The SEC has proposed amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, the SEC rule that sets forth the principal requirements relating to money market funds. According to the SEC, the objective of the proposed amendments is to position money market funds to withstand severe market pressures, such as the pressures money market funds faced in the fourth quarter 2008. Specifically, the proposed amendments are designed to achieve that objective by tightening the risk-limiting provisions in Rule 2a-7.
Because the formal release proposing the amendments was not made available until this edition was being finalized for distribution, this summary is based on the SEC press release announcing the proposal and proceedings of the SEC open meeting at which the vote to propose the amendments was taken. A future edition of the Alert will discuss the proposing release.
Many of the proposed changes are based on the recommendations of the ICI’s money market working group (discussed in the AlertApril 28, 2009 ). Some are based on recommendations included in the U.S. Treasury’s recent white paper on financial markets regulatory reform (discussed in the June 23, 2009 Alert).
The proposed amendments would require a money market fund to, among other things:
- Maintain certain minimum percentages of its portfolio in cash or securities that can be readily converted to cash, to pay redeeming investors;
- Shorten the weighted average maturity limits applicable to its portfolio from 90 days or less to 60 days or less;
- Maintain a "weighted average life maturity" limit (that is, the weighted average maturity calculated without consideration of Rule 2a-7’s maturity shortening provisions) of 120 days or less, which would limit a money market’s investments in long-term floating rate securities;
- Limit "Eligible Securities" to only the highest quality securities, that is, eliminate the ability to acquire limited amounts of "Second Tier" securities as currently permitted under Rule 2a-7; a money market fund could hold a Second Tier security if, at the time it was acquired, the security was an Eligible Security;
- Periodically stress test the fund’s portfolio to determine whether it can withstand significant market turbulence and still maintain a stable net asset value;
- Report its portfolio holdings monthly to the SEC and post them on the fund’s public website within 2 business days following the end of the month; and
Be able to process purchases and redemptions at a price other than $1 per share, that is, be operationally capable of processing shareholder transactions in the event it "breaks the buck."
The proposed amendments also would:
- Permit a money market fund, if it has "broken the buck" and decided to liquidate, to suspend redemptions while the money market fund undertakes an orderly liquidation of assets;
- Make it easier for affiliates to acquire troubled assets from a money market fund;
- Prohibit a money market fund from acquiring illiquid securities, which currently are limited to 10% of a money market fund’s assets in accordance with the SEC staff’s views;
- Require a money market fund to disclose its "shadow" (that is, its market-based) net asset value per share calculations; and
- Require a money market fund to develop procedures to identify investors whose redemption activity may pose a risk to the fund.
The SEC is seeking comment on, among other things:
- Whether money market funds should continue to be able to maintain a stable net asset value per share using the amortized cost method, that is, whether money market funds should be required to value securities in the same manner as other open-end funds, generally at market value, or failing that, fair value;
- Whether money market funds should be required to have the capability to make in-kind redemptions. At the open meeting, the staff of the SEC’s Division of Investment Management suggested that in-kind redemptions could be an alternative to floating share prices, and would essentially provide some "friction" to discourage institutional investors from making a "run" on the money market fund. There would be limits, however, on in-kind redemptions to retail investors;
- Whether to eliminate references in Rule 2a-7 and other SEC rules to nationally recognized statistical ratings organizations ("NRSROs") (the SEC previously made a similar proposal in 2008, as discussed in the AlertJuly 8, 2008 );
- Whether to require a money market fund board to designate several NRSROs that the money market fund will track to determine whether a security is eligible for acquisition or continues to be an Eligible Security; and
- How asset backed securities should be treated under Rule 2a-7, that is, whether the current treatment of ABS under Rule 2a-7 adequately protects money market funds.
Comments on the proposed amendments are due by September 8, 2009.