9 JUN 1994
 lEBll 

Our Ref. No 93-834-CC
 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL CBA Money Fund, et . a 1 DIVISION OF INVESTMENT MANAGEMENT File No. 811-3703
 

By letter dated December 21, 1993, you request our assurance
 

that we would not recommend enforcement action to the Commission
 

under Rule 22c-l under the Investment Company Act of 1940 (the
 

"1940 Act") if, as described in your letter, the money market
 

mutual funds advised by Merrill Lynch Asset Management ("MLA")
 

and its subsidiary, Fund Asset Management, Inc. (collectively,
 

the "Funds"), implement certain automatic redemption procedures.
 

You state that, at 4:00 p.m. each business day, each Fund
 

declares a dividend in shares and calculates the net asset value
 

(1. e. , "dividend/price"). Accordingly, a redeeming shareholder who places a redemption request prior to 4:00 p.m. retains the
 

last dividend paid on that date ("order date"). You state that
 

currently a shareholder who places a redemption request receives
 

redemption proceeds on the next business day following the order
 

date. You further state that currently a Fund shareholder with a
 

securities account ~it~ Merrill Lynch, Pierce, Fenner & Smith
 

Incorporated ("MLPF&S") who places a redemption order and
 

requests same-day settlement receives the redemption proceeds
 

that day. ~I In those instances, MLPF&S or an affiliate, to
 

accommodate its customers, will advance funds on behalf of the
 

customer on the order date but will not receive the proceeds from
 

the redemption of the customer's Fund shares until the business
 

day following the order date. ii You further state that, under
 the proposed automatic redemption procedures, if a. shareholder 

requests same-day settlement, his Fund shares would be
 

transferred to MLPF&S on the basis of the prior business day's
 

share price, which would exclude the dividend declared on the
 

order date. MLPF&S would then redeem the shares at the order
 

date's 4:00 p.m. price for its own account so that MLPF&S would
 

receive the dividend declared immediately prior to the 4: 00 p.m.
 

pricing. The redeeming shareholder would receive the dividends
 only through the business day preceding the order. date. 

You represent that these procedures would partially
 

compensate MLPF&S for its foregone cost of funds in connection
 

wi th same-day settlement transactions. You also represent that
 

~i You state that a shareholder may require same-day funds to
 

purchase Treasury bi 1 Is and certa in other U. S. Government
 

securities, or to enter into other types of transactions
 

that typically require same-day settlement.
 

~/ You state that, because MLPF&S does not receive Fund
 

redemption proceeds until the next business day in
 

connection with same-day settlement transactions, it loses
 

the overnight interest on the funds advanced on behalf of
 

customers on the order date.
 
the proposed procedures would apply only to same-day settlement
 

transactions involving money market funds, and that a Fund's use
 

of the proposed procedures would be suspended during any period
 

in which the net asset value of the Fund is not maintained at a
 

constant $1.00 per share or in the event of a negative dividend.
 

You further represent that the redemption policy would be noted
 

prominently on the shareholder's monthly account statement and
 

would be disclosed in the Funds' prospectuses. d/ Finally, you
 

represent that, if a Fund's yield exceeds the cost of funds to
 

MLPF&S, the proposed redemption procedures would be suspended for
 

that Fund until MLA and the Funds were satisfied that MLPF&S
 

would receive no additional benefits beyond recouping the costs
 

of advancing these funds.
 

Rule 22c-1 prohibits an open-end fund, the fund's principal
 

underwr iter, and any dealer from selling or redeeming the fund's
 

securities except at a price based on the next computed net asset
 

value. The Commission adopted Rule 22c-1 to: (i) eliminate
 

dilution of existing shareholders' interests that might arise
 

through the sale of shares at a price below their net asset
 

value, or the redemption or repurchase of shares at a price above
 

their net asset vaiue¡ and (ii) eliminate speculative trading
 

practices. ~/ You state that because the Funds are designed to
 

maintain a constant net asset value per share, and because the
 

procedures would be suspended if the Funds' net asset value per
 

share deviated from $1.00, the proposed redemption procedures do
 

not present the potential for the backward pricing abuses that
 Rule 22c-l was intended to address. 

We would not recommend enforcement action to the Commission
 

under Rule 22c-1 if the Funds implement the automatic redemption
 

procedures as described in your letter. You should note that
 

different facts or representations may require a different
 

conclusion. Further, this response expresses the Division's


posi tion on enforcement action only and does not express any 

legal conclusion~ on the issues presented.
 

r Janice M. BiShOpB /
 . Attorney ij~
 1~ r:iii1¿( 111 ~~%'. 

ii Telephone conversation between Laurin Blumenthal Kleiman and
 Janice M. Bishop on February 1, i 994. 

~i Investment Company Act ReI. No. 5519 (Oct. 16, 1968).
 
555 CALIFORNIA STREET
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 FACSIMILE: 071-796-1807
 

(DUPLICATE) 

December 21, 1993
 

BY FEDERAL EXPRESS ACT L-lelf-Ljo
 

SECTION 

Off ice of Chief Counsel
 

Di vision of Investme~t Management RULE ~d. (-I


Securities and Exchange Commission PUBLIC ' 

450 Fifth street, N.W. AVAILABILIT 61/ n 9' r 

Washington, D.C. 20549 

Re: Proposed Automatic Redemption Procedures
 

for Money Market Funds Advised by Merrill Lynch
 

Asset Management or Fund Asset Management, Inc.
 

In Connection With Same-Day Settlement Transactions
 

Ladies and Gentlemen:
 

This letter is submitted on behalf of several of the money
 

market mutual funds advised by Merrill Lynch Asset Management!
 

and its subsidiary, Fund Asset Management, Inc. (each a "Fund"
 

and, collectively, the "Funds,,).2 On behalf of the Funds, we
 

The name under which Merrill Lynch Asset Management is
 

incorporated in Delaware is Merrill Lynch Investment
 

Management, Inc. Merrill Lynch Asset Management and Fund
 

Asset Management, Inc. are together referred to herein as


"MLA. " 

The Funds are CBA Money Fund, CMA Government Securities
 

Fund, CMA Money Fund, CMA Tax-Exempt Fund, CMA Treasury Fund
 

and the ten series of CMA Multi-State Municipal Series Trust
 

(collectively, the "CMA/CBA Funds"), Merrill Lynch Ready


Assets Trust ("Ready Assets Trust"), Merrill Lynch
 

Retirdment Reserves Money Fund of Merrill Lynch Retirement
 

series Trust ("Retirement Reserves Money Fund"), Merrill
 

(continued. . . ) 

2 
hereby request that the staff of the Division of Investment
 

Management (the "Division") of the Securities and Exchange
 

Commission (the "Commission") advise us that it would not
 

recommend enforcement action for violation of Rule 22c-1 ("Rule
 

22C-1") under the Investment Company Act of 1940, as amended (the
 

"Investment Company Act") if the Funds implement the proposed


automatic redemption procedures described below. 3 

I.
 

Current Automatic Redemption Procedures
 

Current procedures for all automatic redemptions. Each Fund
 

is a no-load money market fund registered under the Investment
 

Company Act as an open-end management investment company. 4 The
 

Funds' current automatic redemption procedures are applicable to
 

shareholders who maintain securities accounts with Merrill Lynch,
 

Pierce, Fenner & smith Incorporated ("MLPF&S,,).5 Under these
 

procedures, each Fund may redeem a suff icient number of its
 

shares automatically to satisfy amounts due MLPF&S or an
 

affiliate as a result' of (a) account fees and expenses due and/or
 

2 ( . . . continued) 

Lynch U.S. Treasury Money Fund, Merrill Lynch U.S.A.
 

Government Reserves and Summit Cash Reserves Fund of
 

Financial Institutions Series Trust ( "Summi t Cash Reserves
 

Fund") . It is requested that the relief sought in this
 

letter extend both to the Funds currently advised by MLA
 

and to any new Funds advised by MLA in the future.
 

3	 The proposed procedures originally were discussed by 

telephone and by letters dated April 27, 1990 and October 

31, 1990 from Thomas R. Smith, Jr. of this firm to David L. 

Wills of the Division staff. These procedures were further 

discussed by Robert Harris of MLA by telephone with Thomas 

S. Harman and Dorothy M. Donohue of the Division staff and
 

by letter to Ms. Donohue dated October 6, 1992. Based on
 

those communications, Ms. Donohue recommended that this
 

formal no-action request be made.
 

4 Most of the Funds finance the distribution of their shares
 

under the terms of a distribution plan pursuant to Rule
 

12b-1 under the Investment Company Act (a "Rule 12b-1
 

plan"). Neither the Summit Cash Reserves Fund nor the
 

Retirement Reserves Money Fund have adopted a Rule 12b-1


plan. 

5	 Such accounts generally do not include margin accounts with 

MLPF&S, except. in the case of the CMA/CBA Funds. 

2 
6 

(b) purchases of securities or other transactions in the
 shareholder's securities account.
 

For all of the Funds except the cMA/CBA Funds, these
 

procedures are conducted on an "opt-out" basis; i.e., unless the
 

shareholder notifies MLPF&S in advance that he or she does not
 

want his or her Fund shares to be subject to the automatic
 

redemption procedures, such shareholder's account will be scanned
 

for debits (a "sweep") each business day prior to 4:00 p.m. New
 

York time, the time at which such Funds are priced. In the case
 

of the CMA/CBA Funds, the sweep is an integral feature of the CMA
 

or CBA programs and takes place on each business day prior to
 

those Funds' 12:00 p.m. pricing. In either case, if a debit
 

exists, a sufficient number of Fund shares are redeemed as of the
 

related Fund's pricing6 and the redemption proceeds are received
 

the next business day to satisfy the amount due in the
 

shareholder's account.
 

II.
 

Same-Day Settlement Transactions
 

Automatic redemption procedures are utilized to accommodate
 

shareholders' needs for liquid funds to purchase securities or
 

execute other transactions. The required settlement periods for
 

these transactions range from same-day (in which immediately
 

available funds must be delivered on the order date -- the time
 

the order is placed or the transaction entered into) to five or
 

more business days thereafter. Currently, automatic redemptions
 

are effected on the business day preceding the date the
 

shareholder is obligated to make such payment, and MLPF&S or its
 

affiliate receives the redemption proceeds on the business day
 

following the redemption date. Under the current procedures,
 

shareholders receive all dividends declared and reinvested
 through the date of redemption. Therefore, for transactions 

requiring funds one business day or more after the order is
 

placed, the redemption order can be placed on the business day
 

prior to the date funds are needed, and MLPF&S will receive the
 

customer's redemption proceeds on the proper day.
 

At each Fund's pricing time each day, the Fund first
 

declares the daily dividend in shares and then determines
 

the net asset value (i.e., "dividends/price"). Accordingly,
 

the redeeming shareholder retains the last dividend paid on
 

such date. certain other money market funds that are not
 

part of the MLA complex price first and then declare the
 

dividend (Le., "price/dividend"), in which event the
 

redeeming shareholder does not receive the daily dividend
 

paid on the redemption date.
 

3
 
Transactions that require execution on a same-day settlement
 

basis, such as the purchase of Treasury bills, 7 however, cannot
 

be processed in this manner, because Fund redemption proceeds
 

cannot be made available on a same-day basis. In this event,
 

MLPF&S, to accommodate its customers, advances funds on behalf of
 

the customers on the order date but does not receive the proceeds
 

from the redemption of the customer's Fund shares until the
 

business day following the order date. Transactions entered into
 

by Fund shareholders that require same-day settlement for which
 

MLPF&S advances funds against the receipt of Fund redemption
 

proceeds are herein referred to as "same-day settlement


transactions. " 

Because MLPF&S does not receive Fund redemption proceeds
 

until the next business day in connection with same-day
 

settlement transactions, it loses the overnight interest on the
 

funds advanced on behalf of customers on the order date. 8 Based
 

on its cost of funds, MLPF&S estimates that losses due to sarneday settlement transactions aggregated over $7.0 million in 1990,
 

over $5.4 million in l991 and over $3.4 million in 1992.9
 

7	 In addition to the purchase of Treasury bills and certain 

other U.S. Government securities, other types of 

transactions that typically require same-day settlement include (a) transmission of federal funds by wire; (b) 

certain securities purchases involving, ~, options,
 

precious metals, money market securities, customer
 

repurchase agreements and customer agreements pursuant to
 

which cash is advanced collateralized by the customer's own
 

securities; (c) checks issued by MLPF&S branch offices drawn


on local banks in immediately available funds; and (d) 

transfer of funds from one customer account to another to
 

cover debit balances.
 

8	 Conversely, the shareholder receives a double return on his 

or her investment in the Fund for that day, since he or she 

receives both the benefit of immediately available cost-free 

funds and the dividend on the shares to be redeemed. 

9	 The decline in the amount of Merrill Lynch's losses in 

connection with same-day settlement transactions is not 

attributable to a decline in the number of transactions but 

is instead a result of the decline in interest rates over 

the past three years. 

4 
III.
 

Proposed Additional Automatic Redemption Procedures
 

Proposed procedures. MLPF&S has informed MLA that it
 

intends to continue its practice of advancing funds in connection
 

wi th same-day settlement transactions if it can defray, in part,
 

the overnight cost of funds presently incurred in connection with
 

such transactions. In this regard, the Funds seek to implement
 

the additional automatic redemption procedures described below.
 

Under the proposed automatic redemption procedures, Fund
 

shares would be transferred to MLPF&S prior to the declaration of
 

the daily dividend and the subsequent 4:00 p.m. pricing on the
 

10 day the order for a same-day settlement transaction is placed. 


MLPF&S would then redeem the shares at such 4: 00 p.m. pricing for
 

its own account so that MLPF&S would receive the daily dividend
 

declared immediately prior to such 4:00 p.m. pricing.
 

These procedures would partially compensate MLPF&S for the
 

fact that the redemption proceeds would not be received by MLPF&S
 

until the day after the shareholder is obligated to make payment.
 

The proposed automatic redemption procedures would be conducted
 

on the same "opt-out" basis that applies to the current automatic


redemption procedures. 

Restrictions on proposed procedures. The proposed automatic
 

redemption procedures would apply only to same-day settlement
 

transactions. Moreover, a Fund's use of the proposed procedures
 

would be suspended during any period in which the net asset value
 

of the Fund is not maintained at a constant $1.00 per share.
 

Shareholder statement disclosure. To ensure that each
 

shareholder understands that there is a cost associated with
 

same-day settlement transactions, each such transaction would be
 

noted prominently on the shareholder's monthly account statement.
 

Each same-day settlement transaction appearing on the statement
 would be followed by a symbol. On the reverse side of the 

statement, that symbol will be included in the section explaining
 

symbols and abbreviations followed by the following explanation:
 

Transaction you requested required same-day
 

payment -- MLPF&S retained last day's
 

dividend to offset cost of advancing payment


on your behalf. 

10	 The shares will be transferred prior to the daily dividend 

declaration to avoid any adverse Federal tax consequences to

the Fund shareholder on account of the di "ridend. 

5
 
MLPF&S cost of funds versus Fund dividend amount. As
 previously stated herein and discussed with the Division staff, 

the proposed procedures will only partially compensate MLPF&S for
 

its forgone cost of funds in connection with same-day settlement
 

transactions. Based on an historical comparison of the Funds'
 

yields and MLPF&S's cost of funds, both MLPF&S and the Funds are
 

confident that the aggregate amount represented by dividends
 

recovered by MLPF&S under the proposed procedures will not exceed
 

the aggregate amount expended in borrowing money to cover same-


day settlement transactions. For example, set forth in the table
 

below for the last three years is MLPF&S's cost of funds as
 

compared to the yields on MLA's two largest Funds:
 

Year 

Ended I 

Average 3D-day Fund Yield I 

MLPF&S Cost of Funds 

December 

31, CMA Money

Fund 

Ready Assets

Trust 

Short-Term 

Borrowing 

Blended Cost From 

All Sources II 

1990 7.72% 7.76% 8.51% 9.26% 

1991 5.87% 5.85% 6.36% 7.06% 

1992 3.37% 1 3.31% 3.95% 4.67% 

On an ongoing basis, MLPF&S will provide MLA with an 

average weekly cost of funds to ensure that MLPF&S does not 

profit from the proposed automatic redemption procedures by 

obtaining more in dividends than it costs to advance same-day settlement transaction funds. In the unlikely event that a 

Fund's yield exceeded the cost of funds to MLPF&S, the proposed
 

redemption procedures would be suspended until MLA and the Funds
 

were satisfied that MLPF&S would receive no additional benefits
 

beyond the recouping of its cost of funds due to the use of the
 

proposed automatic redemption procedures.
 

iv. 

Leqal Analysis
 

Rule 22c-1 provides, in pertinent part, that:
 

No registered investment company issuing any redeemable
 

security ... and no principal underwriter of, or dealer
 

in, any such security shall sell, redeem, or repurchase
 

any such security except at a price based on the
 

In general, funds advanced in connection with same-day
 

settlement transactions are acquired through both short-term
 

and longer-term borrowings.
 

6 

11 
current net asset value of such security which is next
 

computed after receipt of a tender of such security for
 

redemption ....
 

Rule 22c-l was adopted to institute "forward pricing" to
 

eliminate or reduce so far as reasonably practicable perceived
 

abuses in connection with the sale, redemption or repurchase of
 mutual fund shares at prices based on "backward pricing" (i. e. , 

prices based on the last determined net asset value). Investment
 

Company Act Release No. 5519 (October 16, 1968) (adopting
 

release) (the "Release"). The Commission sought to eliminate the
 

practice of selling, redeeming or repurchasing shares for a
 

certain period of time at a previously determined net asset
 

value. According to the Release, such practice enabled investors
 

to take unfair advantage of increases in share value by
 

purchasing shares at prices lower than current net asset value,
 

thus diluting the value of the fund's outstanding shares. The
 

ability to trade fund shares at prices other than current net
 

asset value also invited speculative trading practices by
 

enabling investors to purchase large blocks of shares whose value
 

had increased above the selling price and then redeem them at the
 

higher price after the next valuation. The Release stated that
 

such speculative trading practices could seriously interfere with
 

fund management to the extent that" (i) management may hesitate
 

to invest what it believes to be speculators' money and (ii)
 

management may have to effect untimely liquidations when
 

speculators redeem their securities." Id.
 

It is submitted that the proposed automatic redemption
 

procedures do not present the potential for the backward pricing
 

abuses that Rule 22c-1 was intended to address. Money market
 

funds invest in high quality, short-term money market
 

instruments, declare daily dividends and maintain a stable $1.00
 

net asset value per share. In this context, the types of
 

fluctuations in net asset value that present opportunities for
 

speculation do not exist. Furthermore, the declaration of a
 

"negative dividend" by a Fund (Le., automatic redemption of
 

shares to cover daily losses) is extremely rare and, in the
 

unlikely event of a negative dividend, the proposed automatic
 

redemption procedures would be suspended. Therefore, the
 

proposed procedures create no risk of dilution. The fact that
 

the automatic procedures will be used only to satisfy a same-day
 

settlement obligation is a further disincentive to speculation.
 

The Commission staff has in several instances recognized the
 

practical necessity for a liberal interpretation of the technical
 

requirements of Rule 22c-l in the money market fund context and
 

has allowed money market funds to price on a technically backward
 

basis (i.e., prior to the daily declaration of the dividend).
 

Certain institutional money market funds, such as TernpFund, issne
 

7
 
two classes of shares, one of which prices prior to the dividend
 

declaration (i.e., backward pricing) and the other of which
 

prices subsequent to dividend declaration (i.e., forward
 

pricing) . (Moreover, due to systems requirements, the Commission
 

staff has allowed the Funds to make a technical deviation from
 

the requirements of Rule 22c-l by allowing purchase orders placed
 

through MLPF&S to be made effective on the business day following
 

the day the order is placed, in which case the customer receives
 the next day's price.) 

In addition, the Commission staff has in the past officially
 

taken an equitable approach to Rule 22c-l in other contexts,
 

granting no-action relief in unique circumstances in which the
 

staff has determined that noncompliance with the Rule is
 justified on grounds of practicality. See,~, Baldwin Life 

Insurance Co.. et ale (pub. avail. February 3,1989); Templeton
 

Global Fund. Inc. (pub. avail. September 7, 1982); Scudder Tax
 

Free Money Fund. et ale (pub. avail. July 16, 1982); Scudder.
 

Stevens & Clark (pub. avail. February 18, 1976).
 

As a practical ~atter, unless MLPF&S continues to incur
 

substantial losses in connection with its customers' same-day
 

settlement transactions, a customer would be unable to enter into
 

such transactions using Fund redemption proceeds and would
 

instead be forced either to produce cash in large amounts when
 

placing his or her order or (ii) to wait and have the order
 

effected on the following business day. MLPF&S is willing,
 

however, to continue to advance funds on behalf of its customers
 

if it can reduce its consequent losses by using the proposed
 

automatic redemption procedures with no adverse consequences to a
 

Fund or its shareholders. MLPF&S therefore believes that the
 

Funds and their shareholders would be best served by allowing the
 

automatic redemption procedures to be effected as proposed, and
 

that the proposed procedures are appropriate in the context of
 

Rule 22c-l and the relevant interpretations discussed above.
 

V. 

Conclusion 

In light of the foregoing, we believe that the proposed
 

automatic redemption procedures for same-day settlement
 

transactions are fair and equitable under the circumstances,
 

provide a benefit to 
 Fund shareholders with no negative effect on
 

any Fund or its shareholders and are appropriate and permissible
 

under the Investment Company Act. Accordingly, we hereby request
 

that the staff of the Division of Investment Management advise us
 

that it would not recommend that the Commission take any
 

enforcement action for violation of Rule 22c-l if the Funds
 

8 
implement the proposed automatic redemption procedures as
 descr ibed herein. 

If you have any questions regarding this matter, please call
 

the undersigned at (212) 839-5525.
 

Sincerely,

Laurin Blumenthal Kleiman
 

i!

CC: Robert Harris, Esq. 

9