Alert June 01, 2010

SEC Staff Responds to Questions Concerning Recent Amendments to Money Market Fund Rules

The staff of the SEC’s Division of Investment Management (the “Staff”) recently responded to a number of questions concerning the recent amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended (the “1940 Act”), and other rules relating to money market funds.  Those amendments were discussed in the March 5, 2010 AlertBelow is a summary of the Staff’s responses. (Capitalized terms not otherwise defined have the meaning given them in Rule 2a-7.)

Board Designation of NRSROs - Rule 2a-7(a)(11)(i)

  • The board of directors of a money market fund that invests only in U.S. government securities or repurchase agreement fully collateralized with U.S. government securities does not need to designate nationally recognized statistical ratings organizations (“NRSROs”), as required by Rule 2a-7(a)(11)(i).
  • A money market fund board does not have to designate four NRSROs for each type of security held by the money market fund, or designate at least one NRSRO for every type of security held by the money market fund.
  • At the time a board designates an NRSRO, it must review whether, as a result of that designation, each portfolio security is an eligible security or if there has been a downgrade.  In other words, the designation of the NRSRO is treated as a credit event, and the fund must take whatever action is required as a result of that credit event.
  • A money market fund may disclose its designated NRSROs (and other investment policy changes made in response to the recent amendments) in a “sticker” to its registration statement filed pursuant to Rule 497 under the Securities Act of 1933, as amended, rather than an amendment filed pursuant to Rule 485(b) of that act.
  • A money market fund’s obligation to use designated NRSROs in determining whether a security is an eligible security commences when the fund first discloses its designated NRSROs in its statement of additional information.
  • If an NRSRO that has previously been designated by a money market fund’s board withdraws its registration as an NRSRO or is merged with another NRSRO, the board may designate a new NRSRO at any time before that event occurs or, if the withdrawal or merger is to occur shortly after it has been announced, at such time after the event has occurred as reasonably necessary to give the fund’s adviser time to prepare a recommendation.

Maturity Requirement – Rule 2a-7(c)(2)

  • A money market fund must be in compliance with the new weighted average maturity (“WAM”) and weighted average maturity life (“WAML”) limits by June 30, 2010.  The Staff is not limiting the means by which a money market fund complies with those requirements (i.e., a fund may choose to dispose of securities it holds or acquire additional securities to bring its portfolio into compliance).

Asset-Backed Securities

  • In performing its minimal credit risk determination relating to an asset-backed security, a fund’s board may disregard any of the minimal credit risk elements discussed in the adopting release if the board determines the element is not relevant to the security.

Liquidity Requirement – Rule 2a-7(c)(5)

  • A money market fund may not rely on the maturity shortening provisions in Rule 2a‑7(d) to determine whether a security is a “Daily Liquid Asset” or a “Weekly Liquid Asset,” as defined in Rule 2a-7(a)(8) and Rule 2a-7(a)(32), respectively.
  • A taxable feeder money market fund may not look to the holdings of the master fund for purposes of complying with the Daily Liquid Assets requirement.  To comply, the master fund must guarantee redemptions in one day or the feeder must hold cash or other Daily Liquid Assets in amounts sufficient to satisfy the requirement.  (Tax-exempt money market funds do not have to comply with the Daily Liquid Asset requirement.)
  • A non-interest bearing U.S. government agency note (i.e., an agency note issued at a discount, with principal paid at maturity) acquired by a money market fund at or above its face value and which matures within 60 days may qualify as a Weekly Liquid Asset.
  • A money market fund may choose any reasonable time for determining its total assets, Daily Liquid Assets and Weekly Liquid Assets for purposes of complying with Rule 2a-7.
  • A money market fund may treat as a Daily Liquid Asset a receivable from the sale of securities due the next business day, and as a Weekly Liquid Asset a receivable due within the next five business days, provided that the security is sold to a creditworthy buyer and the sale proceeds are due unconditionally the next day (Daily Liquid Asset) or within the next five business days (Weekly Liquid Assets).  (Tax-exempt money market funds do not have to comply with the Daily Liquid Asset requirement.)

Stress Testing Requirement – Rule 2a-7(c)(11)(v)

  • A money market fund that invests solely in direct obligations of the U.S. government does not have to perform stress tests for downgrades or defaults if the money market fund’s fund board determines that the tests are not relevant and the money market fund keeps a record of that determination.
  • A money market fund does not have to stress test its portfolio for the risk that the fund’s share price determined using market prices would exceed $1.005.
  • Stress tests based upon “a down grade of or default on portfolio securities,” as required by amended Rule 2a-7, should be designed to assist the board of the money market fund in assessing the effects of isolated stresses on the fund’s shadow pricing, and the test should indicate the full extent of the loss the fund might be expected to incur as a result.
  • A money market fund board may receive a single report at its next regularly scheduled meeting with the results of each stress test that occurred after its last regularly scheduled meeting.
  • A money market fund should incorporate into its stress testing an evaluation of the liquidity needs of its shareholder base.

Website Requirement – Rule 2a-7(c)(12)

  • A money market fund only offered to investment companies that are part of the same “group of investment companies,” as such term is defined in Section 12(d)(1)(G)(ii) of the 1940 Act, must still comply with the website disclosure requirement.
  • A money market fund must provide on its website a link to each of its Forms N‑MFP filed during the previous twelve months, not just a link to the SEC’s website or to the page on the SEC’s website that allows a user to search for a company’s filings.
  • A feeder money market fund may disclose on its website the holdings of the master fund or provide a link to the master fund’s website disclosure of its portfolio holdings.
  • A money market fund is not required to post on its website a schedule of its investments for periods prior to September 30, 2010.
  • A money market fund must provide its WAM and WAML calculations on the same webpage as its required list of securities.