Corrected to conform to Federal Register version

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 270 and 274

Release No. IC-31184; File No. S7-07-11

RIN 3235-AK61

Removal of Certain References to Credit Ratings and Amendment to the Issuer 

Diversification Requirement in the Money Market Fund Rule

AGENCY: Securities and Exchange Commission.

ACTION: Re-proposed rule; proposed rule

SUMMARY: The Securities and Exchange Commission (“SEC” or “Commission”) is

re-proposing certain amendments, initially proposed in March 2011, related to the removal of 

credit rating references in rule 2a-7, the principal rule that governs money market funds, and 

Form N-MFP, the form that money market funds use to report information to the Commission 

each month about their portfolio holdings, under the Investment Company Act of 1940 

(“Investment Company Act” or “Act”). The re-proposed amendments would implement 

provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank 

Act”). We are issuing this re-proposal in consideration of comments received on our March 

2011 proposal. In addition, we are proposing to amend rule 2a-7’s issuer diversification

provisions to eliminate an exclusion from these provisions that is currently available for 

securities subject to a guarantee issued by a non-controlled person.

DATES: Comments should be received on or before October 14, 2014.
2

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 rule-comments@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 to Kevin M. O’Neill, Deputy 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 the Commission process and review your comments more 

efficiently, please use only one method. The Commission will post all comments on the 

Commission’s Internet website (http://www.sec.gov/rules/proposed.shtml). Comments also are 

available for website 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 10:00 am and

3:00 pm. All comments received will be posted without change; the Commission does not edit

personal identifying information from submissions. You should submit only information that you 

wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Erin C. Loomis, Senior Counsel; Amanda 

Hollander Wagner, Senior Counsel; Penelope W. Saltzman, Senior Special Counsel; Investment 

Company Rulemaking Office, at (202) 551-6792, Division of Investment Management, 

Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-8549.
3

SUPPLEMENTARY INFORMATION: We are proposing for public comment amendments 

to rule 2a-7 [17 CFR 270.2a-7] and Form N-MFP [17 CFR 274.201] under the Investment 

Company Act.1

TABLE OF CONTENTS

I. BACKGROUND...................................................................................................................... 3

A. Credit Rating References........................................................................................ 3

B. Exclusion from the Issuer Diversification Requirement......................................... 7

II. DISCUSSION ......................................................................................................................... 7

A. Rule 2a-7................................................................................................................. 7

1. Eligible Securities..................................................................................... 11

2. Conditional Demand Features................................................................... 27

3. Monitoring Minimal Credit Risks............................................................. 31

4. Stress Testing............................................................................................ 37

B. Form N-MFP......................................................................................................... 39

C. Exclusion from the Issuer Diversification Requirement....................................... 42

III. COMPLIANCE PERIOD FOR THE PROPOSED RULE AND FORM AMENDMENTS ...................... 50

IV. PAPERWORK REDUCTION ACT ANALYSIS .......................................................................... 51

V. ECONOMIC ANALYSIS ........................................................................................................ 62

VI. REGULATORY FLEXIBILITY ACT CERTIFICATION............................................................... 94

STATUTORY AUTHORITY ............................................................................................................... 95

TEXT OF RULE AND FORM AMENDMENTS...................................................................................... 96

I. BACKGROUND

A. Credit Rating References

Section 939A of the Dodd-Frank Act requires each federal agency, including the 

Commission, to “review any regulation issued by such agency that requires the use of an 

 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, including rule 2a-7, will be to 

Title 17, Part 270 of the Code of Federal Regulations [17 CFR 270]. 
4

assessment of the credit-worthiness of a security or money market instrument and any references 

to or requirements in such regulations regarding credit ratings.”2

 That section further provides 

that each such agency shall “modify any such regulations identified by the review . . . to remove 

any reference to or requirement of reliance on credit ratings and to substitute in such regulations 

such standard of credit-worthiness as each respective agency shall determine as appropriate for 

such regulations.”3

 

As a step toward implementing these mandates, in March 2011 we proposed to replace 

references to credit ratings issued by nationally recognized statistical rating agencies 

(“NRSROs”) in two rules and four forms under the Securities Act of 1933 (“Securities Act”) and 

the Investment Company Act, including rule 2a-7 and Form N-MFP under the Investment 

Company Act.4 The 2011 proposal preceded other amendments to rule 2a-7 and Form N-MFP 

 2 Pub. L. No. 111-203, section 939A(a)(1)-(2). Section 939A of the Dodd-Frank Act applies to all 

federal agencies. 

3 Pub. L. No. 111-203, section 939A(b). Section 939A of the Dodd Frank Act provides that 

agencies shall seek to establish, to the extent feasible, uniform standards of creditworthiness, 

taking into account the entities the agencies regulate and the purposes for which those entities 

would rely on such standards.

4 See References to Credit Ratings in Certain Investment Company Act Rules and Forms, 

Investment Company Act Release No. 29592 (Mar. 3, 2011) [76 FR 12896 (Mar. 9, 2011)] 

(“2011 Proposing Release”). Specifically, we proposed to: (i) remove references to credit ratings 

in rules 2a-7 and 5b-3 under the Investment Company Act and replace them with alternative 

standards of creditworthiness; (ii) adopt new rule 6a-5 under the Investment Company Act that 

would establish a creditworthiness standard to replace the credit rating reference in section 

6(a)(5) removed by the Dodd-Frank Act; (iii) eliminate required disclosures of credit ratings in 

Form N-MFP under the Investment Company Act; and (iv) remove the requirement that credit 

ratings be used when portraying credit quality in shareholder reports from Forms N-1A, N-2, and 

N-3 under the Securities Act and the Investment Company Act. In December 2013, we adopted 

amendments removing references to credit ratings in rule 5b-3 and eliminating the required use of 

credit ratings in Forms N-1A, N-2, and N-3. See Removal of Certain References to Credit 

Ratings under the Investment Company Act, Investment Company Act Release No. 30847 (Dec. 

27, 2013) [79 FR 1316 (Jan. 8, 2014)] (“2013 Ratings Removal Adopting Release”). We adopted 

new rule 6a-5 on November 19, 2012. See Purchase of Certain Debt Securities by Business and 

Industrial Development Companies Relying on an Investment Company Act Exemption, 

Investment Company Act Release No. 30268 (Nov. 19, 2012) [77 FR 70117 (Nov. 23, 2012)]. 
5

that we proposed last year as part of our broader efforts to reform money market funds.5 At that 

time, we noted that we were not rescinding our 2011 proposal to remove ratings references from 

certain rules and forms under the Investment Company Act, but that we intended to address the 

matter at another time.6 

We received several comments on the 2013 Money Market Fund Proposing Release

suggesting that we act on credit ratings as part of our broader money market fund reforms.7 And 

today in another release, we have adopted certain amendments to rule 2a-7 and Form N-MFP 

that we proposed last year.8 We also received comments on the 2011 Proposing Release that 

 

Rule 3a-7 under the Investment Company Act also contains a reference to ratings. In August 

2011, in a concept release soliciting comment on the treatment of asset-backed issuers under the 

Investment Company Act, we sought comment on the role, if any, that credit ratings should 

continue to play in the context of rule 3a-7. See Treatment of Asset-Backed Issuers under the 

Investment Company Act, Investment Company Act Release No. 29779 (Aug. 31, 2011) [76 FR 

55308 (Sept. 7, 2011)] at section III.A.1.

5 See Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release 

No. 30551 (June 5, 2013) [78 FR 36834 (June 19, 2013)] (“2013 Money Market Fund Proposing 

Release”). The 2013 rule proposals were designed to address money market funds’ susceptibility 

to heavy redemptions, improve their ability to manage and mitigate potential contagion from such 

redemptions, and increase the transparency of their risks, while preserving, as much as possible, 

the benefits of money market funds.

6 Id. at text accompanying n.130. 

7 See Comment Letter of Wells Fargo Funds Management, LLC (Sept. 16, 2013); Comment Letter 

of Hester Pierce & Robert Greene, Mercatus Center, George Mason University (Sept. 17, 2013); 

Comment Letter of The Dreyfus Corporation (Sept. 17, 2013). Comments on the 2013 Money 

Market Fund Proposing Release are available at: http://www.sec.gov/comments/s7-03-

13/s70313.shtml. 

8 See Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release 

No. 31166, (July 23, 2014) (“2014 Money Market Fund Adopting Release”), which is published 

elsewhere in this issue of the Federal Register. With this re-proposal, the Commission is not reopening comment on the amendments adopted in the 2014 Money Market Fund Adopting 

Release. 

Unless otherwise noted, all references to rule 2a-7 and Form N-MFP in this release refer to rule 

2a-7 and Form N-MFP as amended by the 2014 Money Market Fund Adopting Release. 

References to provisions of rule 2a-7 and Form N-MFP as they would be modified by the 

amendments we re-propose in this release are preceded by the term “re-proposed” (i.e., 

“re-proposed rule 2a-7”). 
6

raised a number of concerns with respect to the proposed amendments and suggested alternative 

rule text for some provisions. We have determined to re-propose amendments to replace 

references to credit ratings in rule 2a-7 and to modify provisions in Form N-MFP that reference 

credit ratings, in consideration of the mandate of Dodd-Frank Act section 939A, the comments 

on the 2011 Proposing Release, and the broader money market fund reforms we have adopted 

today.

9

A number of other federal agencies have also taken action to implement section 939A of 

the Dodd-Frank Act, including regulations proposed or adopted by the Commodity Futures 

Trading Commission, the Office of the Comptroller of the Currency (“OCC”), the National 

Credit Union Administration, the Federal Housing Finance Agency, the Department of Labor, 

and jointly by the OCC and Board of Governors of the Federal Reserve.10 In some of these 

initiatives, the references to ratings were or would be replaced with an alternative standard 

designed to retain the same degree of credit quality as reflected by the use of credit ratings. We 

have considered the actions taken by these other regulators in re-proposing the amendments 

discussed in this release. 

 9 As discussed above, the Commission is not re-opening comment on amendments to rule 2a-7 that 

were adopted in the 2014 Money Market Fund Adopting Release. See supra note 8. 

10 See OCC and Board of Governors of the Federal Reserve System, Regulatory Capital Rules: 

Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, 

Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline 

and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk 

Capital Rule [78 FR 62018 (Oct. 11, 2013)]; Department of Labor, Proposed Amendments to 

Class Prohibited Transaction Exemptions to Remove Credit Ratings Pursuant to the Dodd-Frank 

Wall Street Reform and Consumer Protection Act [78 FR 37572 (June 21, 2013)]; Federal 

Housing Finance Agency, Removal of References to Credit Ratings in Certain Regulations 

Governing the Federal Home Loan Banks [78 FR 30784 (May 23, 2013)]; National Credit Union 

Administration, Alternatives to the Use of Credit Ratings [77 FR 74103 (Dec. 13, 2012)]; OCC, 

Alternatives to the Use of External Credit Ratings in the Regulations of the OCC [77 FR 35253 

(June 13, 2012)]; Commodity Futures Trading Commission, Removing Any Reference to or 

Reliance on Credit Ratings in Commission Regulations; Proposing Alternatives to the Use of 

Credit Ratings [76 FR 44262 (July 25, 2011)]. 
7

B. Exclusion from the Issuer Diversification Requirement

As noted above, today we adopted amendments to rule 2a-7 as part of our broader money 

market fund reforms. These included amendments relating to the rule’s diversification

provisions, which require a money market fund to diversify its investments with respect to 

issuers of the securities it acquires, as well as providers of demand features and guarantees 

related to those securities. As discussed in the 2014 Money Market Fund Adopting Release,11

we sought comment on specific amendments we proposed as well as more broadly on the issuer 

and guarantor diversification requirements. Some of the comments we received in response 

prompted us to re-evaluate the exclusion to the issuer diversification requirement for securities 

subject to a guarantee issued by a non-controlled person. After careful consideration, and 

consistent with our reform goal of limiting concentrated exposure of money market funds to 

particular economic enterprises, we are proposing amendments that would eliminate this 

exclusion from the issuer diversification requirement of rule 2a-7. 

II. DISCUSSION

A. Rule 2a-7

The Investment Company Act and applicable rules generally require investment 

companies (“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.12 These valuation requirements are designed 

to prevent unfair share pricing from diluting or otherwise adversely affecting the interests of 

 11 See 2014 Money Market Fund Adopting Release, supra note 7, at section III.I.1.d.

12 See section 2(a)(41) of the Investment Company Act (defining value), rule 2a-4 (defining current 

net asset value), and rule 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).
8

investors.13 Rule 2a-7 under the Investment Company Act, which governs the operation of 

money market funds, exempts certain money market funds from these valuation requirements. 

Until today, all money market funds have been permitted to value their portfolio securities using 

the amortized cost method of valuation (“amortized cost method”) and to use the penny-rounding

method of pricing (“penny-rounding method”) to maintain a stable share price, typically $1.00 

per share.14 After the amendments adopted today go into effect, however, institutional prime and 

institutional municipal money market funds (collectively, “institutional prime funds”15) will be 

 13 If shares are sold or redeemed based on a net asset value that has 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 Compliance 

Programs of Investment Companies and Investment Advisers, Investment Company Act Release 

No. 26299 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)] at text accompanying and following 

nn. 39-40; see also 2014 Money Market Fund Adopting Release, supra note 8, at section III.D 

(providing valuation guidance aimed at, among other things, promoting stronger valuation 

practices that may lessen a money market fund’s susceptibility to heavy redemptions by 

decreasing the likelihood of sudden portfolio write-downs that could encourage financially 

sophisticated investors to redeem early).

14 Under 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 penny-rounding 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 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).

While most money market funds maintain a stable net asset value (“NAV”), some fund sponsors 

have established floating NAV money market funds in past years. See Northern Trust Files to 

Launch Investors Variable NAV Money Funds, Crane Data (Dec. 31, 2012), 

http://cranedata.com/archives/all-articles/4314/. 

15 As part of these amendments, the Commission has amended rule 2a-7 to rescind the exemptions 

that previously permitted institutional prime funds (i.e., money market funds other than 

government and retail money market funds, including municipal money market funds that fall 

under the definition of “retail money market fund” under rule 2a-7 as amended) to maintain a 

stable share price by use of amortized cost valuation and/or penny rounding. See 2014 Money 
9

required to sell and redeem shares at their net asset value calculated on the current market-based 

value of the securities in their underlying portfolios, rounded to the fourth decimal place (e.g., 

$1.000016), i.e., transact at a “floating” net asset value per share (“NAV”).17 

Rule 2a-7 contains “risk limiting” provisions designed to minimize the amount of risk a 

money market fund may assume.

18 For those funds that are permitted to maintain a stable share 

price, these conditions help reduce the deviation between a money market fund’s stabilized share 

price and the market value of its portfolio. For floating NAV funds, these conditions help to 

limit the risk of loss by, among other things, reducing principal volatility. Any fund that holds 

itself out to investors as a money market fund or the equivalent of a money market fund also 

must comply with these conditions.19 Among these conditions, rule 2a-7 limits a money market 

fund’s portfolio investments to “eligible securities,” or securities that have received credit ratings 

from the “requisite NRSROs” in one of the two highest short-term rating categories or 

comparable unrated securities.20 A requisite NRSRO is an NRSRO that a money market fund’s 

board of directors has designated for use (a “designated NRSRO”) and that issues credit ratings 

 

Market Fund Adopting Release, supra note 8, at section III.B. 

16 A money market fund could also price its shares at an equivalent or more precise level of 

accuracy for funds with a different share price. For example, a money market fund with a $10 

target share price could price its shares at $10.000. See rule 2a-7(c)(1)(ii). 

17 See 2014 Money Market Fund Adopting Release, supra note 8, at section III.B. We note that the 

compliance date for the floating NAV amendments adopted in the 2014 Money Market Fund 

Adopting Release is three years after the amendments’ effective date. 

18 Rule 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. Although 

institutional prime funds are no longer permitted to maintain a stable share price by use of 

amortized cost valuation and/or penny rounding, these funds remain subject to the “risk limiting” 

provisions of rule 2a-7.

19 See rule 2a-7(b) (prohibiting a fund from holding itself out as a money market fund unless it 

complies with the provisions of rule 2a-7, including the risk limiting conditions of rule 2a-7(d)). 

20 See rule 2a-7(d)(2)(i). The term “eligible security” is defined in rule 2a-7(a)(12).
10

that the board determines, at least annually, are sufficiently reliable for the fund to use in 

determining the eligibility of portfolio securities.21 Rule 2a-7 further restricts money market 

funds to securities that the fund’s board of directors (or the board’s delegate22) 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.”23 A money market fund is required to invest at least 97 percent of its total assets in 

eligible securities that have received a rating from the requisite NRSROs in the highest 

short-term rating category for debt securities (“first tier securities”24) or unrated securities of 

comparable quality.25

 21 See rule 2a-7(a)(11) (defining “designated NRSRO”); rule 2a-7(a)(24) (defining “requisite 

NRSRO”). 

22 A money market fund board may delegate minimal credit risk determinations, and typically does 

to the fund’s adviser, provided that the board retains sufficient oversight. See rule 2a-7(j); 

Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No. 

18005 (Feb. 20, 1991) [56 FR 8113 (Feb. 27, 1991)] (“1991 Adopting Release”) (permitting a 

money market fund’s board of directors to delegate the responsibility to make such 

determinations). See also INVESTMENT COMPANY INSTITUTE, REPORT OF THE MONEY MARKET 

WORKING GROUP (Mar. 17, 2009) (“ICI WORKING GROUP REPORT”), available at 

http://www.ici.org/pdf/ppr_09_mmwg.pdf, at Appendix I (“In our experience, Boards uniformly 

delegate the determination of minimal credit risks to their fund’s adviser.”); Comment Letter of 

Mutual Fund Directors Forum (Apr. 25, 2011) (“MFDF Comment Letter”) (“as we have 

consistently commented in the past, ... money fund boards will not themselves determine the 

creditworthiness of individual money market securities. Rather consistent with the provisions of 

rule 2a-7, boards will delegate this task in virtually all circumstances to the fund’s adviser.”). 

When discussing or requesting comment on policies, procedures or practices regarding minimal 

credit risk determinations, this release identifies fund advisers as making the determinations. 

Comments on the 2011 Proposing Release are available at: http://www.sec.gov/comments/s7-07-

11/s70711.shtm. 

23 Rule 2a-7(d)(2)(i). Thus, under the current rule, if 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

1991 Adopting Release, supra note 22, at text preceding n.18.

24 See rule 2a-7(a)(14) (defining “first tier security”). 

25 See rule 2a-7(d)(2)(ii) (prohibiting a fund immediately after the acquisition of any second tier 

security from holding more than 3% of its total assets in second tier securities). 
11

To implement the mandate of Dodd-Frank Act section 939A, we are re-proposing 

amendments to remove references to credit ratings in rule 2a-7. The re-proposed amendments 

would affect five elements of the rule: (i) determination of whether a security is an eligible 

security; (ii) determination of whether a security is a first tier security; (iii) credit quality 

standards for securities with a conditional demand feature; (iv) requirements for monitoring 

securities for ratings downgrades and other credit events; and (v) stress testing.26 The 

re-proposed amendments to rule 2a-7 reflect our consideration of commenters’ concerns and 

suggested modifications to our 2011 proposal, as well as the broader money market fund reforms 

we have adopted today. These re-proposed amendments are designed to remove references to, or 

requirement of reliance on, credit ratings in rule 2a-7 and to substitute standards of 

creditworthiness that we believe are appropriate.

27

1. Eligible Securities

In 2011, we proposed to eliminate the requirement that eligible securities be rated.28 

Instead, the Commission would have required that fund boards: first, determine whether 

securities are eligible securities based on minimal credit risks; and second, distinguish between 

first and second tier securities based on subjective standards similar to those the ratings agencies 

have developed to describe their ratings.29 We requested comments on this proposal, including 

comments on whether the Commission should limit money market funds to investing in 

 26 The re-proposed amendments also would make conforming amendments to rule 2a-7’s 

recordkeeping and reporting requirements. See re-proposed rule 2a-7(h)(3).

27 In addition, we are re-proposing a technical revision that would update a cross-reference in rule 

2a-7(a)(5) to reflect amendments to rule 5b-3 adopted last year. See supra note 4.

28 See 2011 Proposing Release, supra note 4. 

29 See id. at section II.A.1. 
12

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. 

A number of commenters objected to our proposal to retain the distinction between first 

and second tier securities.30 They asserted that these proposed amendments were (i) unworkable 

because of the difficulty in differentiating between first and second tier securities and

(ii) redundant because the amendments would require fund boards and their advisers to apply 

almost indistinguishable subjective judgments in determining whether securities were both 

eligible securities and first tier securities.31 Instead, they urged that we combine the two criteria 

and require a single, uniform, very high standard of quality.32 Specifically, several commenters 

suggested that the rule define an “eligible security” to mean a security with a remaining maturity 

 30 See, e.g., Comment Letter of Calvert Group, Ltd. (Apr. 25, 2011); Comment Letter of The 

Dreyfus Corporation (Apr. 25, 2011) (“Dreyfus Comment Letter”); Comment Letter of 

Investment Company Institute (Apr. 25, 2011) (“ICI Comment Letter”); Comment Letter of the 

Independent Directors’ Council (Apr. 25, 2011) (“IDC Comment Letter”); Comment Letter of 

Charles Schwab Investment Management Inc. (Apr. 25, 2011) (“Schwab Comment Letter”); 

Comment Letter of T. Rowe Price Associates, Inc. (Apr. 25, 2011) (“T. Rowe Price Comment 

Letter”); Comment Letter of Vanguard (Apr. 26, 2011) (“Vanguard Comment Letter”). But see 

Comment Letter of Federated Investors, Inc. (Apr. 25, 2011) (“Federated Comment Letter”) 

(supporting a distinction between first and second tier securities); Comment Letter of Invesco 

Advisers, Inc. (Apr. 25, 2011) (“Invesco Comment Letter”) (also supporting this distinction). 

31 See, e.g., Comment Letter of Fidelity Investments (Apr. 28, 2011) (“Fidelity Comment Letter”) 

(“Under the [p]roposed [r]ule, tier categorizations will no longer be determined by a clear, 

objective standard based on published credit rating agency ratings; rather, that determination will 

be put in the hands of myriad money market mutual funds, and a fund’s standards for the first and 

second tiers could change from month to month, or even week to week . . . result[ing] in less 

predictability and more confusion for investors seeking a stable and consistent product . . . .”); 

Schwab Comment Letter, supra note 30 (“[the retention of first tier and second tier securities,] 

given the elimination of credit ratings, is redundant with the investment adviser’s ongoing 

obligation to monitor for minimal credit risks.”). 

32 See ICI Comment Letter, supra note 30; Schwab Comment Letter, supra note 30; T. Rowe Price 

Comment Letter, supra note 30. But see MFDF Comment Letter, supra note 22 (advocating 

maintaining the distinction between first and second tier securities as a risk-limiting condition in 

rule 2a-7, but questioning the usefulness of the distinction between first and second tier securities 

when the proposed description of the difference “comes dangerously close to establishing a 

distinction that is more semantic than substantive”). 
13

of 397 calendar days or less that the fund’s board of directors (or the board’s delegate)

determines presents minimal credit risks and include a determination that the security’s issuer 

has “the highest capacity” or “a strong capacity” to meet its short-term obligations.

33 These 

commenters noted that securities meeting this uniform standard would be generally comparable 

to securities rated in the highest short-term rating category, which are first tier securities under 

current rule 2a-7.34 

After consideration of the comments and the statutory directive to eliminate references to 

ratings in our rules, and to seek consistent standards of creditworthiness to the extent feasible, we 

are re-proposing amendments to rule 2a-7. The re-proposal would combine the two risk criteria 

into a single standard, which would be included as part of rule 2a-7’s definition of eligible 

security.35 As re-proposed, an eligible security would be a security with a remaining maturity of 

397 calendar days or less that the fund’s board of directors (or its delegate) determines presents 

minimal credit risks, which determination includes a finding that the security’s issuer has an 

exceptionally strong capacity to meet its short-term obligations.36 Thus, under our re-proposal, a 

 33 See ICI Comment Letter, supra note 30 (recommending that the Commission adopt a “strong 

capacity” standard as an appropriate substitute for the credit rating references in rule 2a-7, noting 

that this standard reflects certain NRSROs’ highest short-term rating category, but also 

recommending that the Commission adopt an “exceptionally strong capacity” standard, which 

would be consistent with the definitions used by many NRSROs to define their highest long-term 

category, as an alternative substitute for the credit rating references in rule 5b-3); Vanguard 

Comment Letter, supra note 30 (advocating a determination that the issuer have the “highest 

capacity” to meet those obligations). 

34 See id.

35 Currently, the requirement that the fund board (or its delegate) determine that a security presents 

minimal credit risks is set forth in rule 2a-7(d)(2)(i) (requiring that the determination of minimal 

credit risk be based on factors pertaining to credit quality in addition to any rating assigned by a 

designated NRSRO). Under our re-proposal, the definition of eligible security in the rule would 

be restructured to include the minimal credit risk determination, and would include government 

securities and securities issued by money market funds, which are currently included in the 

definition of first tier security. See rule 2a-7(a)(14). 

36 Re-proposed rule 2a-7(a)(11). The re-proposal would make a conforming change to the 
14

money market fund would be limited to investing in securities that the fund’s board (or its 

delegate) has determined present minimal credit risks, notwithstanding any rating the security 

may have received. In addition, fund boards would no longer be required to designate 

NRSROs.37 The re-proposed determination is designed to retain a degree of credit risk similar to 

that in the current rule by allowing for gradations in credit quality among securities that meet a 

very high standard of credit quality,38 while limiting a money market fund’s investments in 

 

recordkeeping requirements under the rule to reflect that funds must retain a written record of the 

determination that a portfolio security is an eligible security, including the determination that it 

presents minimal credit risks. See re-proposed rule 2a-7(h)(3). 

The re-proposal also would eliminate the following defined terms from the rule: “designated 

NRSRO,” “first tier security,” “rated security,” “requisite NRSROs,” “second tier security,” and 

“unrated security.” It also would revise a number of provisions in the rule that currently 

reference these terms. See rule 2a-7(a)(12) (eligible security); rule 2a-7(d)(2) (portfolio quality); 

rule 2a-7(d)(3)(i)(A)(1) and (C) (portfolio diversification); rule 2a-7(d)(3)(iii)(C) (portfolio 

diversification); rule 2a-7(f)(1) (downgrades); rule 2a-7(h)(3) (record keeping and reporting); rule 

2a-7(j) (delegation). 

37 Nor would fund boards have to disclose designated NRSROs in the statement of additional 

information (“SAI”). We note that after enactment of the Dodd-Frank Act, our staff issued a 

no-action letter assuring money market funds and their managers that, in light of section 939A, 

the staff would not recommend enforcement action under section 2(a)(41) of the Act and rules 

2a-4 and 22c-1 thereunder if a money market fund board did not designate NRSROs and did not 

make related disclosures in the fund’s 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 SEC Staff 

No-Action Letter to the Investment Company Institute (Aug. 19, 2010).

38 See Fitch Ratings, Definitions of Ratings and Other Forms of Opinion, Jan. 2014, 

http://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pdf

(“Fitch Ratings Scales”), at 18 (stating that a rating of F1 “[i]ndicates the strongest intrinsic 

capacity for timely payments of financial commitments”); Moody’s Investor Service, Rating 

Symbols and Definitions, Apr. 2014, 

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 (“Moody’s 

Rating Definitions”), at 6 (stating that Prime-1 issuers “have a superior ability to repay short-term 

debt obligations”); Standard & Poor’s, Standard & Poor’s Ratings Definitions, Apr. 27, 2011, 

http://img.en25.com/Web/StandardandPoors/Ratings_Definitions.pdf (“S&P Ratings 

Definitions”), at 5 (stating that for a rating of A-1, “[t]he obligor’s capacity to meet its financial 

commitment on the obligation is strong”).
15

second tier securities to those the fund determines do not diminish the overall high quality of the 

fund’s portfolio.39 

As a result of the single standard and elimination of the distinction between first and 

second tier securities we are re-proposing, we also are re-proposing to remove the current 

prohibition on funds investing more than 3 percent of their portfolios in second tier securities.40 

In 2010, we imposed greater limits on investments in second tier securities because they may 

experience greater price volatility and illiquidity than first tier securities in times of market 

stress, which could adversely affect a money market fund’s ability to maintain a stable net asset 

value.41 Nevertheless, as we acknowledged in 2010, investors could benefit from these 

investments to the extent that a money market fund could conclude, after a thorough risk 

analysis, that second tier securities provide a higher yield than first tier securities while 

 39 A number of commenters expressed concern that the standards proposed in 2011 would 

simultaneously raise the standards for first tier securities and weaken the standards for second tier 

securities. See ICI Comment Letter, supra note 30; T. Rowe Price Comment Letter, supra note 

30; Dreyfus Comment Letter, supra note 30. Each of these comments notes that the proposed 

standard that a first tier security issuer or guarantor have the “highest” capacity to meet its 

short-term obligations could raise the standard above that in the current rule because this 

standard, if taken literally, does not contemplate any variation in creditworthiness among issuers 

of first tier securities. In contrast, the current definition of first tier security refers to issuers and 

guarantors falling within a certain range of capacities to repay their short-term obligations. These 

comments also maintain that the proposed standard for second tier securities, which was not tied 

to minimum rating requirements, could permit a fund to invest in securities that would not be 

eligible securities under the current rule.

40 See rule 2a-7(d)(2)(ii). In conforming changes, we re-propose to move the requirement currently 

in the definition of eligible security that the issuer of a demand feature or guarantee promptly 

notify the holder of the security in the event the demand feature or guarantee is substituted with 

another demand feature or guarantee (if such substitution is permissible) to the paragraphs of the 

rule that address securities subject to guarantees and conditional demand features. Compare rule 

2a-7(a)(12)(iii)(B) with re-proposed rules 2a-7(d)(2)(ii) and 2a-7(d)(2)(iii)(D).

41 See Money Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 23, 2010) 

[75 FR 10060 (Mar. 4, 2010)] (“2010 Money Market Fund Adopting Release”), at nn.52-53 and 

accompanying text (explaining that second tier securities are subject to greater spread risk and 

trade in thinner markets than first tier securities and noting that second tier securities are more 

likely to be downgraded than first tier securities). 
16

maintaining a risk profile consistent with the fund’s investment objectives.42 By eliminating the 

rule’s current limitations on investments in second tier securities, funds theoretically could invest 

in second tier securities to a greater extent than permitted today.43 The re-proposed standard, 

however, is designed to preserve the current degree of risk limitation in rule 2a-7 without 

reference to credit ratings by requiring a fund’s board (or its delegate) to determine that the 

issuer of a portfolio security has an exceptionally strong capacity to meet its short-term 

obligations, a finding that some boards or fund advisers may determine can be met by second tier 

rated securities (but only of the highest quality).44

We do not believe that securities that are rated in the third-highest category for short-term 

ratings (or comparable unrated securities), whose issuers need only have an acceptable or 

adequate ability to repay short-term obligations under rating agency standards, would satisfy the 

re-proposed “exceptionally strong capacity” standard.

45 We therefore believe, as a practical 

matter, that the re-proposed standard would generally preclude funds from determining that 

securities rated “third tier” (or comparable unrated securities) would be eligible securities under 

rule 2a-7.

 42 See id. at text accompanying and following n.54.

43 See rule 2a-7(c)(3)(ii). Money market funds also are limited from investing more than 1⁄2% of 

their assets in second tier securities of a single issuer and 2.5% of their portfolios in second tier 

securities issued, guaranteed or subject to a demand feature issued by the same entity. See rule 

2a-7(d)(3)(i)(C) and rule 2a-7(d)(3)(iii)(C). These limits also would be eliminated under our 

re-proposal. 

44 See ICI Comment Letter, supra note 30 (stating that the Dodd-Frank Act “does not leave any 

means of explicitly limiting acquisitions of securities rated below the highest category [but a 

single, uniform, very high standard] would at least require money market funds to determine that 

such securities do not diminish the overall credit quality of their portfolios”).

45 See Fitch Ratings Scales, supra note 38, at 18 (a rating of F3 indicates the “intrinsic capacity for 

timely payment of financial commitments is adequate.”); Moody’s Rating Definitions, supra note 

38, at 6 (“Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay 

short-term debt obligations.”); S&P Ratings Definitions, supra note 38, at 5 (“A short-term 

obligation rated ‘A-3’ exhibits adequate protection parameters.”). 
17

In determining whether a security presents minimal credit risks, a fund adviser could take 

into account credit quality determinations prepared by outside sources, including NRSRO 

ratings, that the adviser considers are reliable in assessing credit risk. In considering such 

sources, an adviser should understand the particular NRSRO’s methodology for determining the 

rating at issue and make an independent judgment of credit risks, and it should consider any

outside source’s record with respect to evaluating the types of securities in which the fund 

invests.

We request comment on consolidating the credit quality standard and eliminating the 

distinction between first and second tier securities. Do commenters believe that the re-proposed 

standard is an appropriate standard of creditworthiness for rule 2a-7? Is the re-proposed 

“exceptionally strong capacity” standard an appropriate substitute for credit ratings in rule 2a-7? 

Is there another standard that would be a more appropriate substitute for credit ratings in rule 

2a-7? Would the re-proposed consolidated standard, which requires a minimum credit risk 

determination and includes a finding that the issuer has an “exceptionally strong capacity” to 

meet its short-term obligations, provide sufficient clarity for money market fund boards and 

advisers making credit quality determinations? Would such a standard impact investors’ 

understanding of credit quality? Would it promote greater or less uniformity in credit quality 

determinations among funds than the standard we proposed in 2011? Would the 2011 proposal 

establish risk limitations more in line with those provided under the current rule? Is there an 

alternative standard for making credit quality determinations that is more objective than the 

re-proposed standard? We note that no commenters provided suggestions when we sought 

comment in the 2011 proposal on alternatives that would provide a more objective evaluation of 

credit quality; have commenters’ positions on this issue evolved since 2011?
18

We also request specific comment on the finding, required as part of the minimal credit 

risk determination, that the security’s issuer has an exceptionally strong capacity to meet its 

short-term financial obligations. What impact is this proposed standard likely to have on the 

overall risk of money market fund portfolios? What impact is this re-proposed “exceptionally 

strong capacity” standard likely to have on money market fund acquisitions of first tier 

securities? Does it permit sufficient variation among the most creditworthy issuers? Similarly, 

what impact is the re-proposed “exceptionally strong capacity” standard likely to have on money 

market fund acquisitions of second tier securities? Will this re-proposed standard, and the 

elimination of the distinction between first and second tier securities in rule 2a-7, lead money 

market funds to acquire more second tier securities than they do currently? Would a finding that 

a security’s issuer instead has a “superior,” “very strong,” or “strong” capacity to meet its shortterm financial obligations better reflect the current risk limitation in rule 2a-7, or would it result 

in a standard that is less stringent than under the current rule? Our goal is to preserve a similar 

degree of risk limitation as in the current rule, and we note that the phrase “strong capacity” 

reflects the standard that one NRSRO articulates for securities with a second tier rating.46 

As discussed above, we believe that the re-proposed standard would preclude funds from 

investing in securities rated third tier (or comparable unrated securities).47 Do funds agree? We 

do not believe that the re-proposed standard should significantly affect money market funds’ 

investment in unrated securities because we understand that money market funds hold few 

unrated securities.

48 We request comment about the potential reasons for this current practice. 

 46 See Moody’s Rating Definitions, supra note 38, at 6 (“Issuers (or supporting institutions) rated 

Prime-2 have a strong ability to repay short-term debt obligations.”).

47 See supra note 45 and accompanying text.

48 Based on Form N-MFP filings from February 28, 2014, we estimate that 0.005% of money 
19

Specifically, is there currently a limited supply of unrated securities that qualify as eligible 

securities, or do money market funds hold few unrated securities for other reasons (e.g., investor 

or board of directors’ requirements for ratings)? Would money market funds invest in more 

unrated securities under our re-proposed amendments?

As discussed in the 2014 Money Market Fund Adopting Release, we recognize that 

certain of the amendments to rule 2a-7 adopted today could affect money market fund managers’ 

investment decisions. Under the newly adopted amendments to rule 2a-7, certain money market 

funds would be required to transact using a floating NAV. Managers of floating NAV funds, in 

an effort to limit volatility, might further limit their investments in relatively riskier portfolio 

securities, or conversely, in an effort to increase yield, might increase their investments in such 

securities. As described in more detail below, we request comment on the extent to which the 

re-proposed standard may affect the potential incentive for certain funds to invest in riskier 

securities (i.e., those securities that would be second tier under current rule 2a-7). Would a 

finding that issuers have an “exceptionally strong capacity” to meet their short-term obligations 

mitigate any risks associated with floating NAV funds’ potential incentives to invest in riskier 

securities? Would a finding that issuers have a “superior,” “very strong,” or “strong” repayment 

ability be a sufficient risk mitigant? 

Also under the amendments to rule 2a-7 we adopted today, all money market funds 

(including those still able to transact at a stable NAV) will be required to disclose daily the 

 

market fund assets under management were invested in unrated securities. Many securities that 

funds list as unrated in Form N-MFP filings actually are issued as part of a rated program or have 

an issuer or guarantor that is rated. See rule 2a-7(a)(22)(i), (ii) (defining “rated security” to 

include a security that has received the requisite short-term rating from a designated NRSRO, or 

that is issued by an issuer or has a guarantee with such a rating). 
20

market value of their portfolios generally to the fourth decimal place.49 If a money market fund 

were to invest to a greater extent than its peer funds in riskier second tier securities, then that 

fund would have greater volatility in price or market value of its shares, as compared to the 

volatility and price of its peer funds’ shares. We request comment on whether potential 

incentives for increased investments in riskier second tier securities would be reduced by market 

discipline resulting from these newly required disclosures. 

Rule 2a-7 does not set forth any specific factors that a board (or its delegate) should 

consider in determining minimal credit risks. In response to our 2011 proposal to replace an 

objective standard of an NRSRO rating for eligible securities with a subjective standard, some 

commenters advocated that we develop specific guidance in connection with assessments of 

credit quality.50 We have provided guidance before regarding certain factors to be considered in 

minimal credit risk determinations for asset-backed securities under rule 2a-7 and in our release 

removing references to credit ratings from the net capital rule under the Securities Exchange Act 

of 1934.51 Commission staff also has provided guidance in the past on factors that a board could 

consider in performing credit assessments under rule 2a-7.52 

 49 See rule 2a-7(h)(10)(iii); 2014 Money Market Fund Adopting Release, supra note 8, at section 

III.E.9.c. To the extent a money market fund prices its shares using a share price other than 

$1.0000, it would be required to disclose its share price at an equivalent level of accuracy. See 

rule 2a-7(h)(10)(iii). See also supra note 16 and accompanying text. 

50 See Comment Letter of Better Markets (Apr. 25, 2011); Comment Letter of Americans for 

Financial Reform (Apr. 25, 2011).

51 See 2010 Money Market Fund Adopting Release, supra note 41, at section II.3; Removal of 

Certain References to Credit Ratings Under the Securities Exchange Act of 1934, Securities 

Exchange Act Release No. 71194 (Dec. 27, 2013) [79 FR 26550 (Jan. 8, 2014)] (“2013 Net 

Capital Rule Amendments”) at section II.B.1.a.iii (listing certain factors a broker-dealer could 

consider, as appropriate, under policies and procedures it establishes to assess whether a security 

or money market instrument has only a minimal amount of credit risk for purposes of rule 15c3-1 

under the Securities Exchange Act of 1934). See also Comment Letter of Consumer Federation 

of America (Apr. 25, 2011) (suggesting the proposed standard could provide a limitation on 

money market fund firms’ investments by requiring fund boards to review specific types of 
21

Our staff also has had opportunities to observe how money market fund advisers evaluate 

minimal credit risk through its examinations of money market funds. Although staff has noted a 

range in the quality and breadth of credit risk analyses among the money market funds examined, 

staff has also observed that when performing their minimal credit risk determinations, most of 

the advisers to these funds evaluate some common factors that bear on the ability of an issuer or 

guarantor to meet its short-term financial obligations.53 Based on the staff’s experience and in 

consideration of general criteria included in recommendations by an industry money market 

working group of best practices for making minimal credit risk determinations,

54 we believe that 

an assessment of the strength of any issuer’s or guarantor’s ability to satisfy these obligations 

generally should include an analysis of the following factors to the extent appropriate: (i) the 

issuer or guarantor’s financial condition, i.e., analysis of recent financial statements, including 

trends relating to cash flow, revenue, expenses, profitability, short-term and total debt service 

coverage, and leverage (including financial leverage and operating leverage);

55 (ii) the issuer or 

guarantor's liquidity, including bank lines of credit and alternative sources of liquidity; (iii) the 

 

objective data that credit rating agencies and other risk assessment specialists consider in 

developing credit ratings); Comment Letter of Colorado Public Employees’ Retirement 

Association (Apr. 21, 2011) (advocating that any approach to replacing credit ratings contain 

quantitative and qualitative elements with certain specific characteristics).

52 See Letter to Registrants from Kathryn McGrath, Director, Division of Investment Management, 

SEC (May 8, 1990) (“1990 Staff Letter”); Letter to Matthew Fink, President, Investment 

Company Institute from Kathryn McGrath, Director, Division of Investment Management, SEC 

(Dec. 6, 1989) (“1989 Staff Letter”). 

53 Under the current rule, a security may be determined to be an eligible security or a first tier 

security based solely on whether the guarantee is an eligible security or a first tier security, as the 

case may be. Rule 2a-7(d)(2)(ii).

54 ICI WORKING GROUP REPORT, supra note 22, at Appendix I. 

55 Under the current rule, when a security’s maturity is determined with reference to a demand 

feature, the fund’s board of directors must perform an ongoing review of the security’s continued 

minimal credit risks, and that review must be based on, among other things, financial data for the 

most recent fiscal year of the demand feature’s issuer. Rule 2a-7(g)(3).
22

issuer or guarantor’s ability to react to future events, including a discussion of a “worst case 

scenario,” and its ability to repay debt in a highly adverse situation; and (iv) the strength of the 

issuer or guarantor’s industry within the economy and relative to economic trends as well as the 

issuer or guarantor’s competitive position within its industry (including diversification in sources 

of profitability, if applicable).

56 In addition, a minimal credit risk evaluation could include an 

analysis of whether the price and/or yield of a security is similar to that of other securities in the 

fund’s portfolio.57 

 56 Many of these considerations have been included in staff guidance as well as in best practices for 

determining minimal credit risk set forth in the Report of the Money Market Working Group 

submitted to the Board of Governors of the Investment Company Institute in 2009. See 1990 

Staff Letter, supra note 52 (advising registrants that in the staff’s view a board of directors can 

only make a minimal credit risk determination regarding a security based on an analysis of the 

issuer’s capacity to repay its short-term debt, which analysis would include: (i) a cash flow 

analysis; (ii) an assessment of the issuer's ability to react to future events, including a review of 

the issuer's competitive position, cost structure and capital intensiveness; (iii) an assessment of 

the issuer's liquidity, including bank lines of credit and alternative sources of liquidity to support 

its commercial paper; and (iv) a "worst case scenario" evaluation of the issuer's ability to repay its 

short-term debt from cash sources or asset liquidations in the event that the issuer's backup credit 

facilities are unavailable); 1989 Staff Letter, supra note 52 (advising that in making its minimal 

credit risk determination, a money market fund board of directors should take into account certain 

kinds of factors, such as the issuer's or guarantor's current and future credit quality; the strength of 

the issuer's or guarantor's industry within the economy and relative to economic trends; the 

issuer's or guarantor's market position within its industry; cash flow adequacy; the level and 

nature of earnings; financial leverage; asset protection; the quality of the issuer's or guarantor's 

accounting practices and management; the likelihood and nature of event risks, and the effect of 

any significant ownership positions; the degree of financial flexibility of the issuer or guarantor to 

cope with unexpected challenges and to take advantage of opportunities, as well as an assessment 

of the degree and nature of event risks; the likelihood of a sudden change of credit quality from 

external and internal sources); ICI WORKING GROUP REPORT, supra note 22, at Appendix I 

(recommending the same general criteria set forth in the 1990 Staff Letter for assessing the credit 

risks of issuers and securities in procedures for determining minimal credit risks as well as 

consideration of financial and other information provided by the issuer). See also OCC Guidance 

on Due Diligence Requirements in Determining Whether Securities are Eligible for Investment, 

77 FR 35259 (June 13, 2012) (“OCC Guidance”) (matrix of examples of factors for national 

banks and federal savings associations to consider as part of a robust credit risk assessment 

framework (“OCC credit risk factors”) for certain investment securities includes capacity to pay 

and assess operating and financial performance levels and trends). 

57 See 2013 Net Capital Rule Amendments, supra note 51, at second paragraph preceding n.99.
23

The staff has also observed other factors that money market fund advisers may take into 

account when evaluating minimal credit risks of particular asset classes. To the extent 

applicable, fund advisers may wish to consider the following additional factors:

• For municipal securities: (i) sources of repayment; (ii) issuer demographics 

(favorable or unfavorable);58 (iii) the issuer’s autonomy in raising taxes and revenue; 

(iv) the issuer’s reliance on outside revenue sources, such as revenue from a state or 

federal government entity; and (v) the strength and stability of the supporting 

economy.59

• For conduit securities under rule 2a-7:

60 analysis of the underlying obligor as 

described above for all securities except asset backed securities (including asset 

backed commercial paper).

61 

• For asset backed securities (including asset backed commercial paper): (i) analysis of 

the underlying assets to ensure they are properly valued and that there is adequate 

coverage for the cash flows required to repay the asset backed security under various 

market conditions; (ii) analysis of the terms of any liquidity or other support 

provided; and (iii) legal and structural analyses to determine that the particular asset 

 58 Demographics could include considerations such as the type, size, diversity and growth or decline 

of the local government’s tax base, including income levels of residents, and magnitude of 

economic activity.

59 See 1989 Staff Letter, supra note 52 (additional factors such as sources of repayment, autonomy 

in raising taxes and revenue, reliance on outside revenue sources and strength and stability of the 

supporting economy should be considered with respect to tax-exempt securities); OCC Guidance, 

supra note 56. 

60 Under rule 2a-7, a “conduit security” means a security issued by a municipal issuer involving an 

arrangement or agreement entered into, directly or indirectly, with a person other than a 

municipal issuer, which arrangement or agreement provides for or secures repayment of the 

security. Rule 2a-7(a)(7). A “municipal issuer” is defined under the rule to mean a state or 

territory of the United States (including the District of Columbia), or any political subdivision or 

public instrumentality of a state or territory of the United States. Id. A conduit security does not 

include a security that is: (i) fully and unconditionally guaranteed by a municipal issuer; 

(ii) payable from the general revenues of the municipal issuer or other municipal issuers (other 

than those revenues derived from an agreement or arrangement with a person who is not a 

municipal issuer that provides for or secures repayment of the security issued by the municipal 

issuer); (iii) related to a project owned and operated by a municipal issuer; or (iv) related to a 

facility leased to and under the control of an industrial or commercial enterprise that is part of a 

public project which, as a whole, is owned and under the control of a municipal issuer. Id.

61 See OCC Guidance, supra note 56 (OCC credit risk factors for revenue bonds include 

consideration of the obligor’s financial condition and reserve levels).
24

backed security involves no more than minimal credit risks for the money market 

fund.

62 

• For other structured securities, such as variable rate demand notes,63 tender option 

bonds,64 extendible bonds65 or “step up” securities,66 or other structures, in addition to 

analysis of the issuer or obligor’s financial condition, as described above, analysis of 

the protections for the money market fund provided by the legal structure of the 

security.67

• For repurchase agreements that are “collateralized fully” under rule 2a-7,68 an 

assessment of the creditworthiness of the counterparty,69 of the volatility and liquidity 

 62 See 2010 Money Market Fund Adopting Release, supra note 41, at section II.A.3 (citing 

Revisions to Rules Regulating Money Market Funds, Investment Company Act Release No. 

21837 (Mar. 21, 1996) [61 FR 13956 (Mar. 28, 1996)] (“1996 Money Market Fund Adopting 

Release”) at section II.E.4).

63 A variable rate demand obligation (which includes variable rate demand notes) is a security for 

which the interest rate resets on a periodic basis and holders are able to liquidate their security 

through a “put” or “tender” feature, at par. To ensure that the securities are able to be “put” or 

“tendered” by a holder in the event that a remarketing agent is unable to remarket the security, a 

VRDO typically operates with a liquidity facility – a Letter of Credit or Standby Bond Purchase 

Agreement – that ensures that an investor is able to liquidate its position. See Electronic 

Municipal Market Access, Understanding Variable Rate Demand Obligations, 

http://emma.msrb.org/EducationCenter/UnderstandingVRDOs.aspx. 

64 A tender option bond is an obligation that grants the bondholder the right to require the issuer or 

specified third party acting as agent for the issuer (e.g., a tender agent) to purchase the bonds, 

usually at par, at a certain time or times prior to maturity or upon the occurrence of specified 

events or conditions. See Municipal Securities Rulemaking Board, Glossary of Municipal 

Securities Terms, Tender Option Bond, http://www.msrb.org/glossary/definition/tender-optionbond.aspx. Tender option bonds are synthetically created by a bond dealer or other owner of a 

long-term municipal obligation purchased in either the primary or secondary markets, or already 

in a portfolio. 

65 An extendible bond is a long-term debt security with an embedded option for either the investor 

or the issuer to extend its maturity date. To qualify as an eligible security under rule 2a-7, the 

issuer must not have the right to extend the maturity of the bond so that it is more than 397 days 

to maturity at any time. Typically, if an extendible bond is of the type that qualifies as an eligible 

security under rule 2a-7, a money market fund will have the option to either extend the maturity 

of the bond to no more than 397 days in the future, or elect not to extend, in which case the 

bond’s maturity must be no longer than 397 days at that time. 

66 A “step up” security pays an initial interest rate for the first period, and then a higher rate for the 

following periods. 

67 See OCC Guidance, supra note 56 (OCC credit risk factors for structured securities include 

evaluation and understanding of specific aspects of the legal structure including loss allocation 

rules, potential impact of performance and market value triggers, support provided by credit and 

liquidity enhancements, and adequacy of structural subordination).

68 Under rule 2a-7(a)(5), for a repurchase agreement to be “collateralized fully,” among other 

requirements, the collateral must consist entirely of cash items or Government securities. See rule 
25

of the market for collateral, if the collateral is a government agency collateralized 

mortgage obligation or mortgage backed security, or other non-standardized security, 

and the process for liquidating collateral.70

• For repurchase agreements that are not fully collateralized under rule 2a-7, a financial 

analysis and assessment of the minimal credit risk of the counterparty, as described 

above, without regard to the value of the collateral, and consideration of the type of 

collateral accepted and the ability of the money market fund to liquidate the 

collateral.71

This list is not meant to be exhaustive. We recognize that the range and type of specific 

factors appropriate for consideration could vary depending on the category of issuer and 

particular security or credit enhancement under consideration, and may include any factors in 

addition to those discussed above that the board determines appropriate to the credit 

assessment.72 Individual purchases may require more or less analysis depending on the 

 

5b-3(c)(1). 

69 See rule 2a-7(d)(3)(ii)(A) (requiring the fund’s board of directors to evaluate the creditworthiness 

of the seller of a fully collateralized repurchase agreement when looking to the collateral issued 

for purposes of determining issuer’s diversification under the rule).

70 See ICI WORKING GROUP REPORT, supra note 22, at Appendix I (“ When repayment of an 

obligation (such as a repurchase agreement) may depend on the liquidation of securities or other 

assets (Collateral), the credit analysis should include an assessment of the volatility and liquidity 

of the market for the Collateral, especially in times of market stress. The analysis also should 

consider the process for liquidating the Collateral, who would be likely buyers of the Collateral, 

and how long it might take to complete the liquidation. These factors should be included in the 

analysis of the Collateral’s potential volatility and liquidity.”). 

71 See id.

72 See supra text accompanying and following notes 55-70. As noted above, money market fund 

boards of directors typically delegate minimal credit risk determinations to the fund’s adviser. 

See supra note 22. Rule 2a-7 requires money market fund boards to establish and periodically 

review written procedures regarding the delegation (including guidelines for determining whether 

securities present minimal credit risks) and to take measures reasonably necessary to assure that 

the guidelines and procedures are being followed. See rule 2a-7(j); see also rule 38a-1 (requiring 

funds to adopt and implement written policies and procedures reasonably designed to prevent a

fund from violating the federal securities laws). These policies and procedures generally should 

identify the process to be followed by the adviser in performing credit assessments, including, as 

appropriate, the types of data to be used or factors to be considered with respect to particular 

securities and the person(s) or position(s) responsible under the delegated authority. They also 

generally should provide for regular reporting to the board, as appropriate, about these 

evaluations, to allow the board to provide effective oversight of the process. See 2013 Ratings 

Removal Adopting Release, supra note 4, at n.50; 1983 Adopting Release, supra note 14, at 
26

security’s risk characteristics. As discussed in greater detail below, we also would expect that 

the written record of the minimal credit risk determination generally would address any factors 

considered and the analysis of those factors.73

We request comment on the factors discussed above for consideration, as appropriate, in

the determinations that portfolio securities present minimal credit risk. Do commenters agree 

that these are relevant factors for advisers to consider in assessing whether portfolio securities 

present minimal credit risk? Are the factors sufficiently clear? Would it be helpful to describe 

any of the factors with additional specificity? To what extent do investment advisers currently 

consider these factors in making minimal credit risk determinations? Do commenters agree with 

our understanding that consideration of these factors is consistent with current industry practice? 

Are there factors we should omit or other factors we should consider including, such as credit 

spreads or the issuer or guarantor’s risk management structure?74 If so, why? In light of the 

amendments being considered in this re-proposal, would the guidance contribute to more 

consistency in the quality and breadth of money market funds’ credit analyses? If so, would it 

reduce the potential for significant variations in money market funds’ risk profiles?75 Should the 

factors address other asset classes? If so, what types of securities should be included and what 

factors would be appropriate for consideration? We do not presently propose to codify the 

factors as part of rule 2a-7. We request comment, however, on whether codifying these factors 

would further ensure that funds use objective factors and market data in making credit quality 

 

paragraph preceding paragraph accompanying n.3.

73 See infra section II.A.3; proposed rule 2a-7(h)(3).

74 These factors have been included in other guidance on making creditworthiness determinations. 

See 2013 Net Capital Rule Amendments, supra note 51; 1989 Staff Letter, supra note 52; OCC 

Guidance, supra note 56.

75 See Dreyfus Comment Letter, supra note 30. 
27

determinations and thereby promote uniformity in making minimal credit risk determinations 

and/or assist money market fund managers in understanding their obligations pertaining to 

portfolio quality under rule 2a-7. 

2. Conditional Demand Features

Rule 2a-7 limits money market funds to investing in securities with remaining maturities 

of no more than 397 days.76 A long-term security subject to a conditional demand feature77

(“underlying security”), however, 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.78 The rule currently requires 

this analysis of both the short-term and long-term credit aspects of the demand instrument 

because a security subject to a conditional demand feature combines both short-term and 

long-term credit risks.

79 Our re-proposal would require a similar analysis, but consistent with 

 76 See rule 2a-7(a)(12) (defining “eligible security” to mean, among other things, a security with a 

remaining maturity of 397 calendar days or less).

77 A 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); rule 2a-7(a)(30) and 

re-proposed rule 2a-7(a)(25) (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, at the later of the time of exercise or the settlement of the transaction, 

paid within 397 calendar days of exercise and upon no more than 30 calendar days’ notice. Rule 

2a-7(a)(9). 

78 Rule 2a-7(d)(2)(iv). Although underlying securities are generally long-term securities when 

issued originally, they become short-term securities when the remaining time to maturity is 397 

days or less.

79 The quality of a conditional demand instrument depends both on the ability of the issuer of the 

underlying security to meet scheduled payments of principal and interest and upon the availability 
28

section 939A of the Dodd-Frank Act would remove the requirement in the rule that the fund 

board (or its delegate) consider credit ratings of underlying securities.80 

Under our re-proposal, a fund would have to determine, as with any short-term security, 

that the conditional demand feature is an eligible security.81 In addition, a fund’s board of 

directors (or its delegate) would have to evaluate the long-term risk of the underlying security 

and determine that it (or its guarantor) “has a very strong capacity for payment of its financial 

commitments.”82 This standard is similar to those articulated by credit ratings agencies for 

long-term securities assigned the second-highest rating.83 An issuer that the board determines

 

of sufficient liquidity to allow a holder of the instrument to recover the principal amount and 

accrued interest upon exercise of the demand feature. See Acquisition and Valuation of Certain 

Portfolio Instruments by Registered Investment Companies, Investment Company Act Release 

No. 14607 (July 1, 1985) [50 FR 27982 (July 9, 1985)], at n.33. The rule permits the 

determination of whether a security subject to an unconditional demand feature is an eligible or 

first tier security to be based solely on whether the unconditional demand feature is an eligible or 

first tier security because credit and liquidity support will be provided even in the event of default 

of the underlying security. See rule 2a-7(d)(2)(iii). 

80 In a conforming change, we propose to remove two provisions in current rule 2a-7 that reference 

credit ratings in connection with securities subject to a demand feature or guarantee of the same 

issuer that are second tier securities: rule 2a-7(d)(3)(i)(C) (limiting a fund’s 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(f)(1)(iii) (providing that if, as a result of a 

downgrade, more than 2.5% of a fund’s total assets are invested in securities issued by or subject 

to demand features from a single institution that are second tier securities, a fund must reduce its 

investments in these securities to no more than 2.5% of total assets by exercising the demand 

feature at the next succeeding exercise date(s)). In other conforming changes, we are 

re-proposing to amend two rules under the Act that reference the definition of “demand feature” 

and “guarantee” under rule 2a-7, which references would change under our re-proposed 

amendments. Specifically, we propose to amend: (i) rule 12d3-1(d)(7)(v), to replace the 

references to “rule 2a-7(a)(8)” and “rule 2a-7(a)(15)” with “§ 270.2a-7(a)(9)” and 

“§ 270.2a-7(a)(16)”; and (ii) rule 31a-1(b)(1), to replace the phrase “(as defined in 

§ 270.2a-7(a)(8) or § 270.2a-7(a)(15) respectively)” with “(as defined in § 270.2a-7(a))(9) or 

§ 270.2a-7(a)(16) respectively)”. 

81 See re-proposed rule 2a-7(d)(2)(iii)(A).

82 Re-proposed rule 2a-7(d)(2)(iii)(C). An underlying security that is a short-term security (because 

its remaining maturity is less than 397 days, although its original maturity may have been longer) 

also would have to meet the re-proposed standard.

83 See Fitch Ratings Scales, supra note 38, at 12, 15 (for corporate finance obligations, “‘AA’ 
29

has 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 standard. 

We do not believe that securities that are rated in the third-highest category for long-term ratings 

(or comparable unrated securities), which have expectations of low credit risk or whose obligors 

have only a strong capacity to meet their financial commitments, would satisfy the proposed 

standard for underlying securities.84 In making the credit quality determinations required under 

the re-proposed amendment, a fund adviser could continue to take into account analyses 

provided by third parties, including ratings provided by ratings agencies, that it considers reliable 

for such purposes.85 

The amendments that we are re-proposing to the provisions of rule 2a-7 affecting 

securities subject to a conditional demand feature are designed to reflect the same standard as the 

amendment we proposed in 2011.86 Specifically, in 2011, we proposed to remove the credit 

rating requirement from the rule 2a-7 provision setting forth the conditions under which a 

security subject to a conditional demand feature may be determined to be an eligible security and 

 

ratings denote expectations of very low credit risk. They indicate very strong capacity for 

payment of financial commitments;” for structured, project and public finance obligations, “‘AA’ 

ratings denote expectations of very low default risk. They indicate very strong capacity for 

payment of financial commitments.”); Moody’s Rating Definitions, supra note 38, at 5 (on the 

global long-term rating scale, obligations “rated Aa are judged to be of high quality and are 

subject to very low credit risk.”); and S&P Ratings Definitions, supra note 38, at 3 (“An 

obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The 

obligor's capacity to meet its financial commitment on the obligation is very strong.”). 

84 See Moody’s Rating Definitions, supra note 38, at 5 (long-term obligations “rated A are judged to 

be upper-medium grade and are subject to low credit risk.”); Fitch Ratings Scales, supra note 38, 

at 12 (long-term “A ratings denote expectations of low credit risk. The capacity for payment of 

financial commitments is considered strong.”); S&P Ratings Definitions, supra note 38, at 4 (a 

long-term obligation “rated ‘A’ is somewhat more susceptible to the adverse effects of changes in 

circumstances and economic conditions than obligations in higher-rated categories. However, the 

obligor's capacity to meet its financial commitment on the obligation is still strong.”).

85 See supra paragraph following note 45.

86 See 2011 Proposing Release, supra note 4, at section II.A.2. 
30

instead require that the fund’s board (or its delegate) determine that the underlying security be of 

high credit quality and subject to very low credit risk.87 The re-proposed standard differs in 

phrasing to more closely parallel the required finding in our re-proposed minimal risk 

determination.88 Comments we received on the 2011 proposal all urged us to retain the 

requirement that a security subject to a demand feature has received at least a second tier rating, 

to limit the risk that a demand feature might terminate if its underlying security receives a rating 

below investment grade (i.e., if the underlying security receives a downgrade of two ratings 

categories under the current rule).89 

The re-proposed amendments are consistent with section 939A of the Dodd-Frank Act 

regarding the removal of ratings. Nevertheless, we recognize the risks of a money market fund 

investing in securities whose eligibility as portfolio securities depends on a demand feature that 

would terminate if downgraded by a single rating category, and we believe it would be prudent 

for a money market fund to avoid investing in these securities. A downgrade of this type would 

result in the loss of the demand feature, which would render the security no longer eligible for 

the portfolio and expose the fund to the increased interest rate risk associated with a long-term 

security. For this reason, we would retain the current rule 2a-7 requirements that a security 

subject to a conditional demand feature is an eligible security only if at the time it is acquired, 

the fund’s board (or the board’s delegate) determines that there is minimal risk that the 

circumstances that would result in the conditional demand feature terminating will occur, and 

that either (i) the conditions limiting the demand feature’s exercise can be monitored, or (ii) the 

 87 See id. at n.36 and accompanying text. 

88 See Schwab Comment Letter, supra note 30 (querying whether different language for proposed 

descriptions of second tier securities was intended to suggest different standards). 

89 See, e.g., Federated Comment Letter, supra note 30; Fidelity Comment Letter, supra note 31; ICI 

Comment Letter, supra note 30.
31

fund otherwise receives notice of the occurrence of a limiting condition and the opportunity to 

exercise the demand feature in accordance with its terms.90 

We request comment on our proposed credit quality standard for securities with a 

conditional demand feature. Do commenters believe that this is an appropriate standard of 

creditworthiness? Is it consistent with our goal of retaining a similar degree of risk limitation as 

in the current rule? Are there alternative standards that would provide a more robust or objective 

evaluation of credit quality for an underlying security? How should such criteria be applied 

and/or used? Are there alternative subjective standards that would provide meaningful 

distinctions among underlying securities? Is our understanding of a fund’s ability to monitor for 

conditions that would terminate a demand feature correct? How do funds currently satisfy this

monitoring condition? Are we correct in our assumption that removing references to ratings in 

the credit quality requirement for underlying securities is not likely to change fund investment 

policies significantly?

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 determines is in the best interests of the fund and 

 90 See re-proposed rule 2a-7(d)(2)(iii)(B) (providing that a security subject to a conditional demand 

feature is an eligible security only if, at the time of the acquisition of the underlying security, the 

money market fund’s board of directors has determined that there is minimal risk that the 

circumstances that would result in the conditional demand feature not being exercisable will 

occur; and: (i) the conditions limiting exercise either can be monitored readily by the fund or 

relate to the taxability, under federal, state or local law, of the interest payments on the security; 

or (ii) the terms of the conditional demand feature require that the fund will receive notice of the 

occurrence of the condition and the opportunity to exercise the demand feature in accordance 

with its terms). 
32

its shareholders.91 In addition, rule 2a-7 requires ongoing review of the minimal credit risks 

associated with securities for which maturity is determined by reference to a demand feature.92 

In 2011, we proposed 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.93

Most of those who commented on this proposed amendment objected to it.94 They 

asserted that the proposed standard is too vague and would be burdensome to administer.95 A 

number of commenters recommended that we instead eliminate the requirement for reassessing 

minimal credit risk when a security is downgraded by an NRSRO and include a general ongoing 

obligation to monitor the credit risks of portfolio securities, which would eliminate the need for a 

separate requirement to identify specific triggers.96

 91 Rule 2a-7(f)(1)(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 certain events (specified in rule 2a-7(f)(1)(i)(B)), the board is subsequently notified of the 

adviser’s actions. Rule 2a-7(f)(1)(ii).

92 Rule 2a-7(g)(3).

93 See 2011 Proposing Release, supra note 4, at section II.A.3.

94 But see Comment Letter of CFA Institute (July 13, 2011) (supporting the proposed monitoring 

standard).

95 See, e.g., ICI Comment Letter, supra note 30 (there are numerous sources of information about 

issuers, much of which is not relevant to the issuer’s ability to meet its short-term obligations); 

Invesco Comment Letter, supra note 30 (the ambiguity in the terms “credible information” and 

“suggest” will complicate enforcement of the rule); Schwab Comment Letter, supra note 30 (the 

word “suggests” is not constrained by a reasonableness or likelihood standard).

96 See, e.g., Federated Comment Letter, supra note 30; ICI Comment Letter, supra note 30; T. Rowe 

Price Comment Letter, supra note 30.
33

We have carefully considered commenters’ concerns and suggested modifications and 

have been persuaded to re-propose a different standard. In order to meet the requirements of 

section 939A of the Dodd-Frank Act, we re-propose to eliminate the requirement that a fund 

reassess credit risks of an issuer when a security is downgraded by an NRSRO.97 In 

consideration of our re-proposed standard for credit quality, and consistent with the approach 

suggested by a number of commenters, we instead re-propose to require that each money market 

fund adopt written procedures that require the fund adviser to provide ongoing review of the 

credit quality of each portfolio security (including any guarantee or demand feature on which the 

fund relies to determine portfolio quality, maturity, or liquidity) to determine that the security 

continues to present minimal credit risks.98 Ongoing monitoring of minimal credit risks would 

include the determination of whether the issuer of the portfolio security, and the guarantor or 

provider of a demand feature, to the extent relied upon by the fund to determine portfolio quality, 

maturity or liquidity, continues to have an exceptionally strong capacity to repay its short-term 

financial obligations.99 The review would typically update the information that was used to 

 97 See rule 2a-7(f)(1).

98 Re-proposed rule 2a-7(g)(3). Our re-proposal would remove current rule 2a-7(f)(1)(i) 

(downgrades and rating below second tier previously unrated securities) and 2a-7(g)(3) (securities 

for which maturity is determined by reference to demand features). Re-proposed rule 2a-7 

includes a new paragraph (g)(3), which would contain the required procedures for the ongoing 

review of credit risks. 

99 The re-proposal also would make conforming amendments to the recordkeeping provision related 

to the determination of credit risks, which among other things currently requires funds to retain a 

written record of the determination that a portfolio security presents minimal credit risks. See

rule 2a-7(h)(3). As noted above, the re-proposal would require funds to retain a written record of 

the determination that a portfolio security is an eligible security, including the determination that 

it presents minimal credit risks. Re-proposed rule 2a-7(h)(3). Because under our re-proposal a 

fund adviser would be required to conduct an ongoing review of the credit quality of a fund’s 

portfolio securities, rule 2a-7’s current recordkeeping requirement could be understood to require 

the fund to provide for an ongoing documentation of the adviser’s ongoing review, which could 

prove burdensome. Accordingly, our re-proposal would require the fund to maintain and 

preserve a written record of the determination that a portfolio security presents minimal credit 
34

make the initial minimal credit risk determination and would have to be based on, among other 

things, financial data of the issuer or provider of the guarantee or demand feature.100 We note 

that funds could continue to consider external factors, including credit ratings, as part of the 

ongoing monitoring process.101 

Although rule 2a-7 does not explicitly require ongoing monitoring of whether a security 

presents minimal credit risks, as a practical matter, we believe most fund advisers currently 

engage in similar types of ongoing monitoring because (i) funds regularly “roll over” positions in 

portfolio securities, which triggers the obligation to make a new minimal credit risk 

determination102 (ii) rule 2a-7 requires funds to reassess whether a security presents minimal 

credit risks upon the occurrence of certain events103 (iii) events such as downgrades can result in 

a decrease in the mark-to-market value of the fund portfolio, threatening the ability of the fund to 

maintain a stable net asset value104 (iv) changes in credit ratings of a fund’s portfolio securities 

 

risks at the time the fund acquires the security, or at such later times (or upon such events) that 

the board of directors determines that the investment adviser must reassess whether the security 

presents minimal credit risks. See re-proposed rule 2a-7(h)(3). 

100 See re-proposed rule 2a-7(g)(3)(ii). Currently, when a security’s maturity is determined by 

reference to a demand feature, the board’s review of the security’s minimal credit risks must be 

based on, among other things, financial data for the most recent fiscal year of the issuer of a 

demand feature. See rule 2a-7(g)(3). A fund also should review any other factors considered as 

part of its initial minimal credit risk determination.

101 See infra text following note 178 (discussing the Commission’s belief that the majority of funds 

would continue to refer to credit ratings in making minimal credit risk determinations).

102 Funds must limit their portfolios to securities that, among other requirements, are eligible 

securities at the time of acquisition, which is defined to mean any purchase or subsequent 

rollover. Rules 2a-7(a)(1); 2a-7(d)(2). 

103 Rule 2a-7(f)(1) (requiring a money market fund’s board of directors to reassess promptly whether 

a security continues to present minimal credit risks if (i) a first tier portfolio security has been 

downgraded (or an unrated security is no longer of comparable quality to a first tier security), and 

(ii) the fund adviser becomes aware that any unrated security or second tier security has been 

given a rating below a second tier rating). 

104 See rule 2a-7(g)(1).
35

may threaten the fund’s own ability to maintain a rating from an NRSRO105 and (v) shareholders

may be more likely to redeem if the credit quality of portfolio securities declines.106 We do not 

believe that the re-proposal for an explicit monitoring requirement would significantly change 

current fund practices in monitoring minimal credit risks in the portfolio. Moreover, we do not 

believe that the re-proposal to remove the credit reassessment requirement in the event of a 

downgrade would result in less diligence on the part of money market fund managers because, as 

discussed above, a decline in the quality of a fund’s portfolio securities could affect a fund’s own 

NRSRO rating and could increase shareholder redemptions. 

We also note that a fund adviser’s obligation to monitor risks to which the fund is 

exposed would, as a practical matter, require the adviser to monitor for downgrades by relevant 

credit rating agencies107 because such a downgrade would likely affect the security’s market 

value. Nevertheless, we acknowledge that one consequence of our proposal would be that a fund 

adviser could decide to keep a portfolio security that has been downgraded from second tier 

status without involving the fund’s board in that decision. As part of its oversight of the 

 105 See, e.g., Moody’s Investors Service, Moody’s Revised Money Market Fund Rating Methodology 

and Symbols, Mar. 10, 2011, available at 

http://www.citibank.com/transactionservices/home/oli/files/moodys_03_10_2011.pdf (discussing 

the assessment of a money market fund’s “Portfolio Credit Profile” as a part of Moody’s 

methodology for rating money market funds). 

106 See, e.g., 2013 Money Market Fund Proposing Release, supra note 5, at text accompanying nn.

100-103; Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher, a 

report by staff of the Division of Risk, Strategy, and Financial Innovation (Nov. 30, 2012), 

available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf, at 33 

(noting that investors began redeeming government money market fund shares in July and August 

of 2011 when concerns about the U.S. debt ceiling impasse and possible rating downgrades of 

government securities may have fueled investor concerns); Report of the President’s Working 

Group on Financial Markets, Money Market Fund Reform Options (Oct. 2010), available at

http://www.treasury.gov/press-center/pressreleases/Documents/10.21%20PWG%20Report%20Final.pdf, at 12.

107 We use the term “relevant credit rating agencies” to mean those NRSROs whose downgrades 

would likely affect the value of a portfolio security.
36

adviser’s investment decisions, however, we would expect that a fund board generally should 

establish procedures for the adviser to notify the board in such circumstances.108 

For the reasons discussed above, we believe this re-proposed requirement to monitor 

credit risk would essentially codify the current practices of fund managers, which are already 

explicit (and implicit) in several provisions of the rule discussed above. Our re-proposal to 

explicitly require that funds perform ongoing monitoring of credit risks is designed to ensure that 

funds are better positioned to quickly identify potential risks of credit events that could impact 

portfolio security prices and ultimately, for certain funds, the ability of the fund to maintain its 

stable net asset value.109 

We request comment on the re-proposed monitoring requirement. Is our understanding 

of how funds currently monitor fund portfolio securities correct? If not, how are fund practices 

different? Would our proposed amendments, if adopted, impose additional or different costs on 

funds or their advisers, and if so, what would these costs be? Should the rule include specific 

 108 See rule 2a-7(j)(2); rule 2a-7(g)(1) (requiring that for funds using amortized cost, the board, as 

part of its overall duty of care owed to its shareholders, adopt written procedures reasonably 

designed, taking into account current market conditions and the money market fund’s investment

objectives, to maintain a stable net asset value per share). 

109 As under the current rule, the process undertaken by the fund’s board (or adviser) for establishing 

credit quality and the records documenting that process would be subject to review in regulatory 

examinations by Commission staff. See Removal of Certain References to Credit Ratings Under 

the Securities Exchange Act of 1934, Securities Exchange Act Release No. 64352 (Apr. 27, 2011) 

[76 FR 26550 (May 6, 2011)], at text following n.30. In the context of such an examination, a 

fund should be able to support each minimal credit risk determination it makes in light of 

financial data or market data it has considered with appropriate documentation to reflect that 

process and determination. A fund that acquires portfolio securities without having adopted, 

maintained, or implemented written policies and procedures reasonably designed to assess 

minimal credit risk, as required under rules 2a-7 and 38a-1, could be subject to disciplinary action 

for failure to comply with those rules. See id. See also Ambassador Capital Management LLC, 

et al., Investment Company Act Release No. 30809 (Nov. 26, 2013) (alleging that money market 

fund adviser’s failure to (i) make and retain a written record of its minimal credit risk 

determinations resulted in the fund’s violation of rule 22c-1 and (ii) follow the fund’s compliance 

procedures regarding the determination of minimal credit risk and the maintenance of records of 

the determination resulted in the fund’s violations of rule 38a-1). 
37

objective events that would require a reevaluation of minimal credit risks? Would an explicit 

monitoring requirement change current fund priorities in monitoring minimal credit risks in the 

portfolio? Would the re-proposal assist funds to better position themselves to quickly identify 

potential risks of credit events that could impact portfolio security prices? Would replacing the 

credit reassessment requirement in the event of a downgrade with a requirement for ongoing 

monitoring result in less or more diligence on the part of money market fund managers? As a 

practical matter, would a fund adviser’s obligation to monitor risks to which the fund is exposed 

likely require the adviser to monitor for downgrades by relevant credit ratings agencies, as well 

as monitor, for each portfolio security, each NRSRO rating considered as part of the minimal 

credit risk determination at the time the security was acquired? Are there any alternatives to the 

re-proposed monitoring requirement that would permit funds to monitor minimal credit risks

more effectively, or that would better reflect funds’ current monitoring practices, than the 

re-proposed requirement?

4. Stress Testing 

Money market funds currently must adopt written procedures for stress testing their 

portfolios and perform stress tests according to these procedures on a periodic basis.110 

Specifically, a fund must test its ability based on certain hypothetical events, including a 

downgrade of particular portfolio security positions, to: (i) have invested at least 10 percent of 

its total assets in weekly liquid assets; and (ii) minimize principal volatility (and, in the case of a 

money market fund using the amortized cost method of valuation or penny rounding method of 

pricing, the fund’s ability to maintain a stable share price per share).

111 In 2011, we proposed to 

 110 See rule 2a-7(g)(8).

111 See rule 2a-7(g)(8)(i) (requiring written procedures providing for periodic stress testing in light of 
38

replace this reference to ratings downgrades with the requirement that money market funds stress 

test their portfolios for an adverse change in the ability of a portfolio security issuer to meet its 

short-term credit obligations.112 

Commenters on the 2011 proposal who addressed this issue uniformly advocated against 

eliminating the reference to a downgrade in the stress testing conditions.113 They argued that the 

Dodd-Frank Act does not prohibit regulations, such as this stress testing provision, that refer to 

credit ratings without requiring an assessment of a security’s creditworthiness.

In consideration of the comments we received and the mandate in section 939A of the 

Dodd-Frank Act, we re-propose to replace the reference to ratings downgrades in the stress 

testing requirement with a hypothetical event that is designed to have a similar impact on a 

money market fund’s portfolio. Our re-proposed stress testing amendments would require that 

money market funds stress test for an event indicating or evidencing credit deterioration of 

particular portfolio security positions, each representing various exposures in a fund’s 

portfolio.114 The re-proposed amendments would describe the type of hypothetical event that 

funds should use for testing and include a downgrade or default as examples of that type of 

event. Thus, funds could continue to test their portfolios against a potential downgrade or 

 

various events, including a “downgrade or default of particular portfolio security positions, each 

representing various portions of the fund’s portfolio (with varying assumptions about the 

resulting loss in the value of the security), in combination with various levels of an increase in 

shareholder redemptions”); 2014 Money Market Fund Adopting Release, supra note 8, at section 

III.J. 

112 See 2011 Proposing Release, supra note 4, at section II.A.4.

113 See, e.g., Dreyfus Comment Letter, supra note 30; ICI Comment Letter, supra note 30.

114 Re-proposed rule 2a-7(g)(8)(i)(B) (the re-proposal would require stress testing for an event 

indicating or evidencing the credit deterioration, such as a downgrade or default, of a portfolio 

security position representing various portions of the fund’s portfolio (with varying assumptions 

about the resulting loss in the value of the security), in combination with various levels of an 

increase in shareholder redemptions). 
39

default in addition to any other indication or evidence of credit deterioration they determine

appropriate (and that might adversely affect the value or liquidity of a portfolio security).

We note that the 2013 Money Market Fund Reform Proposing Release requested 

comment on certain aspects of money market fund stress testing as it relates to our obligation 

under section 165(i)(2) of the Dodd-Frank Act to specify certain stress testing requirements for 

nonbank financial companies115 that have total consolidated assets of more than $10 billion and 

are regulated by a primary federal financial regulatory agency.116 As discussed in that release 

and the 2014 Money Market Fund Adopting Release, we intend to engage in a separate 

rulemaking to implement the requirements to section 165(i) of the Dodd-Frank Act.117 We 

request comment on our re-proposed amendment to the stress testing requirements. Should the 

rule require testing against specifically named events rather than an event the fund chooses that 

indicates or evidences credit deterioration? Does the re-proposed hypothetical event provide 

adequate guidance to funds? Is there a different hypothetical event, other than a downgrade, that 

we should specify?

B. Form N-MFP

As part of the money market fund reforms adopted in 2010, money market funds must 

provide to the Commission a monthly electronic filing of portfolio holdings information on Form 

N-MFP.118 The information that money market funds must disclose with respect to each 

 115 For a definition of “nonbank financial companies” for these purposes, see Definition of 

“Predominantly Engaged in Financial Activities” and “Significant” Nonbank Financial Company 

and Bank Holding Company, Board of Governors of the Federal Reserve System [78 FR 20756 

(Apr. 5, 2013)].

116 See 2013 Money Market Fund Proposing Release, supra note 5, at section III.L.

117 See id. at section III.L; 2014 Money Market Fund Adopting Release, supra note 8, at section 

III.J.5.

118 See rule 30b1-7; see also 2010 Money Market Fund Adopting Release, supra note 41, at n.301 
40

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.119 

In 2011, we proposed to eliminate the form items that currently require a fund to identify 

whether a portfolio security is a first tier or second tier security or is an unrated security, and that 

require the fund to identify the “requisite NRSROs” for each security (and for each demand 

feature, guarantee or other credit enhancement). Several commenters strongly objected to 

removing ratings disclosures in Form N-MFP. They argued that the Dodd-Frank Act does not 

require us to eliminate these disclosures because these references to ratings do not require the use 

of an assessment of creditworthiness.120 We have carefully considered these comments and are 

re-proposing instead to require that each money market fund disclose, for each portfolio security, 

(i) each rating assigned by any NRSRO if the fund or its adviser subscribes to that NRSRO’s 

services, as well as the name of the agency providing the rating, and (ii) any other NRSRO rating 

that the fund’s board of directors (or its delegate) considered in making its minimal credit risk 

determination, as well as the name of the agency providing the rating.

121 The first prong of this 

requirement reflects our assumption that a fund manager subscribes to the services of a particular 

 

and accompanying and preceding text.

119 See Form N-MFP 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); and 39c-d (requiring disclosure of each designated NRSRO and the credit 

rating given by the designated NRSRO for each portfolio security enhancement).

120 See, e.g., Federated Comment Letter, supra note 30; Dreyfus Comment Letter, supra note 30.

121 See re-proposed Form N-MFP Item C.10. In a conforming change, the re-proposal would also 

amend Form N-MFP Item C.9 to require disclosure of whether the portfolio security is an eligible 

security.
41

NRSRO because the manager has confidence in that NRSRO’s analysis and, therefore, when 

assessing the credit quality of a portfolio security, would consider any rating the NRSRO assigns

to the security. If a fund’s adviser has considered more than one NRSRO rating in making a 

minimal credit risk determination for a particular portfolio security, the Form N-MFP disclosure 

would need to reflect each rating considered (in addition to each rating assigned by an NRSRO if 

the fund or its adviser subscribes to its services). If the fund and its adviser subscribe to no 

NRSRO ratings services, and no other rating was considered in making a minimal credit risk 

determination, the fund would disclose no rating for the portfolio security. We believe this 

information on ratings may be useful both to the Commission and to investors to monitor credit 

ratings that funds use in evaluating the credit quality of portfolio securities and to evaluate risks 

that fund managers take.122 Disclosures of individual portfolio securities ratings would provide 

investors, Commission staff, and others with a snapshot of potential trends in a fund’s overall 

risk profile, which could in turn prompt those monitoring to research or evaluate further whether 

that profile is changing. 

We seek comment on the re-proposed disclosures relating to credit ratings in Form 

N-MFP. Are we correct in our assumption that as part of its minimal credit risk determination a 

fund manager would consider each rating assigned to a portfolio security by an NRSRO to

whose services the fund or the manager subscribes? Would the proposed disclosures assist 

investors in monitoring credit risks in money market fund portfolios? Would the disclosures be 

more useful if they required funds that consider any rating to disclose the highest and lowest 

rating assigned to the portfolio security, regardless of whether the fund considered that rating? 

 122 See Comment Letter of BlackRock, Inc. (Apr. 25, 2011) (“BlackRock Comment Letter”) (“this 

disclosure facilitates investors’ ability to evaluate [money market fund] portfolios and to compare 

[money market funds] to each other.”).
42

Should fund managers that consider more than one credit rating in their credit evaluations be 

required to disclose only one rating and its source? Would disclosure of only one rating limit an 

investor’s ability to monitor the fund’s credit risk if another rating assigned to a portfolio 

security differs from the rating disclosed by the fund in Form N-MFP (i.e., the security is splitrated)? Under such an approach, if a portfolio security is split-rated, which rating should the 

fund have to disclose, or should a fund be able to choose the rating it discloses? If a fund could 

choose, would any funds disclose a lower rating assigned by an NRSRO? We took a similar 

approach in recent amendments removing the required use of credit ratings in Forms N-1A, N-2 

and N-3. Under those amendments, funds that choose to use credit quality to present their 

portfolio securities in shareholder reports and use credit ratings to depict credit quality may use 

credit ratings assigned by different rating agencies (including credit rating agencies that are not 

NRSROs), provided that the fund also describes how it determines the credit quality of portfolio 

holdings and how ratings are identified and selected.123 Would a similar disclosure describing 

how a money market fund determines the credit quality of portfolio holdings, including how 

ratings are identified and selected be appropriate considering the format of Form N-MFP? If not, 

would disclosure in another form, such as Form N-1A, appropriately mitigate the risk that a fund 

could “cherry-pick” the rating to disclose on Form N-MFP? Would investors find disclosure 

about the source of the credit rating to be useful information?

C. Exclusion from the Issuer Diversification Requirement

In addition to the provisions regarding credit quality discussed above, rule 2a-7’s risk 

limiting conditions require a money market fund’s portfolio to be diversified, both as to the 

 123 Form N-1A Item 27(d); Form N-2 Item 24, Instruction 6(a); Form N-3 Item 28(a), Instruction 

6(i); see also 2013 Ratings Removal Adopting Release, supra note 4, at section III.B. 
43

issuers of the securities it acquires and providers of guarantees and demand features related to 

those securities.124 Generally, money market funds must limit their investments in the securities 

of any one issuer of a first tier security (other than government securities) to no more than

5 percent of total assets.125 They must also generally limit their investments in securities subject 

to a demand feature or a guarantee to no more than 10 percent of total assets from any one 

provider.126 We adopted these requirements in order to limit the exposure of a money market 

fund to any one issuer, guarantor, or demand feature provider.127 

 124 See rule 2a-7(d)(3). The diversification requirements of rule 2a-7 differ in significant respects 

from the requirements for diversified management investment companies under section 5(b)(1) of 

the Investment Company Act. A money market fund that satisfies the applicable diversification 

requirements of paragraph (d)(3) of rule 2a-7 is deemed to have satisfied the requirements of 

section 5(b)(1). Rule 2a-7(d)(3)(v). Subchapter M of the Internal Revenue Code contains other 

diversification requirements for a money market fund to be a “regulated investment company” for 

federal income tax purposes. 26 U.S.C. 851 et seq. 

125 Rule 2a-7(d)(3)(i)(A) and (B). A single state fund, however, may invest up to 25% of its total 

assets in the first tier securities of any single issuer. Rule 2a-7(d)(3)(i)(B). A fund also may 

invest no more than 0.5% of fund assets in any one issuer of a second tier security. Rule 

2a-7(d)(3)(i)(C). The rule provides a safe harbor under which a taxable and national tax-exempt 

fund may invest up to 25% of its total assets in the first tier securities of a single issuer for a 

period of up to three business days after acquisition (but a fund may use this exception for only 

one issuer at a time). Rule 2a-7(d)(3)(i)(A). Under our re-proposal, which would eliminate the 

distinction between first and second tier securities, the issuer diversification requirements would 

apply regardless of a portfolio security’s rating and the safe harbor would be available with 

respect to any portfolio security regardless of its rating. See supra note 36. 

126 Rule 2a-7 also provides a “fifteen percent basket” for tax-exempt (including single-state) money 

market funds, under which as much as 15% of the value of securities held in a tax-exempt fund’s

portfolio may be subject to guarantees or demand features from a single institution. See rule 

2a-7(d)(3)(iii)(B). The tax-exempt fund, however, may only use the 15% basket to invest in 

demand features or guarantees issued by non-controlled persons that are first tier securities. See 

rule 2a-7(c)(4)(iii)(B) and (C). Under our re-proposal, the 15% basket would be available with 

respect to any demand feature or guarantee issued by a non-controlled person without regard to 

the rating of the security, guarantee or demand feature. See supra note 36.

127 See Money Market Fund Reform, Investment Company Act Release No 28807 (June 30, 2009) 

[74 FR 32688 (July 8, 2009)] (“2009 Money Market Fund Proposing Release”) at n.220 and 

accompanying text; Revisions to Rules Regulating Money Market Funds, Investment Company 

Act Release No. 17589 (July 17, 1990) [55 FR 30239 (July 25, 1990)], at text accompanying n.23 

(“Diversification limits investment risk to a fund by spreading the risk of loss among a number of 

securities.”).
44

By permitting money market funds a higher 10 percent limit on their indirect exposures 

to a single provider of a guarantee or demand feature than the 5 percent limit on direct 

investments in any one issuer, rule 2a-7 permits a money market fund to take on greater indirect 

exposures to providers of demand features and guarantees. That is because, rather than looking 

solely to the issuer, the money market fund would have two potential sources of repayment—the 

issuer whose securities are subject to the demand features or guarantees and the providers of 

those features or guarantees if the issuer defaults. Both the issuer and the demand feature 

provider or guarantor would have to default at the same time for the money market fund to suffer 

a loss. And if a guarantor or demand feature provider were to come under stress, the issuer may 

be able to obtain a replacement.128

Today, we adopted amendments to certain provisions of these diversification 

requirements in the 2014 Money Market Fund Adopting Release.129 Among other things, our 

amendments require that money market funds treat certain entities that are affiliated with each 

other as single issuers when applying the 5 percent issuer diversification provision of rule 2a-7 

and treat the sponsors of asset-backed securities as guarantors subject to the 10 percent

diversification provision of rule 2a-7 applicable to guarantees and demand features, unless the 

fund’s board makes certain findings. These amendments were intended to increase the resiliency 

of and reduce risk in money market funds by limiting their ability to concentrate investments in a 

single economic enterprise. 

 128 See, e.g., Revisions to Rules Regulating Money Market Funds, Investment Company Act Release 

No.19959 (Dec. 17, 1993) [58 FR 68585 (Dec. 28, 1993)] at n.83 and accompanying text 

(observing that, if the guarantor of one of the money market fund’s securities comes under stress, 

“issuers or investors generally can either put the instrument back on short notice or persuade the 

issuer to obtain a substitute for the downgraded institution”). 

129 See 2014 Money Market Fund Adopting Release, supra note 8, at section III.I.1.d. 
45

When we proposed these amendments, we also discussed and sought comment on 

additional alternatives that we had considered to appropriately limit money market funds’ risk 

exposure.130 These alternatives included requiring money market funds to be more diversified 

by reducing the current 5 percent and 10 percent diversification thresholds of rule 2a-7 and by 

imposing industry concentration limits. Several commenters supported some of these tighter 

diversification requirements.131 One of these commenters suggested limiting any one corporate 

issuer to 2.5 percent of the fund’s total assets rather than the current 5 percent issuer 

diversification requirement, while two others supported additional sector diversification 

requirements.132 Others, however, argued against further narrowing the diversification 

provisions of rule 2a-7 relating to issuers and guarantors.133 

We also asked in the 2013 Money Market Fund Proposing Release more generally 

whether we should continue to distinguish between a fund’s exposure to guarantors and issuers 

by providing different diversification requirements for these exposures.134 We explained that 

rule 2a-7 permits a money market fund, when determining if a security subject to a guarantee 

 130 See 2013 Money Market Fund Proposing Release, supra note 5, at sections III.J.1 – 2.

131 See Comment Letter of Eric S. Rosengren, President, Federal Reserve Bank of Boston, et al. 

(Sept. 12, 2013) (“Boston Federal Reserve Comment Letter”); Comment Letter of Robert 

Comment, Ph.D. (Jun. 14, 2013) (“R. Comment Comment Letter”); Comment Letter of John C. 

Barber, KeyBank, NA (Sept. 16, 2013) (“J. Barber Comment Letter”). 

132 See J. Barber Comment Letter, supra note 131 (recommending 2.5% issuer limit); R. Comment 

Comment Letter, supra note 131 (advocating sector diversification); Boston Federal Reserve

Comment Letter, supra note 131 (same).

133 Comment Letter of Phillip S. Gillespie, Executive Vice President and General Counsel, State 

Street Global Advisors (Sept. 17, 2013) (opposing the additional alternatives because existing 

diversification limits are already challenging due to the short-term market’s current supply 

structure); Comment Letter of Investment Company Institute (Sept. 17, 2013) (“ICI 2013 

Comment Letter”). One of these expressed concern that further restricting diversification limits 

may potentially force money market funds to invest in less creditworthy issuers, which could 

have the effect of increasing the risk within money market funds’ portfolios, rather than 

decreasing it. See id.

134 See 2013 Money Market Fund Proposing Release, supra note 5, at sections III.J.1 – 2.
46

satisfies the credit quality standards, to rely exclusively on the credit quality of the guarantor.135 

We specifically asked whether the guarantor should be treated as the issuer and subject to a 

5 percent diversification requirement whenever the money market fund is relying exclusively on 

the credit quality of the guarantor. No commenters specifically addressed this issue, and we 

decided not to propose amendments that would implement this approach, or any of the 

alternative diversification approaches about which we sought comment as discussed above. 

In considering the comments we received on the proposed amendments to the 

diversification provisions and the alternatives discussed above, we noted that money market 

funds also may effectively rely exclusively on the credit quality of certain guarantors for

purposes of the diversification requirements. Notwithstanding the 5 percent issuer 

diversification provision, rule 2a-7 does not require a money market fund to be diversified with 

respect to issuers of securities that are subject to a guarantee by a non-controlled person.136 This 

exclusion could allow, for example, a fund to invest a significant portion or all of the value of its 

portfolio in securities issued by the same entity if the securities were guaranteed by different 

non-controlled person guarantors such that none guaranteed securities with a value exceeding 

10 percent of the fund’s total assets. By diversifying solely against the guarantor, the fund could 

be relying on the guarantors’ credit quality or repayment ability, not the issuer’s. Thus, the fund 

 135 Rule 2a-7(d)(2)(iii). That a money market fund has both the issuer and guarantor as sources of 

repayment may not meaningfully reduce the risks of the investment in all cases because the issuer 

of the guaranteed securities need not satisfy rule 2a-7’s credit quality requirements, and if the 

issuer of the guaranteed securities is of lesser credit quality, allowing the money market fund to 

have up to 10% of its assets indirectly exposed to the guarantor may not be justified. 

136 Rule 2a-7(d)(3)(i). A guarantee issued by a non-controlled person means a guarantee issued by: 

(i) a person that, directly or indirectly, does not control, and is not controlled by or under common 

control with the issuer of the security subject to the guarantee; or (ii) a sponsor of a special 

purpose entity with respect to an asset-backed security. Rule 2a-7(a)(19). Control has the same 

meaning as in section 2(a)(9) of the Investment Company Act, 15 U.S.C. 80a-2(a)(9).
47

would effectively substitute the credit of the guarantor for that of the issuer for diversification 

purposes, without imposing the tighter 5 percent requirement that rule 2a-7 generally applies for 

issuer diversification. The fund also would have a highly concentrated portfolio and would be 

subject to substantial risk if the single issuer in whose securities it had such a significant 

investment were to come under stress or default. 

We are concerned that a money market fund relying on the exclusion from the issuer 

diversification provision need only comply with the 10 percent guarantor diversification 

requirement, notwithstanding the credit substitution discussed above. In consideration of our 

reform goal of limiting concentrated exposure of money market funds to particular economic 

enterprises, we no longer believe that ignoring a fund’s exposure to the issuer in these 

circumstances is appropriate.137 Rather than subject these guarantors to a unique 5 percent

requirement, however, we believe that a better approach would be to restrict risk exposures to all 

issuers of securities subject to a guarantee or demand feature under rule 2a-7 in the same way. 

That is, under today’s proposed amendment, each money market fund that invests in securities 

subject to a guarantee (whether or not the guarantor is a non-controlled person) would have to 

comply with both the 10 percent diversification requirement for the guarantor as well as the 5

percent diversification requirement for the issuer. As a result, except for the special provisions 

 137 See 2014 Money Market Fund Adopting Release, supra note 8, at text following n.1600 and 

accompanying n.1601. The exclusion from the 5% issuer diversification requirement for certain 

guaranteed securities was adopted in the 1996 money market fund amendments to provide 

flexibility in municipal investments, and was premised on the ability of a money market fund to 

rely on the guarantee if an issuer became distressed. See 1996 Money Market Fund Adopting 

Release, supra note 62. Since 1996, our amendments have generally scaled back on the amount 

of additional flexibility focused on the municipal markets, particularly where money market 

funds do not heavily rely on the exclusion. See, e.g., 2010 Money Market Fund Adopting 

Release, supra note 41.
48

regarding single-state money market funds, no money market fund non-government portfolio 

security would be excluded from rule 2a-7’s limits on issuer concentration.

We recognize that the proposed removal of this exclusion and tightening of issuer 

diversification requirements for securities subject to a guarantee by a non-controlled person 

could impact issuers of these securities and the fund’s risk profile (although we note that fewer 

than 2 percent of money market funds appear to be relying on this exclusion).138 The proposed 

amendments could occasionally prevent some issuers from selling securities to a money market 

fund that would otherwise invest in the issuer’s securities above the 5 percent diversification 

requirement. In addition, while we recognize that removing the exclusion could cause some 

money market funds to invest in securities with higher credit risk, we note that a money market 

fund’s portfolio securities must meet certain credit quality requirements, such as posing minimal 

credit risks, as discussed above.139 We therefore believe that the substantial risk limiting 

provisions of rule 2a-7 would mitigate the potential that these money market funds would 

significantly increase their investments in securities with higher credit risk. We also believe that 

eliminating this exclusion would more appropriately limit money market fund risk exposures by 

limiting the concentration of exposure that a money market fund could have otherwise had to a 

particular issuer.140 

We request comment on our proposal to eliminate the exclusion from the issuer 

diversification requirement. Do commenters agree with our approach to treat securities subject 

to a guarantee by a non-controlled person similar to other securities with a guarantee or demand 

 138 See infra section V.C.2.

139 See rule 2a-7(d)(2) (portfolio quality); supra notes 20-24 and accompanying text.

140 See infra section V.C.2.
49

feature under rule 2a-7? Should we instead, as discussed above, require that a guarantor be 

treated as the issuer and subject to a 5 percent diversification requirement when a money market 

fund is relying exclusively on the credit quality of the guarantor or when the security need not 

meet the issuer diversification requirements? Or should we impose a higher limit on issuer 

exposure when the security is guaranteed by a non-controlled person? If so, what would be an 

appropriate limit? For example, would a 10 percent, 15 percent, or some other limit be 

appropriate? What limit would appropriately balance the interests discussed above – allowing 

greater flexibility for funds with respect to indirect exposures to providers of guarantees and 

demand features because of the potential that tighter diversification provisions could lead to 

investments in lower quality securities and limiting exposure risk when a fund is relying solely 

on such a provider for repayment? Could commenters provide empirical analysis to support a 

particular percentage? Do commenters agree with our understanding that most money market 

funds do not currently rely on the issuer diversification exclusion for securities subject to a 

guarantee issued by a non-controlled person? Do commenters believe that many money market 

funds have used this exclusion in the past or may do so in the future absent our proposed 

amendment? We note that most of the funds whose portfolios have greater than 5 percent

exposure to an issuer are tax-exempt funds, and that most of these funds exceed the 5 percent

threshold by less than 2 percent of fund assets. In addition, none of the funds that appear to have 

relied on the exclusion is a single state fund.141 As a result, we have assumed that tax-exempt 

funds do not need this exclusion. Is this assumption correct? Is the supply of high quality 

eligible municipal investments sufficiently limited such that we should preserve the exclusion for 

 141 As noted above, rule 2a-7 currently permits a single state fund to invest up to 25% of its assets in 

any single issuer, thus these funds appear not to need the exclusion. See supra note 125. 
50

tax-exempt or single state funds? Are there any other particular types of funds for which the 

current exclusion from the issuer diversification requirement should be preserved? Is the 

proposed amendment likely to result in money market funds investing in securities that present 

higher credit risk, or not, given the credit quality requirements of rule 2a-7? 

III. COMPLIANCE PERIOD FOR THE PROPOSED RULE AND FORM AMENDMENTS

We anticipate that the compliance date for the re-proposed amendments to rule 2a-7 and 

Form N-MFP and the proposed amendments to the issuer diversification requirements would be 

April 14, 2016. We expect that this compliance date should provide an adequate period of time 

for money market funds to review and revise their policies and procedures for complying with 

rule 2a-7, as funds deem appropriate in connection with the re-proposed and proposed

amendments, if adopted.142 We note that this compliance date would coincide with the 

compliance date for the rule 2a-7 amendments relating to diversification and stress testing 

adopted in the 2014 Money Market Fund Adopting Release, as well as the Form N-MFP 

amendments also adopted in that release. As discussed below, we believe that coordinating the 

compliance date of the re-proposed amendments with the compliance date of certain related 

amendments adopted in the 2014 Money Market Fund Adopting Release should reduce costs to 

the extent feasible by consolidating changes to be made to a fund’s policies and procedures, as 

well as changes to Form N-MFP, at a single time.143 We request comment on this compliance 

date. 

 142 See infra note 219 and accompanying text.

143 See infra note 233 and accompanying text.
51

IV. PAPERWORK REDUCTION ACT ANALYSIS

Certain provisions of our proposal contain “collections of information” within the 

meaning of the Paperwork Reduction Act of 1995 (“PRA”).144 The titles for the existing 

collections of information are: (1) “Rule 2a-7 under the Investment Company Act of 1940, 

Money market funds” (OMB Control No. 3235-0268); (2) “Rule 30b1-7 under the Investment 

Company Act of 1940, Monthly report for money market funds” (OMB Control No. 3235-0657); 

and (3) “Form N-MFP under the Investment Company Act of 1940, Monthly schedule of 

portfolio holdings of money market funds” (OMB Control No. 3235-0657). 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. 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 agency has submitted the proposed collections of information to OMB for approval. 

Comments on the proposed collections of information should be directed to: (i) Desk Officer for 

the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Office 

of Management and Budget, Room 10102, New Executive Office Building, Washington, D.C. 

20503, or by sending an e-mail to: Shagufta_Ahmed@omb.eop.gov; and (ii) Thomas Bayer, 

Chief Information Officer, Securities and Exchange Commission, c/o Remi Pavlik-Simon, 6432 

General Green Way, Alexandria, VA 22312 or send an email to: PRA_Mailbox@sec.gov. 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 

 144 44 U.S.C. 3501-3520.
52

submitted to OMB by the Commission with regard to this collection of information should be in 

writing, refer to File No. S7-07-11, and be submitted to the Securities and Exchange 

Commission, Office of FOIA Services, 100 F Street, NE, Washington, DC 20549-2736.

A. Rule 2a-7

As discussed above, we are re-proposing to remove references to credit ratings in rule 

2a-7, which would affect five elements of the rule: (i) determination of whether a security is an 

eligible security; (ii) determination of whether a security is a first tier security; (iii) credit quality 

standards for securities with a conditional demand feature; (iv) requirements for monitoring 

securities for ratings downgrades and other credit events; and (v) stress testing. These 

amendments involve collections of information, and the respondents to the collections of 

information are money market funds. This collection of information would be mandatory for 

money market funds that rely on rule 2a-7, and to the extent that the Commission receives 

confidential information pursuant to the collection of information, such information will be kept 

confidential, subject to the provisions of applicable law.145

1. Eligible Security Determinations for Money Market Fund Portfolio 

Securities, Including Securities That Are Subject to a Conditional Demand 

Feature

Rule 2a-7 limits a money market fund’s portfolio investments to “eligible securities,” 

which are currently defined as securities that have received credit ratings from a requisite 

NRSRO in one of the two highest short-term rating categories, or comparable unrated 

 145 See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of Information Act provides an exemption 

for “trade secrets and commercial or financial information obtained from a person and privileged 

or confidential.” 5 U.S.C. 552(b)(4). Exemption 8 of the Freedom of Information Act provides an 

exemption for matters that are “contained in or related to examination, operating, or condition 

reports prepared by, or on behalf of, or for the use of an agency responsible for the regulation or 

supervision of financial institutions.” 5 U.S.C. 552(b)(8)).
53

securities.

146 The rule also restricts money market fund investments to securities that the fund’s 

board, or its delegate, determines present minimal credit risks, and requires a fund to adopt 

policies and procedures regarding minimal credit risk determinations.147 As discussed above, we 

are re-proposing amendments to rule 2a-7 that would remove any reference to, or requirement of 

reliance on, credit ratings in rule 2a-7 and modify the credit quality standard to be used in 

determining the eligibility of a money market fund’s portfolio securities, including securities that 

are subject to a conditional demand feature. Specifically, the re-proposed amendments would 

eliminate the current requirement that an eligible security be rated in one of the two highest 

short-term rating categories by an NRSRO or be of comparable quality, and would combine the 

current “first tier” and “second tier” credit risk categories into a single standard, which would be 

included as part of rule 2a-7’s definition of eligible security. A security would be an eligible 

security only if the money market fund’s board of directors (or its delegate) determines that it 

presents minimal credit risks, which determination would include a finding that the security’s 

issuer has an exceptionally strong capacity to meet its short-term obligations.148 The re-proposed 

amendments also would require that, with respect to a security (or its guarantee) subject to a 

conditional demand feature, the underlying security (or its guarantee) must have a very strong 

capacity for payment of its financial commitments.149 

Money market funds are required to have written policies and procedures regarding 

minimal credit risk determinations.

150 Thus, each money market fund complex would incur 

 146 See rule 2a-7(a)(12). 

147 See rules 2a-7(d)(2)(i); 2a-7(j)(1); 38a-1.

148 Re-proposed rule 2a-7(a)(11); see supra section II.A.1.

149 Re-proposed rule 2a-7(d)(2)(iii)(C); see supra section II.A.2.

150 See rule 2a-7(j)(1); supra note 22.
54

one-time costs to comply with these re-proposed amendments, if adopted. Specifically, each 

fund complex would incur costs to review the amended provisions of rule 2a-7 and, as it 

determines appropriate in light of the re-proposed amendments, revise its policies and procedures 

to incorporate the amended credit quality standards to be used in determining the eligibility of a 

money market fund’s portfolio securities, including securities that are subject to a conditional 

demand feature. As discussed below, we anticipate that many funds are likely to retain their 

investment policies as currently required under rule 2a-7, which incorporate NRSRO ratings and 

which would be permitted under the re-proposed rule amendments.151 Some funds, on the other 

hand, may choose to revise their investment policies to remove references to NRSRO ratings and 

to incorporate the standards provided in the re-proposal, if adopted. Even if funds choose to 

eliminate references to ratings in their investment policies, funds’ investment policies may not 

change substantially, as funds are already required to assess credit quality apart from ratings as 

part of their minimal credit risk determinations.152 In addition to revisions concerning NRSRO 

ratings, some funds may choose to revise their policies and procedures to address certain factors 

discussed above (to the extent those factors are not considered currently) in their credit 

assessment policies and procedures. 

While we cannot predict with precision the extent to which funds may revise their 

policies and procedures for determining minimal credit risk, we estimate that each money market 

fund complex on average would incur a one-time burden of 9 hours,153 at a cost of $2,838,154 to 

 151 See infra note 204 and accompanying paragraph.

152 See rule 2a-7(d)(2)(i).

153 We estimate that the lower range of the one-time hour burden for a money market fund complex 

to review and revise, as appropriate, its policies and procedures for determining minimal credit 

risk would be 6 hours (4 hours by a compliance manager, and 2 hours by an attorney). We 

estimate that the upper range of the one-time hour burden for a money market fund complex to 
55

review and revise, as appropriate, its policies and procedures. Using an estimate of 84 money 

market fund complexes,155 we estimate that money market funds would incur, in aggregate, a 

total one-time burden of 756 hours,156 at a cost of $238,392,157 to comply with the amended 

provisions of rule 2a-7 modifying the credit quality standard to be used in determining the 

eligibility of a fund’s portfolio securities. Amortizing these hourly and cost burdens over three 

years results in an average annual increased burden for all money market fund complexes of 252 

hours158 at a cost of $79,464.159 We do not believe that funds would newly implement or change 

any annual review of policies and procedures that they currently perform as a result of the 

re-proposed amendments. There would be no external costs associated with this collection of 

information.

 

review and revise, as appropriate, its policies and procedures for determining minimal credit risk 

would be 12 hours (8 hours by a compliance manager, and 4 hours by an attorney). For purposes 

of our estimates for the PRA analysis, we have taken the mid-point of this range (mid-point of 6 

hours and 12 hours = 9 hours (6 hours by a compliance manager, and 3 hours by an attorney)).

154 This estimate is based on the following calculation: (6 hours (mid-point of 4 hours and 8 hours 

incurred by a compliance manager) x $283 (rate for a compliance manager) = $1,698) + (3 hours 

(mid-point of 2 hours and 4 hours incurred by an attorney) x $380 (rate for an attorney) = $1,140) 

= $2,838. All estimated wage figures discussed here and throughout this Release are based on 

published rates that have been taken from SIFMA’s Management & Professional Earnings in the 

Securities Industry 2013, available at http://www.sifma.org/research/item.aspx?id=8589940603, 

modified by Commission staff to account for an 1800 hour work-year and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits, and overhead. 

155 Based on data from Form N-MFP and iMoneyNet data as of February 28, 2014.

156 This estimate is based on the following calculation: 9 hours x 84 money market fund 

complexes = 756 hours.

157 This estimate is based on the following calculation: $2,838 x 84 money market fund 

complexes = $238,392.

158 This estimate is based on the following calculation: 756 hours ÷ 3 years = 252 hours.

159 This estimate is based on the following calculation: $238,392 ÷ 3 years = $79,464.
56

2. 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.160 As discussed above, we are re-proposing amendments to rule 2a-7 that 

would eliminate the current use of credit ratings in the rule’s downgrade and default provisions. 

Rule 2a-7 instead would require a money market fund to adopt written procedures requiring the 

fund adviser, or any person to whom the fund’s board of directors has delegated portfolio 

management responsibilities, to provide ongoing review of each portfolio security to determine 

that the issuer continues to present minimal credit risks.161 To comply with these re-proposed 

amendments, if adopted, a fund complex would incur one-time costs to review the amended 

provisions of rule 2a-7 and adopt policies and procedures providing for ongoing review to 

determine whether a money market fund’s portfolio securities continue to present minimal credit 

risks. Money market funds are not currently required to maintain policies and procedures that 

specifically address ongoing minimal credit risk monitoring. Although we understand, based on 

staff experience, that most money market funds currently monitor portfolio securities for 

minimal credit risk on an ongoing basis,162 we are assuming that all money market fund 

complexes would need to adopt new written policies and procedures to provide for this ongoing 

review in order to comply with the amended provisions of rule 2a-7. 

We estimate that each money market fund complex on average would incur a one-time 

burden of 5 hours,163 at a cost of $3,619,164 to adopt policies and procedures for ongoing review 

 160 See rule 2a-7(f)(1)(i).

161 Re-proposed rule 2a-7(g)(3); see supra section II.A.3.

162 See supra notes 102-106 and accompanying text.

163 These hour estimates assume that the process of adopting written policies and procedures will 
57

of minimal credit risks. Using an estimate of 84 money market fund complexes,165 we estimate 

that money market funds would incur, in aggregate, a total one-time burden of 378 hours,166 at a 

cost of $303,996,

167 to comply with the amended provisions of rule 2a-7. Amortizing these 

hourly and cost burdens over three years results in an average annual increased burden for all 

money market fund complexes of 126 hours168 at a cost of $101,332.

169 There would be no 

external costs associated with this collection of information.

 

consist primarily of transcribing and reviewing any existing policies and procedures that funds 

currently use when monitoring minimal credit risk on an ongoing basis. Because we cannot 

predict the extent to which funds may need to develop these policies and procedures to comply 

with the amended provisions of rule 2a-7, if adopted, or may need to transcribe and review any 

existing policies and procedures, we have taken, as an estimated average burden, the mid-point of 

a range of hour estimates discussed below in this note 163 for purposes of our PRA analysis. 

We estimate that the lower range of the one-time hour burden for a money market fund complex 

to adopt policies and procedures for ongoing review to determine whether a money market fund’s 

portfolio securities continue to present minimal credit risks would be 3.5 hours (2 hours by a 

compliance manager and 1 hour by an attorney to develop and review policies and procedures (or 

transcribe and review pre-existing policies and procedures) + 0.5 hours for the fund’s board to 

adopt the policies and procedures). We estimate that the upper range of the one-time hour burden 

for a money market fund complex to adopt such policies and procedures would be 6.5 hours (4 

hours by a compliance manager and 2 hours by an attorney to develop and review policies and 

procedures (or transcribe and review pre-existing policies and procedures) + 0.5 hours for the 

fund’s board to adopt the policies and procedures). The mid-point of the lower range estimate 

and the upper range estimate is 5 hours.

164 This estimate is based on the following calculation: (3 hours (mid-point of 2 hours and 4 hours 

incurred by a compliance manager) x $283 (rate for a compliance manager) = $849) + (1.5 hours 

(mid-point of 1 hour and 2 hours incurred by an attorney) x $380 (rate for an attorney) = $570) + 

(0.5 hours x $4,400 per hour for a board of 8 directors = $2,200)= $3,619. The staff previously 

estimated in 2009 that the average cost of board of director time was $4,000 per hour for the 

board as a whole, based on information received from funds and their counsel. Adjusting for 

inflation, the staff estimates that the current average cost of board of director time is 

approximately $4,400. 

165 Based on data from Form N-MFP and iMoneyNet data as of February 28, 2014.

166 This estimate is based on the following calculation: 4.5 hours x 84 money market fund complexes 

= 378 hours.

167 This estimate is based on the following calculation: $3,619 x 84 money market fund 

complexes = $303,996.

168 This estimate is based on the following calculation: 378 hours ÷ 3 years = 126 hours.

169 This estimate is based on the following calculation: $303,996 ÷ 3 years = $101,332.
58

3. Stress Testing

Rule 2a-7 currently requires money market funds to adopt written stress testing 

procedures and to perform stress tests according to these procedures on a periodic basis.170 We 

are re-proposing amendments to rule 2a-7 that would replace the reference to ratings downgrades 

in the rule’s stress testing provisions with a hypothetical event that is designed to have a similar 

impact on a money market fund’s portfolio.171 The re-proposed amendment is designed to retain 

a similar standard for stress testing as under current rule 2a-7. Specifically, while rule 2a-7 

currently requires a fund to stress test its portfolio based on certain hypothetical events, including 

a downgrade of portfolio securities, the re-proposed amendment would require a fund to stress

test for an event indicating or evidencing credit deterioration in a portfolio security, and would 

include a downgrade or default as examples of that type of event. As discussed below, we 

recognize that a money market fund could use its current policies and procedures to comply with 

the re-proposed amendment, and could continue to use credit quality evaluations prepared by 

outside sources, including NRSRO downgrades, in stress tests.

172 Because the rule currently 

requires testing for a downgrade as a hypothetical event, we do not believe that funds would take 

any additional time to review and revise their policies and procedures with respect to the 

continued use of downgrades in stress testing. Accordingly, we do not expect the proposed 

amendments would significantly change current collection of information burden estimates for 

rule 2a-7.173

 170 See rule 2a-7(g)(8).

171 Re-proposed rule 2a-7(g)(8)(i)(B); see supra section II.A.4.

172 See infra text accompanying and preceding note 217.

173 See infra note 174.
59

Total Burden for Rule 2a-7. The current approved collection of information for rule 2a-7 

is 517,228 annual aggregate hours.174 The aggregate additional burden hours associated with the 

re-proposed amendments to rule 2a-7 increase the burden estimate to 517,606 hours annually for 

all funds.175

4. Request for Comment

We request comment on these assumptions and estimates. If commenters believe these 

assumptions or estimates are not accurate, we request they provide specific data that would allow 

us to make more accurate estimates.

B. Rule 30b1-7 and Form N-MFP

Rule 30b1-7 requires money market funds to file a monthly report electronically 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.176 The respondents to this collection of 

information are money market funds. A fund must comply with the requirement to prepare 

Form N-MFP in order to hold itself out to investors as a money market fund or the equivalent of 

 174 The Commission has submitted an application to the OMB for revision of the current approved 

collection of information for rule 2a-7 in connection with the 2014 Money Market Fund Adopting

Release. When and if approved, the collection of information for rule 2a-7 will increase to 

617,653 hours annually for all funds. 

175 This estimate is based on the following calculation: 517,228 hours (current approved burden) + 

252 hours (eligible security determinations for money market fund portfolio securities, including 

securities that are subject to a conditional demand feature) + 126 hours (monitoring minimal 

credit risks) = 517,606 hours. If the revised collection of information for rule 2a-7 in connection 

with the 2014 Money Market Fund Adopting Release is approved, as well as the collection of 

information associated with the re-proposed amendments to rule 2a-7 as discussed in this release, 

the collection of information for rule 2a-7 would increase to 618,031 hours (617,653 hours + 252 

hours + 126 hours). See supra note 174.

176 For 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. See infra note 

188.
60

a money market fund in reliance on rule 2a-7. Responses to the disclosure requirements of 

Form N-MFP are not kept confidential.

Money market funds are currently required to disclose on Form N-MFP, with respect to 

each portfolio security, whether the security is a first or second tier security or is unrated, as 

well as the “designated NRSROs” for each security (and for each demand feature, guarantee, or 

credit enhancement).177 As discussed above, the re-proposed amendments would require that 

each money market fund disclose on Form N-MFP, for each portfolio security, each rating 

assigned by any NRSRO to whose services the fund or its adviser subscribes (together with the 

name of the assigning NRSRO), and any other NRSRO rating that the fund’s board of directors 

considered in determining that the security presents minimal credit risks (together with the 

name of the assigning NRSRO).

178 Because we believe that the majority of funds would 

continue to refer to credit ratings in making minimal credit risk determinations, we do not 

believe the re-proposed amendments to Form N-MFP would result in material changes to the 

ongoing burden for most funds.179 However, we believe that funds will incur one-time costs to 

re-program their filing software to reflect the new requirements of Form N-MFP. 

We estimate that each fund will incur a one-time burden of 3 hours,180 at a cost of $943 

per fund,181 to comply with the amended disclosure requirements of Form N-MFP, if adopted. 

 177 See Form N-MFP Items C.9, C.10, C.14.b-c, C.15.b-c, C.16.c-d.

178 See re-proposed Form N-MFP Items C.9, C.10, C.14.e, C.15.c, C.16.d; supra section II.B.

179 See infra note 204 and accompanying paragraph.

180 We estimate that the one-time hour burden for a money market fund to re-program its Form 

N-MFP filing software to reflect the new requirements of Form N-MFP would be 3 hours (1 hour 

by a senior systems analyst, 1 hour by a senior programmer, and 1 hour by an attorney). 

181 This estimate is based on the following calculation: (1 hour x $260 (rate for a senior systems 

analyst) = $260) + (1 hour x $303 (rate for a senior programmer) = $303) + (1 hour x $380 (rate 

for an attorney) = $380) = $943. 
61

Using an estimate of 559 money market funds that are required to file reports on Form 

N-MFP,182 we estimate that money market funds would incur, in the aggregate, a total one-time 

burden of 1,677 hours,183 at a cost of $527,137,184 to comply with the amended disclosure 

requirements of Form N-MFP. Amortizing these hourly and cost burdens over three years 

results in an average annual increased burden for all money market funds of 559 hours185 at a 

cost of $175,712.186 There would be no external costs associated with complying with the 

amended disclosure requirement of Form N-MFP.187

The current approved collection of information for Form N-MFP is 45,214 annual 

aggregate hours and $4,424,480 in external costs.188 The aggregate additional hours associated 

with the re-proposed amendments to Form N-MFP increase the burden estimate to 45,773 hours 

 182 This estimate is based on a review of reports on Form N-MFP filed with the Commission for the 

month ended February 28, 2014. 

183 This estimate is based on the following calculation: 3 hours x 559 money market funds = 1,677 

hours.

184 This estimate is based on the following calculation: $943 x 559 money market funds = $527,137.

185 This estimate is based on the following calculation: 1,677 hours ÷ 3 years = 559 hours.

186 This estimate is based on the following calculation: $527,137 ÷ 3 years = $175,712.

187 We understand that a certain percentage of money market funds that report information on Form 

N-MFP license a software solution from a third party that is used to assist the funds to prepare 

and file the required information, and that a certain percentage of money market funds retain the 

services of a third party to provide data aggregation and validation services as part of the 

preparation and filing of reports on Form N-MFP. See 2014 Money Market Fund Adopting 

Release, supra note 8, at text accompanying nn. 2334-2336. 

We recognize that, in general, software service providers that modify their software may incur 

additional external costs, which they may pass on to money market funds in the form of higher 

annual licensing fees. See id. at text accompanying n. 2340. However, on account of the 

relatively low per-fund one-time hour burden that we estimate in connection with the amended 

disclosure requirements of Form N-MFP, we expect that any increase in licensing fees will be 

insignificant, and thus we estimate that there are no external costs associated with the amended 

Form N-MFP disclosure requirements. 

188 The Commission has submitted an application to the OMB for revision of the current approved 

collection of information for Form N-MFP in connection with the 2014 Money Market Fund 

Adopting Release. When and if approved, the collection of information for Form N-MFP will 

increase to 83,412 hours. 
62

annually for all funds.189 Because we estimate no external costs associated with complying with 

the amended Form N-MFP disclosure requirements, the annual external costs associated with 

the Form N-MFP collection of information would remain $4,424,480.

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.

V. ECONOMIC ANALYSIS

As discussed above, we are re-proposing amendments to rule 2a-7 and Form N-MFP 

under the Investment Company Act to implement section 939A of the Dodd-Frank Act, which 

requires the Commission, to “review any regulation issued by [the Commission] that requires the 

use of an assessment of the credit-worthiness of a security or money market instrument and any 

references to or requirements in such regulations regarding credit ratings.”190 That section 

further provides that the Commission shall “modify any such regulations identified by the review 

. . . to remove any reference to or requirement of reliance on credit ratings and to substitute in 

such regulations such standard of credit-worthiness as [the Commission] shall determine as 

appropriate for such regulations.”191 

 189 This estimate is based on the following calculation: 45,214 hours (current approved 

burden) + 559 hours = 45,773 hours. If the revised collection of information for Form N-MFP in 

connection with the 2014 Money Market Fund Adopting Release is approved, as well as the 

collection of information associated with the re-proposed amendments to Form N-MFP as 

discussed in this release, the collection of information for Form N-MFP would increase to 83,971 

hours (83,412 hours + 559 hours). See supra note 188.

190 Pub. L. No. 111-203 § 939A(a)(1)-(2). Section 939A of the Dodd-Frank Act applies to all federal 

agencies. 

191 Pub. L. No. 111-203 § 939A(b). Section 939A of the Dodd Frank Act provides that agencies 

shall seek to establish to the extent feasible, uniform standards of creditworthiness, taking into 

account the entities the agencies regulate and the purposes for which those entities would rely on 

such standards.
63

We also are proposing to amend rule 2a-7 to eliminate the exclusion to the issuer 

diversification requirement for securities subject to a guarantee issued by a non-controlled 

person. As a result, most non-government securities subject to a guarantee (including an assetbacked security with a presumed sponsor guarantee) would have to comply with both the 5

percent diversification requirement for issuers (including SPE issuers) and the 10 percent

diversification requirement for guarantors and providers of demand features.192

The economic baseline for our economic analysis is the regulatory framework as it exists 

immediately before the re-proposal, that is, the regulatory framework after the amendments to 

rule 2a-7 were adopted today in the 2014 Money Market Fund Adopting Release. As discussed 

in more detail below, that adopting release makes material changes to money market fund 

regulation that we believe may result in material changes to the money market fund industry. 

Because there is an extended compliance period for those amendments, we do not know how 

market participants, including money market fund managers selecting portfolio securities, may 

react as a result. Thus, we are not able to provide quantitative estimates for the incremental 

effects of our re-proposal. For example, under the baseline, institutional prime money market 

funds have floating NAVs and maintain the distinction between first and second tier securities. 

We are unable to estimate how institutional prime funds will choose to allocate their portfolios 

among first and second tier securities under our re-proposal when they have floating NAVs. We 

can describe potential economic effects of complying with the re-proposed and proposed 

amendments to the rule, but without knowing how fund portfolio allocations may change, we 

 192 As discussed above, the asset-backed security presumed guarantee is counted toward the 10% 

limitation on guarantees and demand features provided by the same institution. Up to 15% of the 

value of securities held in a tax-exempt money market fund’s portfolio may be subject to 

guarantees or demand features for a single institution, and up to 25% of the value of securities 

held in a single state money market fund portfolio may be issued by any single issuer. See supra

notes 125-126. 
64

cannot quantify these potential effects. For the remainder of our economic analysis, we discuss 

separately the re-proposed rule 2a-7 amendments to remove and replace ratings references, the 

re-proposed Form N-MFP amendments, and the proposed amendments to rule 2a-7’s issuer 

diversification provision. 

A. Rule 2a-7

The re-proposed amendments to rule 2a-7 would affect five elements of the rule. These 

are: (i) determination of whether a security is an eligible security; (ii) determination of whether a 

security is a first tier security; (iii) credit quality standards for securities with a conditional 

demand feature; (iv) requirements for monitoring securities for ratings downgrades and other 

credit events; and (v) stress testing.193 The re-proposed amendments, which are similar to those 

we proposed in 2011, are designed to remove any requirement of reliance on credit ratings and to 

substitute standards of creditworthiness that we believe are appropriate.

1. Economic Baseline

As discussed above, the credit risk limitations in rule 2a-7 currently require that money 

market funds undertake a two-step analysis before acquiring a portfolio security.

194 First, funds 

must determine whether a security has received credit ratings from the “requisite NRSROs” in 

one of the two highest short-term rating categories or, if the security is unrated, determine that it 

is of comparable quality. A money market fund must invest at least 97 percent of its portfolio in 

first tier securities, which are eligible securities that have received a rating from the requisite 

NRSROs in the highest short-term rating category for debt obligations (or unrated securities of 

 193 The re-proposed rule also would make conforming amendments to rule 2a-7’s recordkeeping and 

reporting requirements. See re-proposed rule 2a-7(h)(3).

194 See supra notes 20-25 and accompanying text. The credit risk limitations of rule 2a-7, as well as 

the other specific provisions of rule 2a-7 that reference credit ratings, were not changed by the 

adoption of the amendments discussed in the 2014 Money Market Fund Adopting Release. 
65

comparable quality). Second, the fund’s board of directors (or its delegate) must determine that 

the security presents minimal credit risks, “based on factors pertaining to credit quality in 

addition to any rating assigned to such securities by a designated NRSRO.” In addition, under 

rule 2a-7, a security subject to a conditional demand feature 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. 

Based on Form N-MFP filings from February 28, 2014, the Commission estimates that 

99.75 percent of aggregate money market fund assets are in first tier securities, 0.24 percent of 

aggregate money market fund assets are in second tier securities, and 0.01 percent of aggregate 

money market fund assets are in unrated securities. Among the 559 funds that filed Form 

N-MFP that month, we estimate that 488 funds held only tier one rated securities, 503 funds held 

no tier two rated securities, and 537 funds held no unrated securities. In addition, less than 5 

percent of all money market funds, and only 6 prime funds out of 229 prime funds held the 

maximum amount of second tier securities permitted under rule 2a-7. Using additional data from 

the Federal Reserve Board, we estimate that money market fund holdings of second tier 

commercial paper represent 5.1 percent of the outstanding issues of second tier commercial 

paper.195 

Securities subject to a conditional demand feature are typically variable rate demand 

notes issued by municipalities that have a conditional demand feature issued by a bank. Based 

 195 This data is based on the Federal Reserve Board’s statistics on outstanding volume of commercial 

paper. See Commercial Paper Outstanding by special categories, available at

http://www.federalreserve.gov/releases/cp/outstanding.htm. 
66

on Form N-MFP filings as of February 28, 2014, the Commission estimates that 11 percent of 

money market fund assets are invested in securities with a demand feature. We estimate further 

that securities with conditional demand features represent 25 percent of securities with demand 

features and 3 percent of all securities held by money market funds. We further estimate that 81

percent of those underlying securities (or their issuers or guarantors) have received an NRSRO 

rating in the second-highest long-term rating category, while 19 percent have received an 

NRSRO rating in the highest long-term category.

196

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.197 We understand that downgrades are rare among money market fund 

portfolio securities.198 As discussed above, we believe, based on staff experience, that most, if 

not all, money market funds currently monitor portfolio securities for minimal credit risk on an 

ongoing basis.199 We assume for purposes of this analysis, however, that these funds do not have 

written policies and procedures that specifically address ongoing minimal credit risk monitoring. 

 196 An underlying long-term security would become a short-term security when its remaining time to 

maturity is less than 397 days. See supra note 78. These estimates are based on a random sample 

of 10% of the securities that have demand features that were reported in February 2014 Form 

N-MFP filings.

197 See supra notes 91-92 and accompanying text.

198 See, e.g., Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher, a 

report by staff of the Division of Risk, Strategy, and Financial Innovation (Nov. 30, 2012), 

available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf, at 

14-16 (discussing events such as credit rating downgrades that have led money market fund 

sponsors to choose to provide support to the fund or to seek staff no-action assurances permitting 

such support). 

199 See supra notes 102-106 and accompanying text.
67

Finally, rule 2a-7 currently requires money market funds to stress test their portfolios.200 

Under the rule, a money market fund’s board of directors must adopt written procedures to test 

the ability of a fund to maintain at least 10 percent of its total assets in weekly liquid assets and

minimize principal volatility (and, in the case of a money market fund using the amortized cost 

method of valuation or penny rounding method of pricing, the fund’s ability to maintain a stable 

share price per share) based on certain hypothetical events, including a downgrade or default of 

particular portfolio security positions, each representing various portions of the fund’s portfolio. 

We believe that funds stress test at least monthly.201 

2. Economic Analysis

The re-proposed amendments to rule 2a-7 would assist in further implementing section 

939A of the Dodd-Frank Act. These amendments are designed to establish credit quality 

standards similar to those currently in the rule. By replacing references to credit ratings, the 

re-proposed amendments may, particularly when considered together with other amendments the 

Commission has adopted that remove credit ratings references in other rules and forms under the 

federal securities laws, contribute to the Dodd-Frank Act goals of reducing perceived 

government endorsement of NRSROs and over-reliance on credit ratings by market 

participants.

202

Eligible securities. Under the re-proposal, a money market fund board (or its delegate) 

would be required to determine minimal credit risk by applying a subjective credit quality 

 200 Rule 2a-7(g)(8).

201 See 2014 Money Market Fund Adopting Release, supra note 8, at section IV.A.5.

202 See Report of the House of Representatives Financial Services Committee to Accompany H.R. 

4173, H. Rep. No. 111-517 at 871 (2010). But see infra notes 209-210 and accompanying text 

(discussing a commenter’s view that the Commission’s re-proposal to eliminate credit ratings 

could actually increase money market fund investor reliance on credit ratings). 
68

standard. Because the interpretation of this subjective standard may differ among fund boards 

and their advisers, the possible range of securities available for investment may differ from that

under the current rule if the re-proposed standard is adopted. Aggressive risk assessments may 

result in a broader set of securities holdings through investments in more second tier securities 

with a wider range of credit quality, while conservative risk assessments may result in a more 

restricted set of securities holdings with a narrower range of credit quality. We believe that fund 

managers are generally unlikely to increase exposure of their funds to riskier second tier 

securities in light of both current market practices and amendments to rule 2a-7 adopted in the 

2014 Money Market Fund Adopting Release.203 First, we anticipate that many money market 

funds are likely to retain their current investment policies, which incorporate NRSRO ratings and 

would be permitted under the re-proposed rule amendments. Indeed, we understand that many 

funds today have investment policies that are more restrictive than rule 2a-7 requires, including 

policies that, for example, limit investments to first tier securities.204 As a result, we do not 

 203 As noted above, we do not believe fund managers are likely to invest in third tier securities (or 

comparable unrated securities) because those securities would not satisfy the re-proposed 

standard for eligible securities that the security’s issuer have an exceptionally strong capacity to 

meet its short-term financial obligations. See supra note 45 and accompanying and following 

text.

204 As of February 28, 2014, 179 money market funds, representing approximately 59% of all money 

market funds assets (88% of all institutional money market fund assets) were invested in money 

market funds that were themselves rated by credit rating agencies, and approximately 98% of 

rated money market funds were rated first tier. For a money market fund to receive a first tier 

rating, credit rating agencies generally require the fund to limit its portfolio securities to first tier 

securities. See, e.g., FitchRatings, Global Money Market Fund Rating Criteria (Mar. 26, 2013), 

available at http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704145

(registration required) (stating that its “AAAmmf” top rating requires that a money market fund 

have 100% of its portfolio securities rated first tier (“F1+” or “F1”)); Standard & Poor’s, 

Methodology: Principal Stability Fund Ratings (June 8, 2011), available at

https://www.sbafla.com/prime/portals/8/RiskMan_Oversight/FundProfile/201106_SPPrincipalSta

bilityFundRatingsMethodology.pdf (stating that “[i]n In order for a fund to be eligible for an 

investment-grade rating, all investments should carry a Standard & Poor's short-term rating of 

'A-1+' or 'A-1' (or SP-1+ or SP-1), or Standard & Poor's will consider all of the investments to be 

of equivalent credit quality”). 
69

expect that these money market funds would change current policies and procedures they have 

adopted that limit their investments to those assigned the highest NRSRO ratings. We also note 

that according to Form N-MFP filings from February 28, 2014, fund assets in second tier 

securities represented 0.24 percent of total money market fund assets and that 24 funds (out of a 

total of 559) currently hold the maximum amount of second tier securities permissible under rule 

2a-7. We do not anticipate that money market funds representing the significant majority of 

assets under management are likely to increase substantially their investments in riskier 

securities as a result of our proposal because these funds do not currently invest in second tier 

securities to the extent permitted now. 

Second, as discussed above, the new amendments to rule 2a-7 may reduce the potential

that funds would invest in riskier securities. Under the reforms, money market funds other than 

government money market funds are subject to fees and gates, while institutional prime money 

market funds will be required to transact at a floating NAV.205 We believe that these 

amendments may encourage non-government funds to more closely monitor fund liquidity and 

hold more liquid securities to increase the level of daily and weekly liquid assets in the fund

because doing so will tend to lessen the likelihood of a fee or gate being imposed. The newlyadopted money market fund reforms also require each fund daily to disclose its market value 

rounded to four decimal points (or an equivalent level of accuracy for a fund using a share price 

other than $1.0000206) and to depict historical information about its daily NAV for the previous 

six months. These disclosures may increase informational efficiency by allowing investors to 

 205 Rule 2a-7(a)(16) defines a government money market fund as a money market fund that invests 

99.5% or more of its total assets in cash, government securities, and/or repurchase agreements 

that are collateralized fully. See supra note 15.

206 See supra note 49.
70

see variations in share value that are not apparent in the share price and compare the principal 

volatility among funds over time. As a result, to the extent that institutional investors continue to 

value price stability and can see these variations in share value, we believe that institutional 

prime funds will endeavor to reduce NAV fluctuations. 

Third, funds are permitted to refer to credit ratings while making their minimal credit risk 

determinations. A first tier credit rating might help support the fund’s determination that the 

security is an eligible security, while a second tier credit rating might not support the same 

determination. Thus, fund managers may have to perform additional credit research and analysis 

on the issuers of second tier securities in order to determine whether the investment would be 

permitted under the re-proposed amendments. We believe that many fund managers may not 

wish to invest in the additional resources necessary to make this assessment with respect to 

second tier securities unless the fund believes that the expected risk-adjusted return of doing so 

would be greater than the expected costs. 

The re-proposal would eliminate the current limitations on fund investments in second 

tier securities.207 As a result, funds may increase their holdings of second tier securities despite 

the considerations discussed above. We believe that, to the extent money market funds increase 

investments in riskier securities, institutional prime funds are more likely than stable-NAV funds 

to do so because only stable-NAV funds will break the buck if the economic value of the 

underlying portfolio changes too much. While some shareholders may continue to demand price 

stability rather than high yield from institutional prime funds, if enough shareholders prefer yield 

over price stability, institutional prime funds will be incentivized to increase their investments in 

second tier securities. Allocative efficiency may improve if such preferences result in relatively 

 207 See supra notes 25 and 43 and accompanying text.
71

riskier securities moving from the portfolios of stable-NAV funds to the portfolios of 

institutional prime funds because the reallocation may enable money market fund shareholders to 

choose funds that better match their preferences for risk and return. We do not, however, know 

whether institutional prime funds with floating NAVs, which will have to compete with other 

money market funds, including stable-NAV government funds, will focus on maintaining 

comparatively stable NAVs or on generating comparatively high yields.

Under the assumption that money market funds would increase their relative holdings of 

second tier securities if the re-proposed amendments were adopted, the effects on competition 

and capital formation will depend, in part, on whether the increased second tier investments 

come from new assets outside the funds, which when invested by money market funds are 

disproportionately invested in second tier securities or whether the increased second tier 

investments will come from a shift of assets from first tier securities to second tier securities. If 

the former, the effects of competition between issuers of first and second tier securities might be 

small, and capital formation might improve in the second tier market as the size of the new 

investment increases. If the latter, an increase in capital formation from issuers of second tier 

securities may result in a corresponding decrease in capital formation from issuers of first tier 

securities, which, in turn, may lead to increased competition between issuers of first and second 

tier securities. We are unable to estimate these effects because we do not know how 

shareholders and funds will respond to the elimination of the current limitation on fund 

investments in second tier securities.

The re-proposed amendments to Form N-MFP, which are discussed in more detail below,

may reduce the potential that fund boards (or managers) that use credit ratings will increase 

significantly fund investments in second tier securities beyond the level desired by fund
72

shareholders. We would require each money market fund to disclose on Form N-MFP those 

NRSRO ratings the fund’s board (or its delegate) has considered, if any, in determining whether 

a security presents minimal credit risks. The disclosure to investors of these risk indicators may

have the effect of penalizing funds that assume a level of risk that is different from that which is 

desired by their shareholders. 

As discussed above, the vast majority of money market funds held no second tier 

securities on February 28, 2014, and few funds held the maximum permissible 3 percent. We 

therefore believe that a reduction or even elimination of second tier securities from the money 

market fund industry’s aggregate portfolio will not likely have a material effect on issuers of 

either first or second tier securities. However, removing second tier securities from the 

portfolios of individual money market funds may negatively affect yields in certain funds, 

especially during periods when second tier securities offer substantially higher yields than the 

yields offered by first tier securities.

One commenter suggested that eliminating references to credit ratings in the definition of 

eligible security would lead to more unrated securities issuances in the market.208 The 

commenter argued that some issuers of money market instruments might forego the expense of 

ratings because they would face greater uncertainty as to market acceptance under the subjective 

determinations of money market fund advisers. In addition, some issuers of instruments that 

might not receive a rating in the highest category might choose not to obtain a rating. This 

commenter opined that such a result would make it more difficult to retain a degree of risk 

limitation similar to that in the current rule.

 208 See Schwab Comment Letter, supra note 30.
73

We believe that most money market funds would not likely change their current 

investment policies if the re-proposed amendments were adopted. Nevertheless, we recognize 

that some fund boards might choose not to consider NRSRO ratings in their credit assessments

or as noted above, fewer securities may be rated. If, as a result, the demand for NRSRO ratings 

were reduced significantly, NRSROs might invest less in producing quality ratings. The 

importance attached to NRSRO ratings currently as a result of the history of their use in 

regulatory requirements may impart franchise value to the NRSRO rating business. By 

eliminating references to NRSRO ratings in federal regulations, section 939A of the Dodd-Frank 

Act could reduce these franchise values and reduce NRSROs’ incentives to produce credible and 

reliable ratings. In addition, eliminating the required use of credit ratings in Commission rules 

and forms may reduce the incentive for credit rating agencies to register as NRSROs with the 

Commission, which registration subjects them to Commission oversight and the statutory and 

regulatory requirements applicable to NRSROs. If the quality and accuracy of NRSRO ratings 

were adversely affected yet the ratings continued to be used by enough other parties, the capital 

allocation process and economic efficiency might be impaired.

Another commenter stated that our re-proposal to eliminate references to credit ratings 

could increase investor reliance on credit ratings.209 This commenter stated that to the extent that 

investors cannot be reassured that money market funds are investing in rated securities, they can 

reasonably be expected to seek the “reassurance” ratings provide in other ways. Specifically, 

investors could seek rated funds in even greater numbers “as the ratings, and the investment 

guidelines that underlie them, will provide an objective standard that investors can use to 

 209 See Comment Letter of Wells Fargo Funds Management, LLC (Apr. 25, 2011).
74

distinguish amongst funds,” which would encourage more funds to become rated.210 If, as a 

result of the re-proposed amendments, currently unrated money market funds obtain ratings to 

compete in the market, it could increase their costs. Such a result also might increase rather than

reduce investor reliance on credit ratings. To the extent that funds continue to use ratings, which 

we believe most will, investors would be able to determine the ratings of fund portfolio securities 

from the disclosures required under the re-proposed amendments to Form N-MFP.

In our discussion above, we have suggested guidance that a fund board (or its delegate) 

should consider in making credit quality assessments. As we noted, based on staff observations 

in examinations and prior staff guidance, we assume that most money market fund managers 

currently take these factors into account, as appropriate, when they determine that a portfolio 

security presents minimal credit risks. Moreover, as noted above, the guidance is not intended to 

define the parameters of an appropriate credit quality assessment; that is for the fund’s board and 

its adviser to determine with respect to each particular portfolio security. Thus, we do not 

anticipate that the re-proposal’s discussion of factors that a fund manager should consider would 

significantly change the process for evaluating credit quality or that consideration of the factors 

listed above would significantly impact the holdings in money market fund portfolios. For these 

reasons, we believe that the guidance will not have a material effect on efficiency, competition, 

or capital formation. Funds may, however, consider whether their policies and procedures for 

credit quality assessment should be revised in light of the guidance, and, as a result, may update 

them. 

 210 Id. The comment letter stated that over 80% of institutional assets were in rated money market 

funds.
75

Conditional Demand Feature. The re-proposed amendments would replace the current 

objective standard for determining the credit quality of an underlying security with a subjective 

standard, which is based on the qualitative standard NRSROs use to describe a security with the 

second-highest long term rating. We recognize that fund managers could interpret this subjective 

standard in different ways, which could widen the range of credit quality in underlying securities 

in which money market funds invest. However, we do not believe that fund managers will likely 

interpret this subjective standard in a manner that results in funds increasing the risk profiles of 

their underlying securities. For the reasons discussed above, we do not believe that securities 

that are rated by NRSROs in the third-highest category for long-term ratings (or comparable 

unrated securities) would satisfy the proposed standard that the issuer of underlying securities

have a very strong capacity to meet its financial commitments.

211 We also note that funds 

currently can invest exclusively in underlying securities rated in the second-highest category if 

the instrument meets the other conditions for eligibility.212 We estimate that most underlying 

securities held by money market funds (81 percent) are rated in the second-highest long-term 

category, and a smaller portion (19 percent) are rated in the highest long-term category.

213 For 

these reasons, we have no reason to anticipate that funds are likely to increase the portion of their 

 211 See text accompanying supra note 84. Securities with these ratings generally have expectations 

of low credit risk or have obligors have only a strong capacity to meet their financial 

commitments. See Moody’s Ratings Definitions, supra note 38, at 5 (long-term obligations 

“rated A are judged to be upper-medium grade and are subject to low credit risk.”); Fitch Ratings 

Scales, supra note 38, at 9 (long-term “A ratings denote expectations of low credit risk. The 

capacity for payment of financial commitments is considered strong.”); S&P Ratings Definitions, 

supra note 38, at 4 (a long-term obligation “rated ‘A’ is somewhat more susceptible to the 

adverse effects of changes in circumstances and economic conditions than obligations in 

higher-rated categories. However, the obligor's capacity to meet its financial commitment on the 

obligation is still strong.”). 

212 Rule 2a-7(d)(2)(iv).

213 See supra note 196 and accompanying text.
76

underlying securities that are rated in the second-highest long-term category as a result of the 

re-proposed amendments. Because we believe that our re-proposal will result in only small 

changes to the behavior of funds with respect to investments in securities with conditional 

demand features, we believe that this re-proposed amendment will result in little to no effect on 

efficiency, competition, or capital formation for either funds or issuers. 

As discussed above, we believe that if the re-proposed amendments to rule 2a-7 were 

adopted, money market fund complexes would incur certain costs in reviewing and updating 

their policies and procedures. Specifically, each complex would review the amendments to the 

credit quality standards in rule 2a-7 and, as it determines appropriate in light of the amendments, 

revise its policies and procedures to incorporate the amended credit quality standards to be used 

in determining the eligibility of a money market fund’s portfolio securities, including securities 

that are subject to a conditional demand feature. 

Monitoring Minimal Credit Risk. As discussed above, we believe the re-proposed 

requirement that each money market fund adopt written policies and procedures for ongoing 

monitoring of minimal credit risks for each portfolio security essentially codifies the current 

practices of fund managers, which are already explicit (and implicit) in several provisions of the 

rule and are discussed above.214 Although based on staff experience we believe that most, if not

all, money market funds currently monitor portfolio securities for minimal credit risk on an 

ongoing basis (as rule 2a-7 requires215), we note that money market funds are not currently 

required to maintain written policies and procedures that specifically address monitoring. We 

believe that to the extent that some money market funds may not have written procedures to 

 214 See supra notes 91-92, 102-106 and accompanying text.

215 See id.
77

regularly monitor minimal credit risks, our re-proposal to require such procedures is designed to 

ensure that funds are better positioned to identify quickly potential risks of credit events that 

could impact portfolio security prices. The costs associated with the re-proposed minimal credit 

risk monitoring requirement, as discussed above, will vary based on the extent to which funds’ 

existing procedures need to be transcribed and reviewed.

216 We believe that the

written-procedure requirement in the re-proposal will not materially affect efficiency, 

competition, or capital formation because we expect no material changes in how funds invest.

Stress Testing. As discussed above, the re-proposed amendments are designed to retain 

similar standards for stress testing as under current rule 2a-7. Specifically, while the re-proposed 

amendments would replace the current reference to ratings downgrades in the rule 2a-7 stress 

testing requirement, the amendments would instead require funds to test for an event indicating 

or evidencing credit deterioration of particular portfolio security positions, each representing 

various positions of the fund’s portfolio, and include a downgrade or default as examples of such 

an event. Consequently, we recognize that a money market fund could use its current policies 

and procedures for stress testing, including testing for a downgrade, to comply with the 

proposed amendments. And we believe that funds will do so because a downgrade by a relevant 

NRSRO may impact the price of a portfolio security.

217 Because we believe that funds will not 

change their stress testing policies and procedures in response to this re-proposed amendment, 

we do not believe there would be any costs associated with it.218 Thus we do not anticipate that 

this re-proposed amendment is likely to impact efficiency, competition, or capital formation.

 216 See supra note 163.

217 See ICI Comment Letter, supra note 30.

218 See supra text accompanying and following note 172.
78

Policies and Procedures. As discussed above, money market funds have written policies 

and procedures for complying with rule 2a-7, including policies and procedures for determining

and reassessing minimal credit risk and for stress testing the portfolio.219 Although our 

re-proposal would not require changes to these policies and procedures for most money market 

funds, we anticipate that funds would likely review them and may revise them in consideration

of the standard provided in the re-proposal, if adopted. We also anticipate that after such a 

review, many fund boards and advisers would retain investment policies tied to NRSRO ratings 

required under the current rule.220 Although we cannot predict the number of funds that would 

review and revise their policies and procedures or the extent to which funds may do so, we 

estimate that each fund would incur, at a minimum, the collection of information costs discussed 

in the Paperwork Reduction Act section for a total average one-time cost of approximately 

$2,838 per fund complex.

221 These minimum costs assume that a fund would review its policies 

and procedures in consideration of the re-proposed amendments and make minor changes to 

conform with revised rule text, but would not change significantly the policies and procedures 

relating to the fund’s credit quality assessments, monitoring for minimal credit risk or stress 

testing, which currently include consideration of NRSRO ratings. 

As noted above, we believe that while funds monitor for minimal credit risks on an 

ongoing basis currently, we assume that funds do not have written policies and procedures to 

 219 See rule 38a-1(a).

220 See supra paragraph including note 151. We also note that most commenters on the 2011 

proposal supported permitting funds to continue to use ratings, and some asked us to clarify that 

ratings continue to be a permissible factor for boards or their delegates to consider in making 

credit quality determinations. See, e.g., BlackRock Comment Letter, supra note 122; IDC 

Comment Letter, supra note 30. Our re-proposed amendments to Form N-MFP, discussed above, 

reflect our clarification that ratings continued to be a permissible factor to use in making credit 

quality determinations. 

221 See supra note 154.
79

address monitoring.222 We estimate the average one-time costs to adopt those written policies 

would be $3,619 per fund.223 Because we anticipate that our re-proposal is not likely to change 

these fund policies significantly, we believe it is not likely to have a significant impact on 

efficiency, competition, or capital formation.

3. Alternatives

In addition to the re-proposed amendments to rule 2a-7, we considered adopting the 

amendments we proposed in 2011. That proposal would have required fund boards first to 

determine whether securities are eligible securities based on minimal credit risks, and second to 

distinguish between first and second tier securities based on subjective standards similar to those 

the ratings agencies have developed to describe their ratings. As discussed above, we have been 

persuaded by the concerns some commenters expressed on the 2011 proposal. In particular, as 

several commenters noted, a two-tier approach could be confusing without reference to objective 

standards, and fund advisers are likely to make many of the same considerations in evaluating 

first and second tier securities.224 In addition, on balance, we believe that the re-proposed single 

standard may better reflect the risk limitation in the current rule. The 2011 Proposing Release 

described the standard for second tier securities in language similar to the descriptions NRSROs 

use for second tier securities, which fund managers might interpret as permitting funds to invest 

in riskier second tier securities to a greater extent than under our re-proposal, which is designed 

to limit investments in very high quality second tier securities. Such increased investments in 

riskier second tier securities would increase the risk profile of money market funds. 

 222 See supra notes 102-106 and accompanying text.

223 See supra note 164.

224 See supra note 31 and accompanying text.
80

We also considered proposing a single standard that would require a minimal credit risk 

determination, but with a finding different from what we are re-proposing today. For example, 

the board could be required to find that the issuer or guarantor has a repayment capacity that 

reflects the standard that NRSROs articulate for second tier securities. We did not re-propose 

this alternative because of concerns that such a standard could lower the credit quality of money 

market fund portfolios. Under this single standard, there would be no distinction between first

tier and second tier securities and no limitation on fund holdings of second tier securities, unlike 

the current rule, which limits a money market fund to investing no more than 3 percent of its

total assets in second tier securities. Without that investment limitation, a manager could invest 

a significantly greater portion of the fund’s portfolio in second tier securities, which could result 

in an increase in the portfolio risk of some funds that is inconsistent with the relevant risk 

limitations in the current rule. Both this alternative single standard approach and the two-tier 

approach discussed above could have different effects on competition and capital formation than 

the effects on competition and capital formation stemming from the re-proposed approach, as a 

result of ensuing increased or decreased investments in second tier securities. However, we are 

unable to estimate the relative effects on competition or capital formation because we do not 

know how shareholders and funds would respond to these approaches as compared to the 

re-proposed elimination of the current limitation on fund investments in second tier securities. 

With respect to replacing the reference to ratings in determining the eligibility of 

underlying securities (i.e., those that are subject to a conditional demand feature), we considered 

a qualitative standard that NRSROs use to articulate long-term securities in the highest rating

category. We note generally that few issuers or guarantors have received long-term ratings in the 
81

highest category.225 Moreover, issuers assigned a first tier short-term rating may have received a 

long-term rating in the second-highest category.226 Because of the limited NRSRO assignments 

of the highest long-term ratings to issuers, managers might interpret this alternative to preclude 

fund investments in a security subject to a conditional demand feature (that is itself an eligible 

security) if the underlying security’s issuer or guarantor is rated in the second-highest category. 

Such an interpretation could significantly deviate from the credit quality standards in the current 

rule, which is not our intent. It also would likely reduce money market fund investments in these 

securities.

In re-proposing to eliminate the current reference to ratings downgrades in the monitoring 

standard of rule 2a-7, we considered the rule 2a-7 amendments that we proposed in 2011.227 

These proposed amendments would have required that, in the event the money market fund 

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 security 

 225 See Vipal Monga & Mike Cherney, CFO Journal: Lose your Triple-A Rating? Who Cares?, 

WALL ST. J. (Apr. 29, 2014) (noting the decline in companies with triple A long-term ratings).

226 See Moody’s Ratings Definitions, supra note 38, at 6 (showing the linkage between short-term 

and long-term ratings when such long-term ratings exist); Standard &Poor’s, About Credit 

Ratings (2012), 

http://www.standardandpoors.com/aboutcreditratings/RatingsManual_PrintGuide.html (each 

short-term rating corresponds to a band of long-term ratings. For instance, the A-1 short-term 

rating generally corresponds to the long-term ratings of ‘A+,’ ‘A,’ and ‘A-’.”); FitchRatings, 

Ratings Definitions (2014), 

https://www.fitchratings.com/jsp/general/RatingsDefinitions.faces?context=5&detail=507&conte

xt_ln=5&detail_ln=500 (indicating the relationship between short-term and long-term ratings 

with a table and acknowledging that “lower relative short-term default risk, perhaps through 

factors that lend the issuer’s profile temporary support, may coexist with higher medium-or 

longer term default risk”). 

227 See supra notes 91-93 and accompanying text.
82

continues to present minimal credit risks.228 Most of those who commented on this proposed 

amendment objected to it as an inefficient method of notifying funds if a portfolio security is 

potentially impaired. As discussed in more detail above, we have been persuaded by 

commenters’ concerns in re-proposing a different standard than that proposed in 2011.229

Finally, we also considered removing the current reference to ratings downgrades in the 

stress testing provisions of rule 2a-7 and replacing this reference with the requirement that 

money market funds stress test their portfolios for an adverse change in the ability of a portfolio 

security issuer to meet its short-term credit obligations. As discussed above, we proposed this 

alternative in 2011, and commenters on the 2011 proposal who addressed this issue uniformly 

advocated against removing the reference to a downgrade in the stress testing conditions.230 We 

believe that the 2011 proposed standard, as compared to the standard we re-propose in this 

release, was less clear and that it would lead to more burdensome monitoring and greater 

inefficiencies in developing hypothetical events for stress testing. In light of these commenters’ 

concerns, we have thus decided to re-propose amendments to the stress testing provisions of rule 

2a-7 that would permit funds to continue to test their portfolios against a potential downgrade or 

default, as discussed in more detail above.231

4. Request for Comment

We request comment on our estimates and assumptions regarding the costs and benefits 

of the re-proposed amendments to rule 2a-7 and the effects of these amendments on efficiency, 

competition, or capital formation. For purposes of the Small Business Regulatory Enforcement 

 228 Id.

229 See supra notes 97-100 and accompanying text.

230 See supra notes 112-113 and accompanying text. 

231 See supra note 114 and accompanying text.
83

Fairness Act of 1996 (“SBREFA”),

232 we also request information regarding the potential annual 

effect of the re-proposed amendments to rule 2a-7 on the U.S. economy. Commenters are 

requested to provide empirical data to support their views.

In addition to our general request for comment on the costs and benefits of the 

re-proposed amendments, we request specific comment on certain aspects of the amendments. 

What additional operational costs, if any, may result from making minimal credit risk 

determinations based on a subjective credit quality standard? Specifically, would the potentially 

broader range of securities available for investment that could result from a board’s 

interpretation of this standard produce additional or different costs than the current costs of 

determining minimal credit risks? Likewise, what additional operational costs, if any, may result 

from using a subjective standard for determining the credit quality of securities subject to a 

conditional demand feature? Would the potentially broader range of underlying securities 

available for investment produce additional or different costs than the current costs of evaluating 

the credit quality of underlying securities? 

We have given guidance on the factors that advisers should consider, as appropriate, in 

determining that a fund’s portfolio securities present minimal credit risk. To the extent that 

consideration of these factors is not consistent with current industry practice, how would funds 

benefit from consideration of these factors? Would this guidance result in money market funds 

or their advisers incurring additional costs, such as costs to change the process for evaluating 

credit quality? What type of costs would funds and advisers incur, and how much? With respect 

to our proposed requirement for money market funds to adopt written policies and procedures for 

 232 Pub. L. No. 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).
84

ongoing monitoring of minimal credit risks to what extent do commenters currently have written 

policies and procedures covering this type of monitoring? 

We also request comment on our re-proposed stress test amendments. Do commenters 

agree with our assessment that, under the amendments to rule 2a-7 that we re-propose, funds 

would retain downgrades by relevant NRSROs as hypothetical events for stress testing, as under 

current rule 2a-7? What hypothetical events are funds likely to use in addition to or in place of 

downgrades and why? 

Finally, we request comment on the costs and benefits of the alternatives to the 

re-proposed amendments discussed above. 

B. Form N-MFP

The re-proposed amendments would require money market funds to disclose NRSRO 

ratings in certain circumstances. Specifically, a fund would have to disclose for each portfolio 

security, (i) each rating assigned by any NRSRO if the fund or its adviser subscribes to that 

NRSRO’s services, as well as the name of the agency providing the rating, and (ii) any other 

NRSRO rating that the fund’s board of directors (or its delegate) considered in making its 

minimal credit risk determination, as well as the name of the agency providing the rating. 

NRSRO ratings provide one indicator of riskiness of a fund’s portfolio securities and, as 

discussed above, we anticipate that they will continue to be considered by many money market 

fund managers in performing credit quality assessments. We believe this ratings information 

may be useful to the Commission, to investors, and to various third parties as they monitor and 

evaluate the risks that fund managers take in both stable-NAV and institutional prime funds. We 

believe that this ratings information might be especially useful during periods in which funds 

impose fees and/or gates even though ratings are not immediately updated. 
85

1. Economic Baseline

Under the economic baseline outlined above, money market funds are required to 

disclose in Form N-MFP the credit ratings for each portfolio security. More specifically, the 

baseline form requires a fund to identify whether a portfolio security is a first or second tier 

security or is unrated, and it requires the fund to identify the “designated NRSROs” for each 

security (and for each demand feature, guarantee, or other credit enhancement). This disclosure 

requirement was not changed by the 2014 Money Market Fund Adopting Release.

As noted above, based on Form N-MFP filings from February 28, 2014, the Commission 

estimates that 99.75 percent of aggregate money market fund assets are invested in first tier 

securities, 0.24 percent of aggregate money market fund assets are invested in second tier 

securities, and 0.01 percent of aggregate money market fund assets are invested in unrated 

securities. Among the 559 funds that filed that month, we estimate that 488 funds held only tier 

one securities, 503 funds held no tier two securities, and 537 funds held no unrated securities.

2. Economic Analysis

We anticipate that our re-proposal is likely to have two primary benefits. First, it may 

contribute to eliminating perceived government endorsement of NRSROs and reducing 

over-reliance on credit ratings, particularly when considered together with other amendments the 

Commission has adopted that remove credit ratings references in other rules and forms under the 

federal securities laws. Second, it will provide transparency on whether or not specific funds use 

credit ratings when making investment decisions, and, if credit ratings are used, it allows 

shareholders and other interested parties to use those ratings to make their own risk assessments. 

We anticipate that our re-proposal is likely to have two primary costs. First, it may 

impose administrative costs on funds that need to re-program their Form N-MFP filing 
86

software.233 Second, because only funds that choose to consider credit ratings in assessing 

minimal credit risk will be permitted to disclose NRSRO ratings on Form N-MFP, our 

re-proposal may reduce transparency of risks taken by funds that do not choose to consider credit 

ratings. This loss of transparency could create additional servicing costs for such funds if 

shareholders demanded new communications regarding the credit quality of the portfolio.234

The net effect of the re-proposed amendments to Form N-MFP is that funds could not 

disclose credit ratings if credit ratings are not considered in determining whether a security is 

eligible for the portfolio. However, as discussed above, we believe that our re-proposal will not 

result in any material changes for the majority of funds because they will, we believe, continue to 

refer to credit ratings. We believe, therefore, that the re-proposal’s effects on efficiency, 

competition, and capital formation likely will be negligible. To the extent that money market

funds continue to consider NRSRO ratings in making their minimal credit risk determinations, 

the re-proposed amendments to Form N-MFP may reduce the potential that fund managers will 

increase significantly fund investments in riskier second tier securities; a fund would be required 

to disclose ratings considered in those credit determinations, and the ratings would reflect that 

increased risk. As a result, the disclosure to investors of these risk indicators may have the effect 

of penalizing funds that assume more risk.

3. Alternatives 

In considering how to meet our obligations under the Dodd-Frank Act with respect to 

Form N-MFP, we evaluated two primary alternatives. In 2011, we proposed to completely

 233 See supra notes 180-181 and accompanying text (discussion of re-programming costs in PRA 

analysis). 

234 See Dreyfus Comment Letter supra note 30 (opposing the elimination of credit ratings disclosures 

in Form N-MFP because of the potential that the fund would bear increased shareholder servicing 

costs to provide additional communications regarding the credit quality of the portfolio). 
87

eliminate the following two form items: the item that requires a fund to identify whether a 

portfolio security is a first tier security, a second tier security, or an unrated security; and the 

item that requires the fund to identify the “requisite NRSROs” for each security (and for each 

demand feature, guarantee, or other credit enhancement). We are not re-proposing this 

alternative because we now believe that completely eliminating such disclosure requirements 

masks not only the credit ratings but also information on whether or not the fund uses credit 

ratings when making its investment decisions. 

We also considered not removing the disclosure requirement as recommended by several 

commenters to the 2011 Proposing Release.235 We elected not to leave the current disclosure 

requirements as is, but instead to re-propose the required disclosure of NRSRO ratings only in 

certain circumstances. We believe this re-proposal would be in keeping with Congressional 

intent underlying section 939A of the Dodd-Frank Act to reduce perceived government 

endorsement of credit ratings.

4. Request for Comment

We request comment on our estimates and assumptions regarding the costs and benefits 

of the re-proposed amendments to Form N-MFP and the effects of these amendments on 

efficiency, competition, or capital formation. As discussed above, we believe that most, if not 

all, money market funds will continue to consider NRSRO ratings in some form. We request 

comment on whether any funds expect that they will not report NRSRO ratings, and on 

shareholders’ and third parties’ likely response to funds that do not report NRSRO credit ratings. 

We also request comment on our assumption that the costs to money market funds to reprogram 

 235 See BlackRock Comment Letter, supra note 122; Dreyfus Comment Letter, supra note 30; 

Federated Comment Letter, supra note 30; Comment Letter of the Securities Industry and 

Financial Markets Association (Apr. 18, 2011).
88

their Form N-MFP filing software, in order to comply with the re-proposed amendments, would 

be the same costs that we discuss in the Paperwork Reduction Act analysis of this release.236 

Finally, we request comment on the costs and benefits of the alternatives to the re-proposed 

amendments discussed above.

For purposes of SBREFA, we also request information regarding the potential annual 

effect of the re-proposed amendments to Form N-MFP on the U.S. economy. Commenters are 

requested to provide empirical data to support their views.

C. Exclusion from the Issuer Diversification Requirement

1. Economic Baseline

As discussed above, most money market fund portfolio securities that are subject to a 

guarantee by a non-controlled person are currently subject to a 10 percent diversification 

requirement on guarantors but no diversification requirement on issuers, while non-government 

securities with guarantors that do not qualify as non-controlled persons are generally subject to 

both a 5 percent diversification requirement with respect to issuers and a 10 percent

diversification requirement with respect to guarantors.237 Today, we adopted amendments to rule 

2a-7 that deem sponsors of asset-backed securities to be guarantors of the asset-backed security

(unless the fund’s board rebuts the presumption). As a result, under rule 2a-7’s definition of a 

guarantee issued by a non-controlled person, both non-asset-backed securities and asset-backed 

securities subject to such a guarantee (including asset-backed securities with a presumed sponsor 

guarantee) are excluded from the rule’s issuer diversification requirement. That is, non-asset-

 236 See supra notes 180-187 and accompanying text. 

237 We note that single state funds may invest up to 25% of fund assets in securities of any single 

issuer, and tax-exempt funds may have as much as 15% of the value of portfolio securities 

invested in securities subject to guarantees or demand features issued by a single provider that is a 

non-controlled person. Rule 2a-7(d)(3)(i)(B); 2a-7(d)(3)(iii)(B). 
89

backed securities and asset-backed securities subject to a guarantee by a non-controlled person 

are subject to a 10 percent diversification requirement on guarantors, but they are not subject to a

5 percent issuer diversification requirement on the issuer.238 This forms the economic baseline 

for the new diversification amendments that we are proposing today.

2. Economic Analysis

We believe that very few money market funds rely on the issuer diversification exclusion 

for securities subject to a guarantee by a non-controlled person. This belief is based on our 

analysis of February 2014 Form N-MFP data, which shows that only 8 out of 559 money market 

funds held securities with a guarantee by a non-controlled person that exceeded the 5 percent

diversification requirement for issuers. We believe that these and only these funds in February 

2014 relied on the exclusion from the 5 percent issuer diversification requirement with respect to 

issuers of securities that are subject to a guarantee issued by a non-controlled person. However, 

we recognize that changes in fund assets could mask which funds rely on this exclusion at 

acquisition: a fund might be above the 5 percent limit today solely due to a decline in fund assets 

after acquisition, and a fund might be below the 5 percent limit today solely due to an increase in 

fund assets after acquisition.239 Whatever the cause, a money market fund that has invested more 

than 5 percent of its assets in an issuer of securities subject to a guarantee issued by a 

non-controlled person in reliance on the current exclusion under current rule 2a-7 would, when 

 238 See rule 2a-7(a)(18) (definition of guarantee); rule 2a-7(a)19) (definition of guarantee issued by a 

non-controlled person); rule 2a7(d)(3)(i) (issuer diversification).

239 All of rule 2a-7’s diversification limits are applied at the time of acquisition. For example, a fund 

may not invest in a particular issuer if, after acquisition, the fund’s aggregate investments in the 

issuer would exceed 5% of fund assets. But if the fund’s aggregate exposure after making the 

investment was less than 5%, the fund would not be required to later sell the securities if the 

fund’s assets decreased and the fund’s investment in the issuer came to represent more than 5% of 

the fund’s assets.
90

those investments mature, have to reinvest the proceeds over 5 percent elsewhere. Based on the 

February 2014 Form N-MFP filings, we believe that only a few funds would have to make 

changes to their portfolios to bring them into compliance with the proposed amendments. These

changes may or may not require the funds to invest in alternative securities, and the alternative 

securities may or may not be inferior because they offer, for example, lower yields, lower 

liquidity, or lower credit quality. It appears that the proposed elimination of the exclusion would 

have affected only 8 funds in February 2014. Five of these 8 funds exceeded the 5 percent issuer 

concentration limit by less than 1 percent of fund assets, 2 of the 8 exceeded that limit by less 

than 2 percent, and the remaining fund exceeded the limit by slightly more than 5 percent. In 

most cases, the fund exceeded the 5 percent diversification requirement with respect to only one 

issuer (one fund exceeded the requirement by less than 1 percent with respect to two issuers, and 

two funds had greater than 5 percent exposure to the same issuer). Because of the less than 

significant impact on these funds, we believe that the potential lower yields, less liquidity or 

increased risks associated with the proposal would be small for the affected funds.

240 

We assume that all funds would incur costs associated with updating their systems to 

reflect the proposed amendment, as well as the associated compliance costs, if their systems 

already incorporate this issuer diversification exclusion. We believe that these costs would be 

small for all funds because we believe that all funds currently have the ability to monitor issuer 

diversification to comply with rule 2a-7’s limits on issuer concentration.

241

 240 Consider, for example, how reducing a position from 7% to 5% might affect fund yields. The 

effect could be as small as 0% if the 2% of assets are reinvested in securities that offer the same 

yield as the original 7% of assets. On the other hand, the portfolio change could decrease fund 

yields by as much as 2/7 ≈ 29% if all of the portfolio yield came from the 7% security. We 

believe that funds will choose alternative securities that have similar yields as the securities 

replaced.

241 See 1991 Adopting Release, supra note 22, at section II.B.1 (adopting the issuer concentration 
91

Our proposed amendment offers two primary benefits. First, the amendment simplifies

rule 2a-7’s diversification requirements by eliminating the exclusion for securities with a 

guarantee issued by a non-controlled person. This would lower certain compliance and 

operational costs to the extent that funds no longer have to keep track of the securities that have 

such guarantees and would be eligible for the exclusion. Second, by requiring greater issuer 

diversification for those funds that rely on the exclusion, the proposed amendments will reduce 

concentration risk in those funds and may make it easier for funds to maintain or generate 

liquidity during periods when they impose fees and/or gates.

242 We estimate that 8 funds 

exceeded the 5 percent issuer diversification limit in February 2014; nevertheless, we recognize 

that these amendments may constrain more funds in the future that otherwise would have less 

issuer diversification.

Because we believe that the universe of potentially affected funds and issuers is small, we

believe that our proposed amendments will have only negligible effects on efficiency, 

competition, and capital formation. Although we recognize that our proposed amendments may 

affect more funds and more issuers in the future, we estimate that they will affect only 8 funds 

and 8 issuers today. These 8 funds exceed the proposed issuer diversification limit by only a 

small amount for the 8 issuers. We believe that the 8 funds will find comparable alternative 

securities for the amount that exceeds 5 percent, and we believe that the 8 issuers will find other 

investors willing to buy the amount that exceeds the 5 percent for a comparable price.

 

limit).

242 See supra section II.C.
92

3. Alternatives 

As an alternative to eliminating the exclusion from issuer diversification for securities 

with a guarantee issued by a non-controlled person, we considered requiring money market funds 

to be more diversified by lowering a fund’s permitted exposure to any guarantor or provider of a 

demand feature from 10 percent to 5 percent of total assets. We discussed potential benefits and 

costs of this alternative approach, and we requested comment on it in the 2013 Money Market 

Fund Proposing Release.243 As discussed in more detail above, we decided that the current 

requirements for diversification of guarantors and providers of demand features together with the 

issuer diversification requirement if applied generally to all securities, as under the proposed 

amendment, appropriately address our concerns relating to money market fund risk exposures.244 

We also believe that the potential costs of this alternative approach would likely be more 

significant than the costs of our proposal. As of the end of February 2014, we estimate that 107 

(of 229) prime money market funds had total exposure to a single entity (including directly 

issued, asset backed commercial paper sponsorship, and provision of guarantees and demand 

features) in excess of 5 percent. Under the alternative, any fund that had exposure to an entity

greater than 5 percent when those assets matured would have to reinvest the proceeds of the 

securities creating that exposure in different securities or securities with a different guarantor. 

Those changes may or may not require those funds to invest in alternative securities, and those 

securities might present greater risk if they offered lower yields, lower liquidity, or lower credit 

 243 See 2013 Money Market Fund Proposing Release, supra note 5, at section III.J.4. We received 

no comments on this alternative approach. We also requested comment in 2009 on whether to 

reduce rule 2a-7’s current diversification limits. See 2009 Money Market Fund Proposing 

Release, supra note 127, at section II.D. Most commenters opposed these reforms because, 

among other reasons, the reductions could increase risks to funds by requiring the funds to invest 

in relatively lower quality securities. See id. at n.909. 

244 See supra text following note 137 and accompanying notes 138-140.
93

quality. The alternative approach would appear to affect many more funds than would the 

proposed amendment. As a result, we believe that a better approach to achieving our reform goal 

would be to restrict risk exposures to all non-government issuers of securities subject to a 

guarantee or demand feature in the same way, and to require money market funds (other than 

tax-exempt and single state funds as described above) that invest in non-government securities 

subject to a guarantee to comply with the 5 percent issuer diversification requirement and the 

10 percent diversification requirement on guarantors and demand feature providers. 

4. Request for Comment

We request comment on our estimates and assumptions regarding the costs and benefits 

of the proposed amendments to rule 2a-7 that would remove the issuer diversification exclusion 

for securities subject to a guarantee by a non-controlled person, as well as the effects of this

amendment on efficiency, competition, and capital formation. For purposes of SBREFA, we 

also request information regarding the potential annual effect of this proposed amendment to rule 

2a-7 on the U.S. economy. Commenters are requested to provide empirical data to support their 

views.

In addition to our general request for comment on the costs and benefits of the proposed 

amendment, we request specific comment on certain aspects of the amendment. Are we correct 

in assuming that funds would not make substantial changes to their securities holdings as a result 

of the proposal? Do commenters expect that funds would incur operational costs in addition to, 

or that differ from, the costs we outlined above? What would be the costs of making such 

changes? Do commenters expect that money market funds would encounter any difficulties in 

finding alternative investments under our proposal that have suitable characteristics? Why or 

why not? How would this proposal affect fund yields and the stability of fund NAVs and 
94

liquidity? Will any of these or other effects be large enough to affect the behavior of money 

market fund shareholders? How will shareholders respond? Would any of these effects be 

different in floating NAV funds than they would be in non-floating NAV funds? Would our 

proposed amendments have a differential effect on funds that impose fees and/or gates? Do 

commenters agree that our proposed amendments will have only negligible effects on issuers? 

Why or why not? Are there benefits or costs in any part of the money market fund industry that 

we have not identified or discussed? If so, what are those costs or benefits? Are we correct in 

our belief that there will be only negligible effects on efficiency, competition, and capital 

formation? If not, what are the effects that we overlooked?

VI. REGULATORY FLEXIBILITY ACT CERTIFICATION

Section 3(a) of the Regulatory Flexibility Act of 1980245 (“RFA”) requires the 

Commission to undertake an initial regulatory flexibility analysis (“IRFA”) of the proposed rule 

amendments on small entities unless the Commission certifies that the rule, if adopted, would not 

have a significant economic impact on a substantial number of small entities.246 Pursuant to 

5 U.S.C. section 605(b), the Commission hereby certifies that the re-proposed and proposed 

amendments to rule 2a-7 under the Investment Company Act and the re-proposed amendments to 

Form N-MFP under the Investment Company Act would not, if adopted, have a significant 

economic impact on a substantial number of small entities.

We are re-proposing amendments to replace references to credit ratings in rule 2a-7 and 

modify disclosures of credit ratings in Form N-MFP. In addition, we are proposing to amend 

rule 2a-7’s provisions relating to issuer diversification to eliminate an exclusion from the current 

 245 5 U.S.C. 603(a).

246 5 U.S.C. 605(b).
95

issuer diversification requirement for securities that are subject to a guarantee issued by a 

non-controlled person.

Based on information in filings submitted to the Commission, we believe that there are 

no money market funds that are small entities.247 For this reason, the Commission believes that 

the re-proposed and proposed amendments to rule 2a-7 and the re-proposed amendments to Form 

N-MFP would not, if adopted, have a significant economic impact on a substantial number of 

small entities.

We encourage written comments regarding this certification. We solicit comment as to 

whether the re-proposed and proposed amendments to rule 2a-7 and the re-proposed amendments 

to Form N-MFP could have an effect on small entities that has not been considered. We request 

that commenters describe the nature of any impact on small entities and provide empirical data to 

support the extent of such impact.

STATUTORY AUTHORITY

The Commission is proposing amendments to rule 2a-7 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 Dodd-Frank Act. 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.

 247 Under the Investment Company Act, an investment company is considered a small business or 

small organization 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. See 17 CFR 270.0–10.
96

List of Subjects

17 CFR Parts 270 and 274

Investment companies, Reporting and recordkeeping requirements, Securities.

TEXT OF RULE AND FORM AMENDMENTS

In accordance with the foregoing, 17 CFR parts 270 and 274, as amended elsewhere in 

this issue of the Federal Register, are proposed to be amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 

1940

1. The authority citation for Part 270 continues to read, in part, as follows:

Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, and Pub. L. 111-203, 

sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.

* * * * *

2. 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)(13) as (a)(11) through (a)(12);

d. Revising newly designated paragraph (a)(11);

e Removing paragraph (a)(14);

f. Redesignating paragraphs (a)(15) through (a)(21) as (a)(13) through (a)(19);

g. In newly designated paragraph (a)(16):

i. Removing the phrase “(a)(12)(iii) (definition of eligible security)” from 

paragraph (a)(16)(ii); 

ii. Removing the phrase “(d)(2)(iii)” and adding in its place “(d)(2)(ii)” in 

paragraph (a)(16)(ii);
97

h. Revising newly designated paragraph (a)(17);

i. Removing paragraph (a)(22);

j. Redesignating paragraph (a)(23) as paragraph (a)(20);

k. Removing paragraph (a)(24);

l. Redesignating paragraph (a)(25) as paragraph (a)(21);

m. Removing paragraph (a)(26);

n Redesignating paragraphs (a)(27) through (a)(31) as paragraphs (a)(22) through 

(a)(26);

o. Removing paragraph (a)(32);

p. Redesignating paragraphs (a)(33) and (a)(34) as paragraphs (a)(27) and (a)(28);

q Revising paragraph (d)(2)(i);

r. Removing paragraph (d)(2)(ii);

s. Redesignating paragraphs (d)(2)(iii) and (d)(2)(iv) as paragraphs (d)(2)(ii) and 

(d)(2)(iii);

t. Revising newly designated paragraph (d)(2)(ii);

u. In newly designated paragraph (d)(2)(iii):

i. removing the words “or a first tier security” from the introductory text;

ii. removing the words “or first tier security, as the case may be” from 

paragraph (A);

v. Revising newly designated paragraph (d)(2)(iii)(C);

w. Adding paragraph (d)(2)(iii)(D);

x. In paragraph (d)(3);
98

i. Removing the words “and securities subject to a guarantee issued by a 

non-controlled person” in paragraph (d)(3)(i);

ii. Removing the words “first tier” in paragraph (d)(3)(i)(A)(1);

iii. Removing paragraph (d)(3)(i)(C);

iv. Removing paragraph (d)(3)(iii)(C);

y. In paragraph (f):

i. Removing the word “Downgrades,” from the paragraph heading; 

ii. Removing paragraph (f)(1);

iii. Redesignating paragraphs (f)(2) through (f)(4) as paragraphs (f)(1) 

through (f)(3);

iv. Removing the words “and other events” in the heading of newly 

designated paragraph (f)(1);

v. In the introductory text of newly designated paragraph (f)(1), removing

the phrase “paragraphs (f)(2)(i) through (iii)” and adding in its place “paragraphs (f)(1)(i)

through (iii)”;

vi. Revising newly designated paragraph (f)(1)(ii);

vii. Removing newly designated paragraph (f)(1)(iii) and redesignating 

paragraph (f)(1)(iv) as paragraph (f)(1)(iii);

viii. In the heading of newly designated paragraph (f)(3), removing the phrase 

“paragraphs (f)(2) and (3)” and adding in its place “paragraphs (f)(1) and (2)”;

ix. In the introductory text of newly designated paragraph (f)(3), removing 

the phrase “paragraphs (f)(2) and (3)” and adding in its place “paragraphs (f)(1) and (2)”; 

x. In newly designated paragraph (f)(3)(iii), removing the phrase
99

“paragraph (a)(18)(ii)” and adding in its place “paragraph (a)(16)(ii)”;

z. Revising paragraph (g)(3);

aa. Revising paragraph (g)(8)(i)(B);

bb. Revising paragraph (h)(3);

cc. In paragraph (j):

i. Removing the words “(a)(11)(i) (designation of NRSROs),” in the 

introductory text; 

ii. Removing the phrase “(f)(2)” and adding in its place “(f)(1)” in the 

introductory text;

iii. Removing the phrase “in paragraph (d)(2)” and adding in its place the 

phrase “in paragraphs (d)(2) and (g)(3)” in paragraph (1);

iv. Removing the phrase “(f)(3)” and adding in its place “(f)(2)” in paragraph 

(2).

The additions and revisions read as follows:

§ 270.2a-7 Money market funds.

(a) * * *

(11) Eligible security means a security:

(i) 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 include a finding 

that the security’s issuer has an exceptionally strong capacity to meet its short-term financial 

obligations;
100

NOTE to paragraph (a)(11)(i): For a discussion of the phrase “exceptionally strong capacity to 

meet its short-term financial obligations,” see Investment Company Act Release No. 31184, 

(July 23, 2014).

(ii) That is issued by a registered investment company that is a money market fund; or

(iii) That is a government security. 

* * * * *

(17) Guarantee issued by a non-controlled person means a guarantee issued by a person 

that, directly or indirectly, does not control, and is not controlled by or under common control 

with the issuer of the security subject to the guarantee (control means “control” as defined in 

section 2(a)(9) of the Act) (15 U.S.C. 80a-2(a)(9)).

* * * * *

(d) * * * 

(2) * * * 

(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.

(ii) Securities subject to guarantees. A security that is subject to a guarantee may be 

determined to be an eligible security based solely on whether the guarantee is an eligible 

security, 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).

(iii) * * *
101

(C) The fund’s board of directors determines that the issuer of the underlying security or 

any guarantor of such security has a very strong capacity for payment of its financial 

commitments; 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).

* * * * * 

(f) * * *

(1) * * *

(ii) A portfolio security ceases to be an eligible security (e.g., no longer presents minimal 

credit risks); or

* * * * *

(g) * * *

(3) Ongoing review of credit risks. The written procedures must require the adviser to 

provide ongoing review of whether each security (other than a government security) continues to 

present minimal credit risks. The review must: 

(i) Include an assessment of each security’s credit quality, including the issuer’s capacity

to meet its short-term financial obligations; and

(ii) Be based on, among other things, financial data of the issuer of the portfolio security 

or provider of the guarantee or demand feature, as the case may be, and in the case of a security 

subject to a conditional demand feature, the issuer of the security whose financial condition must 
102

be monitored under paragraph (e)(2)(iii) of this section, whether such data is publicly available 

or provided under the terms of the security’s governing documents. 

* * * * *

(8) * * *

(i) * * *

(B) An event indicating or evidencing credit deterioration, such as a downgrade or 

default, of particular portfolio security positions, each representing various portions of the fund’s 

portfolio (with varying assumptions about the resulting loss in the value of the security), in 

combination with various levels of an increase in shareholder redemptions;

* * * * *

(h) * * *

(3) 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 must be 

maintained and preserved in an easily accessible place of the determination that a portfolio 

security is an eligible security, including the determination that it presents minimal credit risks at 

the time the fund acquires the security, or at such later times (or upon such events) that the board 

of directors determines that the investment adviser must reassess whether the security presents 

minimal credit risks.

* * * * *

3. Section 270.12d3-1(d)(7)(v) is amended by removing the phrase “§§ 270.2a7(a)(8) and 270.2a-7(a)(15)” and adding in its place the phrase “§§ 270.2a-7(a)(9) and 

270.2a-7(a)(16)”;
103

4. Section 270.31a-1(b)(1) is amended by removing the phrase “(as defined in 

§ 270.2a-7(a)(8) or § 270.2a-7(a)(15) respectively)” and adding in its place the phrase “(as 

defined in § 270.2a-7(a)(9) or “§ 270.2a-7(a)(16) respectively)”.

PART 274—FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 

1940

5. 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.

* * * * *

4. Form N-MFP (referenced in § 274.201) is amended by:

a. Revising Item C.9;

b. Revising Item C.10;

d. Removing Items C.14.b and C.14.c;

e. Redesignating Items C.14.d through C.14.f as Items C.14.b through C.14 d; 

f. Adding new Item C.14.e;

g. Removing Items C.15.b and C.15.c;

h. Redesignating Item C.15.d as Item C.15.b;

i. Adding new Item C.15.c;

j. Removing Items C.16.c and C.16.d;

k. Redesignating Item C.16.e as Items C.16.c; and 

l. Adding new Item C.16.d.

The revisions read as follows:
104

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 C.9 Is the security an Eligible Security? [Y/N]

Item C.10 Security rating(s) considered. Provide each rating assigned by any NRSRO to 

whose services the fund or its adviser subscribes (together with the name of the assigning 

NRSRO), and any other NRSRO rating that the fund’s board of directors considered in 

determining that the security presents minimal credit risks (together with the name of the 

assigning NRSRO). If none, leave blank.

* * * * *

Item C.14 * * *

e. Rating(s) considered. Provide each rating assigned to the demand feature(s) or 

demand feature provider(s) by any NRSRO to whose services the fund or its adviser subscribes

(together with the name of the assigning NRSRO), and any other NRSRO rating assigned to the 

demand feature(s) or demand feature provider(s) that the board of directors considered in 

evaluating the quality, maturity or liquidity of the security (together with the name of the 

assigning NRSRO). If none, leave blank.

* * * * *

Item C.15 * * *

c. Rating(s) considered. Provide each rating assigned to the guarantee(s) or 

guarantor(s) by any NRSRO to whose services the fund or its adviser subscribes (together with 

the name of the assigning NRSRO), and any other NRSRO rating assigned to the guarantee(s) or 
105

guarantor(s) that the board of directors considered in evaluating the quality, maturity or liquidity 

of the security (together with the name of the assigning NRSRO). If none, leave blank.

Item C.16 * * *

d. Rating(s) considered. Provide each rating assigned to the enhancement(s) or 

enhancement provider(s) by any NRSRO to whose services the fund or its adviser subscribes

(together with the name of the assigning NRSRO), and any other NRSRO rating assigned to the 

enhancement(s) or enhancement provider(s) that the board of directors considered in evaluating 

the quality, maturity or liquidity of the security (together with the name of the assigning 

NRSRO). If none, leave blank.

By the Commission.

Kevin M. O’Neill

Deputy Secretary

Dated: July 23, 2014