds would be
approximately $38.1 million.581
B. Rule 17a–9
The Commission is amending rule
17a–9 to expand the circumstances
under which affiliated persons can
purchase money market fund portfolio
securities. Under the amendment, a
money market fund generally will be
able to sell a portfolio security that has
defaulted to an affiliated person for cash
equal to the greater of the security’s
amortized cost value or market value
(including accrued interest), even
though the security continues to be an
eligible security.582
576 See
supra Section II.F.
estimate is based on the following
calculation: $244/hour × 160 hours (senior systems
analyst) = $39,040.
578 This estimate was based on the following
calculation: (171 fund complexes ÷ 3) × $39,040 =
$2,225,280.
579 See, e.g., HighMark Capital Comment Letter;
ICI Comment Letter.
580 See ICI Comment Letter. The ICI conducted a
survey of its members and gathered data from 10
fund complexes and 2 transfer agent service
providers. Six of the 12 respondents indicated that
their transfer agent system already had the
capability to process money market fund trades at
other than a $1.00 stable net asset value.
581 We believe that the systems changes costs are
correlated to the size of the fund complex.
Accordingly, this estimate is based on the following
calculations: $24 million ÷ 63% = $38.1 million.
The ICI Comment Letter also provided additional
cost estimates for changes to the systems of
intermediaries who perform sub-transfer agency or
similar recordkeeping functions. We do not discuss
those additional costs here because, as discussed
above, the rule does not impose any requirements
on those intermediaries. See supra text preceding
note 363.
582 See amended rule 17a–9(a).
577 This
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The amendment essentially codifies
past Commission staff no-action
letters 583 and should benefit investors
by enabling money market funds to
dispose of distressed 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 benefits
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.584 We do not believe
that there are any costs associated with
this amendment, and we received no
comments on this analysis.
In addition, the amendment permits
affiliated persons to purchase other
portfolio securities from an affiliated
money market fund, for any reason, as
long as the security’s purchase price
meets the rules’ other conditions and
such person promptly remits to the fund
any profit it realizes from the later sale
of the security.585 Our staff provided
temporary no-action assurances during
the fall of 2008 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).586 In these
circumstances, money market funds
may need to obtain cash quickly to
avoid selling securities into the market
at fire sale prices to meet shareholder
redemption requests, to the detriment of
remaining shareholders. The staff also
provided no-action assurances to money
market funds for affiliated persons of
the fund to purchase at the greater of
amortized cost or market value (plus
accrued and unpaid interest) certain
distressed securities that were
depressed in value due to market
conditions potentially threatening the
stable share price of the fund, but that
remained eligible securities and had not
defaulted.587 Money market funds and
their shareholders benefit if affiliated
persons are 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.
583 See
supra Section II.G.1.
staff estimates that the costs to
obtain staff no-action assurances range from
$50,000 to $100,000.
585 See amended rule 17a–9(b).
586 Many of the no-action letters can be found on
our Web site. See http://www.sec.gov/divisions/
investment/im-noaction.shtml#money.
587 Id.
Affiliated persons purchasing such
securities will 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 163 fund
complexes with money market funds,
and a total cost of $237,980.588 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 will 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
received no comments on this analysis.
The Commission also is adopting a
related amendment to rule 2a–7, which
requires that funds report all
transactions under rule 17a–9 to the
Commission. We believe that this
reporting requirement benefits 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 allows 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 will assist us in monitoring
emerging risks at money market funds.
For purposes of the Paperwork
Reduction Act analysis, we estimate this
amendment will impose relatively small
reporting costs on money market funds
of $7625 per year.589 We received no
comments on this analysis.
C. Rule 22e–3
Rule 22e–3 permits a money market
fund that has broken the buck, or is at
imminent risk of breaking the buck, to
suspend redemptions and postpone the
payment of proceeds pending boardapproved liquidation proceedings. By
facilitating orderly liquidations in
584 Commission
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588 This estimate is based on the following
calculation: $292/hour × 5 hours × 163 fund
complexes = $237,980.
589 This estimate is based on the following
calculation: 25 (notices) × $305/hour (attorney) × 1
hour = $7625. See supra note 437 and
accompanying text.
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distressed circumstances, we anticipate
that rule 22e–3 will reduce the
vulnerability of shareholders to the
harmful effects of a run on a fund and
minimize the potential for market
disruption. The rule also enables funds
to avoid the expense and delay of
obtaining an exemptive order from the
Commission, which we estimate would
otherwise cost approximately $75,000,
and will provide legal certainty to funds
that wish to suspend redemptions
during a liquidation in the interest of
fairness to all shareholders.
Rule 22e–3 will 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.
Furthermore, the rule will impose
minimal costs on certain conduit funds
that have invested in money market
funds that suspended redemptions in
reliance on the rule by also requiring
those conduit funds to provide notice to
the Commission. We estimate that the
total annual burden of the notification
requirement for all money markets
funds and conduit funds will be 110
minutes, at a cost of $559.590 In
addition, rule 22e–3 imposes costs on
shareholders who seek to redeem their
shares, but are unable to do so. In those
instances, shareholders may have to
borrow funds from another source, and
thereby incur interest charges and other
transaction fees. We believe, however,
that the costs associated with rule 22e–
3 are minimal because the rule provides
a very limited exemption that is
triggered only when a fund breaks the
buck, or is in imminent risk of breaking
the buck, and liquidates.
D. Rule 30b1–7 and Form N–MFP:
Monthly Reporting of Portfolio Holdings
Rule 30b1–7 and Form N–MFP
require money market funds to file with
the Commission interactive dataformatted portfolio holdings
information on a monthly basis. We
expect that the rule and form will
improve the efficiency and effectiveness
of the Commission’s oversight of money
market funds by enabling Commission
staff to manage and analyze
comprehensive money market fund
portfolio information more quickly and
at a lower cost than is currently
possible. The interactive data will also
facilitate the flow of information
between money market funds and other
users of this information, such as
information services, academics, and
590 See supra note 443 and accompanying text.
This estimate is based on the following calculation:
$305/hour × 110 minutes = $559.
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investors. As a result, users of this
information, including investors, may
benefit by gaining a better
understanding of money market funds’
risk exposure and becoming better
informed in their investment decisions.
As the development of software
products to analyze the data continues
to grow, we expect these benefits will
increase. Finally, the portfolio reporting
may instill more discipline into
portfolio management and reduce the
likelihood of a money market fund
breaking the buck.
Money market funds may also realize
cost savings from the 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 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.
The reporting requirement will also
impose certain costs. We estimated in
the Proposing Release, 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 $35,968 591 per money
market fund for the first year, and 96
burden hours at a cost of $26,976 592 per
money market fund in subsequent
years.593 We requested comment on
these estimated costs in the Proposing
Release.594
As discussed above, two commenters
asserted that the Commission’s cost
estimates did not include time to review
the information required in Form N–
MFP.595 In response to these
commenters, we revised our PRA
estimates to include an additional 2
591 See Proposing Release, supra note 2, at n.396
and accompanying text. This estimate was based on
the following calculation: $281/hour × 128 hours
(senior database administrator) = $35,968.
592 See Proposing Release, supra note 2, at n.397
and accompanying text. This estimate was based on
the following calculation: $281/hour × 96 hours
(senior database administrator) = $26,976.
593 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.
594 See Proposing Release, supra note 2, at
paragraph following n.398.
595 See Bowne Comment Letter; Data
Communique´ Comment Letter. Another commenter
suggested that we may have underestimated the
costs associated with the initial filing of Form N–
MFP, but also may have overestimated the ongoing
costs associated with subsequent filings. See
Clearwater Comment Letter. The commenter,
however, did not provide any cost estimates.
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hours per filing for review of the
information.596 As a result of this
increase, we have revised our cost
estimates. We estimate that, for the
purposes of the PRA, these filing
requirements (including collecting (and
review), tagging, and electronically
filing the report) would impose 152
burden hours at a cost of $42,712 597 per
money market fund for the first year,
and 120 burden hours at a cost of
$33,720 598 per money market fund in
subsequent years.599 We estimate that
the total cost for all money market funds
for the first year would be
$30,709,928.600 The total annual
estimated cost for all money market
funds in subsequent years would be
$24,244,680.601
In addition, funds may incur
additional costs as a result of the public
availability of a fund’s market-based net
asset value, which is required to be
included in Form N–MFP filings. In
particular, some commenters noted that
if investors systematically redeem
shares for one dollar when the marketbased net asset value is less than one
dollar, the fund might have difficulty
maintaining its stable price. However, in
response to concerns about the
disclosure of market-based values, we
are delaying the public availability of
the information filed on Form N–MFP
for 60 days after the end of the reporting
period.602 We acknowledge that
investors might choose to sell their
money market fund shares that have a
low market-based net asset value, and it
is possible that a run could develop.
596 See
supra Section IV.C.
estimate is based on the following
calculation: $281/hour × 152 hours (senior database
administrator) = $42,712.
598 This estimate is based on the following
calculation: $281/hour × 120 hours (senior database
administrator) = $33,720.
599 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.
600 This estimate is based on the following
calculation: $42,712 (total estimated cost per fund
for first year) × 719 funds = $30,709,928.
601 This estimate is based on the following
calculation: $33,720 (total estimated cost per fund
after the first year) × 719 funds = $24,244,680.
602 See rule 30b1–7(b). See also supra text
accompanying note 320. As noted above, money
market funds currently must disclose their mark-tomarket net asset value per share semi-annually in
their Form N–SAR filings [17 CFR 274.101], which
are publicly available. Form N–SAR must be filed
with the Commission no later than the 60th day
after the end of the fiscal period for which the
report is being prepared. See supra note 337 and
accompanying text. Thus, investors already have
access to market-based portfolio value information
on the basis of which they could make redemptions.
597 This
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10105
Nevertheless, at least two other factors
will reduce the risk of a run. First,
portfolio managers may choose to follow
less risky investment strategies in an
effort to maintain a high market-based
net asset value. Second, funds may be
quicker to ask for help from their
affiliates through, for example, rule
17a–9 transactions.
The money market fund industry is
characterized by a mix of competitors
with and without affiliates that can
provide financial support. The
disclosure of a fund’s market-based net
asset value might encourage funds that
have affiliates with the ability to
provide financial support to request
such support as soon as any problems
develop. This support could provide
stability to funds that receive the
support. This support might also give a
competitive advantage to funds that
receive it because they may be more
willing to invest in securities with
higher risk and higher yields. However,
the extent of this competitive advantage
may be mitigated because the
amendments will require the disclosure
of the fund’s market-based NAV with
and without capital support agreements.
In addition, much of the extent to which
fund managers might take advantage of
capital support arrangements to boost
fund yields is independent of the
amendments we are adopting today and
affiliated persons of money market
funds are not obligated to support these
funds. For the reasons outlined in the
discussion on the monthly Web site
posting requirement, we estimate that
there will be minimal additional costs
incurred from predatory trading
practices (e.g., front-running or ‘‘free
riding’’) as a result of the reporting
requirement.603
E. Rule 30b1–6T
We adopted rule 30b1–6T to enable
the Commission staff to continue to
have effective oversight of money
market funds. The rule was designed to
improve the efficiency and effectiveness
of the Commission’s oversight by
providing useful information about
money market funds that report under
the rule, and by enabling the staff to
manage and analyze money market fund
portfolio information more quickly and
at a lower cost than possible without
electronic submissions of portfolio
schedules. When we adopted rule 30b1–
6T in September 2009, we requested
603 See supra note 574 and accompanying and
following text.
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comments on the costs and benefits of
the rule but received no comments.604
Rule 30b1–6T will impose some costs
on funds. For the purposes of the PRA,
we estimated that the rule will result in
an increase of 2100 burden hours per
year. We estimate that these burden
hours will cost a total of $590,100.605
We do not believe that rule 30b1–6T
will impose other significant costs,
especially given the nonpublic nature of
the reports required under the rule.
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.606
A. Rule 2a–7
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1. Second Tier Securities, Portfolio
Maturity, and Liquidity Limits
We are adopting several amendments
to rule 2a–7 to tighten the risk-limiting
conditions of the rule. As discussed
above, we are further restricting money
market funds’ ability to acquire second
tier securities. The amendments reduce
the maximum weighted average
maturity of a money market fund
permitted by rule 2a–7 from 90 days to
60 days.607 They also impose a new
maturity limitation based on the
weighted average ‘‘life’’ of fund
securities that limits the portion of a
fund’s portfolio that can be held in
longer term floating- or variable-rate
securities.608 We are deleting a
provision in rule 2a–7 that permitted
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 adopting new liquidity
requirements for money market funds.
In particular, we are amending rule 2a–
7 to (i) Require that each money market
fund hold securities that are sufficiently
liquid to meet reasonably foreseeable
shareholder redemptions in light of its
obligations under section 22(e) of the
Act and any commitments the fund has
made to shareholders; 609 (ii) further
604 See Rule 30b1–6T Release, supra note 303, at
Section VI.
605 This estimate is based on the following
calculation: 2100 hours × $281/hour (senior
database administrator) = $590,100.
606 15 U.S.C. 80a–2(c).
607 See amended rule 2a–7(c)(2)(ii).
608 See amended rule 2a–7(c)(2)(iii).
609 Amended rule 2a–7(c)(5).
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limit a money market fund’s
investments in illiquid securities (i.e.
securities that cannot be sold or
disposed of in the ordinary course of
business within seven days at
approximately the value ascribed to
them by the money market fund); 610
and (iii) require a taxable money market
fund to hold at least 10 percent of its
total assets in ‘‘daily liquid assets’’ and
any money market fund to hold at least
30 percent of its total assets in ‘‘weekly
liquid assets.’’ 611
We believe that these changes will
reduce money market funds’ sensitivity
to interest rate, credit, and liquidity
risks. These changes will also limit the
spread risk produced by longer term
securities and second tier securities. A
reduction of these risks will help
individual money market funds to
weather market turbulence and
maintain a stable net asset value per
share, which will increase the stability
of the entire money market fund
industry. To the extent that money
market funds are more stable, the
changes also will 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 will encourage
capital formation by encouraging
investment in money market funds as
well as the issuance of securities that
money market funds can purchase.
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. As
discussed above, several commenters
stated that the elimination of money
market funds’ ability to acquire second
tier securities could increase second tier
security issuers’ borrowing costs and
thus increase capital formation costs.612
Some of these commenters also asserted
that such a prohibition could require
second tier security issuers to rely more
on bank financing, which could
negatively impact banks’ ability to lend
to other parts of the economy.613 We
note that these impacts should be
mitigated given that we are limiting and
610 Amended rule 2a–7(c)(5)(i). Under the
amended rule, a money market fund cannot acquire
illiquid securities if immediately after the
acquisition, the fund would have invested more
than five percent of its total assets in illiquid
securities.
611 See amended rule 2a–7(c)(5)(ii)–(iii). See also
amended rule 2a–7(a)(8) (defining ‘‘daily liquid
assets’’); 2a–7(a)(32) (defining ‘‘weekly liquid
assets’’).
612 See supra notes 48–49 and accompanying
paragraph.
613 See, e.g., Chamber/Tier 2 Issuers Comment
Letter.
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not eliminating money market funds’
ability to acquire second tier securities.
However, to the extent that some issuers
are unwilling or unable to issue
securities that match money market
fund demand given these new
restrictions or that banks become less
willing to lend to finance new
businesses, the amendments could have
a negative impact on capital formation.
As discussed in the cost benefit
analysis above, we expect that the
amendments will reduce yields that
some money market funds are able to
offer. The lower yields may affect the
ability of money market funds to
compete with other investment vehicles.
While money market funds compete
with each other, they also compete for
investors on the basis of risk-return
tradeoff with other lower-risk
investment vehicles, such as offshore or
unregulated money market funds, bank
money market deposit accounts, and
deposit accounts in general. The
reduction in yield may cause some
investors to move their money to,
among other places, offshore or
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.
Further limitations on money market
funds’ ability to acquire 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. One
commenter stated that elimination of
money market funds’ ability to acquire
second tier securities could have a
disproportionate impact on smaller
money market funds.614 Our review of
money market fund holdings of second
tier securities during September 2008
did not reveal smaller money market
funds holding second tier securities to
a greater extent than larger funds,
although smaller funds may try to
increase their holdings of second tier
securities in different market
environments. Even if there were any
anticompetitive effects on smaller
money market funds, these effects
should be reduced by the fact that we
are only further limiting, and not
eliminating, money market funds’
ability to acquire second tier securities.
The further limitations on the ability
of money market funds to invest in
second tier securities may affect the
capital raising ability and strategies of
second tier security issuers or otherwise
614 See
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affect their financing arrangements, and
may affect the flexibility of investing
options for funds. As a preliminary
matter, taking into account commenters’
concerns, we have determined not to
eliminate money market funds’ ability
to acquire second tier securities.
Further, as noted above, second tier
securities represent only a very small
percentage of money market fund
portfolios today and money market
funds are not the primary purchasers of
second tier securities, which suggests
that our amendments would not in
themselves have a material effect on
capital formation.615 Nonetheless, we
recognize that some non-rule 2a–7
regulated cash management funds and
investment pools voluntarily use rule
2a–7 as an investment guideline.616
However, since we are only further
limiting, and not eliminating, money
market funds’ ability to acquire second
tier securities, we do not believe that the
behavior of these non-rule 2a–7 funds
will have a material adverse effect on
capital formation.
2. Designation of NRSROs
We are adopting amendments
requiring money market fund boards to
designate at least four NRSROs that the
fund will use in determining the
eligibility of portfolio securities and that
the board determines annually issue
credit ratings that are sufficiently
reliable for this use.617 As noted above,
several commenters suggested that
designating at least three NRSROs could
encourage competition among NRSROs
to achieve designation by money market
fund boards.618 We assume that three
NRSROs issue more than 90 percent of
ratings of short-term debt.619 Requiring
the designation of at least four NRSROs
will ensure that money market funds
will consider NRSROs beyond the
dominant three. In addition, the
amendment may encourage new
NRSROs that issue ratings specifically
for money market fund instruments to
enter the market. To the extent that
requiring designation of at least four
NRSROs will further increase
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615 Based
on discussions with one commenter to
clarify certain aspects of its comment letter,
however, we understand that money market funds
purchase approximately 80% of the commercial
paper of at least one second tier issuer. See
Chamber/Tier 2 Issuers Comment Letter. We
understand that such a significant reliance on
money market funds to purchase a second tier
issuer’s securities is quite unusual.
616 See, e.g., Chamber/Tier 2 Issuers Comment
Letter.
617 Amended rule 2a–7(a)(11)(i).
618 See, e.g., HighMark Capital Comment Letter;
Invesco Aim Comment Letter.
619 See Proposing Release, supra note 2, at text
accompanying and following n.116. See also supra
note 104 and accompanying text.
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competition, it also should increase the
reliability of the credit ratings of
designated NRSROs. Having better
information about risk could increase
the efficiency of fund managers in
determining eligibility of portfolio
securities. We do not anticipate that the
proposed designation of NRSROs will
have an adverse impact on capital
formation.
3. Stress Testing
We are amending 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.620 We believe
that stress testing will 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 will likely 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 will have an
adverse impact on competition or
capital formation.621
4. Repurchase Agreements
We are adopting, as proposed,
changes to the conditions under which
a money market fund may take
advantage of the special look-through
treatment of repurchase agreements
under rule 2a–7’s diversification
provisions.622 In order to obtain such
special treatment, a money market fund
will be limited to investing in
repurchase agreements collateralized by
cash items or Government securities and
the fund’s board of directors or its
delegate will have to evaluate the
creditworthiness of the repurchase
agreement’s counterparty.
We believe that these changes will
limit the risk that a money market fund
incurs losses upon the sale of collateral
in the event of a counterparty’s
default.623 The lower risk will in turn
increase money market funds’ ability to
maintain a stable net asset value per
share, thereby preventing losses to fund
620 Amended
rule 2a–7(c)(10)(v).
commenters addressed the analysis in the
Proposing Release regarding whether the proposed
stress testing requirements would promote
competition, efficiency, and capital formation.
622 See supra Section II.D; Proposing Release,
supra note 2, at Section II.E.
623 See supra note 272 and accompanying text.
621 No
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10107
investors. More stable money market
funds may attract greater investments,
thus promoting capital formation and
providing a greater source of financing
in the capital markets. The changes will
not negatively impact competition,
efficiency, or capital formation. In
particular, commenters noted that most
money market funds typically do not
look through to collateral consisting of
non-Government securities.624
5. Public Web Site Disclosure
One of the amendments to rule 2a–7
requires money market funds to disclose
certain portfolio holdings information
on their Web sites on a monthly
basis.625 In the Proposing Release, we
requested comment on what effect this
rule amendment would have on
competition, efficiency, and capital
formation.626 No commenters addressed
the effect of this amendment on
competition, efficiency, and capital
formation.
The rule amendment will provide
greater transparency of the fund’s
investments for current and prospective
shareholders, and may thus promote
more efficient allocation of investments
by investors.627 We believe the rule
amendment may also improve
competition, as better-informed
investors may prompt funds managers
to provide better services and products.
We do not anticipate that funds would
be disadvantaged, with respect to
competition, because so many already
have chosen to provide the information
more frequently than monthly. In
addition, the investments selected by
money market funds are less likely than,
for example, equity funds, to be
investments from which competing
funds would obtain benefit by
scrutinizing on a monthly basis.
The rule amendment 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
624 See supra note 274. Wells Fargo stated that the
amendment would negatively affect capital
formation because money market funds will no
longer invest in repurchase agreements
collateralized with securities with the highest rating
or unrated securities of comparable quality, which
would negatively affect counterparties and issuers
of collateral. See Wells Fargo Comment Letter. We
discuss those comments above. See supra note 273.
625 See supra Section II.E.1.
626 See Proposing Release, supra note 2, at
Section VI.A.4.
627 Due to the availability of the portfolio holding
information on fund Web sites, investors may
allocate their investments away from funds with
riskier portfolios. Among other things, this may
reduce systemic risks as money market funds may
respond by investing in securities with less risk.
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alternative product. Alternatively, the
rule amendment might 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 might 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 also recognize
the potential for runs on money market
funds that might result from any
investors who compute market-based
net asset values from the public
disclosure of portfolio holdings. As
discussed above, however, most money
market funds currently disclose their
portfolio holdings on their Web sites,
and therefore we do not believe that our
requirement that funds post monthly
portfolio holdings will have a material
effect on the ability of investors to
compute market-based values and incite
a run on the fund.
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6. Processing of Transactions
The amendments to rule 2a–7 require
a money market fund to have the
capacity to redeem and sell its securities
at a price based on the fund’s current
net asset value per share, even if the
fund’s current net asset values does not
correspond to the fund’s stable net asset
value or price per share. This
amendment increases 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 redemptions
would be unduly delayed if a money
market fund were to break the buck. We
do not believe that this amendment has
a material impact on competition or
capital formation.
B. Rule 17a–9
The Commission is amending rule
17a–9 to expand the circumstances
under which affiliated persons can
purchase money market fund securities.
Under the amendments, a money market
fund generally will be able to sell a
portfolio security that has defaulted to
an affiliated person for the greater of the
security’s amortized cost value or
market value (including accrued
interest), even though the security
continued to be an eligible security.628
In addition, the amendment permits
affiliated persons, for any reason, to
purchase other portfolio securities from
an affiliated money market fund on the
628 See
amended rule 17a–9(a).
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17:23 Mar 03, 2010
same terms as long as such person is
required to promptly remit to the fund
any profit it realizes from the later sale
of the security.629 These amendments
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. The
money market fund industry is
competitive; some money market funds
have well-funded affiliates to support
the money market fund while others do
not. This amendment may increase the
competitive advantage of money market
funds with well-funded affiliates
relative to other money market funds,
which we balanced against the need to
promote stability in money market
funds. We do not believe that the
amendments will have any material
impact on capital formation. We
received no comments on this analysis.
C. Rule 22e–3
Rule 22e–3 permits a money market
fund that has broken the buck, or is at
imminent risk of breaking the buck, to
suspend redemptions and postpone the
payment of proceeds pending boardapproved liquidation proceedings. We
anticipate the rule will promote
efficiency in the financial markets by
facilitating the orderly disposal of assets
during a liquidation. To the extent that
investors choose money market funds
over alternative investments because the
rule provides reassurance as to the
protection of fund assets in the event a
money market fund breaks the buck, the
rule also may promote capital
formation. If, however, the possibility
that redemptions may be suspended
during a liquidation makes money
market funds less appealing to
investors, the rule may have a negative
effect on capital formation. The rule also
may help make investors more
confident that they will receive the
proceeds from their investment in the
event of a liquidation. We do not believe
that the rule will have any adverse effect
on competition. We received no
comments on this analysis.
D. Rule 30b1–7 and Form N–MFP:
Monthly Reporting of Portfolio Holdings
New rule 30b1–7 and Form N–MFP
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 will
improve the efficiency and effectiveness
of the Commission’s oversight of money
629 See
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Frm 00050
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market funds. The availability, and
usability, of this data will 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 new
reporting requirement may encourage a
standardized format for disclosure or
transmission of portfolio holdings
information, it may promote efficiency
for money market funds. We do not
believe that the reporting requirement
will have an adverse effect on capital
formation.
In the Proposing Release, we
requested comment on what effect the
proposed rule 630 would have on
competition, efficiency, and capital
formation.631 One commenter stated
that the Commission’s view that the
proposed rule would not have an
adverse effect on competition may be
incorrect for subadvised money market
funds, because a number of the
information items in Form N–MFP
require information that typically is in
the possession of the subadviser who
manages the portfolio and not the
principal adviser who, in most cases,
would be responsible for preparing
Form N–MFP. The commenter stated
that obtaining the data from subadvisers
would be costly because it would have
to be done on a real-time basis, which
would require a significant investment
in new infrastructure.632 The
information required by the items cited
by the commenter, however, already
should be readily available to the
subadviser.633 The information also is
630 The rule was proposed as rule 30b1–6. As
noted above, in September 2009 we adopted interim
final temporary rule 30b1–6T. We therefore have
adopted proposed rule 30b1–6 as rule 30b1–7.
631 See Proposing Release, supra note 2, at
Section VI.D.
632 See Committee Ann. Insur. Comment Letter. In
particular, the commenter stated that the
information required by Items 17 (dollar weighted
average life maturity), 20 (CIK of the issuer of
security), 26(b) (credit rating given by the NRSROs
for the security), and 30–35 (information on
enhancements) of proposed Form N–MFP are not
typically in the possession of the principal adviser
and must be obtained from the subadviser managing
the portfolio. The commenter asserted that the
Commission’s estimate of 128 burden hours per
money market fund for the first year (1 filing × 40
hours + 11 filings × 8 hours) is far too low for
subadvised funds. For the reasons discussed below,
we do not believe that subadvised funds would be
subject to significant investment in new
infrastructure and thus we believe that the burden
estimate is not too low for subadvised funds. The
commenter does not state that there would be any
ongoing additional costs for compliance with Form
N–MFP by subadvised money market funds.
633 Subadvisers must have all of the information
required by the particular items the commenter
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not needed on a real-time basis by the
principal adviser because the form
requires information as of the last
business day of the preceding month.
Moreover, we have lengthened the time
for filing Form N–MFP from the
proposed two business days after the
end of each month to five business days
after the end of each month. This
change should provide subadvisers with
sufficient time to send the information
to the principal adviser without having
to invest in new infrastructure to
provide the information on a real-time
basis.634 We therefore continue to
believe that the reporting requirement
will not have an adverse effect on
competition.
The amendments also will require the
public disclosure of a money market
fund’s market-based net asset value. We
expect that the disclosure of month-end
market-based NAV may discourage the
fund’s portfolio manager from taking
certain risks that could reduce the
fund’s market-based NAV. The money
market fund industry is characterized by
a mix of competitors with and without
affiliates that can provide financial
support. The new disclosure might
encourage funds that have affiliates with
the ability to provide financial support
to request such support as soon as any
problems develop. This support could
provide stability to funds that receive
the support. This support might also
give a competitive advantage to funds
that receive it because they may be more
willing to invest in securities with
higher risk and higher yields. However,
the extent of this competitive advantage
may be mitigated because the
amendments will require the disclosure
of the fund’s market-based NAV with
and without capital support agreements.
In addition, much of the extent to which
fund managers might take advantage of
capital support arrangements to boost
fund yields is independent of the
amendments we are adopting today and
affiliated persons of money market
funds are not obligated to support these
funds.
The disclosure of a market-based net
asset value below $1.00 also might
precipitate a run on the fund. If one
fund were to fail for this reason, runs
might develop in other money market
specifies in order to manage the portfolio on a dayto-day basis in compliance with rule 2a–7, other
than an issuer’s CIK. Under Form N–MFP, as
adopted, the CIK of the issuer of the security is only
required if the security does not have a CUSIP and
the issuer has a CIK. Under our proposal the CIK
number of the issuer would have been required for
all securities.
634 By increasing the deadline to five business
days, filers also will have at least two non-business
days (in addition to the extra three business days)
in which to complete and submit the form.
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17:23 Mar 03, 2010
Jkt 020001
funds, even those with relatively high
market-based net asset values. However,
we believe that shareholders will benefit
from knowing the monthly marketbased net asset values of money market
funds. We anticipate that the public
availability of these values will help
investors make informed decisions
about whether to invest, or maintain
their investments, in money market
funds. We also anticipate that retail
investors over time will become
acclimated to the market-based net asset
value information that money market
funds will be required to disclose, and
that most of those investors will not
likely make decisions based on
immaterial changes to funds’ portfolio
values. In response to concerns
expressed by some commenters about
the potential for harm that immediate
public disclosure may pose for funds,
we will delay for 60 days after the end
of the reporting period, public
disclosure of the information filed on
Form N–MFP, including the marketbased net asset values.635
E. Rule 30b1–6T
Rule 30b1–6T is intended to facilitate
oversight of money market funds that
present a greater risk that they will be
unable to maintain their primary
investment objectives. As noted above,
the nonpublic reports are designed to
improve the efficiency and effectiveness
of the Commission’s oversight of such
money market funds, which may also
provide reassurance to investors, which
may in turn promote capital formation.
We do not believe that the rule will
have any effect on competition.
VII. Regulatory Flexibility Act
Certification
The Commission certified, pursuant
to section 605(b) of the Regulatory
Flexibility Act of 1980 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 have a significant
economic impact on a substantial
number of small entities.636 We
included this certification in Section VII
of the Proposing Release. Although we
encouraged written comments regarding
635 See
supra Section II.E.2.
U.S.C. 605(b). Based on information in
filings submitted to the Commission, we believe
that there are no money market funds that are small
entities. 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.
636 5
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10109
this certification, no commenters
responded to this request.637
VIII. Statutory Authority
The Commission is adopting
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
[15 U.S.C. 80a–6(c), 80a–8(b), 80a–22(c),
80a–37(a)]. The Commission is adopting
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 adopting 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 adopting an amendment
to rule 30b1–6T 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)]. The Commission
is adopting new rule 30b1–7 and Form
N–MFP pursuant to authority set forth
in sections 8(b), 30(b), 31(a), and 38(a)
of the Investment Company Act [15
U.S.C. 80a–8(b), 80a–29(b), 80a–30(a),
and 80a–37(a)].
List of Subjects in 17 CFR Parts 270 and
274
Investment companies, Reporting and
recordkeeping requirements, Securities.
Text of Rules, Rule Amendments, and
Form
For reasons set out in the preamble,
Title 17, Chapter II of the Code of
Federal Regulations is amended as
follows:
■
PART 270—RULES AND
REGULATIONS, INVESTMENT
COMPANY ACT OF 1940
1. The authority citation for Part 270
continues to read, in part, as follows:
■
Authority: 15 U.S.C. 80a–1 et seq., 80a–
34(d), 80a–37, and 80a–39, unless otherwise
noted.
*
*
*
*
*
2. Section 270.2a–7 is revised to read
as follows:
■
§ 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).
637 We also certified that rule 30b1–6T would not
have a significant economic impact on a substantial
number of small entities. See Rule 30b1–6T Release,
supra note 303, at Section VIII. We received no
comment on that certification.
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(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 of which consist of Qualifying
Assets (as defined in this paragraph).
Special Purpose Entity means a trust,
corporation, partnership or other entity
organized for the sole purpose of issuing
securities that entitle their holders to
receive payments that depend primarily
on the cash flow from Qualifying Assets,
but does not include a registered
investment company. Qualifying Assets
means financial assets, either fixed or
revolving, that by their terms convert
into cash within a finite time period,
plus any rights or other assets designed
to assure the servicing or timely
distribution of proceeds to security
holders.
(4) Business Day means any day, other
than Saturday, Sunday, or any
customary business holiday.
(5) Collateralized Fully means
‘‘Collateralized Fully’’ as defined in
§ 270.5b–3(c)(1) except that § 270.5b–
3(c)(1)(iv)(C) and (D) shall not apply.
(6) Conditional Demand Feature
means a Demand Feature that is not an
Unconditional Demand Feature. A
Conditional Demand Feature is not a
Guarantee.
(7) Conduit Security means a security
issued by a Municipal Issuer (as defined
in this paragraph) involving an
arrangement or agreement entered into,
directly or indirectly, with a person
other than a Municipal Issuer, which
arrangement or agreement provides for
or secures repayment of the security.
Municipal Issuer means a State or
territory of the United States (including
the District of Columbia), or any
political subdivision or public
instrumentality of a State or territory of
the United States. A Conduit Security
does not include a security that is:
(i) Fully and unconditionally
guaranteed by a Municipal Issuer;
(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);
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(iii) Related to a project owned and
operated by a Municipal Issuer; or
(iv) Related to a facility leased to and
under the control of an industrial or
commercial enterprise that is part of a
public project which, as a whole, is
owned and under the control of a
Municipal Issuer.
(8) Daily Liquid Assets means:
(i) Cash;
(ii) Direct obligations of the U.S.
Government; or
(iii) Securities that will mature or are
subject to a Demand Feature that is
exercisable and payable within one
Business Day.
(9) Demand Feature means:
(i) A feature permitting the holder of
a security to sell the security at an
exercise price equal to the approximate
amortized cost of the security plus
accrued interest, if any, at the time of
exercise. A Demand Feature must be
exercisable either:
(A) At any time on no more than 30
calendar days’ notice; or
(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) Designated NRSRO means any
one of at least four nationally
recognized statistical rating
organizations, 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:
(i) The money market fund’s board of
directors:
(A) Has designated as an NRSRO
whose credit ratings with respect to any
obligor or security or particular obligors
or securities will be used by the fund to
determine whether a security is an
Eligible Security; and
(B) Determines at least once each
calendar year issues credit ratings that
are sufficiently reliable for such use;
(ii) 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
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of, or any insurer or provider of credit
support for, the security; and
(iii) The fund discloses in its
statement of additional information is a
Designated NRSRO, including any
limitations with respect to the fund’s
use of such designation.
(12) Eligible Security means:
(i) A Rated Security with a remaining
maturity of 397 calendar days or less
that has received a rating from the
Requisite NRSROs in one of the two
highest short-term rating categories
(within which there may be subcategories or gradations indicating
relative standing); or
(ii) An Unrated Security that is of
comparable quality to a security meeting
the requirements for a Rated Security in
paragraph (a)(12)(i) of this section, as
determined by the money market fund’s
board of directors; provided, however,
that: 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 Designated
NRSRO that is not within the
Designated NRSRO’s three highest longterm ratings categories (within which
there may be sub-categories or
gradations indicating relative standing),
unless the security has received a longterm rating from the Requisite NRSROs
in one of the three highest rating
categories.
(iii) 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 a Designated NRSRO or the
Guarantee is issued by a guarantor that
has received a rating from a Designated
NRSRO with respect to a class of debt
obligations (or any debt obligation
within that class) that is comparable in
priority and security to the Guarantee,
unless:
(1) The Guarantee is issued by a
person that, directly or indirectly,
controls, is controlled by or is under
common control with the issuer of the
security subject to the Guarantee (other
than a sponsor of a Special Purpose
Entity with respect to an Asset Backed
Security);
(2) The security subject to the
Guarantee is a repurchase agreement
that is Collateralized Fully; or
(3) The Guarantee is itself a
Government Security; and
(B) The issuer of the Demand Feature
or Guarantee, or another institution, has
undertaken promptly to notify the
holder of the security in the event the
Demand Feature or Guarantee is
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substituted with another Demand
Feature or Guarantee (if such
substitution is permissible under the
terms of the Demand Feature or
Guarantee).
(13) Event of Insolvency means ‘‘Event
of Insolvency’’ as defined in § 270.5b–
3(c)(2).
(14) First Tier Security means any
Eligible Security that:
(i) Is a Rated Security that has
received a short-term rating from the
Requisite NRSROs in the highest shortterm rating category for debt obligations
(within which there may be subcategories or gradations indicating
relative standing);
(ii) Is an Unrated Security that is of
comparable quality to a security meeting
the requirements for a Rated Security in
paragraph (a)(14)(i) of this section, as
determined by the fund’s board of
directors;
(iii) Is a security issued by a registered
investment company that is a money
market fund; or
(iv) Is a Government Security.
(15) 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.
(16) Government Security means any
‘‘Government security’’ as defined in
section 2(a)(16) of the Act (15 U.S.C.
80a–2(a)(16)).
(17) Guarantee means an
unconditional obligation of a person
other than the issuer of the security to
undertake to pay, upon presentment by
the holder of the Guarantee (if required),
the principal amount of the underlying
security plus accrued interest when due
or upon default, or, in the case of an
Unconditional Demand Feature, an
obligation that entitles the holder to
receive upon exercise the approximate
amortized cost of the underlying
security or securities, plus accrued
interest, if any. A Guarantee includes a
letter of credit, financial guaranty (bond)
insurance, and an Unconditional
Demand Feature (other than an
Unconditional Demand Feature
provided by the issuer of the security).
(18) Guarantee Issued By A NonControlled Person means a Guarantee
issued by:
(i) A person that, directly or
indirectly, does not control, and is not
controlled by or under common control
with the issuer of the security subject to
the Guarantee (control means ‘‘control’’
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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.
(19) Illiquid Security means a security
that cannot be sold or disposed of in the
ordinary course of business within
seven calendar days at approximately
the value ascribed to it by the fund.
(20) Penny-Rounding Method of
pricing means the method of computing
an investment company’s price per
share for purposes of distribution,
redemption and repurchase whereby the
current net asset value per share is
rounded to the nearest one percent.
(21) Rated Security means a security
that meets the requirements of
paragraphs (a)(21)(i) or (ii) of this
section, in each case subject to
paragraph (a)(21)(iii) of this section:
(i) The security has received a shortterm rating from a Designated NRSRO,
or has been issued by an issuer that has
received a short-term rating from a
Designated 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 a Designated NRSRO, or a
Guarantee issued by a guarantor that has
received a short-term rating from a
Designated 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 Designated NRSROs that
have issued a rating with respect to a
security or class of debt obligations of
an issuer; or
(ii) If only one Designated 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 Designated NRSRO.
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(24) Second Tier Security means any
Eligible Security that is not a First Tier
Security.
(25) Single State Fund means a Tax
Exempt Fund that holds itself out as
seeking to maximize the amount of its
distributed income that is exempt from
the income taxes or other taxes on
investments of a particular State and,
where applicable, subdivisions thereof.
(26) Tax Exempt Fund means any
money market fund that holds itself out
as distributing income exempt from
regular Federal income tax.
(27) Total Assets means, with respect
to a money market fund using the
Amortized Cost Method, the total
amortized cost of its assets and, with
respect to any other money market fund,
the total market-based value of its
assets.
(28) Unconditional Demand Feature
means a Demand Feature that by its
terms would be readily exercisable in
the event of a default in payment of
principal or interest on the underlying
security or securities.
(29) United States DollarDenominated means, with reference to a
security, that all principal and interest
payments on such security are payable
to security holders in United States
dollars under all circumstances and that
the interest rate of, the principal amount
to be repaid, and the timing of payments
related to such security do not vary or
float with the value of a foreign
currency, the rate of interest payable on
foreign currency borrowings, or with
any other interest rate or index
expressed in a currency other than
United States dollars.
(30) Unrated Security means a
security that is not a Rated Security.
(31) Variable Rate Security means a
security the terms of which provide for
the adjustment of its interest rate on set
dates (such as the last day of a month
or calendar quarter) and that, upon each
adjustment until the final maturity of
the instrument or the period remaining
until the principal amount can be
recovered through demand, can
reasonably be expected to have a market
value that approximates its amortized
cost.
(32) Weekly Liquid Assets means:
(i) Cash;
(ii) Direct obligations of the U.S.
Government;
(iii) Government Securities that are
issued by a person controlled or
supervised by and acting as an
instrumentality of the Government of
the United States pursuant to authority
granted by the Congress of the United
States that:
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(A) Are issued at a discount to the
principal amount to be repaid at
maturity; and
(B) Have a remaining maturity date of
60 days or less; or
(iv) Securities that will mature or are
subject to a Demand Feature that is
exercisable and payable within five
Business Days.
(b) Holding Out and Use of Names
and Titles. (1) It shall be an untrue
statement of material fact within the
meaning of section 34(b) of the Act (15
U.S.C. 80a–33(b)) for a registered
investment company, in any registration
statement, application, report, account,
record, or other document filed or
transmitted pursuant to the Act,
including any advertisement, pamphlet,
circular, form letter, or other sales
literature addressed to or intended for
distribution to prospective investors
that is required to be filed with the
Commission by section 24(b) of the Act
(15 U.S.C. 80a–24(b)), to hold itself out
to investors as a money market fund or
the equivalent of a money market fund,
unless such registered investment
company meets the conditions of
paragraphs (c)(2), (c)(3), (c)(4), and (c)(5)
of this section.
(2) It shall constitute the use of a
materially deceptive or misleading
name or title within the meaning of
section 35(d) of the Act (15 U.S.C. 80a–
34(d)) for a registered investment
company to adopt the term ‘‘money
market’’ as part of its name or title or the
name or title of any redeemable
securities of which it is the issuer, or to
adopt a name that suggests that it is a
money market fund or the equivalent of
a money market fund, unless such
registered investment company meets
the conditions of paragraphs (c)(2),
(c)(3), (c)(4), and (c)(5) of this section.
(3) For purposes of this paragraph, a
name that suggests that a registered
investment company is a money market
fund or the equivalent thereof shall
include one that uses such terms as
‘‘cash,’’ ‘‘liquid,’’ ‘‘money,’’ ‘‘ready assets’’
or similar terms.
(c) Share Price Calculations. The
current price per share, for purposes of
distribution, redemption and
repurchase, of any redeemable security
issued by any registered investment
company (‘‘money market fund’’ or
‘‘fund’’), notwithstanding the
requirements of section 2(a)(41) of the
Act (15 U.S.C. 80a–2(a)(41)) and of
§§ 270.2a–4 and 270.22c–1 thereunder,
may be computed by use of the
Amortized Cost Method or the PennyRounding Method; provided, however,
that:
(1) Board Findings. The board of
directors of the money market fund
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shall determine, in good faith, that it is
in the best interests of the fund and its
shareholders to maintain a stable net
asset value per share or stable price per
share, by virtue of either the Amortized
Cost Method or the Penny-Rounding
Method, and that the money market
fund will continue to use such method
only so long as the board of directors
believes that it fairly reflects the marketbased net asset value per share.
(2) Portfolio Maturity. The money
market fund shall maintain a dollarweighted average portfolio maturity
appropriate to its objective of
maintaining a stable net asset value per
share or price per share; provided,
however, that the money market fund
will not:
(i) Acquire any instrument with a
remaining maturity of greater than 397
calendar days;
(ii) Maintain a dollar-weighted
average portfolio maturity that exceeds
60 calendar days; or
(iii) Maintain a dollar-weighted
average portfolio maturity that exceeds
120 calendar days, determined without
reference to the exceptions in paragraph
(d) of this section regarding interest rate
readjustments.
(3) Portfolio Quality—(i) General. The
money market fund shall limit its
portfolio investments to those United
States Dollar-Denominated securities
that the fund’s board of directors
determines present minimal credit risks
(which determination must be based on
factors pertaining to credit quality in
addition to any rating assigned to such
securities by a Designated NRSRO) and
that are at the time of Acquisition
Eligible Securities.
(ii) Second Tier Securities. No money
market fund shall Acquire a Second Tier
Security with a remaining maturity of
greater than 45 calendar days.
Immediately after the Acquisition of any
Second Tier Security, a money market
fund shall not have invested more than
three percent of its Total Assets in
Second Tier Securities.
(iii) Securities Subject to Guarantees.
A security that is subject to a Guarantee
may be determined to be an Eligible
Security or a First Tier Security based
solely on whether the Guarantee is an
Eligible Security or First Tier Security,
as the case may be.
(iv) 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 or
a First Tier Security only if:
(A) The Conditional Demand Feature
is an Eligible Security or First Tier
Security, as the case may be;
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(B) At the time of the Acquisition of
the Underlying Security, the money
market fund’s board of directors has
determined that there is minimal risk
that the circumstances that would result
in the Conditional Demand Feature not
being exercisable will occur; and
(1) The conditions limiting exercise
either can be monitored readily by the
fund, or relate to the taxability, under
Federal, State or local law, of the
interest payments on the security; or
(2) The terms of the Conditional
Demand Feature require that the fund
will receive notice of the occurrence of
the condition and the opportunity to
exercise the Demand Feature in
accordance with its terms; and
(C) The Underlying Security or any
Guarantee of such security (or the debt
securities of the issuer of the Underlying
Security or Guarantee that are
comparable in priority and security with
the Underlying Security or Guarantee)
has received either a short-term rating or
a long-term rating, as the case may be,
from the Requisite NRSROs within the
NRSROs’ two 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’ two 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 First Tier Securities of a
single issuer for a period of up to three
Business Days after the Acquisition
thereof; provided, further, that the fund
may not invest in the securities of more
than one issuer in accordance with the
foregoing proviso in this paragraph at
any time.
(B) Single State Funds. With respect
to seventy-five percent of its Total
Assets, immediately after the
Acquisition of any security, a Single
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State Fund shall not have invested more
than five percent of its Total Assets in
securities issued by the issuer of the
security.
(C) Second Tier Securities.
Immediately after the Acquisition of any
Second Tier Security, a money market
fund shall not have invested more than
one half of one percent of its Total
Assets in the Second Tier Securities of
any single issuer.
(ii) Issuer Diversification Calculations.
For purposes of making calculations
under paragraph (c)(4)(i) of this section:
(A) Repurchase Agreements. The
Acquisition of a repurchase agreement
may be deemed to be an Acquisition of
the underlying securities, provided the
obligation of the seller to repurchase the
securities from the money market fund
is Collateralized Fully and the fund’s
board of directors has evaluated the
seller’s creditworthiness.
(B) Refunded Securities. The
Acquisition of a Refunded Security shall
be deemed to be an Acquisition of the
escrowed Government Securities.
(C) Conduit Securities. A Conduit
Security shall be deemed to be issued by
the person (other than the Municipal
Issuer) ultimately responsible for
payments of interest and principal on
the security.
(D) Asset Backed Securities—(1)
General. An Asset Backed Security
Acquired by a fund (‘‘Primary ABS’’)
shall be deemed to be issued by the
Special Purpose Entity that issued the
Asset Backed Security, provided,
however:
(i) Holdings of Primary ABS. Any
person whose obligations constitute ten
percent or more of the principal amount
of the Qualifying Assets of the Primary
ABS (‘‘Ten Percent Obligor’’) shall be
deemed to be an issuer of the portion of
the Primary ABS such obligations
represent; and
(ii) Holdings of Secondary ABS. If a
Ten Percent Obligor of a Primary ABS
is itself a Special Purpose Entity issuing
Asset Backed Securities (‘‘Secondary
ABS’’), any Ten Percent Obligor of such
Secondary ABS also shall be deemed to
be an issuer of the portion of the
Primary ABS that such Ten Percent
Obligor represents.
(2) Restricted Special Purpose
Entities. A Ten Percent Obligor with
respect to a Primary or Secondary ABS
shall not be deemed to have issued any
portion of the assets of a Primary ABS
as provided in paragraph (c)(4)(ii)(D)(1)
of this section if that Ten Percent
Obligor is itself a Special Purpose Entity
issuing Asset Backed Securities
(‘‘Restricted Special Purpose Entity’’),
and the securities that it issues (other
than securities issued to a company that
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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.
(iii) Diversification Rules for Demand
Features and Guarantees. The money
market fund shall be diversified with
respect to Demand Features and
Guarantees Acquired by the fund as
provided in paragraphs (c)(4)(iii) and
(c)(4)(iv) of this section, other than with
respect to a Demand Feature issued by
the same institution that issued the
underlying security, or with respect to
a Guarantee or Demand Feature that is
itself a Government Security.
(A) General. Immediately after the
Acquisition of any Demand Feature or
Guarantee or security subject to a
Demand Feature or Guarantee, a money
market fund, with respect to seventyfive percent of its Total Assets, shall not
have invested more than ten percent of
its Total Assets in securities issued by
or subject to Demand Features or
Guarantees from the institution that
issued the Demand Feature or
Guarantee, subject to paragraphs
(c)(4)(iii)(B) and (C) of this section.
(B) Second Tier Demand Features or
Guarantees. Immediately after the
Acquisition of any Demand Feature or
Guarantee (or a security after giving
effect to the Demand Feature or
Guarantee) that is a Second Tier
Security, a money market fund shall not
have invested more than 2.5 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.
(C) 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
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10113
not have invested more than ten percent
of its Total Assets in securities issued
by, or subject to Demand Features or
Guarantees from the institution that
issued the Demand Feature or
Guarantee, unless, with respect to any
security subject to Demand Features or
Guarantees from that institution (other
than securities issued by such
institution), the Demand Feature or
Guarantee is a Demand Feature or
Guarantee Issued By A Non-Controlled
Person.
(iv) Demand Feature and Guarantee
Diversification Calculations—(A)
Fractional Demand Features or
Guarantees. In the case of a security
subject to a Demand Feature or
Guarantee from an institution by which
the institution guarantees a specified
portion of the value of the security, the
institution shall be deemed to guarantee
the specified portion thereof.
(B) Layered Demand Features or
Guarantees. In the case of a security
subject to Demand Features or
Guarantees from multiple institutions
that have not limited the extent of their
obligations as described in paragraph
(c)(4)(iv)(A) of this section, each
institution shall be deemed to have
provided the Demand Feature or
Guarantee with respect to the entire
principal amount of the security.
(v) Diversification Safe Harbor. A
money market fund that satisfies the
applicable diversification requirements
of paragraphs (c)(4) and (c)(6) of this
section shall be deemed to have
satisfied the diversification
requirements of section 5(b)(1) of the
Act (15 U.S.C. 80a–5(b)(1)) and the rules
adopted thereunder.
(5) Portfolio Liquidity. The money
market fund shall hold securities that
are sufficiently liquid 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; provided, however, that:
(i) Illiquid Securities. The money
market fund shall not Acquire any
Illiquid Security if, immediately after
the Acquisition, the money market fund
would have invested more than five
percent of its Total Assets in Illiquid
Securities.
(ii) Minimum Daily Liquidity
Requirement. The money market fund
shall not Acquire any security other
than a Daily Liquid Asset if,
immediately after the Acquisition, the
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.
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(iii) Minimum Weekly Liquidity
Requirement. The money market fund
shall not Acquire any security other
than a Weekly Liquid Asset if,
immediately after the Acquisition, the
fund would have invested less than
thirty percent of its Total Assets in
Weekly Liquid Assets.
(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.
Upon the occurrence of either of the
events specified in paragraphs
(c)(7)(i)(A)(1) and (2) of this section with
respect to a portfolio security, 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:
(1) A portfolio security of a money
market fund ceases to be a First Tier
Security (either because it no longer has
the highest rating from the Requisite
NRSROs or, in the case of an Unrated
Security, the board of directors of the
money market fund determines that it is
no longer of comparable quality to a
First Tier Security); and
(2) 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 or Second Tier
Security held by the money market fund
has, since the security was Acquired by
the fund, been given a rating by a
Designated NRSRO below the
Designated NRSRO’s second highest
short-term rating category.
(B) Securities To Be Disposed Of. The
reassessments 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 of the specified event
and, in the case of events specified in
paragraph (c)(7)(i)(A)(2) of this section,
the board is subsequently notified of the
adviser’s actions.
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(C) Special Rule for Certain Securities
Subject to Demand Features. In the
event that after giving effect to a rating
downgrade, more than 2.5 percent of the
fund’s Total Assets are invested in
securities issued by or subject to
Demand Features from a single
institution that are Second Tier
Securities, the fund shall reduce its
investment in securities issued by or
subject to Demand Features from that
institution to no more than 2.5 percent
of its Total Assets by exercising the
Demand Features at the next succeeding
exercise date(s), 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.
(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 or Event of Insolvency
with respect to the issuer of one or more
portfolio securities (other than an
immaterial default unrelated to the
financial condition of the issuer) or any
issuer of a Demand Feature or Guarantee
to which one or more portfolio
securities is subject, and the actions the
money market fund intends to take in
response to such event, 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
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the money market fund’s Total Assets;
or
(B) Purchase of a security from the
fund by an affiliated person, promoter,
or principal underwriter of the fund, or
an affiliated person of such a person, in
reliance on § 270.17a–9, including
identification of the security, its
amortized cost, the sale price, and the
reasons for such purchase.
(iv) Defaults for Purposes of
Paragraphs (c)(7)(ii) and (iii). For
purposes of paragraphs (c)(7)(ii) and (iii)
of this section, an instrument subject to
a Demand Feature or Guarantee shall
not be deemed to be in default (and an
Event of Insolvency with respect to the
security shall not be deemed to have
occurred) if:
(A) In the case of an instrument
subject to a Demand Feature, the
Demand Feature has been exercised and
the fund has recovered either the
principal amount or the amortized cost
of the instrument, plus accrued interest;
or
(B) The provider of the Guarantee is
continuing, without protest, to make
payments as due on the instrument.
(8) Required Procedures: Amortized
Cost Method. In the case of a money
market fund using the Amortized Cost
Method:
(i) General. In supervising the money
market fund’s operations and delegating
special responsibilities involving
portfolio management to the money
market fund’s investment adviser, the
money market fund’s board of directors,
as a particular responsibility within the
overall duty of care owed to its
shareholders, shall establish written
procedures reasonably designed, taking
into account current market conditions
and the money market fund’s
investment objectives, to stabilize the
money market fund’s net asset value per
share, as computed for the purpose of
distribution, redemption and
repurchase, at a single value.
(ii) Specific Procedures. Included
within the procedures adopted by the
board of directors shall be the following:
(A) Shadow Pricing. Written
procedures shall provide:
(1) That the extent of deviation, if any,
of the current net asset value per share
calculated using available market
quotations (or an appropriate substitute
that reflects current market conditions)
from the money market fund’s
amortized cost price per share, shall be
calculated at such intervals as the board
of directors determines appropriate and
reasonable in light of current market
conditions;
(2) For the periodic review by the
board of directors of the amount of the
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deviation as well as the methods used
to calculate the deviation; and
(3) For the maintenance of records of
the determination of deviation and the
board’s review thereof.
(B) Prompt Consideration of
Deviation. In the event such deviation
from the money market fund’s
amortized cost price per share exceeds
1⁄2 of 1 percent, the board of directors
shall promptly consider what action, if
any, should be initiated by the board of
directors.
(C) Material Dilution or Unfair
Results. Where the board of directors
believes the extent of any deviation
from the money market fund’s
amortized cost price per share may
result in material dilution or other
unfair results to investors or existing
shareholders, it shall cause the fund to
take such action as it deems appropriate
to eliminate or reduce to the extent
reasonably practicable such dilution or
unfair results.
(9) Required Procedures: PennyRounding Method. In the case of a
money market fund using the PennyRounding Method, in supervising the
money market fund’s operations and
delegating special responsibilities
involving portfolio management to the
money market fund’s investment
adviser, the money market fund’s board
of directors undertakes, as a particular
responsibility within the overall duty of
care owed to its shareholders, to assure
to the extent reasonably practicable,
taking into account current market
conditions affecting the money market
fund’s investment objectives, that the
money market fund’s price per share as
computed for the purpose of
distribution, redemption and
repurchase, rounded to the nearest one
percent, will not deviate from the single
price established by the board of
directors.
(10) Specific Procedures: Amortized
Cost and Penny-Rounding Methods.
Included within the procedures adopted
by the board of directors for money
market funds using either the Amortized
Cost or Penny-Rounding Methods shall
be the following:
(i) Securities for Which Maturity is
Determined by Reference to Demand
Features. In the case of a security for
which maturity is determined by
reference to a Demand Feature, written
procedures shall require ongoing review
of the security’s continued minimal
credit risks, and that review must be
based on, among other things, financial
data for the most recent fiscal year of the
issuer of the Demand Feature and, in the
case of a security subject to a
Conditional Demand Feature, the issuer
of the security whose financial
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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 (pursuant to paragraph (c)(5) of
this section) 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 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.
(v) Stress Testing. Written procedures
shall provide for:
(A) The periodic testing, at such
intervals as the board of directors
determines appropriate and reasonable
in light of current market conditions, of
the money market fund’s ability to
maintain a stable net asset value per
share based upon specified hypothetical
events that include, but are not limited
to, a change in short-term interest rates,
an increase in shareholder redemptions,
a downgrade of or default on portfolio
securities, and the widening or
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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.
(B) A report on the results of such
testing to be provided to the board of
directors at its next regularly scheduled
meeting (or sooner, if appropriate in
light of the results), which report shall
include:
(1) The date(s) on which the testing
was performed and the magnitude of
each hypothetical event that would
cause the deviation of the money market
fund’s net asset value calculated using
available market quotations (or
appropriate substitutes which reflect
current market conditions) from its net
asset value per share calculated using
amortized cost to exceed 1⁄2 of 1 percent;
and
(2) 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.
(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 Designated NRSRO
ratings (if any) used to determine the
status of the security as an Eligible
Security, First Tier Security or Second
Tier Security shall be maintained and
preserved in an easily accessible place.
(iv) Determinations With Respect to
Adjustable Rate Securities. For a period
of not less than three years from the date
when the determination was most
recently made, a written record shall be
preserved and maintained, in an easily
accessible place, of the determination
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required by paragraph (c)(10)(iii) of this
section (that a Variable Rate or Floating
Rate Security that is not subject to a
Demand Feature and for which maturity
is determined pursuant to paragraphs
(d)(1), (d)(2) or (d)(4) of this section can
reasonably be expected, upon
readjustment of its interest rate at all
times during the life of the instrument,
to have a market value that
approximates its amortized cost).
(v) Determinations with Respect to
Asset Backed Securities. For a period of
not less than three years from the date
when the determination was most
recently made, a written record shall be
preserved and maintained, in an easily
accessible place, of the determinations
required by paragraph (c)(10)(iv) of this
section (the number of Ten Percent
Obligors (as that term is used in
paragraph (c)(4)(ii)(D) of this section)
deemed to be the issuers of all or a
portion of the Asset Backed Security for
purposes of paragraph (c)(4)(ii)(D) of
this section). The written record shall
include:
(A) The identities of the Ten Percent
Obligors (as that term is used in
paragraph (c)(4)(ii)(D) of this section),
the percentage of the Qualifying Assets
constituted by the securities of each Ten
Percent Obligor and the percentage of
the fund’s Total Assets that are invested
in securities of each Ten Percent
Obligor; and
(B) Any determination that an Asset
Backed Security will not have, or is
unlikely to have, Ten Percent Obligors
deemed to be issuers of all or a portion
of that Asset Backed Security for
purposes of paragraph (c)(4)(ii)(D) of
this section.
(vi) Evaluations with Respect to
Securities Subject to Demand Features
or Guarantees. For a period of not less
than three years from the date when the
evaluation was most recently made, a
written record shall be preserved and
maintained, in an easily accessible
place, of the evaluation required by
paragraph (c)(10)(ii) (regarding
securities subject to one or more
Demand Features or Guarantees) of this
section.
(vii) Reports 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)(10)(v)(B) 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
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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) Web Site Disclosure of Portfolio
Holdings. The money market fund shall
post on its Web site, for a period of not
less than six months, beginning no later
than the fifth Business Day of the
month, a schedule of its investments, as
of the last Business Day of the prior
month, that includes the following
information:
(i) With respect to the money market
fund and each class thereof:
(A) The dollar-weighted average
portfolio maturity; and
(B) The dollar-weighted average
portfolio maturity determined without
reference to the exceptions in paragraph
(d) of this section regarding interest rate
readjustments;
(ii) With respect to each security held
by the money market fund:
(A) Name of the issuer;
(B) Category of investment (indicate
the category that most closely identifies
the instrument from among the
following: Treasury Debt; Government
Agency Debt; Variable Rate Demand
Note; Other Municipal Debt; Financial
Company Commercial Paper; Asset
Backed Commercial Paper; Other
Commercial Paper; Certificate of
Deposit; Structured Investment Vehicle
Note; Other Note; Treasury Repurchase
Agreement; Government Agency
Repurchase Agreement; Other
Repurchase Agreement; Insurance
Company Funding Agreement;
Investment Company; Other
Instrument);
(C) CUSIP number (if any);
(D) Principal amount;
(E) Maturity date as determined under
this section;
(F) Final legal maturity date (taking
into account any maturity date
extensions that may be effected at the
option of the issuer), if different from
the maturity date as determined under
this section;
(G) Coupon or yield; and
(H) Amortized cost value; and
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(iii) A link to a Web site of the
Securities and Exchange Commission
where a user may obtain the most recent
12 months of publicly available
information filed by the money market
fund pursuant to § 270.30b1–7.
(13) Processing of Transactions. The
money market fund (or its transfer
agent) shall have 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.
(d) Maturity of Portfolio Securities.
For purposes of this section, the
maturity of a portfolio security shall be
deemed to be the period remaining
(calculated from the trade date or such
other date on which the fund’s interest
in the security is subject to market
action) until the date on which, in
accordance with the terms of the
security, the principal amount must
unconditionally be paid, or in the case
of a security called for redemption, the
date on which the redemption payment
must be made, except as provided in
paragraphs (d)(1) through (d)(8) of this
section:
(1) Adjustable Rate Government
Securities. A Government Security that
is a Variable Rate Security where the
variable rate of interest is readjusted no
less frequently than every 397 calendar
days shall be deemed to have a maturity
equal to the period remaining until the
next readjustment of the interest rate. A
Government Security that is a Floating
Rate Security shall be deemed to have
a remaining maturity of one day.
(2) Short-Term Variable Rate
Securities. A Variable Rate Security, the
principal amount of which, in
accordance with the terms of the
security, must unconditionally be paid
in 397 calendar days or less shall be
deemed to have a maturity equal to the
earlier of the period remaining until the
next readjustment of the interest rate or
the period remaining until the principal
amount can be recovered through
demand.
(3) Long-Term Variable Rate
Securities. A Variable Rate Security, the
principal amount of which is scheduled
to be paid in more than 397 calendar
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
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principal amount of which, in
accordance with the terms of the
security, must unconditionally be paid
in 397 calendar days or less shall be
deemed to have a maturity of one day.
(5) Long-Term Floating Rate
Securities. A Floating Rate Security, the
principal amount of which is scheduled
to be paid in more than 397 calendar
days, that is subject to a Demand
Feature, shall be deemed to have a
maturity equal to the period remaining
until the principal amount can be
recovered through demand.
(6) Repurchase Agreements. A
repurchase agreement shall be deemed
to have a maturity equal to the period
remaining until the date on which the
repurchase of the underlying securities
is scheduled to occur, or, where the
agreement is subject to demand, the
notice period applicable to a demand for
the repurchase of the securities.
(7) Portfolio Lending Agreements. A
portfolio lending agreement shall be
treated as having a maturity equal to the
period remaining until the date on
which the loaned securities are
scheduled to be returned, or where the
agreement is subject to demand, the
notice period applicable to a demand for
the return of the loaned securities.
(8) Money Market Fund Securities. An
investment in a money market fund
shall be treated as having a maturity
equal to the period of time within which
the Acquired money market fund is
required to make payment upon
redemption, unless the Acquired money
market fund has agreed in writing to
provide redemption proceeds to the
investing money market fund within a
shorter time period, in which case the
maturity of such investment shall be
deemed to be the shorter period.
(e) Delegation. The money market
fund’s board of directors may delegate
to the fund’s investment adviser or
officers the responsibility to make any
determination required to be made by
the board of directors under this section
(other than the determinations required
by paragraphs (a)(11)(i) (designation of
NRSROs); (c)(1) (board findings);
(c)(7)(ii) (defaults and other events);
(c)(8)(i) (general required procedures:
Amortized Cost Method); (c)(8)(ii)(A)
(shadow pricing), (B) (prompt
consideration of deviation), (C) (material
dilution or unfair results); (c)(9)
(required procedures: Penny Rounding
Method); and (c)(10)(v)(A) (stress testing
procedures) of this section; provided
that:
(1) Written Guidelines. The Board
shall establish and periodically review
written guidelines (including guidelines
for determining whether securities
present minimal credit risks as required
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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)(12)), or has defaulted (other than an
immaterial default unrelated to the
financial condition of the issuer):
(1) The purchase price is paid in cash;
and
(2) The purchase price is equal to the
greater of the amortized cost of the
security or its market price (in each
case, including accrued interest).
(b) In the case of any other portfolio
security:
(1) The purchase price meets the
requirements of 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) Exemption. 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:
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10117
(1) The fund’s board of directors,
including a majority of directors who
are not interested persons of the fund,
determines pursuant to § 270.2a–
7(c)(8)(ii)(C) that the extent of the
deviation between the fund’s amortized
cost price per share and its current net
asset value per share calculated using
available market quotations (or an
appropriate substitute that reflects
current market conditions) may result in
material dilution or other unfair results
to investors or existing shareholders;
(2) The fund’s board of directors,
including a majority of directors who
are not interested persons of the fund,
irrevocably 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
the Director’s designee.
(b) Conduits. Any registered
investment company, or series thereof,
that owns, pursuant to section
12(d)(1)(E) of the Act (15 U.S.C. 80a–
12(d)(1)(E)), shares of a money market
fund that has suspended redemptions of
shares pursuant to paragraph (a) of this
section also is exempt from the
requirements of section 22(e) of the Act
(15 U.S.C. 80a–22(e)). A registered
investment company 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 the
Director’s designee.
(c) Commission Orders. For the
protection of shareholders, the
Commission may issue an order to
rescind or modify the exemption
provided by this section, after
appropriate notice and opportunity for
hearing in accordance with section 40 of
the Act (15 U.S.C. 80a–39).
■ 5. Section 270.30b1–6T is amended by
revising paragraph (d) to read as
follows:
§ 270.30b1–6T Weekly portfolio report for
certain money market funds.
*
*
*
*
*
(d) Expiration. This section will
expire on December 1, 2010.
■ 6. Section 270.30b1–7 is added to read
as follows:
§ 270.30b1–7 Monthly report for money
market funds.
(a) Report. Every registered open-end
management investment company, or
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series thereof, that is regulated as a
money market fund under § 270.2a–7
must file with the Commission a
monthly report of portfolio holdings on
Form N–MFP (§ 274.201 of this chapter),
current as of the last business day of the
previous month, no later than the fifth
business day of each month.
(b) Public availability. The
Commission will make the information
filed on Form N–MFP available to the
public 60 days after the end of the
month to which the information
pertains.
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
(referenced in § 274.201) are added to
read as follows:
■
§ 274.201 Form N–MFP, portfolio holdings
of money market funds.
This form shall be used by registered
open-end management investment
companies that are regulated as money
market funds under § 270.2a–7 of this
chapter to file reports pursuant to
§ 270.30b1–7 of this chapter no later
than the fifth business day of each
month.
Note: The text of Form N–MFP will not
appear in the Code of Federal Regulations.
FORM N–MFP
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MONTHLY SCHEDULE OF
PORTFOLIO HOLDINGS OF MONEY
MARKET FUNDS
Form N–MFP is to be used by
registered open-end management
investment companies, or series thereof,
that are regulated as money market
funds pursuant to rule 2a–7 under the
Investment Company Act of 1940
(‘‘Act’’) (17 CFR 270.2a–7) (‘‘money
market funds’’), to file reports with the
Commission pursuant to rule 30b1–7
under the Act (17 CFR 270.30b1–7). The
Commission may use the information
provided on Form N–MFP in its
regulatory, disclosure review,
inspection, and policymaking roles.
GENERAL INSTRUCTIONS
A. Rule as to Use of Form N–MFP
Form N–MFP is the public reporting
form that is to be used for monthly
reports of money market funds required
by section 30(b) of the Act and rule
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17:23 Mar 03, 2010
Jkt 020001
30b1–7 under the Act (17 CFR
270.30b1–7). A money market fund
must report information about the fund
and its portfolio holdings as of the last
business day of the preceding month.
The Form N–MFP must be filed with the
Commission no later than the fifth
business day of each month, but may be
filed any time beginning on the first
business day of the month. Each money
market fund, or series of a money
market fund, is required to file a
separate form. If the money market fund
does not have any classes, the fund
must provide the information required
by Part I.B for the series.
A money market fund may file an
amendment to a previously filed Form
N–MFP at any time, including an
amendment to correct a mistake or error
in a previously filed form. A fund that
files an amendment to a previously filed
form must provide information in
response to all items of Form N–MFP,
regardless of why the amendment is
filed.
B. Application of General Rules and
Regulations
The General Rules and Regulations
under the Act contain certain general
requirements that are applicable to
reporting on any form under the Act.
These general requirements should be
carefully read and observed in the
preparation and filing of reports on this
form, except that any provision in the
form or in these instructions shall be
controlling.
C. Filing of Form N–MFP
A money market fund must file Form
N–MFP 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.
E. Definitions
References to sections and rules in
this Form N–MFP are to the Investment
Company Act of 1940 [15 U.S.C. 80a]
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(the ‘‘Investment Company Act’’), unless
otherwise indicated. Terms used in this
Form N–MFP have the same meaning as
in the Investment Company Act or
related rules, unless otherwise
indicated.
As used in this Form N–MFP, the
terms set out below have the following
meanings:
‘‘Class’’ means a class of shares issued
by a Multiple Class Fund that represents
interests in the same portfolio of
securities under rule 18f–3 [17 CFR
270.18f–3] or under an order exempting
the Multiple Class Fund from sections
18(f), 18(g), and 18(i) [15 U.S.C. 80a–
18(f), 18(g), and 18(i)].
‘‘Fund’’ means the Registrant or a
separate Series of the Registrant. When
an item of Form N–MFP specifically
applies to a Registrant or a Series, those
terms will be used.
‘‘Master-Feeder Fund’’ means a twotiered arrangement in which one or
more Funds (each a ‘‘Feeder Fund’’)
holds shares of a single Fund (the
‘‘Master Fund’’) in accordance with
section 12(d)(1)(E) [15 U.S.C. 80a–
12(d)(1)(E)].
‘‘Money Market Fund’’ means a Fund
that holds itself out as a money market
fund and meets the maturity, quality,
and diversification requirements of rule
2a–7 [17 CFR 270.2a–7].
‘‘Securities Act’’ means the Securities
Act of 1933 [15 U.S.C. 77a–aa].
‘‘Series’’ means shares offered by a
Registrant that represent undivided
interests in a portfolio of investments
and that are preferred over all other
series of shares for assets specifically
allocated to that series in accordance
with rule 18f-2(a) [17 CFR 270.18f–2(a)].
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N–MFP MONTHLY SCHEDULE
OF PORTFOLIO HOLDINGS OF
MONEY MARKET FUNDS
Report for [Month, Day, Year]
CIK Number of Registrant:
EDGAR Series Identifier:
Total number of share classes in the
series:
Do you anticipate that this will be the
fund’s final filing on Form N–MFP?
[Y/N]
Is the fund liquidating? [Y/N]
Is the fund merging with, or being
acquired by, another fund? [Y/N]
If so, identify the successor fund by
CIK, Securities Act file number, and
EDGAR series identifier.
If this is not a final filing: has the fund
acquired or merged with another fund
since the last filing? [Y/N]
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If so, identify the acquired or merged
fund by CIK, Securities Act file number,
and EDGAR series identifier.
Part I: Information about the Fund
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A. Series-Level Information
Item 1. Securities Act File Number.
Item 2. Investment Adviser.
a. SEC file number of investment
adviser.
Item 3. Sub-Adviser. If a fund has one
or more sub-advisers, disclose the
name of each sub-adviser.
a. SEC file number of each subadviser.
Item 4. Independent Public Accountant.
a. City and state of independent
public accountant.
Item 5. Administrator. If a fund has one
or more administrators, disclose the
name of each administrator.
Item 6. Transfer Agent.
a. CIK Number.
b. SEC file number of transfer agent.
Item 7. Master-Feeder Funds. Is this a
feeder fund? [Y/N]
a. Identify the master fund by CIK.
b. Securities Act file number of the
master fund.
c. EDGAR series identifier of the
master fund.
Item 8. Master-Feeder Funds. Is this a
master fund? [Y/N]
a. If this is a master fund, identify all
feeder funds by CIK or, if the fund
does not have a CIK, by name.
b. Securities Act file number of each
feeder fund.
c. EDGAR series identifier of each
feeder fund.
Item 9. Is this series primarily used to
fund insurance company separate
accounts? [Y/N]
Item 10. Category. Indicate the category
that most closely identifies the
money market fund from among the
following: Treasury, Government/
Agency, Prime, Single State Fund,
or Other Tax Exempt Fund.
Item 11. Dollar weighted average
portfolio maturity.
Item 12. Dollar weighted average life
maturity. Calculate the dollar
weighted average portfolio maturity
without reference to the exceptions
in rule 2a–7(d) regarding interest
rate readjustments.
Item 13. Total value of portfolio
securities at amortized cost, to the
nearest cent.
Item 14. Total value of other assets, to
the nearest cent.
Item 15. Total value of liabilities, to the
nearest cent.
Item 16. Net assets of the series, to the
nearest cent.
Item 17. 7-day gross yield. Based on the
7 days ended on the last day of the
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prior month, calculate the fund’s
yield by determining the net
change, exclusive of capital changes
and income other than investment
income, in the value of a
hypothetical pre-existing account
having a balance of one share at the
beginning of the period and
dividing the difference by the value
of the account at the beginning of
the base period to obtain the base
period return, and then multiplying
the base period return by (365/7)
with the resulting yield figure
carried to at least the nearest
hundredth of one percent. The 7day gross yield should not reflect a
deduction of shareholders fees and
fund operating expenses.
Item 18. Shadow Price of the Series.
a. The net asset value per share most
recently calculated using available
market quotations (or an
appropriate substitute that reflects
current market conditions),
including the value of any capital
support agreement, to the nearest
hundredth of a cent;
b. The date as of which the marketbased net asset value disclosed in
Item 18a was calculated;
c. The net asset value per share most
recently calculated using available
market quotations (or an
appropriate substitute that reflects
current market conditions),
excluding the value of any capital
support agreement, to the nearest
hundredth of a cent; and
d. The date as of which the marketbased net asset value disclosed in
Item 18c was calculated.
B. Class-Level Information. For each
Class of the Series, disclose the
following:
Item 19. EDGAR Class identifier.
Item 20. Minimum initial investment.
Item 21. Net assets of the Class, to the
nearest cent.
Item 22. Net asset value per share for
purposes of distributions,
redemptions, and repurchase, to the
nearest cent.
Item 23. Net shareholder flow activity
for the month ended (subscriptions
less redemptions), to the nearest
cent.
a. Gross subscriptions for the month
ended (including dividend
reinvestments), to the nearest cent.
b. Gross redemptions for the month
ended, to the nearest cent.
Item 24. 7-day net yield, as calculated
under Item 26(a)(1) of Form N–1A.
Item 25. Shadow Price of each Class.
a. The net asset value per share most
recently calculated using available
market quotations (or an
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10119
appropriate substitute that reflects
current market conditions),
including the value of any capital
support agreement, to the nearest
hundredth of a cent;
b. The date as of which the marketbased net asset value disclosed in
Item 25a was calculated;
c. The net asset value per share most
recently calculated using available
market quotations (or an
appropriate substitute that reflects
current market conditions),
excluding the value of any capital
support agreement, to the nearest
hundredth of a cent; and
d. The date as of which the marketbased net asset value disclosed in
Item 25c was calculated.
Part 2: Schedule of Portfolio Securities.
For each security held by the money
market fund, disclose the following:
Item 26. The name of the issuer.
Item 27. The title of the issue (including
coupon or yield).
Item 28. The CUSIP. If the security has
a CUSIP, filers must provide the
security’s CUSIP pursuant to this
Item and may skip Items 29 and 30.
Item 29. Other unique identifier, if the
security has a unique identifier. If a
CUSIP is provided pursuant to Item
28, skip this Item.
Item 30. The CIK of the issuer, if the
issuer has a CIK. If a CUSIP is
provided pursuant to Item 28, skip
this Item.
Item 31. The category of investment.
Indicate the category that most
closely identifies the instrument
from among the following: Treasury
Debt; Government Agency Debt;
Variable Rate Demand Note; Other
Municipal Debt; Financial
Company Commercial Paper; Asset
Backed Commercial Paper; Other
Commercial Paper; Certificate of
Deposit; Structured Investment
Vehicle Note; Other Note; Treasury
Repurchase Agreement;
Government Agency Repurchase
Agreement; Other Repurchase
Agreement; Insurance Company
Funding Agreement; Investment
Company; Other Instrument. If
Other Instrument, include a brief
description.
Item 32. If the security is a repurchase
agreement: is the fund treating the
acquisition of the repurchase
agreement as the acquisition of the
underlying securities (i.e.,
collateral) for purposes of portfolio
diversification under rule 2a–7? [Y/
N]
For repurchase agreements, describe
the securities subject to the
repurchase agreement, including:
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a. The name of the issuer;
b. Maturity date;
c. Coupon or yield;
d. The category of investments,
selected from Item 31 above;
e. The principal amount, to the
nearest cent;
f. Value of collateral, to the nearest
cent.
If multiple securities of an issuer are
subject to the repurchase
agreement, the securities may be
aggregated, in which case disclose:
(a) the total principal amount and
value and (b) the range of maturity
dates and interest rates.
Item 33. Rating. Indicate whether the
security is a rated First Tier
Security, rated Second Tier
Security, an Unrated Security, or no
longer an Eligible Security.
Item 34. Name of each Designated
NRSRO.
a. For each Designated NRSRO,
disclose the credit rating given by
the Designated NRSRO. If the
instrument and its issuer are not
rated by the Designated NRSRO,
indicate ‘‘NR.’’
Item 35. The maturity date as
determined under rule 2a–7.
Determine the maturity date, taking
into account the maturity
shortening provisions of rule 2a–
7(d).
Item 36. The final legal maturity date,
taking into account any maturity
date extensions that may be effected
at the option of the issuer.
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Item 37. Does the security have a
Demand Feature? [Y/N]
a. The identity of the Demand Feature
issuer.
b. Designated NRSRO(s) for the
Demand Feature or provider of the
Demand Feature.
c. For each Designated NRSRO,
disclose the credit rating given by
the Designated NRSRO. If there is
no rating given by the Designated
NRSRO, indicate ‘‘NR.’’
Item 38. Does the security have a
Guarantee? [Y/N]
a. The identity of the Guarantor.
b. Designated NRSRO(s) for the
Guarantee or Guarantor.
c. For each Designated NRSRO,
disclose the credit rating given by
the Designated NRSRO. If there is
no rating given by the Designated
NRSRO, indicate ‘‘NR.’’
Item 39. Does the security have any
enhancements, other than those
identified in Items 37 and 38 above,
on which the fund is relying to
determine the quality, maturity or
liquidity of the security? [Y/N]
a. The type of enhancement.
b. The identity of the enhancement
provider.
c. Designated NRSRO(s) for the
enhancement or enhancement
provider.
d. For each Designated NRSRO,
disclose the credit rating given by
the Designated NRSRO. If there is
no rating given by the Designated
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NRSRO, indicate ‘‘NR.’’
Item 40. The total principal amount of
the security held by the series, to
the nearest cent.
Item 41. The total current amortized
cost, to the nearest cent.
Item 42. The percentage of the money
market fund’s net assets invested in
the security, to the nearest
hundredth of a percent.
Item 43. Explanatory notes. Disclose any
other information that may be
material to other disclosures related
to the portfolio security.
Item 44. Is this an Illiquid Security as
of the date of this report? [Y/N]
Item 45. The value of the security,
calculated using available market
quotations (or an appropriate
substitute that reflects current
market conditions), including the
value of any capital support
agreement, to the nearest cent.
Item 46. The value of the security,
calculated using available market
quotations (or an appropriate
substitute that reflects current
market conditions), excluding the
value of any capital support
agreement, to the nearest cent.
Dated: February 23, 2010.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010–4059 Filed 3–3–10; 8:45 am]
BILLING CODE 8011–01–P
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| File Type | application/pdf |
| File Title | Document |
| Subject | Extracted Pages |
| Author | U.S. Government Printing Office |
| File Modified | 2010-03-04 |
| File Created | 2010-03-04 |