12896 Federal Register / Vol. 76, No. 46 / Wednesday, March 9, 2011 / Proposed Rules 

1 15 U.S.C. 80a–1. Unless otherwise noted, all 

references to statutory sections are to the 

Investment Company Act, and all references to 

rules under the Investment Company Act are to 

Title 17, Part 270 of the Code of Federal Regulations 

[17 CFR 270]. 

2 15 U.S.C. 77a. 

3Public Law 111–203, 124 Stat. 1376 (2010). 

4Section 939A(a)–(b) of the Dodd-Frank Act. 

5Section 939(c) of the Dodd-Frank Act (amending 

section 6(a)(5)(A)(iv)(I) of the Investment Company 

Act). The Dodd-Frank Act also requires the 

Commission to adopt a number of rules concerning 

the integrity and transparency of the credit rating 

process and the accountability of credit rating 

agencies. See sections 931 to 939H of the DoddFrank Act. 

6See References to Ratings of Nationally 

Recognized Statistical Rating Organizations, 

Investment Company Act Release No. 28327 (July 

1, 2008) [73 FR 40124 (July 11, 2008)] (‘‘2008 

Ratings Removal Proposing Release’’). The 

Commission also proposed to eliminate references 

to credit ratings in rules under the Securities Act 

and the Securities Exchange Act of 1934 (15 U.S.C. 

78a) (‘‘Exchange Act’’). See Security Ratings, 

Securities Act Release No. 8940 (July 1, 2008) [73 

amendments also will modernize existing 

provisions that will apply to all Commission 

registrants. 

[FR Doc. 2011–4799 Filed 3–8–11; 8:45 am] 

BILLING CODE 6351–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 239, 270, and 274 

[Release Nos. 33–9193; IC–29592; File No. 

S7–07–11] 

RIN 3235–AL02 

References to Credit Ratings in Certain 

Investment Company Act Rules and 

Forms 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: This is one of several releases 

that the Securities and Exchange 

Commission (‘‘Commission’’) will be 

considering relating to the use of credit 

ratings in our rules and forms. In this 

release, we are proposing a new rule as 

well as rule and form amendments 

under the Securities Act of 1933 and the 

Investment Company Act of 1940 to 

implement provisions of the DoddFrank Wall Street Reform and Consumer 

Protection Act (‘‘Dodd-Frank Act’’). The 

Commission is proposing amendments 

to two rules and four forms under the 

Investment Company Act and the 

Securities Act that contain references to 

credit ratings. The proposed 

amendments would give effect to 

provisions of the Dodd-Frank Act that 

call for the amendment of Commission 

regulations that contain credit rating 

references. In addition, the Commission 

is proposing a new rule under the 

Investment Company Act to establish a 

standard of credit-worthiness in place of 

a statutory reference to credit ratings in 

that Act that the Dodd-Frank Act 

removes. 

DATES: Comments should be received on 

or before April 25, 2011. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–07–11 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–07–11. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Web site (http:// 

www.sec.gov/rules/proposed.shtml). 

Comments are also available for Web 

site viewing and printing in the 

Commission’s Public Reference Room, 

100 F Street, NE., Washington, DC 

20549, on official business days 

between the hours of 10 a.m. and 3 p.m. 

All comments received will be posted 

without change; we do not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

publicly available. 

FOR FURTHER INFORMATION CONTACT: 

With respect to the proposed rule, rule 

amendments or Form N–MFP, Anu 

Dubey, Attorney, or Penelope Saltzman, 

Assistant Director (202) 551–6792, 

Office of Regulatory Policy, or with 

respect to Forms N–1A, N–2 and N–3, 

Jane H. Kim, Attorney, or Mark T. 

Uyeda, Assistant Director, (202) 551– 

6784, Office of Disclosure Regulation, 

Division of Investment Management, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–8549. 

SUPPLEMENTARY INFORMATION: The 

Commission is proposing for public 

comment amendments to rules 2a–7 [17 

CFR 270.2a–7] and 5b–3 [17 CFR 

270.5b–3] and new rule 6a–5 [17 CFR 

270.6a–5] under the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’).1 The Commission is 

also proposing for comment 

amendments to Forms N–1A [17 CFR 

239.15A and 17 CFR 274.11A], N–2 [17 

CFR 239.14 and 17 CFR 274.11a–1] and 

N–3 [17 CFR 239.17a and 17 CFR 

274.11b] under the Investment 

Company Act and the Securities Act of 

1933 (‘‘Securities Act’’)2 and Form 

N–MFP [17 CFR 274.201] under the 

Investment Company Act. 

Table of Contents 

I. Background 

II. Discussion 

A. Rule 2a–7 

1. Eligible Securities 

2. Securities With a Conditional Demand 

Feature 

3. Monitoring Minimal Credit Risks 

4. Stress Testing 

B. Form N–MFP 

C. Rule 5b–3 

D. Proposed Rule 6a–5 

E. Forms N–1A, N–2 and N–3 

III. Request for Comment 

IV. Paperwork Reduction Act 

V. Cost-Benefit Analysis 

VI. Consideration of Promotion of Efficiency, 

Competition and Capital Formation 

VII. Regulatory Flexibility Act Certification 

VIII. Initial Regulatory Flexibility Analysis 

Statutory Authority 

Text of Proposed Rule and Form 

Amendments 

I. Background 

The Dodd-Frank Act was enacted on 

July 21, 2010.3 Section 939A of the Act 

requires the Commission to review its 

regulations for any references to or 

requirements regarding credit ratings 

that require the use of an assessment of 

the credit-worthiness of a security or 

money market instrument, remove these 

references or requirements and 

substitute in those regulations other 

standards of credit-worthiness in place 

of the credit ratings that we determine 

to be appropriate.4 Section 939 of the 

Dodd-Frank Act removes a reference to 

credit ratings from section 6(a)(5) of the 

Investment Company Act and replaces it 

with a reference to ‘‘such standards of 

credit-worthiness as the Commission 

shall adopt.’’5

In 2008, we undertook a review 

similar to that required under section 

939A for references to credit ratings in 

our rules. As a result of that review, we 

proposed to eliminate references to 

ratings issued by nationally recognized 

statistical rating organizations 

(‘‘NRSROs’’) in four rules under the 

Investment Company Act.6 Specifically, 


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FR 40106 (July 11, 2008)]; References to Ratings of 

Nationally Recognized Statistical Rating 

Organizations, Securities Exchange Act Release No. 

58070 (July 1, 2008) [73 FR 40088 (July 11, 2008)]. 

Prior to this initiative, in 2003, the Commission 

published a concept release in which we sought 

comment on the use of NRSRO ratings in our rules. 

See Rating Agencies and the Use of Credit Ratings 

under the Federal Securities Laws, Investment 

Company Act Release No. 26066 (June 4, 2003) [68 

FR 35258 (June 12, 2003)]. 

7See References to Ratings of Nationally 

Recognized Statistical Rating Organizations, 

Investment Company Act Release No. 28939 (Oct. 

5, 2009) [74 FR 52358 (Oct. 9, 2009)] (‘‘2009 Ratings 

Removal Adopting Release’’) (adopting amendments 

to rule 5b–3, with respect to the treatment of 

refunded securities, and rule 10f–3); References to 

Ratings of Nationally Recognized Statistical Rating 

Organizations, Investment Company Act Release 

No. 28940 (Oct. 5, 2009) [74 FR 52374 (Oct. 9, 

2009)] at Section IV (reopening the comment period 

for the proposed amendments to rules 3a–7 and 5b– 

3, with respect only to repurchase agreements). We 

also sought comment on removing references to 

credit ratings in rule 2a–7 in our 2009 proposal for 

certain reforms for money market funds. See Money 

Market Fund Reform Proposing Release, infra note 

8. We received over 70 comments in response to the 

2008 proposed amendments. Most commenters 

opposed the proposals. These comment letters are 

available on the Commission’s Internet Web site 

(http://www.sec.gov/comments/s7-19-08/ 

s71908.shtml; http://www.sec.gov/comments/s7-17- 

08/s71708.shtml). In light of today’s proposal to 

amend rule 5b–3, we are withdrawing the 2008 

proposed amendments to rule 5b–3 from further 

consideration. 

8See Money Market Fund Reform, Investment 

Company Act Release No. 29132 (Feb. 23, 2010) [75 

FR 10060 (Mar. 4, 2010)] (‘‘Money Market Fund 

Reform Adopting Release’’). See also Money Market 

Fund Reform, Investment Company Act Release No. 

28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)] 

(‘‘Money Market Fund Reform Proposing Release’’). 

Most commenters that responded to our request for 

additional comment on the 2008 proposed 

amendments to rule 2a–7 in the Money Market 

Fund Reform Proposing Release opposed that 

approach. 

9We have already proposed to remove references 

to credit ratings in certain rules and forms under 

the Securities Act and the Exchange Act. See 

Security Ratings, Securities Act Release No. 9186 

(Feb. 9, 2011) [76 FR 8946 (Feb. 16, 2011)]. 

10Rule 2a–7 defines the term NRSRO to have the 

same meaning as in section 3(a)(62) of the Exchange 

Act [15 U.S.C. 78c(a)(62)]. Rule 5b–3 defines 

NRSRO with reference to Exchange Act rule 15c3– 

1(c)(2)(vi)(E), (F), and (H) [17 CFR 240.15c3– 

1(c)(2)(vi)(E), (F), (H)]. 

11We intend to propose amendments to rule 

3a–7 in a separate release. 

12Under the amortized cost method, portfolio 

instruments are valued by reference to their 

acquisition cost as adjusted for amortization of 

premium or accretion of discount. See rule 2a– 

7(a)(2). Share price is determined under the pennyrounding method by valuing securities at market 

value, fair value or amortized cost and rounding the 

per share net asset value to the nearest cent on a 

share value of a dollar, as opposed to the nearest 

one tenth of one cent as otherwise would be 

required. 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 Money Market Fund Adopting Release’’) at 

n.6 (‘‘Release 9786 sets the amount of less than 1⁄10

of one cent on a share value of one dollar as the 

benchmark for materiality.’’); Valuation of Debt 

Instruments by Money Market Funds and Certain 

Other Open-End Investment Companies, Investment 

Company Act Release No. 9786 (May 31, 1977) [42 

FR 28999 (June 7, 1977)] at text accompanying n.11; 

rule 2a–7(a)(20) (defining penny-rounding method). 

13See section 2(a)(41) of the Investment Company 

Act (defining value) and rules 2a–4 (defining 

current net asset value) and 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). 

14 If shares are sold or redeemed based on a net 

asset value that turns out to have been either 

understated or overstated compared to the amount 

at which portfolio instruments could have been 

sold, then the interests of either existing 

shareholders or new investors will have been 

diluted. See Investment Trusts and Investment 

Companies: Hearings on S. 3580 Before a 

Subcomm. of the Sen. Comm. on Banking and 

Currency, 76th Cong., 3d Sess. 136–138, 288–289 

(1940). 

15Rule 2a–7 contains conditions that apply to 

each investment a money market fund proposes to 

make, as well as conditions that apply to a money 

market fund’s entire portfolio. 

16The term ‘‘eligible security’’ is currently defined 

in rule 2a–7(a)(12). 

we proposed to remove references to 

credit ratings in rules 2a–7, 3a–7, 5b–3 

and 10f–3 under the Investment 

Company Act. In 2009, we adopted 

certain of the proposed amendments to 

rules 5b–3 and 10f–3 and reopened the 

comment period for the other proposed 

amendments to rules 3a–7 and 5b–3.7 In 

2010, when we adopted amendments to 

rule 2a–7 (which governs the operation 

of money market funds), we retained the 

use of credit ratings in rule 2a–7 as an 

initial threshold requirement for 

whether a money market fund may 

invest in the security, but eliminated a 

requirement that all asset-backed 

securities in which a money market 

fund invests have received a rating.8

As directed by section 939A of the 

Dodd-Frank Act, we have reviewed our 

regulations for any references to or 

requirements regarding credit ratings in 

regulations that require the use of an 

assessment of the credit-worthiness of a 

security or money market instrument. In 

light of our review, and as further 

directed by the Dodd-Frank Act, we are 

proposing in this release to amend two 

rules and four forms under the 

Investment Company Act and the 

Securities Act.9 In addition, in order to 

implement section 939(c) of the DoddFrank Act, we are proposing a new rule 

to establish a standard of creditworthiness for purposes of section 

6(a)(5) of the Investment Company Act. 

II. Discussion 

Three rules—rules 2a–7, 3a–7 and 5b– 

3 and four forms—Forms N–1A, N–2, 

N–3 and N–MFP under the Investment 

Company Act currently contain 

references to credit ratings issued by 

NRSROs.10 We propose to remove the 

references to credit ratings in rules 2a– 

7 and 5b–3 and replace them with 

alternative standards of creditworthiness that are designed to 

appropriately achieve the same 

purposes as the ratings requirements. In 

addition to the amendments to rules 2a– 

7 and 5b–3, we are proposing a new 

rule—rule 6a–5 under the Investment 

Company Act—to establish a creditworthiness standard to replace the 

credit rating reference in section 6(a)(5) 

of that Act that the Dodd-Frank Act 

eliminates.11 Finally, we propose to 

eliminate required disclosures of credit 

ratings in Form N–MFP and remove 

from Forms N–1A, N–2 and N–3 the 

requirement that NRSRO credit ratings 

be used when portraying credit quality 

in shareholder reports. We discuss our 

proposed amendments and new rule in 

greater detail below. 

A. Rule 2a–7 

Rule 2a–7 under the Investment 

Company Act governs the operation of 

money market funds. Unlike other 

investment companies (‘‘funds’’), money 

market funds seek to maintain a stable 

share price, typically at $1.00 per share. 

To do so, most money market funds use 

the amortized cost method of valuation 

(‘‘amortized cost method’’) and the 

penny-rounding method of pricing 

(‘‘penny-rounding method’’) permitted 

by rule 2a–7.12 The Investment 

Company Act and applicable rules 

generally require funds to calculate 

current net asset value per share by 

valuing their portfolio instruments at 

market value or, if market quotations are 

not readily available, at fair value as 

determined in good faith by the board 

of directors.13 These valuation 

requirements are designed to prevent 

unfair share pricing from diluting or 

otherwise adversely affecting the 

interests of investors.14

Rule 2a–7 exempts money market 

funds from these provisions but 

contains conditions designed to 

minimize the amount of risk a money 

market fund may assume and thus 

reduce the deviation between a money 

market fund’s stabilized share price and 

the market value of its portfolio.15

Among these conditions, rule 2a–7 

limits a money market fund’s portfolio 

investments to securities that have 

received credit ratings from the 

‘‘requisite NRSROs’’ in one of the two 

highest short-term rating categories or 

comparable unrated securities (i.e., 

‘‘eligible securities’’).16 A requisite 

NRSRO must be one of the NRSROs that 

a money market fund’s board of 

directors has designated (‘‘designated 

NRSRO’’) for use, and determines at 

least annually issues credit ratings that 


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17See rule 2a–7(a)(11) (defining ‘‘designated 

NRSRO’’); 2a–7(a)(23) (defining ‘‘requisite NRSRO’’). 

18See rule 2a–7(e). 

19Rule 2a–7(c)(3)(i). Thus, under the current rule, 

where the security is rated, having the requisite 

NRSRO rating is a necessary but not sufficient 

condition for investing in the security and cannot 

be the sole factor considered in determining 

whether a security presents minimal credit risks. 

See Revisions to Rules Regulating Money Market 

Funds, Investment Company Act Release No. 18005 

(Feb. 20, 1991) [56 FR 8113 (Feb. 27, 1991)] (‘‘1991 

Money Market Fund Adopting Release’’) at text 

preceding n.18. 

20The proposed rule also would make 

conforming amendments to rule 2a–7’s 

recordkeeping and reporting requirements. See 

proposed rule 2a–7(c)(11)(iii). 

21We previously adopted certain of the 

amendments that we proposed in 2008 as part of 

the 2010 money market fund reforms. See Money 

Market Fund Reform Adopting Release, supra note 

8, at Sections II.C.2, II.G.2. Specifically, we 

expressly limited money market funds’ investments 

in illiquid securities. See rule 2a–7(c)(5)(i). We also 

required money market funds to notify the 

Commission promptly when an affiliate has 

purchased certain securities, including a security 

that is no longer an eligible security, from the fund 

in reliance on rule 17a–9, which permits certain 

affiliated persons to purchase certain portfolio 

securities from a money market fund under certain 

conditions. See rule 2a–7(c)(7)(iii)(B). See also 2008 

Ratings Removal Proposing Release, supra note 6, 

at Sections III.A.2, III.A.4. 

22See proposed rule 2a–7(a)(11). 

23The proposal would not change current rule 

2a–7 limitations on money market fund investments 

in second tier securities, under which a money 

market fund cannot acquire second tier securities 

with remaining maturities greater than 45 days, 

generally must limit its investments in second tier 

securities to no more than three percent of fund 

assets, and limit investments in the second tier 

securities of any one issuer to one half of one 

percent of fund assets. Rule 2a–7(c)(3)(ii); 2a– 

7(c)(4)(i)(C). 

24See rule 2a–7(c)(3)(iii) (allowing the credit 

quality of a guarantee to substitute for the credit 

quality of the security subject to the guarantee); 2a– 

7(a)(17) (defining ‘‘guarantee’’ to mean ‘‘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.’’). 

25Proposed rule 2a–7(a)(13). As under the current 

rule, government securities and securities issued by 

a money market fund also would be first tier 

securities. Proposed rule 2a–7(a)(13); see rule 2a– 

7(a)(14). 

Our proposed amendments would eliminate the 

defined terms ‘‘designated NRSRO,’’ ‘‘rated 

security,’’ ‘‘requisite NRSRO,’’ and ‘‘unrated 

security’’ from the rule. As a result, under the 

proposal, fund boards would no longer be required 

to designate NRSROs and funds would not have to 

disclose designated NRSROs in their statements of 

additional information (‘‘SAI’’). See rule 2a–7(a)(11) 

(defining ‘‘designated NRSRO’’ as one of at least four 

NRSROs that, among other things, the fund’s board 

has designated as an NRSRO whose credit ratings 

will be used by the fund to determine the eligibility 

of portfolio securities, the board determines at least 

annually issues credit ratings sufficiently reliable 

for such use, and the fund discloses in its SAI is 

a designated NRSRO, including any limitations on 

the fund’s use of the designation). We note that after 

enactment of the Dodd-Frank Act, money market 

funds received Commission staff assurances that the 

staff would not recommend enforcement action if 

a money market fund board did not designate 

NRSROs and did not make related disclosures in its 

SAI before the Commission had completed its 

review of rule 2a–7 required by the Dodd-Frank Act 

and made any modifications to the rule. See 

Investment Company Institute, SEC No-Action 

Letter (Aug. 19, 2010). 

26See proposed rule 2a–7(a)(21). The specific 

language of this provision would not change 

(compare current rule 2a–7(a)(24)), but the 

definitions of ‘‘eligible security’’ and ‘‘first tier 

security’’ would change under the proposal. 

27Proposed rule 2a–7(a)(11). Currently, the 

requirement that the fund board (or its delegate) 

determine that a security presents minimal credit 

risks is contained in paragraph (c)(3)(i) of the rule. 

In connection with the amendments discussed 

above, we propose to restructure the rule to 

incorporate the minimal credit risk determination 

into the definition of ‘‘eligible security,’’ currently 

in paragraph (a)(12) of the rule, but which would 

be renumbered as paragraph (a)(11). 

28See proposed rule 2a–7(a)(13) (defining first 

tier security); rule 2a–7(c)(3)(ii) (prohibiting money 

market funds from acquiring second tier securities 

if, as a result of the acquisition, second tier 

securities would comprise more than three percent 

of the fund’s total assets). 

29See, e.g., Standard & Poor’s Ratings Definitions, 

Short-Term Issue Credit Ratings, http://

www.standardandpoors.com/ratings/articles/en/us/

?assetID=1245219848760 (‘‘S&P Ratings 

Definitions’’) (a short-term obligation rated ‘‘A–1’’ is 

rated in the highest category, and the obligor’s 

capacity to meet its financial commitment on the 

obligation is strong; obligations within the category 

designated with a plus sign (+) indicates that the 

obligor’s capacity to meet its financial commitment 

on these obligations is extremely strong); Moody’s 

Investors Service Rating Symbols and Definitions, 

http://v3.moodys.com/researchdocumentcontent

page.aspx?docid=PBC_79004 (‘‘Moody’s Ratings 

Definitions’’) at 5–6 (issuers rated Prime-1 ‘‘have a 

superior ability to repay short-term debt 

obligations.’’); FitchRatings, International Issuer and 

Credit Rating Scales, http://www.fitchratings.com/

creditdesk/public/ratings_definitions/index.cfm?rd_

file=ltr (‘‘Fitch Ratings Definitions’’) (stating that a 

rating of F1 is the highest short-term rating, 

indicating the ‘‘strongest intrinsic capacity for 

are sufficiently reliable for the fund to 

use, in determining the eligibility of 

portfolio securities.17 Rule 2a–7 further 

restricts money market funds to 

securities that the fund’s board of 

directors (or its delegate18) determines 

present 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.’’19

We are proposing to remove 

references to credit ratings in rule 2a– 

7, which would affect five elements of 

the rule: Determination of whether a 

security is an eligible security; 

determination of whether a security is a 

first tier security; credit quality 

standards for securities with a 

conditional demand feature; 

requirements for monitoring securities 

for ratings downgrades and other credit 

events; and stress testing.20 The 

proposed amendments to rule 2a–7, 

which are similar to those we proposed 

in 2008, are designed to offer 

protections comparable to those 

provided by the NRSRO ratings.21

1. Eligible Securities 

Under the proposed amendments, a 

money market fund would continue to 

be limited to investing in securities that 

money market fund boards of directors 

(or their delegates) determine present 

minimal credit risks,22 and each of 

which is either a ‘‘first tier security’’ or 

a ‘‘second tier security’’ under the rule.23

Fund boards of directors (which 

typically rely on the fund’s adviser) 

would still be able to consider quality 

determinations prepared by outside 

sources, including NRSRO ratings, that 

fund advisers conclude are credible and 

reliable, in making credit risk 

determinations. We would expect the 

fund advisers to understand the method 

for determining the rating and make an 

independent judgment of credit risks, 

and to consider an outside source’s 

record with respect to evaluating the 

types of securities in which the fund 

invests. 

We propose to eliminate the 

requirement that an eligible security be 

rated by an NRSRO or be of comparable 

quality while maintaining the two-step 

analysis currently required by rule 2a– 

7. Under the proposed amendments, a 

security would be a first tier security 

(regardless of the ratings it has received 

from any credit rating agency) if the 

fund’s board (or its delegate) determines 

that the issuer (or in the case of a 

security subject to a guarantee, the 

guarantor) 24 has the ‘‘highest capacity to 

meet its short-term financial 

obligations.’’ 25 A security would be a 

second tier security if it is an eligible 

security but is not a first tier security.26

In addition, a security would be an 

eligible security only if the board of 

directors (or its delegate) determines 

that it presents minimal credit risks, 

which determination must be based on 

factors pertaining to credit quality and 

the issuer’s ability to meet its short-term 

financial obligations.27

We have designed these amendments 

to retain a degree of risk limitation on 

money market funds similar to the 

current rule. The proposed amendments 

would continue to require that funds 

invest at least 97 percent of their total 

assets in the highest quality short-term 

debt securities.28 Money market fund 

holdings of these first tier securities 

would have to satisfy a standard similar 

to the credit quality standards that have 

been articulated by the credit ratings 

agencies.29 An issuer of a first tier 


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timely payment of financial commitments; may 

have an added ‘+’ to denote any exceptionally 

strong credit feature.’’). 

30We note that all money market fund portfolio 

securities also must be eligible securities (i.e., 

present minimal credit risks under the proposed 

amendments). See proposed rule 2a–7(a)(13). Thus, 

even if the issuer had the highest capacity to meet 

its short-term financial obligations, a security, such 

as a subordinated short-term security secured by 

assets that are not of high credit quality, likely 

would not present minimal credit risks to a money 

market fund’s portfolio and therefore likely would 

not be an eligible security. 

31Rule 2a–7(c)(3)(ii). 

32Nothing in the proposed rule would prohibit a 

money market fund from relying on policies and 

procedures it has adopted to comply with the 

current rule as long as the board (or its delegate) 

concluded that the ratings specified in the policies 

and procedures establish similar standards to those 

proposed, and are credible and reliable for that use. 

A fund also would be able to revise its policies and 

procedures to change or eliminate the use of 

specific NRSRO ratings or to incorporate other third 

party evaluations of credit quality. 

33See rule 2a–7(a)(12)(iii)(A). We also propose to 

move the provision that conditions the eligibility of 

a demand feature or guarantee of the issuer, or 

another institution, on an undertaking promptly to 

notify the fund in the event of a substitution of a 

demand feature or guarantee, which is currently in 

paragraph (a)(12)(iii)(B), to paragraphs (c)(3)(iii) 

(permitting money market funds to substitute the 

credit quality of a guarantee for the credit quality 

of the security subject to the guarantee in 

determining whether a security is an eligible or first 

tier security) and (c)(3)(iv)(D) (conditions under 

which a security subject to a conditional demand 

feature may be determined to be an eligible security 

or first tier security). 

34A conditional demand feature is a demand 

feature that a fund may be precluded from 

exercising because of the occurrence of a condition. 

See rule 2a–7(a)(6) (defining ‘‘conditional demand 

feature’’ as a demand feature that is not an 

unconditional demand feature); 2a–7(a)(28) 

(defining ‘‘unconditional demand feature’’ as 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). 

For purposes of rule 2a–7, a demand feature allows 

the security holder to receive, upon exercise, the 

approximate amortized cost of the security, plus 

accrued interest, if any. In addition, a demand 

feature must be exercisable either: (i) At any time 

on no more than 30 calendar days’ notice; or (ii) at 

specified intervals not exceeding 397 calendar days 

and upon no more than 30 calendar days’ notice. 

Rule 2a–7(a)(9)(i). If an asset-backed security is 

subject to a demand feature, the feature must permit 

the security holder unconditionally to receive 

principal and interest within 397 calendar days of 

making demand. Rule 2a–7(a)(9)(ii). 

35Rule 2a–7(c)(3)(iv). 

36Proposed rule 2a–7(c)(3)(iv)(C). The rule 

references both short-term and long-term ratings 

because most money market fund portfolio 

securities with demand features are long-term 

securities (that would not meet the portfolio 

maturity requirements of rule 2a–7 without the 

demand feature). Under current rule 2a–7, a money 

market fund must limit its investments in securities 

subject to a demand feature or guarantee of the 

same issuer that are second tier securities to 2.5% 

of the fund’s total assets. Rule 2a–7(c)(4)(iii). If, as 

a result of a downgrade, a fund exceeds this 

limitation on such securities, the fund must reduce 

its investment in the securities to no more than 

2.5% of total assets by exercising the demand 

feature at the next succeeding exercise date(s). Rule 

2a–7(c)(7)(i)(C). In a conforming change, we 

propose to amend this provision to require the fund 

to reduce its investment in securities subject to a 

demand feature or guarantee of a single issuer that 

are second tier securities, if, as a result of a portfolio 

security that ceases to be a first tier security, the 

fund exceeds the 2.5% investment limit on such 

securities. Proposed rule 2a–7(c)(7)(i)(B). 

37These credit quality characteristics are similar 

to credit quality standards that have been 

articulated by credit rating agencies. See, e.g., S&P 

Ratings Definitions, supra note 29 (describing the 

capacity of an issuer of long-term obligations rated 

‘‘AA’’ as ‘‘very strong’’); Moody’s Ratings Definitions, 

supra note 29 (describing Aa-rated long-term 

obligations as ‘‘judged to be of high quality and are 

subject to very low credit risk.’’); Fitch Ratings 

Definitions, supra note 29 (describing AA-rated 

long-term obligations as denoting expectations of 

very low default risk and indicating that the issuer’s 

capacity for payment of financial commitments is 

very strong and ‘‘not significantly vulnerable to 

foreseeable events’’). 

38The proposed amendment would not prohibit 

a money market fund from relying on policies and 

procedures it has adopted to comply with the 

current rule regarding the credit quality of 

securities with conditional demand features as long 

as the board (or its delegate) concluded that the 

ratings specified in the policies and procedures 

establish similar standards to those proposed, and 

that the agencies providing ratings used in the 

policies and procedures are credible and reliable for 

that use. A fund also could revise its policies and 

procedures to change or eliminate the consideration 

of specific NRSRO ratings or to incorporate other 

third party evaluations of credit quality. 

security that would satisfy our proposed 

standard should have an exceptionally 

strong ability to repay its short-term 

debt obligations and the lowest 

expectation of default.30 The credit risk 

associated with a second tier security, 

which would continue to be limited to 

three percent of total fund assets,31

would differ from that associated with 

first tier securities only to a small 

degree. Thus, the issuer of a second tier 

security that would satisfy our proposed 

standard should have a very strong 

ability to repay its short-term debt 

obligations, and a very low vulnerability 

to default.32 Finally, we propose to 

eliminate the requirement that 

guarantors or guarantees of securities 

held by a money market fund be rated 

by an NRSRO.33

Our proposal would eliminate the 

objective standard provided by credit 

ratings in the definitions of eligible 

security and first tier security and 

instead require a subjective 

determination of both eligible securities 

and first tier securities. We request 

comment on this proposed approach. 

• Would our proposed approach 

achieve the goal of retaining a degree of 

risk limitation on money market funds 

similar to the current rule? 

• Are there alternatives to our 

proposed approach that would provide 

a more robust or objective evaluation of 

credit quality? 

• Is there a better way to describe the 

characteristics of a first tier security? 

• Should we instead simply limit 

money market funds to investing in 

securities solely based on a minimal 

credit risk determination, i.e., establish 

a single test for determining whether a 

fund could invest in a security? 

• Would such an approach allow 

money market funds to invest a large 

portion of their portfolios in what are 

currently second tier securities? 

2. Securities With a Conditional 

Demand Feature 

Under rule 2a–7, a security subject to 

a conditional demand feature 34 may be 

determined to be an eligible security or 

a first tier security if, among other 

conditions, (i) the conditional demand 

feature is an eligible security or a first 

tier security, and (ii) the underlying 

security (or its guarantee) has received 

either a short-term rating or a long-term 

rating, as the case may be, within the 

highest two categories from the requisite 

NRSROs or is a comparable unrated 

security.35 We propose to remove the 

credit rating requirement from this 

provision of the rule and amend the 

provision to require that the fund’s 

board (or its delegate) determine that the 

underlying security be of high quality 

and subject to very low credit risk.36

The proposed standard is designed to 

retain a similar degree of risk limitation 

to that in the current rule. An issuer that 

is determined to have a very strong 

capacity to meet its financial 

commitments, a very low risk of default, 

and a capacity for payment of its 

financial commitments that is not 

significantly vulnerable to reasonably 

foreseeable events would satisfy the 

proposed definition.37 In making the 

credit quality determinations required 

under the proposed amendment, a fund 

board (or its delegate) would continue to 

be able to consider analyses provided by 

third parties, including ratings provided 

by ratings agencies, that it concludes are 

credible and reliable for such 

purposes.38

We request comment on the proposed 

credit quality standard for securities 

with a conditional demand feature. 

• Does our proposed standard retain 

the same or similar degree of risk 

limitation as that under the current 

rule? 

• Are there alternative standards that 

would provide a more robust or 

objective evaluation of credit quality? 

3. Monitoring Minimal Credit Risks 

Rule 2a–7 currently requires a money 

market fund board (or its delegate) 

promptly to reassess whether a security 

that has been downgraded by an NRSRO 

continues to present minimal credit 

risks, and take such action as it 


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39Rule 2a–7(c)(7)(i)(A). This current reassessment 

is not required, however, if the downgraded 

security is disposed of or matures within five 

business days of the specified event and in the case 

of events specified in rule 2a–7(c)(7)(i)(A)(2), the 

board is subsequently notified of the adviser’s 

actions. Rule 2a–7(c)(7)(i)(B). 

40Proposed rule 2a–7(c)(7)(i)(A). As under the 

current rule, the proposal would not require 

reassessment in certain circumstances. See supra 

note 39. Our proposed standard differs slightly from 

our proposal in 2008, which would have required 

the board’s reassessment if the money market fund’s 

investment adviser became aware of any 

information about a portfolio security or an issuer 

of a portfolio security that suggested that the 

security might not have continued to present 

minimal credit risks. See 2008 Ratings Removal 

Proposing Release, supra note 6, at Section III.A.3. 

We believe that requiring the relevant information 

to relate to whether the portfolio security may no 

longer be first or second tier (as compared with the 

standard proposed in 2008) is more similar to the 

current standard. In addition, as noted by several 

commenters on the standard proposed in 2008, 

without limiting the information to be monitored in 

any way, the standard could be interpreted to 

require monitoring of all information regarding 

portfolio securities, including unreliable sources or 

unsubstantiated market rumors. See, e.g., Comment 

Letter of CFA Institute Centre for Financial Market 

Integrity (Mar. 26, 2009); Comment Letter of Charles 

Schwab & Co., Inc. (Sept. 5, 2008); Comment Letter 

of Federated Investors, Inc. (Sept. 5, 2008). 

41Rule 2a–7(c)(10)(v)(A). 

42Proposed rule 2a–7(c)(10)(v)(A). 

43See rule 30b1–7. See also Money Market Fund 

Reform Adopting Release, supra note 8, at n.301 

and accompanying and preceding text. 

44See Items 34 (requiring disclosure of each 

designated NRSRO for a portfolio security and the 

credit rating given by the designated NRSRO for 

each portfolio security); 37b–c (requiring disclosure 

of each designated NRSRO and the credit rating 

given by the designated NRSRO for each portfolio 

security demand feature); 38b–c (requiring 

disclosure of each designated NRSRO and the credit 

rating given by the designated NRSRO for each 

portfolio security guarantee); 39c–d (requiring 

disclosure of each designated NRSRO and the credit 

rating given by the designated NRSRO for each 

portfolio security enhancement) of Form N–MFP. 

45See Item 33 of Form N–MFP (requiring money 

market funds to disclose whether a security is a 

‘‘rated’’ first or second tier security, an unrated 

security, or no longer an eligible security). 

46Repurchase agreements provide funds with a 

convenient means to invest excess cash on a 

secured basis, generally for short periods of time. 

Economically, a repurchase agreement functions as 

a loan from the fund to the counterparty, in which 

the securities purchased by the fund serve as 

collateral for the loan and are placed in the 

possession or under the control of the fund’s 

custodian during the term of the agreement. See 

Treatment of Repurchase Agreements and Refunded 

Securities as an Acquisition of the Underlying 

Securities, Investment Company Act Release No. 

25058 (July 5, 2001) [66 FR 36156 (July 11, 2001)] 

(‘‘Rule 5b–3 Adopting Release’’). Various issues 

arose during the market events of 2007 to 2009 that 

affected the market for repurchase agreements. In 

response, a task force of participants in the market 

for tri-party repurchase agreements was formed and 

issued a report setting forth its findings and 

recommendations for improvements. See Report of 

Task Force on Tri-Party Repo Infrastructure, (May 

17, 2010) at http://www.ny.frb.org/prc/ 

report_100517.pdf. 

determines is in the best interests of the 

fund and its shareholders.39 We propose 

to amend the rule to require that, in the 

event the money market fund’s adviser 

(or any person to whom the board has 

delegated portfolio management 

responsibilities) becomes aware of any 

credible information about a portfolio 

security or an issuer of a portfolio 

security that suggests that the security is 

no longer a first tier security or a second 

tier security, as the case may be, the 

board or its delegate would have to 

reassess promptly whether the portfolio 

security continues to present minimal 

credit risks.40 To satisfy the proposed 

standard, an investment adviser would 

be required to exercise reasonable 

diligence in keeping abreast of new 

information about a portfolio security 

that the adviser believes to be credible. 

We understand that most money market 

fund advisers currently exercise a 

similar degree of diligence in 

monitoring their portfolios in order to 

meet the rule 2a–7 requirement that 

portfolio investments be limited to 

securities that the board determines 

present minimal credit risks. 

We request comment on the proposed 

amendments for monitoring minimal 

credit risks. 

• Would our proposed approach to 

describing when reassessment of 

whether a portfolio security presents 

minimal credit risks is required achieve 

the objective of retaining a degree of risk 

limitation on money market funds 

similar to the current rule? 

• Is there an alternative or more 

objective standard for determining when 

the board must reassess the credit risk 

of a security that would provide 

adequate investor protections? 

• Are we correct in our 

understanding of current monitoring 

practices? 

4. Stress Testing 

Rule 2a–7 currently requires money 

market funds to adopt written 

procedures for stress testing their 

portfolios. Specifically they must test 

the fund’s ability to maintain a stable 

net asset value per share based on 

certain hypothetical events, including a 

downgrade of portfolio securities.41 We 

propose to replace this reference to 

ratings downgrades with a hypothetical 

event that is designed to have a similar 

impact on a money market fund’s 

portfolio. Our proposal would require 

that money market funds stress test for 

an adverse change in the ability of a 

portfolio security issuer to meet its 

short-term financial obligations.42

Under the proposed rule, funds could 

continue to test their portfolios by 

treating a downgrade as a credit event 

that might adversely affect the value or 

liquidity of the portfolio security (and 

affect the fund’s ability to maintain a 

stable net asset value per share). 

We request comment on our proposed 

amendment to the stress testing 

requirements. 

• Does the standard we propose 

adequately address the same concerns 

that arise when a security is 

downgraded? 

• Is the proposed standard too broad? 

• Would the proposed standard 

provide adequate guidance to funds? 

• Is there a narrower standard that we 

should specify? 

B. Form N–MFP 

As part of the money market fund 

reforms we adopted in 2010, money 

market funds must provide to the 

Commission a monthly electronic filing 

of portfolio holdings information on 

Form N–MFP.43 The information money 

market funds must disclose with respect 

to each portfolio security (and any 

guarantee, demand feature or other 

enhancement associated with the 

portfolio security) includes the name of 

each designated NRSRO for the portfolio 

security and the rating assigned to the 

security.44 We propose to eliminate the 

items requiring disclosure of ratings 

information from the form. We also 

propose to amend Item 33 of Form N– 

MFP to remove the reference to a rating 

in this item so that funds would only 

disclose whether a portfolio security is 

first or second tier or no longer an 

eligible security.45

We request comment on the proposed 

form amendments. 

C. Rule 5b–3 

Rule 5b–3 under the Investment 

Company Act permits a fund, subject to 

certain conditions, to treat a repurchase 

agreement as an acquisition of the 

securities collateralizing the repurchase 

agreement in determining whether the 

fund is in compliance with two 

provisions of the Investment Company 

Act that may affect a fund’s ability to 

invest in repurchase agreements. In a 

typical investment company repurchase 

agreement, a fund enters into a contract 

with a broker, dealer or bank (the 

‘‘counterparty’’ to the transaction) for the 

purchase of securities. The counterparty 

agrees to repurchase the securities at a 

specified future date, or on demand, for 

a price that is sufficient to return to the 

fund its original purchase price, plus an 

additional amount representing the 

return on the fund’s investment.46

Section 12(d)(3) of the Investment 

Company Act generally prohibits a fund 

from acquiring an interest in a broker, 

dealer, or underwriter. Because a 

repurchase agreement may be 

considered to be the acquisition of an 


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47Rule 5b–3(a). The term ‘‘collateralized fully’’ is 

defined in rule 5b–3(c)(1). In general, a fund 

investing in a repurchase agreement looks to the 

value and liquidity of the securities collateralizing 

the repurchase agreement rather than the credit 

quality of the counterparty for satisfaction of the 

repurchase agreement. See Rule 5b–3 Adopting 

Release, supra note 46, at Section II.A.3. But see 

rule 2a–7(c)(4)(ii)(A) (requiring money market funds 

to evaluate the counterparty’s credit-worthiness). 

48The term ‘‘requisite NRSROs’’ means any two 

NRSROs that have issued a rating with respect to 

a security or class of debt obligations of an issuer 

or, if only one NRSRO has issued a rating with 

respect to such security or class of debt obligations 

of an issuer at the time the investment company 

acquires the security, that NRSRO. Rule 5b–3(c)(6). 

49Rule 5b–3(c)(1)(iv). The term ‘‘unrated 

securities’’ means securities that have not received 

a rating from the requisite NRSROs. Rule 5b–3(c)(8). 

We note, however, that as a result of our recent 

money market fund reforms, money market funds 

seeking similar treatment with respect to the 

diversification requirements under rule 2a–7 are 

subject to stricter limitations. In order to qualify for 

such special treatment, a repurchase agreement is 

collateralized fully only if the collateral for the 

repurchase agreement consists entirely of cash or 

government securities. Rule 2a–7(a)(5). See Money 

Market Fund Reform Adopting Release, supra note 

8, at Section II.D. 

50See Treatment of Repurchase Agreements and 

Refunded Securities as an Acquisition of the 

Underlying Securities, Investment Company Act 

Release No. 24050 (Sept. 23, 1999) [64 FR 52476 

(Sept. 29, 1999)] (‘‘Rule 5b–3 Proposing Release’’) at 

n.43 and accompanying text (noting that the high 

quality requirement is designed to limit a fund’s 

exposure to the ability of the counterparty to 

maintain sufficient collateral, and that securities of 

lower quality may be subject to greater price 

fluctuation). 

51Proposed rule 5b–3(c)(1)(iv)(C). Under the 

proposal, the board would make credit quality 

determinations for all collateral securities that are 

not government securities, rather than just unrated 

securities. As in the current rule, the proposed rule 

would permit the board to delegate the credit 

quality and liquidity determination. The proposed 

amendment to rule 5b–3 would not affect a money 

market fund that seeks special treatment under the 

diversification provisions of rule 2a–7 because in 

order to obtain such treatment, a money market 

fund is limited to investing in repurchase 

agreements collateralized by cash items or 

government securities. See supra note 49. We are 

proposing to amend rule 2a–7(a)(5), which defines 

‘‘collateralized fully,’’ to conform the references in 

that provision to the proposed amendments to rule 

5b–3. 

The first element of this proposed standard 

reflects the same standard as that proposed for the 

definition of first tier security under rule 2a–7. See 

proposed rule 2a–7(a)(13). 

52Proposed rule 5b–3(c)(4) (defining ‘‘issuer’’ to 

mean ‘‘the issuer of a collateral security or the issuer 

of an unconditional obligation of a person other 

than the issuer of the collateral security to 

undertake to pay, upon presentment by the holder 

of the obligation (if required), the principal amount 

of the underlying collateral security plus accrued 

interest when due or upon default.’’). 

53See supra text accompanying note 30. 

54The proposed liquidity standard is the same as 

that we use for rule 2a–7. See, e.g., rule 2a–7(a)(19) 

(defining illiquid security to mean 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). 

55See Tri-Party Repo Infrastructure, Reform Task 

Force, Tri-Party Repo Margin Data, Summary 

Statistics for the U.S. Tri-Party Repo Market (as of 

Jan. 11, 2011), http://www.newyorkfed.org/ 

tripartyrepo/margin_data.html (describing 98.7% of 

tri-party repurchase agreement collateral as 

composed of asset-backed securities, agency 

collateralized mortgage backed obligations 

(‘‘CMOs’’), agency debentures and strips, agency 

mortgage-backed securities, private label CMOs, 

corporate debt, equity securities, money market 

instruments and U.S. Treasury securities). 

56See supra note 50. A fund that acquires 

repurchase agreements would, under rule 38a–1, 

have to adopt and implement a written policy 

reasonably designed to comply with the conditions 

of rule 5b–3, including any credit quality and 

liquidity requirements we might adopt under the 

rule. See rule 38a–1(a) (requiring registered funds 

to adopt and implement written policies and 

procedures reasonably designed to prevent the 

fund’s violation of Federal securities laws). 

interest in the counterparty, section 

12(d)(3) may limit a fund’s ability to 

enter into repurchase agreements with 

many of the firms that act as repurchase 

agreement counterparties. Section 

5(b)(1) of the Investment Company Act 

limits the amount that a fund that holds 

itself out as being a diversified 

investment company may invest in the 

securities of any one issuer (other than 

the U.S. Government). This provision 

may limit the number and principal 

amounts of repurchase agreements a 

diversified fund may enter into with any 

one counterparty. 

Rule 5b–3 allows funds to treat the 

acquisition of a repurchase agreement as 

an acquisition of securities 

collateralizing the repurchase agreement 

for purposes of sections 5(b)(1) and 

12(d)(3) of the Investment Company Act 

if the obligation of the seller to 

repurchase the securities from the fund 

is ‘‘collateralized fully.’’ 47 A repurchase 

agreement is collateralized fully if, 

among other things, the collateral for the 

repurchase agreement consists entirely 

of (i) cash items, (ii) government 

securities, (iii) securities that at the time 

the repurchase agreement is entered into 

are rated in the highest rating category 

by the ‘‘requisite NRSROs’’ 48 or (iv) 

unrated securities that are of a 

comparable quality to securities that are 

rated in the highest rating category by 

the requisite NRSROs, as determined by 

the fund’s board of directors or its 

delegate.49 In proposing rule 5b–3, the 

Commission explained that the highest 

rating category requirement in the 

definition of collateralized fully was 

designed to help ensure that the market 

value of the collateral would remain 

stable and that the fund could more 

readily liquidate the collateral quickly 

in the event of a default.50

We propose to eliminate the 

requirement that collateral other than 

cash or government securities be rated 

in the highest category by the requisite 

NRSROs or be of comparable quality. In 

place of this requirement, we propose to 

require that collateral other than cash or 

government securities consist of 

securities that the fund’s board of 

directors (or its delegate) determines at 

the time the repurchase agreement is 

entered into are: (i) Issued by an issuer 

that has the highest capacity to meet its 

financial obligations; and (ii) 

sufficiently liquid that they can be sold 

at approximately their carrying value in 

the ordinary course of business within 

seven calendar days.51 For purposes of 

rule 5b–3, an issuer would be defined to 

include an issuer of an unconditional 

guarantee of the security.52 Thus, a 

collateral security with an 

unconditional guarantee, the issuer of 

which meets the proposed credit quality 

test, would satisfy that element of the 

proposed standard. 

We have designed the proposed 

amendments to retain a degree of credit 

quality similar to that under the current 

rule. An issuer of collateral securities 

that the board (or its delegate) 

determined has an exceptionally strong 

capacity to repay its short or long-term 

debt obligations, as appropriate, the 

lowest expectation of default, and a 

capacity for repayment of its financial 

commitments that is the least 

susceptible to adverse effects of changes 

in circumstances would satisfy the 

proposed standard.53

Our proposal also would require that 

at the time the repurchase agreement is 

entered into, collateral could be sold at 

approximately its carrying value in the 

ordinary course of business within 

seven calendar days.54 We expect that 

securities that trade in a secondary 

market at the time of the acquisition of 

the repurchase agreement would satisfy 

this liquidity standard. We also 

understand that most securities that are 

currently used to collateralize 

repurchase agreements 55 generally trade 

in a secondary market. 

We have designed the proposed 

amendments to be clear enough to 

permit a fund board or fund investment 

adviser to make a determination 

regarding credit quality and liquidity 

that would achieve the same objectives 

that the credit rating requirement was 

designed to achieve, i.e., to limit 

collateral securities to those that are 

likely to retain a fairly stable market 

value and that, under ordinary 

circumstances, the fund would be able 

to liquidate quickly in the event of a 

counterparty default.56 We believe that 

fund advisers have experience with or 

knowledge of the evaluation of 

securities and would be qualified to 

make the credit and liquidity 


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57We note that under the current rule, if 

collateral securities are unrated, fund boards of 

directors (or their delegates) must determine that 

the securities are of comparable quality to securities 

rated in the highest category by an NRSRO. Rule 

5b–3(c)(iv)(D). 

58We understand that credit quality standards for 

securities collateralizing repurchase agreements are 

typically contained in the agreements between 

funds and counterparties. We expect that those 

standards include a rating (for rated collateral 

securities) and any additional criteria a fund 

manager considers necessary to ensure that the 

credit quality of collateral securities meets the 

fund’s requirements, or for unrated securities, a 

comparable credit quality standard. The proposed 

amendment would not prohibit fund boards (or 

their delegates) from relying on the credit quality 

standards in current repurchase agreements and 

policies and procedures adopted to comply with the 

current rule regarding the credit quality of collateral 

securities as long as they conclude that the ratings 

specified in the repurchase agreements and policies 

and procedures establish similar standards to those 

proposed, and that the agencies providing the 

ratings used in the policies and procedures are 

credible and reliable for that use. A fund could also 

revise its repurchase agreements and policies and 

procedures to change or eliminate the consideration 

of specific NRSRO ratings or to incorporate other 

third party evaluations of credit quality. 

59See proposed rule 5b–3(c)(1)(iv)(C)(4). 

60See Rule 5b–3 Proposing Release, supra note 

50, at n.43. 

61We have noted before the difficulties of 

liquidating collateral in the case of a default by a 

large counterparty when many investors in 

repurchase agreements seek to liquidate similar 

collateral at the same time. See Money Market Fund 

Reform Proposing Release, supra note 8, at n.229 

and accompanying and preceding text. 

62See S. Rep. No. 103–166, at 11 (1993) (‘‘1993 

Senate Report’’). 

63For purposes of the Investment Company Act, 

an ‘‘investment company’’ means any issuer that (A) 

is or holds itself out as being engaged primarily, or 

proposes to engage primarily, in the business of 

investing, reinvesting, or trading in securities; (B) 

is engaged or proposes to engage in the business of 

issuing face-amount certificates of the installment 

type, or has been engaged in such business and has 

any such certificate outstanding; or (C) is engaged 

or proposes to engage in the business of investing, 

reinvesting, owning, holding, or trading in 

securities, and owns or proposes to acquire 

investment securities having a value exceeding 40 

per centum of the value of such issuer’s total assets 

(exclusive of government securities and cash items) 

on an unconsolidated basis. 15 U.S.C. 80a–3(a)(1). 

64 15 U.S.C. 80a–6(a)(5); Pub. L. 104–290 § 501, 

110 Stat. 3416, 3444 (1996). Section 6(a)(5)(B) 

provides that section 9 and, to the extent necessary 

to enforce section 9, sections 38 through 51, apply 

to a BIDCO as though the company were a 

registered investment company. Among other 

conditions to reliance on the exemption in section 

6(a)(5), a BIDCO may not issue redeemable 

securities. 

65See 1993 Senate Report, supra note 62, at 19 

(further stating that states are well positioned to 

monitor these companies and address the needs of 

resident investors). Prior to the addition of section 

6(a)(5), the Commission had granted orders to 

exempt BIDCOs from regulation under the Act. See, 

e.g., The Idaho Company, Investment Company 

Release Nos. 18926 (Sept. 3, 1992) (notice) and 

18985 (Sept. 30, 1992) (order). 

determinations proposed under the 

rule.57

Under the proposal, the board could 

delegate day-to-day determinations 

regarding the quality and liquidity of 

collateral if it chooses, provided that the 

board retained sufficient oversight. In 

addition, although the rule would no 

longer require the collateral to be rated 

by an NRSRO, fund boards (or their 

delegates) would still be able to 

consider analysis provided by outside 

sources, including credit agency ratings, 

that they conclude are credible and 

reliable, for purposes of making these 

credit quality evaluations.58

We request comment on our proposed 

amendment to rule 5b–3. 

• Would the proposed determinations 

sufficiently address our concerns that 

collateral securities be of high quality in 

order to limit a fund’s exposure to 

counterparties’ credit risks? If not, are 

there additional or alternative standards 

that do not use credit ratings that would 

better address our concerns? 

• Should a fund board (or its 

delegate) be permitted to consider 

assessments issued by third parties, as 

we anticipate? What, if any, criteria or 

standards should be imposed on the use 

of such assessments? Would the use of 

third party assessments help fund 

boards (or their delegates) arrive at 

consistent determinations regarding the 

credit quality of collateral under the 

rule? 

• We propose to allow the credit 

quality of an issuer of an unconditional 

guarantee to substitute for the credit 

quality of the issuer of a collateral 

security subject to the guarantee.59 This 

is designed to preserve a fund’s ability 

to use the same types of collateral 

securities as it currently uses to satisfy 

the conditions of rule 5b–3. Should we 

instead limit collateral to securities that 

alone satisfy the proposed credit quality 

standard regardless of whether the 

security is subject to an unconditional 

guarantee? 

• Would the proposed standard 

adequately address our concern that a 

fund be able to readily liquidate 

collateral securities in the event of a 

counterparty default? 

• As noted above, we expect that, in 

general, securities that trade in 

secondary markets and most securities 

that are used as collateral for repurchase 

agreements would meet the proposed 

liquidity requirement. Are there 

securities typically used for collateral 

that would not meet the proposed 

liquidity standard? 

• We have noted before that high 

quality securities generally are more 

liquid than lower quality securities.60

Would the proposed credit quality 

requirement alone be sufficient to 

address concerns regarding liquidity of 

the collateral? 

• We acknowledge that securities that 

may be liquid at the time of acquisition 

of the repurchase agreement may be less 

liquid when the counterparty defaults.61

Would a different standard of liquidity 

provide any greater protection? For 

example, if we required that collateral 

could be sold at carrying value almost 

immediately, would it be more likely to 

remain liquid if many holders of the 

security are trying to sell at the same 

time? Would such a standard limit 

collateral securities to U.S. Treasury 

securities as a practical matter? 

• In light of the potential for 

decreased liquidity of collateral 

securities at the time of a counterparty 

default, should we limit the exemption 

to repurchase agreements that are 

collateralized only by cash or 

government securities? 

• Would we better achieve the goals 

of rule 5b–3 if the rule provided that a 

fund could no longer rely on rule 5b– 

3 if, at any point after the time a fund 

enters into a repurchase agreement, the 

collateral no longer met the proposed 

liquidity standard? 

D. Proposed Rule 6a–5 

Business and industrial development 

companies (‘‘BIDCOs’’) are companies 

that operate under state statute that 

provide direct investment and loan 

financing, as well as managerial 

assistance, to state and local 

enterprises.62 Because they invest in 

securities, BIDCOs frequently meet the 

definition of ‘‘investment company’’ 

under the Investment Company Act.63

In 1996, the Investment Company Act 

was amended to add section 6(a)(5) to 

exempt these companies from most 

provisions of the Act subject to certain 

conditions.64 The statutory exemption 

was premised on states having a strong 

interest in overseeing the structure and 

operations of these companies, thus 

rendering regulation under the 

Investment Company Act largely 

duplicative and unnecessary.65

BIDCOs that seek to rely on the 

exemption in section 6(a)(5) are limited 

with respect to the types of securities 

issued by investment companies and 

companies exempt from the definition 

of investment company under section 

3(c)(1) or 3(c)(7) of the Act (‘‘private 

funds’’) that they may purchase. 

Specifically, section 6(a)(5)(A)(iv) limits 

these BIDCOs from purchasing 

securities issued by investment 

companies and private funds other than 

debt securities that are rated investment 

grade by at least one NRSRO and 

securities issued by registered open-end 

investment companies that invest at 


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66 15 U.S.C. 80a–6(a)(5)(A), as in effect prior to 

July 21, 2012 (exempting any company that is not 

engaged in the business of issuing redeemable 

securities, the operations of which are subject to 

regulation by the State in which the company is 

organized under a statute governing entities that 

provide financial or managerial assistance to 

enterprises doing business, or proposing to do 

business in that state if, among other things, the 

company does not purchase any security issued by 

an investment company or by any company that 

would be an investment company except for the 

exclusions from the definition of the term 

‘‘investment company’’ under sections 3(c)(1) or 

3(c)(7), other than (I) any debt security that is rated 

investment grade by not less than 1 nationally 

recognized statistical rating organization; or (II) any 

security issued by a registered open-end fund that 

is required by its investment policies to invest not 

less than 65% of its total assets in securities 

described in subclause (I) or securities that are 

determined by such registered open-end fund to be 

comparable in quality to securities described in 

subclause (I)). 

67See 1993 Senate Report, supra note 62, at 20. 

68Proposed rule 6a–5. The standard for creditworthiness that we are proposing in rule 6a–5 is 

similar to the standard that we adopted in rule 10f– 

3 under the Investment Company Act. See 2009 

Ratings Removal Adopting Release, supra note 7, at 

Section II.B.2; rule 10f–3(a)(3). This credit quality 

standard differs from those we propose for rules 2a– 

7 and 5b–3 because it reflects the different standard 

of credit quality associated with the ratings 

referenced in rule 10f–3 and section 6(a)(5)(A)(iv)(I) 

of the Act before the amendment of each provision. 

Compare supra notes 16, 48, and accompanying 

text with supra note 66 and accompanying text and 

rule 10f–3(a)(3), as in effect before November 12, 

2009 (conditioning an exemption to permit an 

investment company that is affiliated with members 

of an underwriting syndicate to purchase securities 

from the syndicate if certain conditions are met, 

including if the securities are municipal securities, 

that have received an investment grade rating, or if 

the securities are less seasoned, one of the three 

highest ratings, from an NRSRO). 

69Proposed rule 6a–5. From our review of the 

state statutes under which BIDCOs are formed and 

operate, we understand that BIDCOs must be 

organized as corporations with boards of directors 

or limited liability companies that are managed by 

members or managers. See, e.g., Mich. comp. Laws 

§ 301 (2010) (stating that a company other than a 

Michigan corporation or a limited liability company 

cannot apply for a license to be a BIDCO); Mont. 

Code Ann. § 102 (2010) (defining a BIDCO as a 

corporation that is licensed under the act to provide 

financial and management assistance to businesses); 

Alaska Stat. § 20 (2010) (stating that a license to 

operate a BIDCO will be issued to a corporation if 

certain conditions are met); Tenn. Code Ann. § 208 

(2010) (stating that a person other than a Tennessee 

corporation cannot apply for a license to be a 

BIDCO). 

70Section 6(a)(5)(A)(iv)(II) (permitting a BIDCO to 

purchase any security issued by a registered openend fund that is required by its investment policies 

to invest not less than 65% of its total assets in 

securities described in subclause (I) (i.e., securities 

that meet the standards of credit-worthiness that the 

Commission adopts) or securities that are 

determined by such registered open-end fund to be 

comparable in quality to securities described in 

subclause (I)). 

71See 2009 Ratings Removal Adopting Release, 

supra note 7, at n.86. 

72 Id. 

73Form N–1A is used by open-end management 

investment companies, commonly known as mutual 

funds. Form N–2 is used by closed-end 

management investment companies. Form N–3 is 

used by separate accounts, organized as 

management investment companies, that offer 

variable annuity contracts. 

74 Item 27(d)(2) of Form N–1A; Instruction 6(a) to 

Item 24 of Form N–2; Instruction 6(i) to Item 28(a) 

of Form N–3. 

least 65 percent of their assets in 

investment grade securities or securities 

that the fund determines are comparable 

in quality.66 This provision was 

intended to provide limited flexibility to 

invest capital not immediately needed 

for the company’s long-term 

commitments.67 Although the 

legislative history of the provision does 

not specifically explain why Congress 

restricted BIDCOs to acquiring 

‘‘investment grade’’ debt of investment 

companies and private funds, it may 

have been designed to limit BIDCOs to 

investing in debt securities of 

sufficiently high credit quality that they 

are likely to maintain a fairly stable 

market value and that could be 

liquidated easily, as appropriate, for the 

BIDCO to support its investment and 

financing activities. 

As described above, section 939(c) of 

the Dodd-Frank Act eliminates the 

credit rating reference in section 

6(a)(5)(A)(iv) of the Investment 

Company Act. Instead of limiting 

BIDCOs to purchasing debt securities 

issued by investment companies and 

private funds that are rated ‘‘investment 

grade,’’ the amendment requires such 

debt securities to meet ‘‘such standards 

of credit-worthiness as the Commission 

shall adopt.’’ 

We are proposing new rule 6a–5 to 

establish this standard of creditworthiness. Proposed rule 6a–5 would 

deem a BIDCO to have met the 

requirements for credit-worthiness of 

certain debt securities under section 

6(a)(5)(A)(iv)(I) if the board of directors 

or members of the company (or its 

delegate) determines that the debt 

security is (i) subject to no greater than 

moderate credit risk and (ii) sufficiently 

liquid that the security can be sold at or 

near its carrying value within a 

reasonably short period of time.68 The 

proposed standard is designed to limit 

BIDCOs to purchasing debt securities 

issued by investment companies or 

private funds of sufficiently high credit 

quality that they are likely to maintain 

a fairly stable market value and may be 

liquidated easily, as appropriate, for the 

BIDCO to support its investment and 

financing activities. The board of 

directors or members of a BIDCO (or its 

delegate) would have to make the 

determination at the time of 

acquisition.69 As a result of the 

proposed rule, section 6(a)(5) of the Act 

would also limit a BIDCO’s investments 

in registered open-end funds to those 

funds that invest at least 65 percent of 

their assets in debt securities that meet 

our proposed standard.70

Moderate credit risk would denote 

current low expectations of default risk, 

with an adequate capacity for payment 

of principal and interest.71 Debt 

securities (or their issuers) subject to a 

moderate level of credit risk would 

demonstrate at least average creditworthiness relative to other similar debt 

issues (or issuers of similar debt).72 In 

making these determinations, a BIDCO’s 

board of directors, members or managers 

would be able to consider credit quality 

reports prepared by outside sources, 

including NRSRO ratings, that they 

conclude are credible and reliable for 

this purpose. 

We request comment on proposed 

rule 6a–5. 

• Does the standard we have 

proposed provide BIDCOs with 

flexibility to invest in certain debt 

securities that are likely to retain their 

value and that a BIDCO could sell 

quickly if necessary to support its 

investment and financing activities? If 

not, are there additional or alternative 

standards that do not use credit ratings 

that would be more appropriate to the 

statutory intent of section 6(a)(5)? 

• Is our understanding that BIDCOs 

are organized as corporations with a 

board of directors or limited liability 

companies with members or managers 

correct? Are there BIDCOs that are 

formed as partnerships or other 

structures? 

• Do BIDCO directors or members 

have sufficient experience with or 

knowledge of evaluating securities to 

allow them to make the determinations 

called for by proposed rule 6a–5 or to 

oversee decisions made by a delegate? 

E. Forms N–1A, N–2 and N–3 

We are proposing to amend Forms N– 

1A, N–2 and N–3 to remove the required 

use of credit ratings assigned by an 

NRSRO. Forms N–1A, N–2 and N–3, 

among other things, contain the 

requirements for shareholder reports of 

mutual funds, closed-end funds, and 

certain insurance company separate 

accounts that offer variable annuities.73

Currently, Forms N–1A, N–2 and N– 

3 each require shareholder reports to 

include a table, chart, or graph depicting 

portfolio holdings by reasonably 

identifiable categories (e.g., type of 

security, industry sector, geographic 

region, credit quality or maturity).74 The 

forms require the categories to be 

selected in a manner reasonably 

designed to depict clearly the types of 

investments made by the fund, given its 

investment objectives. If credit quality is 


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12904 Federal Register / Vol. 76, No. 46 / Wednesday, March 9, 2011 / Proposed Rules 

75Proposed Item 27(d)(2) of Form N–1A; 

proposed Instruction 6(a) to Item 24 of Form N–2; 

proposed Instruction 6(i) to Item 28(a) of Form N– 

3. In these items, we are also proposing to define 

NRSRO by reference to the Exchange Act definition, 

rather than by reference to Exchange Act rule 15c3– 

1 as is currently the case, and to replace the use 

of the term ‘‘rating’’ with ‘‘credit rating’’ as defined 

under the Exchange Act. See sections 3(a)(60) [15 

U.S.C. 78c(a)(60)] and 3(a)(62) [15 U.S.C. 78c(a)(62)] 

of the Exchange Act, which define ‘‘credit rating’’ 

and ‘‘nationally recognized statistical rating 

organization,’’ respectively. 

76This statement is based on a staff review of a 

sample of fund shareholder reports filed with the 

Commission. 

77 44 U.S.C. 3501–3520. 

78The proposed amendments to Forms N–1A, N– 

2 and N–3 relate solely to the contents of fund 

shareholder reports. The PRA burden associated 

with fund shareholder reports is included in the 

burden associated with the collection of 

information for rule 30e–1 under the Investment 

Company Act rather than Forms N–1A, N–2 and 

N–3. 

79Proposed rule 2a–7(a)(11). See supra Section 

II.A.1. 

80Proposed rule 2a–7(a)(13). See supra Section 

II.A.1. 

81Proposed rule 2a–7(c)(3)(iv)(C). See supra 

Section II.A.2. 

82Proposed rule 2a–7(c)(7)(i)(A). See supra 

Section II.A.3. 

used to present portfolio holdings, the 

forms require that credit quality be 

depicted using the credit ratings 

assigned by a single NRSRO. 

We are proposing to amend Forms N– 

1A, N–2 and N–3 to eliminate the 

required use of NRSRO credit ratings by 

funds that choose to use credit quality 

categorizations in the required table, 

chart or graph of portfolio holdings. If 

a fund chooses to use NRSRO credit 

ratings to depict credit quality of 

portfolio holdings, the proposal, like the 

current forms, generally would require 

the fund to use the credit ratings of a 

single NRSRO. This requirement is 

intended to eliminate the possibility 

that a fund could choose to use NRSRO 

credit ratings and then select the most 

favorable ratings among credit ratings 

assigned by multiple NRSROs. The 

proposal would clarify that, if credit 

ratings of the NRSRO selected by a fund 

are not available for certain holdings, 

the fund must briefly discuss the 

methodology for determining credit 

quality for those holdings, including, if 

applicable, the use of credit ratings 

assigned by another NRSRO.75 Funds 

typically provide this discussion in 

their shareholder reports today.76

We request comment on the proposal 

to eliminate the required use of NRSRO 

credit ratings by funds that choose to 

use credit quality categorizations in 

shareholder reports. 

• Are there better methods than the 

proposal by which funds could portray 

credit quality for purposes of the 

required table, chart or graph that 

presents portfolio holdings? 

• Does the proposal adequately 

address situations where a fund would 

choose to portray credit quality using 

NRSRO ratings and there is no single 

NRSRO that has rated all of the fund’s 

portfolio holdings? 

III. Request for Comment 

We request comment on the rule and 

form amendments and new rule 

proposed in this release. We also 

request suggestions for additional 

changes to existing rules, and comments 

on other matters that might have an 

effect on the proposals contained in this 

release. Commenters are requested to 

provide empirical data to support their 

views. 

IV. Paperwork Reduction Act 

Certain provisions of our proposal 

contain ‘‘collections of information’’ 

within the meaning of the Paperwork 

Reduction Act of 1995 (‘‘PRA’’).77 The 

titles for the existing collections of 

information are: (1) ‘‘Rule 2a–7 under 

the Investment Company Act of 1940, 

Money market funds’’; (2) ‘‘Rule 30e–1 

under the Investment Company Act of 

1940, Reports to Stockholders of 

Management Companies’’;78 (3) ‘‘Rule 

38a–1 under the Investment Company 

Act of 1940, Compliance procedures 

and practices of registered investment 

companies’’; and (4) ‘‘Form N–MFP 

under the Investment Company Act of 

1940, Portfolio Holdings of Money 

Market Funds.’’ We adopted the rules 

and form pursuant to the Investment 

Company Act. The Commission is 

submitting these 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. 

There is currently no approved 

collection of information for rule 5b–3 

and the proposed amendments would 

not create any new collections under 

that rule. The proposed amendments to 

rule 5b–3 would, however, affect the 

collection of information burden for rule 

38a–1. Proposed rule 6a–5 also would 

not create any new collections of 

information. 

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. The approved 

collection of information associated 

with rule 2a–7 displays control number 

3235–0268. The approved collection of 

information associated with rule 30e–1 

displays control number 3235–0025. 

The approved collection of information 

associated with rule 38a–1, which 

would be revised by the proposed 

amendments to rule 5b–3, displays 

control number 3235–0586. The 

approved collection of information 

associated with Form N–MFP displays 

control number 3235–0657. 

A. Money Market Funds 

1. Rule 2a–7 

As discussed above, we are proposing 

to remove references to credit ratings in 

rule 2a–7, which would affect five 

elements of the rule. First, we propose 

to eliminate the requirement that an 

eligible security be rated by an NRSRO 

or be of comparable quality, while 

maintaining the two-step analysis 

currently required by rule 2a–7. A 

security would be an eligible security 

only if the board of directors (or its 

delegate) determines that it presents 

minimal credit risks, which 

determination must be based on factors 

pertaining to credit quality and the 

issuer’s ability to meet its short-term 

financial obligations.79 Second, we 

propose to define first tier security as a 

security whose issuer the fund’s board 

(or its delegate) determines has the 

‘‘highest capacity to meet its short-term 

financial obligations.’’ 80 Third, we 

propose to require that with respect to 

a security (or its guarantee) subject to a 

conditional demand feature, in addition 

to other conditions, the underlying 

security (or its guarantee) must itself be 

of high quality and subject to very low 

credit risk as determined by the fund’s 

board (or its delegate).81 Fourth, we 

propose to eliminate the use of credit 

ratings in the rule’s downgrade and 

default provisions. The proposed 

amendment would require that in the 

event 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 of any 

credible information about a portfolio 

security or an issuer of a portfolio 

security that suggests that the security is 

no longer a first tier security or a second 

tier security, as the case may be, the 

money market fund’s board of directors 

would have to reassess promptly 

whether the portfolio security continues 

to present minimal credit risks.82

Finally, we propose to eliminate the 

reference to portfolio securities’ 

downgrades in the stress testing 

provisions. Under the proposal, a 

money market fund’s stress testing 

procedures would be required to 

include as a hypothetical event, ‘‘an 

adverse change in the ability of the 

issuer of a portfolio security to meet its 


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83Proposed rule 2a–7(c)(10)(v)(A). See supra 

Section II.A.4. As a result of eliminating the term 

‘‘designated NRSRO,’’ the proposal would eliminate 

the requirement that boards of directors designate 

NRSROs and disclose such designated NRSROs in 

their SAIs. See supra note 25. We believe that the 

deletion of the disclosure requirement would not 

affect the collection of information requirements in 

the SAI, however, and therefore would not change 

current paperwork burden estimates. When we 

adopted the requirement to disclose designated 

NRSROs in the SAI, we stated that we anticipated 

that making this disclosure would not result in 

additional hourly burdens or printing costs beyond 

those currently approved in the existing collection 

of information for Form N–1A. See Money Market 

Fund Reform Adopting Release, supra note 8, at 

106. The proposed amendments also would make 

conforming amendments to rule 2a–7’s 

recordkeeping and reporting requirements. See 

proposed rule 2a–7(c)(11)(iii). These conforming 

changes would not result in changes in the 

estimated hourly burden associated with the 

recordkeeping and reporting requirements. 

84See rules 2a–7(c)(3); 2a–7(c)(11)(ii); 2a–7(e); 

38a–1. 

85The current approved annual burden for rule 

2a–7 under the PRA is 395,779 hours. The 

estimated number of respondents is 652 money 

market funds as of December 31, 2010. The 

estimated number of money market funds is based 

on the Investment Company Institute, Trends in 

Mutual Fund Investing, December 2010 (Jan. 27, 

2011), http://www.ici.org/research/stats/trends/ 

trends_12_10. 

86These estimates are based on the following 

calculation: (652 money market funds × 1.5 hours 

= 978 hours); (978 hours × $232 per hour = 

$226,896). The staff estimates that the internal cost 

of a senior business analyst is $232 per hour. This 

estimate, as well as other internal time cost 

estimates made in this analysis, is derived from 

SIFMA’s Management and Professional Earnings in 

the Securities Industry 2010, modified by 

Commission staff to account for an 1800-hour work 

week and multiplied by 5.35 to account for 

bonuses, firm size, employee benefits and overhead. 

87For purposes of the PRA analysis, the current 

burden associated with the requirements of rule 

30b1–7 is included in the collection of information 

requirements of Form N–MFP. The current 

approved annual burden for Form N–MFP under 

the PRA is 94,189 hours. 

88See supra note 85. 

89The staff estimates that the internal cost of a 

senior database administrator is $301 per hour. 

90These estimates are based on the following 

calculation: (652 × 6 hours = 3912 hours); (3912 

hours × $301 per hour = $1,177,512). We 

understand that some money market funds may 

outsource all or a portion of their responsibilities 

regarding Form N–MFP to a filing agent, software 

consultant, or other third-party service provider. 

We believe that a fund would engage third-party 

service providers at an external cost similar to or 

less than the estimated internal costs so the amount 

of the savings would be comparable. 

short-term financial obligations.’’ 83 The 

respondents to these collections of 

information are money market funds. A 

fund must comply with the 

requirements of rule 2a–7, including the 

collections of information, in order to 

obtain the exemptive relief provided 

under the rule and to operate as a 

money market fund. 

We do not anticipate that the 

proposed amendments would 

significantly change collection of 

information requirements under rule 

2a–7 because we believe funds would 

likely rely on their current policies and 

procedures to comply with the proposed 

amendments. Under current rule 2a–7, 

money market fund boards, or their 

delegates, are required to perform a 

minimal credit risk evaluation with 

respect to each of the fund’s portfolio 

securities. Funds also must adopt 

policies and procedures regarding those 

determinations.84 Eligible securities and 

first tier securities currently are defined 

with reference to credit ratings, and 

securities subject to a conditional 

demand feature must meet a minimum 

credit rating threshold or if unrated, be 

of comparable quality. With respect to 

monitoring for downgrades and 

defaults, Commission staff understands 

that money market funds generally 

monitor for information regarding credit 

events that may affect the portfolio in 

addition to those specified in the rule. 

In addition, a fund could treat a 

downgrade as a credit event that might 

adversely affect a portfolio security. 

Finally, staff also understands that 

money market funds stress test for credit 

events other than downgrades that 

might affect the fund’s portfolio. As we 

have noted above, with respect to each 

of the amendments we propose today, 

money market funds could continue to 

consider evaluations of outside sources, 

including credit ratings, in making 

credit quality determinations, 

monitoring and stress testing. Moreover, 

we anticipate that funds would likely 

continue to rely on their current policies 

and procedures with respect to credit 

quality determinations, monitoring for 

credit events and stress testing because 

that is likely to be less costly than 

revising policies. Accordingly, we do 

not expect the proposed amendments 

would significantly change current 

collection of information burden 

estimates for rule 2a–7.85 Nevertheless, 

money market funds may make 

technical changes to their policies and 

procedures in response to the proposed 

amendments, if adopted. Staff estimates 

that it would take, on average, 1.5 hours 

of a senior business analyst’s time to 

make any technical changes for an 

individual money market fund, for an 

estimated one-time burden of 978 hours 

for all money market funds at a total 

cost of $226,896.86 Amortized over three 

years, we estimate that the total annual 

burden would be 326 hours at a cost of 

$75,632. 

• We request comment on these 

assumptions. If commenters believe 

these assumptions are not accurate, we 

request they provide specific data that 

would allow us to make more accurate 

estimates. 

2. Form N–MFP 

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 information required by the 

form must be data-tagged in XML format 

and filed through EDGAR. Preparing 

Form N–MFP is a collection of 

information under the PRA.87 The 

respondents to the requirement to 

prepare Form N–MFP are investment 

companies that are regulated as money 

market funds under rule 2a–7. 

Compliance with the requirement to 

prepare Form N–MFP is mandatory for 

any fund that holds itself out as a 

money market fund in reliance on rule 

2a–7. Responses to the disclosure 

requirement of Form N–MFP are not 

kept confidential. 

As discussed previously, the 

proposed amendments would eliminate 

the items requiring disclosure for each 

portfolio security (and any guarantee, 

demand feature or enhancement 

associated with the portfolio security) of 

the designated NRSROs for the security 

and the rating assigned to the security 

in Items 34, 37, 38 and 39 of the Form. 

The proposed amendments would also 

eliminate the requirement in Item 33 

that a money market fund disclose 

whether a security is a rated security or 

an unrated security. 

The staff estimates that, as of 

December 31, 2010, there are 

approximately 652 money market funds 

that are required to file Form N–MFP.88

The staff estimates that our proposed 

amendments would reduce the time it 

takes money market funds to complete 

Form N–MFP by 0.5 hours. Because 

Form N–MFP is completed 12 times a 

year, the staff estimates that each 

respondent would save approximately 6 

hours annually (at an internal cost of 

$301 per hour).89 The staff therefore 

estimates that our proposed 

amendments to Form N–MFP would 

result in total incremental time savings 

of approximately 3912 hours (and 

$1,177,512) annually.90

• We request comment on these 

estimates. If commenters believe these 

estimates are not accurate, we request 

they provide specific data that would 

allow us to make more accurate 

estimates. 

B. Rule 5b–3 

Rule 5b–3 under the Investment 

Company Act allows funds to treat the 

acquisition of a repurchase agreement as 

an acquisition of securities 

collateralizing the repurchase agreement 

for purposes of sections 5(b)(1) and 


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91Proposed rule 5b–3(c)(1)(iv)(C). See supra 

Section II.C. 

92Under rule 38a–1, funds must have written 

policies and procedures reasonably designed to 

prevent violation of the Federal securities laws. 

Rule 38a–1(a)(1). Funds thus would have policies 

and procedures for complying with rule 5b–3, 

which would include policies and procedures 

relating to credit quality determinations of unrated 

collateral securities, if appropriate. 

93The current approved annual burden for rule 

38a–1 under the PRA is 254,703 hours. 

94For purposes of this PRA analysis, we assume 

that all funds enter into repurchase agreements and 

rely on rule 5b–3. We have not included money 

market funds in our estimates, however, because 

they are subject to different requirements under rule 

2a–7, as noted above. See supra note 49. The staff’s 

estimate of the number of fund portfolios is based 

on staff examination of industry data as of 

December 31, 2010. 

95These estimates are based on the following 

calculation: (8,460 fund portfolios × 1.5 hours = 

12,690 hours); (12,690 hours $232 per hour = 

$2,944,080). The staff estimates that the internal 

cost for time spent by a senior business analyst is 

$232 per hour. 

96This assessment is based on a staff review of 

a sample of fund shareholder reports filed with the 

Commission. 

12(d)(3) of the Act under certain 

conditions. We propose to amend rule 

5b–3 to require that the securities 

collateralizing a repurchase agreement 

consist of securities that the fund’s 

board of directors, or its delegate, 

determines are issued (or have 

unconditional guarantees that are 

issued) by an issuer that has the highest 

capacity to meet its financial obligations 

and are highly liquid.91 To that end, the 

fund’s board of directors, pursuant to 

rule 38a–1 under the Act, would have 

to develop procedures to ensure that at 

the time the repurchase agreement is 

entered into, the securities meet the 

requirements for collateral outlined in 

the proposed amendments to the rule.92

As discussed above, these procedures 

are designed to limit collateral securities 

to those that are likely to retain a stable 

market value and that, in ordinary 

circumstances, the fund would be able 

to liquidate quickly in the event of a 

default. This collection of information 

would be mandatory for funds that rely 

on rule 5b–3. Records of information 

made in connection with this 

requirement would be required to be 

maintained for inspection by 

Commission staff, but the collection 

would not otherwise be submitted to the 

Commission. The information, when 

provided to the Commission in 

connection with staff examinations or 

investigations, would be kept 

confidential to the extent permitted by 

law. 

We do not anticipate that the 

proposed amendments would 

significantly change collection of 

information burdens under rule 38a–1 

because we believe funds would likely 

rely on their current policies and 

procedures to determine the credit 

quality of collateral securities to comply 

with rule 5b–3, as we propose to amend 

it. We understand that credit quality 

standards for securities collateralizing 

repurchase agreements are contained in 

the repurchase agreements between 

funds and counterparties. We expect 

that those standards currently include a 

rating and any additional criteria a fund 

manager considers necessary to ensure 

that the credit quality of the collateral 

securities meets the fund’s 

requirements, or, for unrated securities, 

a comparable credit quality standard. 

Counterparties provide collateral 

securities to conform to these standards 

and funds confirm that the securities are 

conforming. As we have noted above, 

funds could continue to consider 

evaluations of outside sources, 

including credit ratings, that the board 

determines are credible and reliable in 

making their credit quality 

determinations under the proposed rule. 

We expect that funds would likely 

continue to rely on their current policies 

and procedures (i.e., using credit quality 

standards that include ratings currently 

set forth in their repurchase agreements 

with counterparties). Thus, we do not 

expect that the proposed amendments 

would significantly change the current 

collection of information burden 

estimates for rule 38a–1.93 Nevertheless, 

funds may review their repurchase 

agreements and policies and procedures 

that address rule 5b-3 compliance and 

make technical changes to those 

documents in response to the proposed 

amendments, if adopted. Staff estimates 

that it will take, on average, 1.5 hours 

of a senior business analyst’s time to 

perform this review and make any 

technical changes for an individual fund 

portfolio, for an estimated burden of 

12,690 hours for all fund portfolios 

(other than money market fund 

portfolios) 94 at a total cost of 

$2,944,080.95 Amortized over three 

years, we estimate that the total burden 

would be 4230 hours at a cost of 

$981,360. We anticipate that the fund’s 

board would review the fund manager’s 

recommendation, but that the cost of 

this review would be incorporated in 

the fund’s overall annual board costs 

and would not result in any particular 

additional cost. 

• We request comment on these 

estimates. If commenters believe these 

estimates are not accurate, we request 

they provide specific data that would 

allow us to make more accurate 

estimates. 

• Is our expectation that funds would 

continue to consider ratings in their 

credit quality standards to evaluate 

rated collateral securities for repurchase 

agreements correct? If funds choose not 

to continue this consideration of ratings, 

we request comment on how long it 

would take a fund to confirm that 

collateral securities satisfy the credit 

quality standards in a repurchase 

agreement under our proposed standard. 

C. Rule 30e–1 

The proposed amendments to Forms 

N–1A, N–2 and N–3 eliminate the 

required use of NRSRO credit ratings by 

funds that choose to use credit quality 

categorizations in the required table, 

chart, or graph of portfolio holdings. If 

a fund chooses to use NRSRO credit 

ratings to depict credit quality of 

portfolio holdings, the proposed 

amendments, like the current forms, 

generally would require the fund to use 

the credit ratings of a single NRSRO. 

The proposed amendments would 

clarify that, if credit ratings of the 

NRSRO selected by a fund are not 

available for certain holdings, the fund 

must briefly discuss the methodology 

for determining credit quality for those 

holdings, including, if applicable, the 

use of credit ratings assigned by another 

NRSRO. 

The Commission believes that the 

proposed amendments to Forms N–1A, 

N–2 and N–3 would not affect the 

current PRA burden under rule 30e–1, 

because funds would remain obligated 

to provide a table, chart, or graph of 

portfolio holdings by reasonably 

identifiable categories. The proposed 

amendments only eliminate the 

required use of NRSRO credit ratings by 

funds that choose to use credit quality 

categorizations. The Commission further 

believes that the proposed clarification 

for cases when credit ratings of the 

NRSRO selected by a fund are not 

available for certain holdings would not 

impose any additional PRA burden 

because funds typically provide this 

disclosure in their shareholder reports 

today.96

• We request comment on this 

analysis. If commenters believe this 

analysis is not accurate, we request that 

they provide specific data that would 

allow us to make a more accurate 

analysis. 

D. Request for Comments 

We request comment on whether the 

estimates provided in this PRA analysis 

are accurate. Pursuant to 44 U.S.C. 

3506(c)(2)(B), the Commission solicits 

comments in order to: (i) Evaluate 

whether the proposed collections of 

information are necessary for the proper 


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97Proposed rule 2a–7(a)(11). See supra Section 

II.A.1. 

98Proposed rule 2a–7(a)(13). See supra Section 

II.A.1. 

99Proposed rule 2a–7(c)(3)(iv)(C). See supra 

Section II.A.2. 

100Proposed rule 2a–7(c)(7)(i)(A). See supra 

Section II.A.3. 

101Proposed rule 2a–7(c)(10)(v)(A). See supra 

Section II.A.4. As noted above, see supra note 20, 

the proposed amendments would make conforming 

changes to rule 2a–7’s recordkeeping and reporting 

requirements. We do not believe that these 

amendments would affect costs. 

performance of the functions of the 

Commission, including whether the 

information will have practical utility; 

(ii) evaluate the accuracy of the 

Commission’s estimate of the burden of 

the proposed collections of information; 

(iii) determine whether there are ways 

to enhance the quality, utility, and 

clarity of the information to be 

collected; and (iv) minimize the burden 

of the collections of information on 

those who are to respond, including 

through the use of automated collection 

techniques or other forms of information 

technology. 

Persons wishing to submit comments 

on the collection of information 

requirements of the proposed 

amendments should direct them to the 

Office of Management and Budget, 

Attention Desk Officer for the Securities 

and Exchange Commission, Office of 

Information and Regulatory Affairs, 

Room 10102, New Executive Office 

Building, Washington DC 20503, and 

should send a copy to Elizabeth M. 

Murphy, Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–1090, with 

reference to File No. S7–7–11. OMB is 

required to make a decision concerning 

the collections of information between 

30 and 60 days after publication of this 

Release; therefore a comment to OMB is 

best assured of having its full effect if 

OMB receives it within 30 days after 

publication of this Release. Requests for 

materials submitted to OMB by the 

Commission with regard to these 

collections of information should be in 

writing, refer to File No. S7–7–11, and 

be submitted to the Securities and 

Exchange Commission, Office of 

Investor Education and Advocacy, 100 F 

Street, NE., Washington, DC 20549– 

0213. 

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 proposed rule and form 

amendments and proposed rule, and we 

request comment on all aspects of this 

cost-benefit analysis, including 

identification and assessment of any 

costs and benefits not discussed in this 

analysis. We seek comment and data on 

the value of the benefits identified. We 

also welcome comments on the 

accuracy of the cost estimates in each 

section of this analysis, and request that 

commenters provide data that may be 

relevant to these cost estimates. In 

addition, we seek estimates and views 

regarding these costs and benefits for 

particular funds, including funds that 

are small entities, as well as any other 

costs or benefits that may result from 

the adoption of the proposed rule and 

rule and form amendments. Where 

possible, we request commenters 

provide empirical data to support any 

positions advanced. 

As discussed above, to implement 

provisions of the Dodd-Frank Act, we 

propose to (i) remove the references to 

credit ratings in rules 2a–7 and 5b–3 

and replace them with alternative 

standards of credit-worthiness that are 

designed to appropriately achieve the 

same purposes as the ratings, (ii) 

eliminate references to credit ratings in 

Form N–MFP, and (iii) remove from 

Forms N–1A, N–2 and N–3 the 

requirement that NRSRO credit ratings 

be used when portraying credit quality 

in shareholder reports. We are also 

proposing rule 6a–5 to replace a 

statutory reference to credit ratings that 

the Dodd-Frank Act removes from the 

Investment Company Act and for which 

the Dodd-Frank Act anticipates the 

Commission will adopt a replacement 

standard. Thus, the benefits and costs 

associated with the replacement of 

credit rating references with alternative 

standards of credit-worthiness are 

attributable to the Dodd-Frank Act. The 

Commission has discretion, however, in 

adopting the alternative standards of 

credit-worthiness, and we undertake 

below to discuss the costs and benefits 

of the rule and form amendments and 

new rule that we are proposing. 

A. Money Market Funds 

1. Rule 2a–7 

As discussed above, we are proposing 

to remove references to credit ratings in 

rule 2a–7, which would affect five 

elements of the rule. First, we propose 

to eliminate the requirement that an 

eligible security be rated by an NRSRO 

or be of comparable quality, while 

maintaining the two-step analysis 

currently required by rule 2a–7. A 

security would be an eligible security 

only if the board of directors (or its 

delegate) determines that it presents 

minimal credit risks, which 

determination must be based on factors 

pertaining to credit quality and the 

issuer’s ability to meet its short-term 

financial obligations.97 Second, we 

propose to define first tier security as a 

security whose issuer the fund’s board 

(or its delegate) determines has the 

‘‘highest capacity to meet its short-term 

financial obligations.’’ 98 Third, we 

propose to require that with respect to 

a security (or its guarantee) subject to a 

conditional demand feature, in addition 

to other conditions, the underlying 

security (or its guarantee) must itself be 

of high quality and subject to very low 

credit risk as determined by the fund’s 

board (or its delegate).99 Fourth, we 

propose to remove the reference to 

credit ratings in the rule’s downgrade 

and default provisions. The proposed 

amendment would require that, in the 

event 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 of any 

credible information about a portfolio 

security or an issuer of a portfolio 

security that suggests that the security is 

no longer a first tier security or a second 

tier security, as the case may be, the 

money market fund’s board of directors 

would have to reassess promptly 

whether the portfolio security continues 

to present minimal credit risks.100

Finally, we propose to eliminate the 

reference to portfolio securities’ 

downgrades in the stress testing 

provisions. Under the proposal, a 

money market fund’s stress testing 

procedures would be required to 

include as a hypothetical event, ‘‘an 

adverse change in the ability of the 

issuer of a portfolio security to meet its 

short-term financial obligations.’’ 101

a. Benefits 

We believe that the proposed 

amendments to rule 2a–7 may provide 

certain benefits to money market funds. 

As discussed above, in connection with 

the PRA analysis, money market funds 

have adopted policies and procedures 

that with respect to portfolio securities 

(including securities subject to a 

conditional demand feature) address 

credit quality, minimal credit risk 

determinations, monitoring for 

downgrades and defaults and stress 

testing. Under the proposed rules, 

money market funds could revise their 

policies and procedures with respect to 

each of these requirements to change or 

eliminate the consideration of credit 

ratings or consider other sources of 

credit quality evaluations as funds 

determine would be appropriate. 

Nevertheless, because the proposed 

amendments are designed to retain the 

same degree of credit risk limitation and 

similar standards for monitoring credit 


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102See supra note 86 and accompanying text. 

103See rule 2a–7(a)(12)(i)–(ii); supra notes 15–17 

and accompanying text. 

104Rule 2a–7(c)(3)(ii). 

105See supra note 23, notes 24–25 and 

accompanying and preceding text. 

106The increased risks to money market funds 

associated with investments in short-term securities 

rated second tier are discussed in detail in the 

Money Market Fund Reform Adopting Release, 

supra note 8, at Section II.A.1. and Money Market 

Fund Reform Proposing Release, supra note 8, at 

Section II.A.1. 

107See supra note 90 and accompanying text. As 

noted above, however, money market funds have 

not had to make these disclosures so actual savings 

may be less. 

events and stress testing as under 

current rule 2a–7, the proposed 

amendments would not prohibit a 

money market fund from using its 

current policies and procedures to 

comply with the proposed amendments. 

In particular, as discussed above, fund 

boards (or their delegates) could still 

consider credit quality evaluations 

prepared by outside sources, including 

NRSRO ratings, that they conclude are 

credible and reliable for purposes of 

making credit quality determinations 

with respect to portfolio securities 

(including securities subject to a 

conditional demand feature), 

monitoring minimal credit risks of the 

portfolio and stress testing. We expect 

that each money market fund would 

undertake its own analysis of the costs 

or benefits of revising policies and 

procedures and would only change 

them to the extent the fund believed the 

benefits justified the costs of doing so. 

Although some money market funds 

may eliminate the specific use of ratings 

in their credit risk determinations, we 

anticipate that many of those funds are 

likely to consider some outside analyses 

in evaluating the credit quality of, and 

minimal credit risks presented by, 

portfolio securities (including securities 

subject to a conditional demand 

feature). Fund boards’ (or their 

delegates’) consideration of external 

analyses by third party sources 

determined to be credible and reliable to 

the extent the fund board (or its 

delegate) considers appropriate may 

contribute to the accuracy of funds’ 

determinations and thus help money 

market funds arrive at consistent credit 

risk determinations. 

b. Costs 

We recognize that there may be minor 

costs associated with the proposed 

amendments to rule 2a–7. Money 

market funds may incur some costs 

internally or to consult outside legal 

counsel to evaluate any need to change 

their policies and procedures relating to 

determinations of credit quality, 

monitoring for credit events and stress 

testing if the proposed amendments 

were adopted. We do not believe, 

however, that these costs are 

attributable to the proposed rule and 

form amendments because the 

requirement in the Dodd-Frank Act that 

we replace the use of credit ratings in 

rules with alternative standards of 

credit-worthiness would result in 

similar costs of evaluating compliance 

with a new credit quality standard. 

As discussed above, because the 

proposed amendments are designed to 

retain the same degree of credit risk 

limitation and similar standards for 

monitoring credit events and stress 

testing as under current rule 2a–7, a 

money market fund also could use its 

current policies and procedures to 

comply with the proposed amendments. 

In particular, as discussed above, a fund 

could still incorporate credit quality 

evaluations prepared by outside 

sources, including NRSRO ratings, that 

the fund’s board or adviser concludes 

are credible and reliable for purposes of 

making credit quality determinations 

with respect to portfolio securities 

(including securities subject to a 

conditional demand feature), 

monitoring minimal credit risks of the 

portfolio, and stress testing. We expect 

that each money market fund would 

undertake its own analysis of the costs 

or benefits of revising policies and 

procedures and would only change its 

policies to the extent the fund believed 

the benefits justified the costs of doing 

so. Nevertheless, money market funds 

may make technical changes to their 

policies and procedures in response to 

the proposed amendments, if adopted. 

We estimate that money market funds 

would incur a one-time aggregate cost of 

$226,896 to make any technical 

changes.102

In addition to the costs that funds 

may incur, the removal of credit ratings 

pursuant to the Dodd-Frank Act may 

result in increased risks to money 

market funds and their shareholders. As 

discussed above, rule 2a–7 limits money 

market funds to investing in securities 

that, among other things, have received 

a rating in one of the highest two shortterm rating categories from the requisite 

NRSROs or are unrated securities of 

comparable quality.103 The rule further 

limits money market funds’ investments 

in second tier securities to no more than 

three percent of the fund’s portfolio.104

The minimum credit rating requirement 

in the current rule provides the 

Commission with an objective standard 

to use in examining and enforcing 

money market fund compliance with 

rule 2a–7’s credit quality conditions, 

including the limitation on investments 

in second tier securities. As discussed 

above, the proposed rule would 

eliminate the requirement that eligible 

securities meet minimum rating 

requirements, while maintaining the 

two-step analysis provided in the 

current rule and the limitation on 

investments in second tier securities.105

Although we anticipate that funds 

would continue to manage risk in the 

same manner as under the current rule, 

under the proposed subjective standard, 

a money market fund board (or its 

delegate) could disregard a second tier 

rating in order to invest a larger portion 

of the fund’s portfolio in lower quality 

securities that it classifies as first tier 

securities. In addition, it could be 

difficult for the Commission to 

challenge the determination of a money 

market fund board (or its delegate) in 

those circumstances.106

2. Form N–MFP 

We propose to amend Form N–MFP to 

eliminate the items requiring disclosure 

for each portfolio security (and any 

guarantee, demand feature or 

enhancement associated with the 

portfolio security) of the designated 

NRSROs for the security and the rating 

assigned to the security. We also 

propose to eliminate the requirement 

that a money market fund disclose 

whether a security is a rated security or 

an unrated security. 

a. Benefits 

The proposed amendments to Form 

N–MFP would conform the disclosure 

in Form N–MFP to the proposed 

amendments to rule 2a–7. The proposed 

amendments to Form N–MFP should 

reduce costs for money market funds by 

eliminating from the form certain 

disclosure items relating to designated 

NRSROs and ratings, which would no 

longer be elements of rule 2a–7. For 

purposes of the PRA analysis, we 

estimate that money market funds 

would realize, in the aggregate, a cost 

savings of $1,177,512 in completing 

Form N–MFP as a result of the proposed 

amendments.107

b. Costs 

We do not believe there would be any 

costs associated with the proposed 

amendments to Form N–MFP. 

B. Rule 5b–3 

We propose to amend rule 5b–3 to 

allow a fund to treat the acquisition of 

a repurchase agreement as an 

acquisition of securities collateralizing 

the repurchase agreement for purposes 

of sections 5(b)(1) and 12(d)(3) of the 

Investment Company Act if the 


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108Rule 5b–3(c)(1)(iv)(D). 

109See supra text preceding note 93. 110Rule 38a–1(a). 111See supra note 95 and accompanying text. 

collateral other than cash or government 

securities consists of securities that the 

fund’s board of directors, or its delegate, 

determines at the time the repurchase 

agreement is entered into are: (i) Issued 

by an issuer that has the highest 

capacity to meet its financial 

obligations; and (ii) sufficiently liquid 

that they can be sold at approximately 

their carrying value in the ordinary 

course of business within seven days. 

1. Benefits 

We believe that the proposed 

amendments to rule 5b–3 may yield 

certain benefits. First, our proposed 

standard is designed to achieve the 

same purpose as the credit rating 

reference in the existing rule. i.e., limit 

collateral securities to those that are 

likely to retain a stable market value and 

that, under ordinary circumstances, the 

fund would be able to liquidate quickly 

in the event of a counterparty default. 

Second, we believe that the proposed 

standards would not result in significant 

changes in fund evaluations of the 

quality of collateral securities. A fund’s 

board of directors or its delegate is 

already required under the rule to assess 

the credit quality of unrated 

securities.108 As noted above, funds 

typically establish standards for the 

credit quality of collateral securities 

(that include credit ratings and 

additional credit quality criteria 

required by the fund) in repurchase 

agreements with counterparties.109 In 

addition, although the rule would no 

longer require the collateral to be rated 

by an NRSRO, the evaluation of credit 

risk could incorporate ratings, reports, 

analyses and other assessments issued 

by third parties, including NRSRO 

ratings, that the board concludes are 

credible and reliable for purposes of 

making the evaluation. We expect that 

the ability to consider outside 

assessments would help minimize any 

burdens on the fund’s board or its 

delegate under the proposed 

amendments. In addition, the use of 

external analyses by third party sources 

that fund boards (or their delegates) 

believe are credible and reliable to the 

extent the fund board (or its delegate) 

considers appropriate may contribute to 

the accuracy of funds’ determinations 

and thus help funds arrive at consistent 

minimal credit risk determinations. 

2. Costs 

The proposed credit quality standard 

for rule 5b–3 may impose costs on funds 

that rely on the rule. A fund’s board of 

directors, or its delegate, pursuant to 

rule 38a–1 of the Act, would be required 

to develop written policies or 

procedures to ensure that at the time the 

repurchase agreement is entered into, 

the collateral meets the requirements 

outlined in the proposed 

amendments.110 Consistent with the 

requirements of rule 38a–1 under the 

Act, we expect that boards of funds 

relying on rule 5b–3 have established 

procedures regarding compliance with 

the rule. We recognize that these funds 

may incur minor costs associated with 

the proposed amendments to rule 5b–3 

including some internal costs or costs of 

consulting outside legal counsel to 

determine whether they must change 

their policies and procedures for 

evaluating collateral securities if the 

proposed amendments are adopted. We 

do not believe, however, that those costs 

are attributable to the proposed 

amendments because the requirement in 

the Dodd-Frank Act that we replace the 

use of credit ratings in rules with 

alternative standards of creditworthiness would result in similar costs 

of evaluating compliance with a new 

standard of credit quality. 

As noted above, funds typically set 

forth credit quality standards for 

securities collateralizing a repurchase 

agreement in the agreement with the 

counterparty. We expect that those 

standards include a rating and any 

additional criteria a fund manager 

considers necessary to ensure that the 

credit quality of the collateral meets the 

fund’s requirements. As we have noted 

above, fund boards (or their delegates) 

could continue to consider evaluations 

of outside sources, including credit 

rating agencies, in making their credit 

quality determinations under rule 5b–3, 

as we propose to amend it. We 

anticipate that funds would likely 

continue to rely on the credit quality 

standards in their current repurchase 

agreements and their existing policies 

and procedures that address compliance 

with rule 5b–3 if the proposed 

amendments were adopted. We expect 

that each fund would undertake its own 

analysis of the costs or benefits of 

revising repurchase agreements and 

policies and procedures that address 

compliance with rule 5b–3 and would 

only change these documents to the 

extent the fund believed the benefits 

justified the costs of doing so. 

Nevertheless, funds may consider 

whether to amend their repurchase 

agreements and policies and procedures 

that address compliance with rule 5b– 

3, including making technical changes 

to these documents in response to the 

proposed amendments, if adopted. As 

noted above, we estimate that funds 

would incur a one-time aggregate cost of 

$2,944,080 to make any of these 

changes.111

• We request comment on these cost 

estimates. Do commenters foresee 

additional or alternative costs if the 

proposed amendments to rule 5b–3 are 

adopted? Have we accurately estimated 

costs of amending repurchase 

agreements and policies and procedures 

for the evaluation of the credit quality 

and liquidity of collateral securities? 

C. Proposed Rule 6a–5 

We are proposing new rule 6a–5, 

which would establish a creditworthiness standard under section 

6(a)(5)(A)(iv)(I) of the Investment 

Company Act. BIDCOs that seek to rely 

on the exemption in section 6(a)(5) of 

the Act would be limited to investing in 

debt securities issued by investment 

companies and private funds if, at the 

time of purchase, the board of directors 

or members of the BIDCO (or their 

delegate) determines that the debt 

security is (i) subject to no greater than 

moderate credit risk and (ii) sufficiently 

liquid that the security can be sold at or 

near its carrying value within a 

reasonably short period of time. 

1. Benefits 

We anticipate that proposed rule 6a– 

5 would result in certain benefits. Our 

proposed standard is intended to 

achieve the same purpose as the credit 

rating it would replace. In particular, 

the proposed standard is designed to 

limit BIDCOs to purchasing debt 

securities issued by investment 

companies or private funds of 

sufficiently high credit quality that they 

are likely to maintain a fairly stable 

market value and may be liquidated 

easily, as appropriate, for the BIDCO to 

support its investment and financing 

activities. 

Furthermore, to comply with the 

proposed standard, we do not believe 

that BIDCOs would be required to 

change any policies and procedures 

they may have with respect to the 

evaluation of these debt securities. As 

noted above, under proposed rule 6a–5, 

in evaluating whether debt securities 

issued by investment companies and 

private funds present moderate credit 

risk, boards of directors and members of 

BIDCOs (or their delegates) would be 

able to consider credit quality 

determinations prepared by outside 

sources, including NRSRO ratings, that 

they conclude are credible and reliable 

for purposes of making these 

determinations. We expect that the 


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112We estimate that each BIDCO would incur on 

average a one-time burden of 4 hours for a senior 

business analyst (under board or member 

delegation) to develop policies and procedures for 

evaluating credit and liquidity risk (4 hours × $232 

per hour = $928). Commission staff believes that 

additional costs incurred by boards or members for 

review of procedures would be incorporated into 

BIDCOs’ overall board or member costs and would 

not add any particular costs. In addition, 

Commission staff estimates that a BIDCO board or 

member is likely to delegate the credit risk 

determinations, and that such determinations 

would take on average 1 hour of a senior business 

analyst’s time (at $232 per hour) to evaluate the 

credit quality for each of an average of 4 investment 

company or private fund debt securities that a 

BIDCO would purchase each year (4 hours × $232 

per hour) for a total cost of $928 per year. 

113We do not expect that money market funds 

would incur similar development assistance costs 

with respect to the proposed amendments to rule 

2a–7 because rule 2a–7 currently requires these 

funds to perform credit quality determinations with 

respect to portfolio securities. Similarly, we expect 

that funds that rely on rule 5b–3 currently 

incorporate credit quality standards for collateral 

securities in addition to ratings in their repurchase 

agreements. 

114Staff estimates that a BIDCO would need up 

to 16 hours of consulting advice to assist in 

developing procedures and to make or oversee the 

proposed determinations. Staff estimates that this 

advice would cost a BIDCO $500 per hour based on 

an understanding of the rates typically charged by 

outside consulting firms. 

115This assessment is based on a staff review of 

a sample of fund shareholder reports filed with the 

Commission. 

116Public Law 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

ability to consider outside assessments 

in making these determinations would 

help minimize the burden on BIDCOs 

and contribute to a BIDCO’s ability to 

make consistent credit quality 

determinations. 

2. Costs 

We recognize that BIDCOs may incur 

some costs if we adopted proposed rule 

6a–5. These may be internal costs or 

costs to consult outside legal counsel to 

evaluate whether changes to any 

policies and procedures the BIDCOs 

may have currently for acquiring debt 

securities issued by investment 

companies or private funds may be 

appropriate in light of the proposed 

rule. We do not believe, however, that 

these costs are attributable to the 

proposed rule because the Dodd-Frank 

Act’s replacement of the credit rating 

standard in the Investment Company 

Act with a standard to be adopted by the 

Commission would result in similar 

costs of evaluating compliance with a 

new credit quality standard. 

We expect that, although not required 

by the Investment Company Act, as a 

matter of good business practice, 

directors or members of most BIDCOs 

that do not currently have them may 

prepare policies and procedures to make 

the credit quality and liquidity 

determinations required by the 

proposed rule. Commission staff 

estimates that the costs of preparing the 

procedures for making determinations 

of credit quality and liquidity under the 

rule would be borne upfront. Once 

generated, reviewed and implemented 

by directors or members of BIDCOs (or 

their delegates), directors and members 

(or their delegates) would be able to 

follow them for purposes of making 

future determinations under the rule. 

Our staff has estimated that each BIDCO 

would incur, on average, an initial onetime cost of $928 to prepare policies and 

procedures and an average of $928 in 

annual costs for making credit 

determinations with respect to the 

acquisition of debt securities.112

We anticipate that many BIDCOs that 

invest cash in these types of debt 

securities would continue to consider 

credit quality determinations prepared 

by outside sources, including NRSRO 

ratings, that they conclude are credible 

and reliable for purposes of making 

these determinations. Nevertheless, we 

recognize that some BIDCO boards or 

members may choose to hire consultants 

to assist in developing procedures and 

to make or oversee the proposed 

determinations.113 Staff estimates that 

the cost to hire such consultants would 

be, on average, $8,000 for each 

BIDCO.114

• We request comment on these cost 

estimates. Are the costs estimates 

accurate regarding the proposed 

procedures for making credit quality 

determinations? Do commenters foresee 

additional or alternative costs if 

proposed rule 6a–5 were adopted? 

D. Forms N–1A, N–2 and N–3 

The proposed amendments to Forms 

N–1A, N–2 and N–3 would eliminate 

the required use of NRSRO credit 

ratings by funds that choose to use 

credit quality categorizations in the 

required table, chart, or graph of 

portfolio holdings. If a fund chooses to 

use NRSRO credit ratings to depict 

credit quality of portfolio holdings, the 

proposed amendments, like the current 

forms, generally would require the fund 

to use the credit ratings of a single 

NRSRO. The proposed amendments 

would clarify that, if credit ratings of the 

NRSRO selected by a fund are not 

available for certain holdings, the fund 

must briefly discuss the methodology 

for determining credit quality for those 

holdings, including, if applicable, the 

use of credit ratings assigned by another 

NRSRO. 

1. Benefits 

Under the proposed amendments, 

funds will have greater flexibility to 

depict credit quality in the most 

meaningful manner, which may lead to 

better information for investors. This 

largely results from the congressionally 

mandated removal of the required use of 

credit ratings under section 939A of the 

Dodd-Frank Act. 

2. Costs 

The Commission believes that 

because the proposed amendments only 

eliminate the required use of NRSRO 

credit ratings by funds that choose to 

use credit quality categorizations, any 

cost imposed on funds would not be 

material. Funds might incur costs to the 

extent that they choose to develop new 

methodologies for depicting credit 

quality. If a fund chooses to use NRSRO 

credit ratings to depict credit quality of 

portfolio holdings, the proposed 

amendments would clarify that, if credit 

ratings of the NRSRO selected by a fund 

are not available for certain holdings, 

the fund must briefly discuss the 

methodology for determining credit 

quality for those holdings. The 

Commission believes that the proposed 

clarification would not impose any 

additional cost because funds typically 

provide this disclosure in their 

shareholder reports today.115

E. Request for Comment 

The Commission requests comments 

on all aspects of the cost-benefit 

analysis, including the accuracy of the 

potential costs and benefits identified 

and assessed in this Release, as well as 

any other costs or benefits that may 

result from the proposals. We encourage 

commenters to identify, discuss, 

analyze, and supply relevant data 

regarding these or additional costs and 

benefits. For purposes of the Small 

Business Regulatory Enforcement 

Fairness Act of 1996,116 the Commission 

also requests information regarding the 

potential annual effect of the proposals 

on the U.S. economy. Commenters are 

requested to provide empirical data to 

support their views. 

VI. Consideration of Promotion of 

Efficiency, Competition and Capital 

Formation 

Section 2(c) of the Investment 

Company Act and section 2(b) of the 

Securities Act each requires the 

Commission, when engaging in 

rulemaking under the respective Act 

that requires it to consider or determine 

whether an action is consistent with or 

necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 


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117 15 U.S.C. 80a–2(c); 15 U.S.C. 77b(b). 

118This assessment is based on a staff review of 

fund shareholder reports filed with the 

Commission. 

119 5 U.S.C. 605(b). 

120 17 CFR 270.0–10(a). 

121 5 U.S.C. 603(a). 

action will promote efficiency, 

competition, and capital formation.117

Our proposed amendments to rules 

2a–7 and 5b–3 and Forms N–MFP, N– 

1A, N–2 and N–3 implement provisions 

of the Dodd-Frank Act that call for the 

Commission to remove credit rating 

references in its regulations and to 

substitute other appropriate standards of 

credit-worthiness in place of the credit 

ratings. Thus, effects on efficiency, 

competition, and capital formation that 

arise from the removal of credit ratings 

are attributable to the congressionally 

mandated removal of the required use of 

credit ratings under section 939A of the 

Dodd-Frank Act. The Commission has 

discretion, however, to adopt rule and 

rule amendments that set forth the 

alternative standards of creditworthiness, and we undertake below to 

discuss the effects on efficiency, 

competition and capital formation of the 

specific standards that we are 

proposing. 

We do not believe that the proposed 

amendments to rules 2a–7 and 5b–3 and 

Forms N–MFP, N–1A, N–2 and N–3 

would significantly affect competition 

or have an adverse effect on efficiency 

or capital formation. 

Rule 2a–7. With respect to rule 2a–7, 

as we have discussed above, money 

market funds have procedures for 

making credit quality and credit risk 

determinations under current rule 2a–7. 

In addition, we have designed the 

proposed standard to retain a degree of 

risk limitation similar to that reflected 

by the credit ratings in the current rule. 

Because we do not anticipate that the 

proposed amendments are likely to 

change the types of investments that are 

made by money market funds, we do 

not believe that the proposed 

amendments would have a significant 

effect on competition or capital 

formation. As we have noted above, we 

believe that money market funds could 

change their policies and procedures to 

reflect changes in the proposed 

amendments or continue to rely on their 

current policies and procedures to 

comply with the proposed amendments. 

We expect that money market funds are 

likely to make changes only if the 

benefits of such changes would justify 

the costs, which would not be likely to 

have an adverse effect on efficiency. 

Form N–MFP. The proposed 

amendments would conform the 

disclosures in Form N–MFP to the 

proposed amendments to rule 2a–7. We 

do not believe that our proposal to 

remove certain disclosures from the 

form would change the types of 

securities money market funds invest in 

and, therefore, would have no effect on 

competition or capital formation. To the 

extent that the proposed amendments 

reduce the time funds spend making the 

disclosures required in Form N–MFP, 

the proposed amendments may slightly 

increase efficiency. 

Rule 5b–3. The proposed standard for 

determining the credit quality of 

collateral securities in rule 5b–3 is 

designed to achieve the same purpose as 

the credit rating reference in the existing 

rule, i.e., to limit collateral securities to 

those that are likely to retain a stable 

market value and that, under ordinary 

circumstances, the fund could liquidate 

quickly in the event of a counterparty 

default. Because we do not anticipate 

that the proposed amendments would 

change the types of collateral securities 

that funds relying on 5b–3 would use, 

we do not believe that the proposed 

amendments would have a significant 

effect on competition or capital 

formation. Furthermore, funds typically 

establish credit quality standards for 

collateral securities that include credit 

ratings in repurchase agreements they 

enter into with counterparties. Funds 

could change their policies and 

procedures to reflect changes in the 

proposed amendments, but the rule 

would not prohibit funds from relying 

on the standards in current repurchase 

agreements and policies and procedures 

that address compliance with rule 5b– 

3. We anticipate that the consideration 

of outside sources in making credit 

quality determinations with respect to 

collateral securities may help funds 

arrive at consistent credit quality 

determinations. For these reasons, we 

do not believe that the proposed 

amendments to rule 5b–3 would have a 

significant effect on efficiency. 

Forms N–1A, N–2 and N–3. The 

proposed amendments to Forms N–1A, 

N–2 and N–3 would eliminate the 

required use of NRSRO ratings by funds 

that choose to use credit quality 

categorizations in the required table, 

chart, or graph of portfolio holdings. If 

a fund chooses to use NRSRO credit 

ratings to depict credit quality of 

portfolio holdings, the proposed 

amendments would clarify that, if credit 

ratings of the NRSRO selected by a fund 

are not available for certain holdings, 

the fund must briefly discuss the 

methodology for determining credit 

quality for those holdings, including, if 

applicable, the use of credit ratings 

assigned by another NRSRO. We do not 

believe that the proposed clarification 

would affect efficiency, competition or 

capital formation because funds 

typically provide this disclosure in their 

shareholder reports today.118 The effect, 

if any, on efficiency, competition and 

capital formation that would arise from 

the proposed amendments to Forms N– 

1A, N–2 and N–3 results from the 

congressionally mandated removal of 

the required use of credit ratings under 

section 939A of the Dodd-Frank Act. 

Request for comment. We request 

comment whether the proposed rule 

and rule and form amendments would, 

if adopted, promote efficiency, 

competition, and capital formation. 

Commenters are requested to provide 

empirical data to support their views. 

VII. Regulatory Flexibility Act 

Certification 

Pursuant to section 5(b) of the 

Regulatory Flexibility Act,119 the 

Commission hereby certifies that the 

proposed amendments to rule 2a–7 and 

Form N–MFP under the Investment 

Company Act would not, if adopted, 

have a significant economic impact on 

a substantial number of small entities. 

For purposes of the RFA, an investment 

company is 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.120 Based on information in 

filings submitted to the Commission, we 

believe that there are no money market 

funds that are small entities. For this 

reason, the Commission believes that 

the amendments to rule 2a–7 and Form 

N–MFP under the Investment Company 

Act would not, if adopted, have a 

significant economic impact on a 

substantial number of small entities. 

The Commission requests written 

comments regarding this certification. 

The Commission requests that 

commenters describe the nature of any 

impact on small businesses and provide 

empirical data to support the extent of 

the impact. 

VIII. Initial Regulatory Flexibility 

Analysis 

The Commission has prepared the 

following Initial Regulatory Flexibility 

Analysis (‘‘IRFA’’) in accordance with 

section 3(a) of the Regulatory Flexibility 

Act.121 It relates to the Commission’s 

proposed amendments to rule 5b–3 

under the Investment Company Act and 

Forms N–1A, N–2 and N–3 under the 

Investment Company Act and Securities 


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12912 Federal Register / Vol. 76, No. 46 / Wednesday, March 9, 2011 / Proposed Rules 

122 17 CFR 270.0–10(a). 

123The 181 investment companies that meet the 

definition of small entity include business 

development companies, which are subject to 

sections 5 and 12 of the Investment Company Act. 

15 U.S.C. 80a–58; 15 U.S.C. 80a–59. 

124 13 CFR 121.201. 

125 17 CFR 270.38a–1(a). 

126See supra Section V.B.2. 127See rule 31a–1(b)(2)(i)(d). 

Act and proposed rule 6a–5 under the 

Investment Company Act. 

A. Objectives and Legal Basis 

As described more fully in Sections I 

and II of this Release, to implement 

section 939A of the Dodd-Frank Act, the 

Commission is proposing to amend (i) 

rule 5b–3 to eliminate references to the 

credit rating and replace it with an 

alternative standard of credit-worthiness 

that is designed to appropriately achieve 

the same purpose as the use of the credit 

rating and (ii) Forms N–1A, N–2 and N– 

3 to eliminate the required use of 

NRSRO credit ratings by funds that 

choose to use credit quality 

categorizations in the required table, 

chart, or graph of portfolio holdings in 

their shareholder reports. The 

Commission is also proposing new rule 

6a–5 to set forth a standard of creditworthiness for purposes of section 

6(a)(5)(A)(iv) of the Act, as anticipated 

by the Dodd Frank Act, which 

eliminates the investment grade 

standard from section 6(a)(5) of the 

Investment Company Act. 

The Commission is proposing 

amendments to rule 5b–3 pursuant to 

our 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)] and 

section 939A of the Dodd-Frank Act. 

The Commission is proposing rule 6a– 

5 pursuant to our authority set forth in 

section 38(a) of the Investment 

Company Act [15 U.S.C. 80a–37(a)] and 

section 939 of the Dodd-Frank Act, 

codified at section 6(a)(5)(A)(iv)(I) of the 

Investment Company Act [15 U.S.C. 

80a–6(a)(5)(A)(iv)(I)]. The Commission 

is proposing amendments to Forms N– 

1A, N–2 and N–3 pursuant to the 

authority set forth in sections 5, 6, 7, 10 

and 19(a) of the Securities Act and 

sections 8, 24(a), 30 and 38 of the 

Investment Company Act. 

B. Small Entities Subject to the Rule 

The proposed amendments to rule 

5b–3 and proposed rule 6a–5 under the 

Investment Company Act would affect 

funds and BIDCOs, respectively, 

including entities that are considered to 

be a small business or small 

organization (collectively, ‘‘small 

entity’’) for purposes of the Regulatory 

Flexibility Act. 

Investment Companies. For purposes 

of the Regulatory Flexibility Act, an 

investment company is 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.122 Based on a 

review of filings submitted to the 

Commission, we estimate that 181 

investment companies may be 

considered small entities and that all of 

these investment companies may 

potentially rely on rule 5b–3.123 We 

estimate that approximately 150 

investment companies that meet the 

definition of small entity would be 

subject to the proposed amendments to 

Forms N–1A, N–2 and N–3. 

BIDCOs. Under the standards adopted 

by the Small Business Administration, 

small entities in the financial 

investment industry include entities 

with $7 million or less in annual 

receipts.124 We do not have any data 

and are not aware of any databases that 

compile information regarding how 

many BIDCOs would be small entities 

under this definition. We request 

comment on how many BIDCOs are 

small entities under this definition. 

C. Reporting, Recordkeeping, and Other 

Compliance Requirements 

Rule 5b–3. We propose to amend rule 

5b–3 to allow a fund to treat the 

acquisition of a repurchase agreement as 

an acquisition of securities 

collateralizing the repurchase agreement 

for purposes of sections 5(b)(1) and 

12(d)(3) of the Act if the collateral other 

than cash or government securities 

consists of securities that the fund’s 

board of directors (or its delegate) 

determines at the time the repurchase 

agreement is entered into are: (i) Issued 

by an issuer that has the highest 

capacity to meet its financial 

obligations; and (ii) sufficiently liquid 

that they can be sold at approximately 

their carrying value in the ordinary 

course of business within seven days. A 

fund that acquires repurchase 

agreements and intends the acquisition 

to be treated as an acquisition of the 

collateral securities must adopt and 

implement written policies and 

procedures reasonably designed to 

comply with the conditions of 

rule 5b–3, including any credit quality 

or liquidity requirements that we 

adopt.125

We have estimated the costs of these 

amendments previously in the costbenefit analysis in Section V above.126

Proposed rule 6a–5. Proposed rule 

6a–5 would impose no reporting, 

recordkeeping or other compliance 

requirements. 

Forms N–1A, N–2 and N–3. The 

proposed amendments to Forms N–1A, 

N–2 and N–3 would apply to open-end 

management investment companies, 

closed-end management investment 

companies and separate accounts 

organized as management investment 

companies that offer variable annuity 

contracts, including those that are small 

entities. We are proposing to amend the 

forms to eliminate the required use of 

NRSRO credit ratings by funds that 

choose to use credit quality 

categorizations in the required table, 

chart, or graph of portfolio holdings in 

their shareholder reports. If a fund 

chooses to use NRSRO credit ratings to 

depict credit quality of portfolio 

holdings, the proposed amendments, 

like the current forms, generally would 

require the fund to use the credit ratings 

of a single NRSRO. The proposed 

amendments would clarify that, if credit 

ratings of the NRSRO selected by a fund 

are not available for certain holdings, 

the fund must briefly discuss the 

methodology for determining credit 

quality for those holdings, including, if 

applicable, the use of credit ratings 

assigned by another NRSRO. For 

purposes of the cost-benefit analysis, we 

have estimated that any cost imposed on 

funds would not be material. 

D. Duplicating, Overlapping, or 

Conflicting Federal Rules 

Rule 31a–1 under the Act requires the 

retention of ledger accounts for each 

portfolio security and each person 

through which a portfolio transaction is 

effected, including certain records of 

collateral for monies borrowed and 

loaned.127 Although some of the 

procedures under the proposed 

amendments to rule 5b–3 may overlap 

with information in the ledgers, we 

believe any overlap would be minimal 

and the rule 5b–3 procedures would 

contain additional information 

specifically related to the concerns 

underlying these rules. The Commission 

believes that there are no other rules 

that duplicate, overlap, or conflict with 

the proposed amendments to Forms N– 

1A, N–2 and N–3 and proposed new 

rule 6a–5. 

E. Significant Alternatives 

The Regulatory Flexibility Act directs 

us to consider significant alternatives 

that would accomplish our stated 

objectives, while minimizing any 

significant adverse impact on small 

issuers. In connection with the 

proposed rule and rule and form 

amendments, the Commission 

considered the following alternatives: (i) 


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Federal Register / Vol. 76, No. 46 / Wednesday, March 9, 2011 / Proposed Rules 12913 

128Comments on the IRFA will be placed in the 

same public file that contains comments on the 

proposed rule and rule and form amendments. 

Establishing different compliance 

standards or timetables that take into 

account the resources available to small 

entities; (ii) clarifying, consolidating, or 

simplifying compliance and reporting 

requirements under the rule for small 

entities; (iii) use of performance rather 

than design standards; and (iv) 

exempting small entities from all or part 

of the requirements. 

The Commission believes that, at the 

present time, special compliance or 

reporting requirements for small 

entities, or an exemption from coverage 

for small entities, would not be 

appropriate or consistent with investor 

protection. The proposed rule and 

amendments to rules and forms are 

intended to implement sections 939 and 

939A of the Dodd-Frank Act. We believe 

that, with respect to rule 5b–3, different 

credit quality standards, special 

compliance requirements or timetables 

for small entities, or an exemption from 

coverage for small entities, may create a 

risk that those entities could acquire 

repurchase agreements with collateral 

that is less likely to retain its market 

value or liquidity in the event of a 

counterparty default. Similarly, with 

respect to proposed rule 6a–5, we 

believe that special compliance 

requirements or timetables for small 

entities, or an exemption from coverage 

for small entities, may create a risk that 

those BIDCOs could acquire debt 

securities that are not of sufficiently 

high credit quality that they would be 

likely to maintain a fairly stable market 

value or be liquidated easily, as we 

believe may have been intended for the 

BIDCO to support its long-term 

commitments. Further consolidation or 

simplification of the proposals for funds 

that are small entities would be 

inconsistent with the Commission’s 

goals of fostering investor protection. 

The proposed form amendments, if 

adopted, would apply to all investment 

companies that use Forms N–1A, N–2 

and N–3 to register under the 

Investment Company Act and to offer 

their securities under the Securities Act. 

If the Commission excluded small 

entities from the proposed form 

amendments, small entities would be 

required to use NRSRO credit ratings if 

they choose to depict credit quality, 

while other entities would not be 

subject to that requirement. We believe 

this outcome is inconsistent with 

section 939A of the Dodd-Frank Act. We 

believe that special compliance or 

reporting requirements, or an 

exemption, for small entities would not 

be appropriate because the proposed 

requirement—that if a fund chooses to 

use NRSRO credit ratings to depict 

credit quality of portfolio holdings, 

generally it must use the ratings of a 

single NRSRO—is intended to eliminate 

the possibility that a fund of any size 

could choose to use NRSRO credit 

ratings and then select the most 

favorable ratings among credit ratings 

assigned by multiple NRSROs. 

We have endeavored through the 

proposed form amendments to 

minimize regulatory burden on 

investment companies, including small 

entities, while meeting our regulatory 

objectives. We have endeavored to 

clarify, consolidate, and simplify the 

requirements applicable to investment 

companies, including those that are 

small entities. Finally, the proposal 

would use performance rather than 

design standards for determining the 

credit quality of specific securities. 

For these reasons, we have not 

proposed alternatives to the proposed 

rule and rule and form amendments. 

F. Request for Comments 

We encourage the submission of 

comments with respect to any aspect of 

the IRFA. In particular, the Commission 

seeks comment on the number of small 

entities that would be subject to the 

proposed rule and rule and form 

amendments and whether the effect of 

the proposed rule on small entities 

subject to it would be economically 

significant. Commenters are asked to 

describe the nature of any impact and 

provide empirical data supporting its 

extent. These comments will be 

considered in connection with any 

adoption of the proposed rule and rule 

and form amendments, and reflected in 

a Final Regulatory Flexibility Analysis. 

Comments should be submitted in 

triplicate to Elizabeth M. Murphy, 

Secretary, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–1090. 

Comments may also be submitted 

electronically to the following e-mail 

address: rule-comments@sec.gov. All 

comment letters should refer to File No. 

S7–7–11, and this file number should be 

included on the subject line if e-mail is 

used.128 Comment letters will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549–1520, on official 

business days between the hours of 10 

a.m. and 3 p.m. Electronically submitted 

comment letters also will be posted on 

the Commission’s Internet Web site 

(http://www.sec.gov). 

Statutory Authority 

The Commission is proposing 

amendments to rules 2a–7 and 5b–3 

under 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)] and section 939A of the DoddFrank Act. The Commission is 

proposing new rule 6a–5 under the 

authority set forth in section 38(a) of the 

Investment Company Act [15 U.S.C. 

80a–37(a)] and section 939 of the DoddFrank Act, to be codified at section 

6(a)(5)(A)(iv)(I) of the Investment 

Company Act [15 U.S.C. 80a– 

6(a)(5)(A)(iv)(I)]. The Commission is 

proposing amendments to Form N–1A, 

Form N–2 and Form N–3 under the 

authority set forth in sections 5, 6, 7, 10 

and 19(a) of the Securities Act [15 

U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and 

sections 8, 24(a), 30 and 38 of the 

Investment Company Act [15 U.S.C. 

80a–8, 80a–24(a), 80a–29 and 80a–37]. 

The Commission is proposing 

amendments to Form N–MFP under the 

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)] and 

section 939A of the Dodd-Frank Act. 

List of Subjects 

17 CFR Part 239 

Reporting and recordkeeping 

requirements, Securities. 

17 CFR Parts 270 and 274 

Investment companies, Reporting and 

recordkeeping requirements, Securities. 

Text of Proposed Rule and Form 

Amendments 

For reasons set out in the preamble, 

Title 17, Chapter II of the Code of 

Federal Regulations is proposed to be 

amended as follows: 

PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

1. The authority citation for Part 239 

continues to read in part as follow: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, 

78o(d), 78u–5, 78w(a), 78ll, 78mm, 80a–2(a), 

80a–3, 80a–8, 80a–9, 80a–10, 80a–13, 80a– 

24, 80a–26, 80a–29, 80a–30, and 80a–37, 

unless otherwise noted. 

* * * * * 

PART 270—RULES AND 

REGULATIONS, INVESTMENT 

COMPANY ACT OF 1940 

2. The authority citation for part 270 

is revised to read in part as follows: 


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12914 Federal Register / Vol. 76, No. 46 / Wednesday, March 9, 2011 / Proposed Rules 

Authority: 15 U.S.C. 80a–1 et seq., 80a– 

34(d), 80a–37, and 80a–39, unless otherwise 

noted. 

* * * * * 

Section 270.6a–5 is also issued under 15 

U.S.C. 80a–6(a)(5)(A)(iv)(I). 

* * * * * 

3. Section 270.2a–7 is amended by: 

a. In paragraph (a)(5), removing the 

words ‘‘and (D)’’; 

b. Removing paragraph (a)(11); 

c. Redesignating paragraphs (a)(12) 

through (a)(20) as (a)(11) through (a)(19); 

d. Revising newly designated 

paragraph (a)(11); 

e. Revising newly designated 

paragraph (a)(13); 

f. Removing paragraph (a)(21); 

g. Redesignating paragraph (a)(22) as 

paragraph (a)(20); 

h. Removing paragraph (a)(23); 

i. Redesignating paragraphs (a)(24) 

through (a)(29) as paragraphs (a)(21) 

through (a)(26); 

j. Removing paragraph (a)(30); 

k. Redesignating paragraphs (a)(31) 

and (a)(32) as paragraphs (a)(27) and 

(a)(28); 

l. Revising paragraphs (c)(3)(i), 

(c)(3)(iii), and (c)(3)(iv)(C); 

m. Adding paragraph (c)(3)(iv)(D); 

n. In paragraph (c)(7): 

i. Revising the paragraph heading; 

ii. Revising paragraph (c)(7)(i); 

iii. In the introductory text of 

paragraph (c)(7)(ii), removing the phrase 

‘‘paragraphs (c)(7)(ii)(A) through (D)’’ 

and adding in its place ‘‘paragraphs 

(c)(7)(ii)(A) through (C)’’; 

iv. Adding ‘‘or’’ at the end of 

paragraph (c)(7)(ii)(B); 

v. Removing paragraph (c)(7)(ii)(C) 

and redesignating paragraph (c)(7)(ii)(D) 

as paragraph (c)(7)(ii)(C); 

o. Revising paragraph (c)(10)(v)(A); 

p. Revising paragraph (c)(11)(iii); 

q. In paragraph (e): 

i. Removing the words ‘‘(a)(11)(i) 

(designation of NRSROs);’’ from the 

introductory text of paragraph (e); and 

ii. Revising paragraph (e)(1). 

These additions and revisions read as 

follows: 

§ 270.2a–7 Money market funds. 

(a) * * * 

(11) Eligible Security means a security 

with a remaining maturity of 397 

calendar days or less that the fund’s 

board of directors determines presents 

minimal credit risks (which 

determination must be based on factors 

pertaining to credit quality and the 

issuer’s ability to meet its short-term 

financial obligations). 

* * * * * 

(13) First Tier Security means any 

Eligible Security: 

(i) The issuer of which the fund’s 

board of directors has determined has 

the highest capacity to meet its shortterm financial obligations; 

(ii) That is a security issued by a 

registered investment company that is a 

money market fund; or 

(iii) That is a Government Security. 

* * * * * 

(c) * * * 

(3) * * * 

(i) General. The money market fund 

shall limit its portfolio investments to 

those United States Dollar-Denominated 

securities that are at the time of 

Acquisition Eligible 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, provided however, 

that the issuer of the Guarantee, or 

another institution, has undertaken to 

promptly notify the holder of the 

security in the event the Guarantee is 

substituted with another Guarantee (if 

such substitution is permissible under 

the terms of the Guarantee). 

(iv) * * * 

(C) The fund’s board of directors 

determines that the Underlying Security 

or any Guarantee of such security is of 

high quality and subject to very low 

credit risk; and 

(D) The issuer of the Conditional 

Demand Feature, or another institution, 

has undertaken to promptly notify the 

holder of the security in the event the 

Conditional Demand Feature is 

substituted with another Conditional 

Demand Feature (if such substitution is 

permissible under the terms of the 

Conditional Demand Feature). 

* * * * * 

(7) Monitoring, Defaults and Other 

Events. 

(i)(A) Monitoring. In the event 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 of any credible 

information about a portfolio security or 

an issuer of a portfolio security that may 

suggest that the security is no longer a 

First Tier Security or a Second Tier 

Security, as the case may be, the board 

of directors 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. This reassessment 

shall not be required if the fund 

disposes of the security (or it matures) 

within five Business Days after the date 

the money market fund’s adviser (or any 

person to whom the fund’s board of 

directors has delegated portfolio 

management responsibilities) becomes 

aware of the relevant information, and 

the board is subsequently notified of the 

adviser’s actions. 

(B) Special Rule for Certain Securities 

Subject to Demand Features. If, as a 

result of a portfolio security that ceases 

to be a First Tier Security, 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. 

* * * * * 

(10) * * * 

(v) * * * 

(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, 

an adverse change in the ability of the 

issuer of a portfolio security to meet its 

short-term financial obligations or a 

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. 

* * * * * 

(11) * * * 

(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 used to determine the status 

of the security as an Eligible Security 

shall be maintained and preserved in an 

easily accessible place. 

* * * * * 

(e) * * * 

(1) Written Guidelines. The Board 

shall establish and periodically review 

written guidelines (including guidelines 

for determining whether securities 

present minimal credit risks as required 

in paragraph (c)(3) of this section (by 


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Federal Register / Vol. 76, No. 46 / Wednesday, March 9, 2011 / Proposed Rules 12915 

reference to paragraph (a)(11)) and 

procedures under which the delegate 

makes such determinations. 

* * * * * 

4. Section 270.5b–3 is amended by: 

a. Adding ‘‘or’’ at the end of paragraph 

(c)(1)(iv)(B); 

b. Revising paragraph (c)(1)(iv)(C); 

c. Removing paragraph (c)(1)(iv)(D); 

d. Removing paragraphs (c)(5), (c)(6), 

and (c)(8); 

e. Redesignating paragraph (c)(4) as 

(c)(5); 

f. Adding new paragraph (c)(4); and 

g. Redesignating paragraph (c)(7) as 

paragraph (c)(6). 

The revisions read as follows: 

§ 270.5b–3 Acquisition of repurchase 

agreement or refunded security treated as 

acquisition of underlying securities. 

* * * * * 

(c) * * * 

(1) * * * 

(iv) * * * 

(C) Securities that the investment 

company’s board of directors, or its 

delegate, determines at the time the 

repurchase agreement is entered into: 

(1) Each issuer of which has the 

highest capacity to meet its financial 

obligations; and 

(2) Are sufficiently liquid that they 

can be sold at approximately their 

carrying value in the ordinary course of 

business within seven calendar days; 

and 

* * * * * 

(4) Issuer, as used in paragraph 

(c)(1)(iv)(C) of this section, means the 

issuer of a collateral security or the 

issuer of an unconditional obligation of 

a person other than the issuer of the 

collateral security to undertake to pay, 

upon presentment by the holder of the 

obligation (if required), the principal 

amount of the underlying collateral 

security plus accrued interest when due 

or upon default. 

* * * * * 

5. Section 270.6a–5 is added to read 

as follows: 

§ 270.6a–5 Purchase of certain debt 

securities by companies relying on section 

6(a)(5) of the Act. 

For purposes of reliance on the 

exemption for certain companies under 

section 6(a)(5)(A) of the Act (15 U.S.C. 

80a–6(a)(5)(A)), a company shall be 

deemed to have met the requirement for 

credit-worthiness of certain debt 

securities under section 6(a)(5)(A)(iv)(I) 

of the Investment Company Act (15 

U.S.C. 80a–6(a)(5)(A)(iv)(I)) if, at the 

time of purchase, the board of directors 

(or its delegate) determines or members 

of the company (or their delegate) 

determine that the debt security is: 

(a) Subject to no greater than 

moderate credit risk; and 

(b) Sufficiently liquid that it can be 

sold at or near its carrying value within 

a reasonably short period of time. 

PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933 

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940 

6. 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. 

* * * * * 

7. Form N–1A (referenced in 

§§ 239.15A and 274.11A) is amended by 

revising Item 27(d)(2) to read as follows: 

Note: The text of Form N–1A does not, and 

these amendments will not, appear in the 

Code of Federal Regulations. 

Form N–1A 

* * * * * 

Item 27. Financial Statements 

* * * * * 

(d) Annual and Semi-Annual Reports. 

* * * 

(2) Graphical Representation of 

Holdings. One or more tables, charts, or 

graphs depicting the portfolio holdings 

of the Fund by reasonably identifiable 

categories (e.g., type of security, 

industry sector, geographic region, 

credit quality, or maturity) showing the 

percentage of net asset value or total 

investments attributable to each. The 

categories and the basis of presentation 

(e.g., net asset value or total 

investments) should be selected, and the 

presentation should be formatted, in a 

manner reasonably designed to depict 

clearly the types of investments made 

by the Fund, given its investment 

objectives. If the Fund uses the credit 

ratings, as defined in section 3(a)(60) of 

the Securities Exchange Act [15 U.S.C. 

78(c)(a)(60)], assigned by a nationally 

recognized statistical rating organization 

(‘‘NRSRO’’), as defined in section 

3(a)(62) of the Securities Exchange Act 

[15 U.S.C. 78(c)(a)(62)], to categorize the 

credit quality of portfolio holdings, it 

should use the credit ratings of only one 

NRSRO except in the case of portfolio 

holdings that are not rated by that 

NRSRO. If credit ratings of that NRSRO 

are not available for certain holdings, 

the Fund must briefly discuss the 

methodology for determining credit 

quality for such holdings, including, if 

applicable, the use of credit ratings 

assigned by another NRSRO. 

* * * * * 

8. Form N–2 (referenced in §§ 239.14 

and 274.11a–1) is amended by revising 

Instruction 6(a) to Item 24 to read as 

follows: 

Note: The text of Form N–2 does not, and 

these amendments will not, appear in the 

Code of Federal Regulations. 

Form N–2 

* * * * * 

Item 24. Financial Statements 

* * * * * 

Instructions: 

* * * * * 

6. * * * 

a. One or more tables, charts, or 

graphs depicting the portfolio holdings 

of the Registrant by reasonably 

identifiable categories (e.g., type of 

security, industry sector, geographic 

region, credit quality, or maturity) 

showing the percentage of net asset 

value or total investments attributable to 

each. The categories and the basis of 

presentation (e.g., net asset value or 

total investments) should be selected, 

and the presentation should be 

formatted, in a manner reasonably 

designed to depict clearly the types of 

investments made by the Registrant, 

given its investment objectives. If the 

Registrant uses the credit ratings, as 

defined in Section 3(a)(60) of the 

Exchange Act [15 U.S.C. 78(c)(a)(60)], 

assigned by a nationally recognized 

statistical rating organization 

(‘‘NRSRO’’), as defined in Section 

3(a)(62) of the Exchange Act [15 U.S.C. 

78(c)(a)(62)], to categorize the credit 

quality of portfolio holdings, it should 

use the credit ratings of only one 

NRSRO except in the case of portfolio 

holdings that are not rated by that 

NRSRO. If credit ratings of that NRSRO 

are not available for certain holdings, 

the Registrant must briefly discuss the 

methodology for determining credit 

quality for such holdings, including, if 

applicable, the use of credit ratings 

assigned by another NRSRO. 

* * * * * 

9. Form N–3 (referenced in §§ 239.17a 

and 274.11b) is amended by revising 

Instruction 6(i) to Item 28(a) to read as 

follows: 

Note: The text of Form N–3 does not, and 

these amendments will not, appear in the 

Code of Federal Regulations. 

Form N–3 

* * * * * 

Item 28. Financial Statements 

(a) * * * 


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12916 Federal Register / Vol. 76, No. 46 / Wednesday, March 9, 2011 / Proposed Rules 

Instructions: 

* * * * * 

6. * * * 

(i) One or more tables, charts, or 

graphs depicting the portfolio holdings 

of the Registrant by reasonably 

identifiable categories (e.g., type of 

security, industry sector, geographic 

region, credit quality, or maturity) 

showing the percentage of net asset 

value or total investments attributable to 

each. If the Registrant has sub-accounts, 

provide the information separately for 

each sub-account. The categories and 

the basis of presentation (e.g., net asset 

value or total investments) should be 

selected, and the presentation should be 

formatted, in a manner reasonably 

designed to depict clearly the types of 

investments made by the Registrant, 

given its investment objectives. If the 

Registrant uses the credit ratings, as 

defined in Section 3(a)(60) [15 U.S.C. 

78c(a)(60)] of the Exchange Act, 

assigned by a nationally recognized 

statistical rating organization 

(‘‘NRSRO’’), as defined in Section 

3(a)(62) of the Exchange Act [15 U.S.C. 

78c(a)(62)], to categorize the credit 

quality of portfolio holdings, it should 

use the credit ratings of only one 

NRSRO except in the case of portfolio 

holdings that are not rated by that 

NRSRO. If credit ratings of that NRSRO 

are not available for certain holdings, 

the Registrant must briefly discuss the 

methodology for determining credit 

quality for such holdings, including, if 

applicable, the use of credit ratings 

assigned by another NRSRO. 

* * * * * 

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940 

10. Form N–MFP (referenced in 

§ 274.201) is amended by: 

a. Revising Item 33; 

b. Removing Item 34; 

c. Revising Item 37.b; 

d. Removing Item 37.c; 

e. Removing Items 38.b and 38.c; 

f. Removing Items 39.c and 39.d; 

g. Redesignating Items 35 through 46 

as Items 34 through 45; and 

h. In redesignated Item 38, replacing 

‘‘Items 37 and 38’’ with ‘‘Items 36 and 

37’’. 

The revisions read as follows: 

Note: The text of Form N–MFP does not, 

and this amendment will not, appear in the 

Code of Federal Regulations. 

Form N–MFP 

* * * * * 

Item 33 

Indicate whether the security is a First 

Tier Security, a Second Tier Security or 

no longer an Eligible Security. 

* * * * * 

Item 37 

* * * * * 

b. The period remaining until the 

principal amount of the security may be 

recovered through the Demand Feature. 

Dated: March 3, 2011. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2011–5184 Filed 3–8–11; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Food and Drug Administration 

21 CFR Part 310 

[Docket No. FDA–1981–N–0012] (Formerly 

Docket No. 1981N–0022) 

RIN 0910–AF45 

Benzocaine; Weight Control Drug 

Products for Over-the-Counter Human 

Use 

AGENCY: Food and Drug Administration, 

HHS. 

ACTION: Proposed rule. 

SUMMARY: The Food and Drug 

Administration (FDA) is issuing a 

proposed rule to reclassify benzocaine 

from its previously proposed 

monograph status (category I) for overthe-counter (OTC) weight control use to 

nonmonograph status. Although, in the 

Federal Register of February 26, 1982, 

an advanced notice of proposed 

rulemaking (ANPR) included the 

recommendation of an Advisory Panel, 

consisting of health care providers from 

outside FDA, recommended that 

benzocaine should be generally 

recognized as safe and effective 

(GRASE) for weight control, this 

document includes our first evaluation 

of benzocaine for this use. Based on our 

evaluation of the available data and 

information, we have tentatively 

concluded that the data are not 

sufficient to support the safety and 

effectiveness of benzocaine for this use. 

This proposed rule, if finalized, would 

require an approved new drug 

application (NDA) or abbreviated new 

drug application (ANDA) for the 

marketing of OTC weight control 

products containing benzocaine. 

DATES: Submit written or electronic 

comments on the proposed rule by June 

7, 2011. See section IX of this document 

for information on the proposed 

effective date of this proposed rule. 

ADDRESSES: You may submit comments, 

identified by Docket No. FDA–1981–N– 

0012 (formerly Docket No. 1981N–0022 

and RIN No. 0910–AF45 by any of the 

following methods: 

Electronic Submissions 

Submit electronic comments in the 

following way: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Written Submissions 

Submit written submissions in the 

following ways: 

• FAX: 301–827–6870. 

• Mail/Hand delivery/Courier (for 

paper, disk, or CD–ROM submissions): 

Division of Dockets Management (HFA– 

305), Food and Drug Administration, 

5630 Fishers Lane, Rm. 1061, Rockville, 

MD 20852. 

Instructions: All submissions received 

must include the Agency name and 

Docket No. FDA–1981–N–0012 

(formerly Docket No. 1981N–0022) and 

RIN No. 0910–AF45 for this rulemaking. 

All comments received may be posted 

without change to http:// 

www.regulations.gov, including any 

personal information provided. 

Docket: For access to the docket to 

read background documents or 

comments received, go to http:// 

www.regulations.gov and insert the 

docket number, found in brackets in the 

heading of this document, into the 

‘‘Search’’ box and follow the prompts 

and/or go to the Division of Dockets 

Management, 5630 Fishers Lane, Rm. 

1061, Rockville, MD 20852. 

FOR FURTHER INFORMATION CONTACT: 

Michelle M. Jackson, Center for Drug 

Evaluation and Research (HFD–560), 

Food and Drug Administration, 10903 

New Hampshire Ave., Bldg. 22, MS 

5411, Silver Spring, MD 20993–0002, 

301–796–2090. 

SUPPLEMENTARY INFORMATION: 

I. Purpose of This Document 

In the Federal Register of February 

26, 1982, we (FDA) published an ANPR 

to establish a monograph for OTC 

weight control drug products. The 

ANPR included the recommendations of 

an Advisory Review Panel on the OTC 

Miscellaneous Internal Drug Products 

(the Panel) that evaluated all OTC 

weight control drug products on the 

market at the time the OTC drug review 

began in 1972. The Panel consisted of 


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