The Staff of the SEC’s Division of Investment Management recently issued a no-action letter (the “No‑Action Letter”) to the Investment Company Institute (the “ICI”) in which it stated that it would not recommend enforcement action against a money market fund that maintains a stable net asset value per share if the money market fund, in complying with the “shadow pricing” requirement of Rule 2a-7 under the Investment Company Act of 1940, as amended, uses the amortized cost valuation method to value certain securities when calculating its market-based net asset value per share. Subject to a number of conditions, Rule 2a-7 permits a money market fund to calculate its share price for purposes of issuing and redeeming shares using the amortized cost method of valuing portfolio securities, rather than market values or, in the absence of readily available market quotations, fair value as otherwise required. One of the conditions imposed by Rule 2a-7 on a fund using the amortized cost method is that the fund must adopt procedures requiring the fund periodically to “shadow price,” that is, determine the extent that the fund’s current net asset value per share calculated using the amortized cost valuation method deviates from its net asset value per share calculated using valuations based on available market quotations or appropriate substitutes that reflect current market conditions.In its request for no-action relief, the ICI argued that under current market conditions, the shadow pricing provisions of Rule 2a-7 are not working as intended because of the difficulty funds were experiencing in obtaining market prices for certain securities. The SEC’s no-action relief will permit a fund to use the amortized cost value of a security, rather than the security’s market price or an appropriate substitute, for shadow pricing, provided that (a) the security (i) has a remaining maturity of 60 days or less and (ii) is a First Tier Security (as defined in Rule 2a-7, which is generally a security in the highest short-term ratings categories of two or more nationally recognized statistical ratings organizations, or unrated but of comparable quality) and (b) the fund reasonably expects to hold the security to maturity. In addition, a fund may not rely upon the No-Action Letter with respect to any security if the impairment of the creditworthiness of the issuer of the security suggests that the use of amortized cost no longer is appropriate. Funds may rely on the relief in the No-Action Letter through January 12, 2009.
Alert October 14, 2008