Alert October 14, 2008

Update on Treasury Temporary Guarantee Program Developments

As discussed in the October 7, 2008 Alert, all money market funds that intend to participate in the U.S. Treasury’s Temporary Guarantee Program (the “Program”) were required to have filed applications with the Treasury and paid the appropriate fees on or before October 8, 2008, or in certain circumstances, October 10, 2008.  Since the October 7, 2008 Alert, there have been further developments with respect to the Program.

  • The Staff of the SEC’s Division of Investment Management issued to the Investment Company Institute (the “ICI”) a no-action letter stating that it would not recommend any enforcement action against a money market fund participating in the Program for violating the senior securities prohibitions of Section 18(f) of the Investment Company Act of 1940, as amended (the “1940 Act”). 
  • The Treasury and the Internal Revenue Service (the “IRS”) issued guidance for an insurance-dedicated money market fund participating in the Program, that is, a money market fund whose beneficial interests are held exclusively by one or more segregated asset accounts of one or more insurance companies or other investors permitted under Section 1.817-5(f)(3) of the Treasury regulations under the Internal Revenue Code of 1986, as amended (the “Code”).  Under that guidance, the Treasury and the IRS addressed two issues.  First, they stated that a segregated asset account that invests in an insurance-dedicated money market fund will not violate the diversification requirements of Section 817(h) of the Code.  Second, they stated that a fund’s participation in the Program will not cause the holder of a variable contract supported by a segregated asset account that invests in the fund to be treated as an owner of the fund.
  • The Treasury issued an supplementary Q&A for the Program, in which it stated, among other things, that:
    • Although there is no explicit requirement for a participating money market fund to shadow price each day, the fund’s agreement with the Treasury requires it to notify the Treasury promptly if there is a Guarantee Event (generally defined as when the fund’s net asset value calculated using market quotations (its “market‑based net asset value”) falls below $0.995) or if the fund’s market-based net asset value per share falls below a threshold value (generally, $0.9975 per share).  The Treasury stated that whether or not a fund should shadow price daily in order to meet those notification and reporting requirements “is one that must be made in light of the specific facts and circumstances applicable to each individual fund.”
    • A fund may “cure” a Guarantee Event if its market-based net asset value increases above the Guarantee Threshold Value (generally, $0.995 per share) before the fund is required to commence liquidation.  In general, if the fund has a good faith belief that the market-based net asset value will increase above the Guarantee Threshold Value in a “short period of time” or the fund seeks to obtain a NAV Support Agreement (generally, an agreement under which a third party provides assistance in maintaining a fund’s $1.00 share price), the fund may take the full five days to commence liquidation.  If during that period the market-based net asset value per share equals or exceeds the Guarantee Threshold Value, the fund will be deemed to have cured the Guarantee Event.
    • The AICPA Audit and Accounting Guide for Investment Companies suggests that premiums paid by a fund to participate in the Program should be treated as a fund expense.  Moreover, the premium paid should be reflected on the fund’s books as a prepaid asset and that expenses should be amortized over the period beginning as soon as the fund determines that it will participate in the Program and ending on December 18, 2008.