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Thursday, 

March 4, 2010 

Part III 

Securities and 

Exchange 

Commission 

17 CFR Parts 270 and 274 

Money Market Fund Reform; Final Rule 

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10060 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 270 and 274 

[Release No. IC–29132; File Nos. S7–11– 

09, S7–20–09] 

RIN 3235–AK33 

Money Market Fund Reform 


AGENCY: Securities and Exchange 


Commission. 


ACTION: Final rule. 


SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’) is 

adopting amendments to certain rules 

that govern money market funds under 

the Investment Company Act of 1940. 

The amendments will tighten the risklimiting conditions of rule 2a–7 by, 

among other things, requiring funds to 

maintain a portion of their portfolios in 

instruments that can be readily 

converted to cash, reducing the 

maximum weighted average maturity of 

portfolio holdings, and improving the 

quality of portfolio securities; require 

money market funds to report their 

portfolio holdings monthly to the 

Commission; and permit a money 

market fund that has ‘‘broken the buck’’ 

(i.e., re-priced its securities below $1.00 

per share), or is at imminent risk of 

breaking the buck, to suspend 

redemptions to allow for the orderly 

liquidation of fund assets. The 

amendments are designed to make 

money market funds more resilient to 

certain short-term market risks, and to 

provide greater protections for investors 

in a money market fund that is unable 

to maintain a stable net asset value per 

share. 

DATES: The rules, rule amendments, and 

form are effective May 5, 2010. The 

expiration date for 17 CFR 270.30b1–6T 

is extended from September 17, 2010 to 

December 1, 2010. Compliance dates are 

discussed in Section III of the 

SUPPLEMENTARY INFORMATION. 


FOR FURTHER INFORMATION CONTACT: 


Office of Regulatory Policy, at (202) 

551–6792, Division of Investment 

Management, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–8549. 

SUPPLEMENTARY INFORMATION: The 

Commission is adopting amendments to 

rules 2a–7 [17 CFR 270.2a–7], 17a–9 [17 

CFR 270.17a–9] and 30b1–6T [17 CFR 

270.30b1–6T], new rules 22e–3 [17 CFR 

270.22e–3] and 30b1–7 [17 CFR 

270.30b1–7], and new Form N–MFP [17 

CFR 274.201] under the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’ or ‘‘Act’’).1 

Table of Contents 

I. Background 

II. Discussion 

A. Portfolio Quality 

1. Second Tier Securities 

2. Eligible Securities 

3. Asset Backed Securities 

B. Portfolio Maturity 

1. Weighted Average Maturity 

2. Weighted Average Life 

3. Maturity Limit for Government 


Securities 


C. Portfolio Liquidity 

1. General Liquidity Requirement 

2. Limitation on Acquisition of Illiquid 

Securities 

3. Minimum Daily and Weekly Liquidity 

Requirements 

4. Stress Testing 

D. Repurchase Agreements 

E. Disclosure of Portfolio Information 

1. Public Web site Posting 

2. Reporting to the Commission 

3. Phase-Out of Weekly Reporting by 


Certain Funds 


F. Processing of Transactions 

G. Exemption for Affiliate Purchases 

1. Expanded Exemptive Relief 

2. New Reporting Requirement 

H. Fund Liquidation 

III. Compliance Dates 

IV. Paperwork Reduction Act Analysis 

V. Cost Benefit Analysis 

VI. Competition, Efficiency, and Capital 

Formation 

VII. Regulatory Flexibility Act Certification 

VIII. Statutory Authority 

Text of Rules, Rule Amendments, and Form 

I. Background 

On June 30, 2009, the Commission 

issued a release proposing new rules 

and rule amendments governing the 

operation of money market funds.2 

Money market funds are open-end 

management investment companies that 

are registered under the Investment 

Company Act. They invest in highquality, short-term debt instruments 

such as commercial paper, Treasury 

bills and repurchase agreements. Money 

market funds pay dividends that reflect 

prevailing short-term interest rates and, 

unlike other investment companies, 

maintain a stable net asset value per 

share (or ‘‘NAV’’), typically $1.00 per 

1 15 U.S.C. 80a. 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, are to Title 17, Part 270 of the Code of 

Federal Regulations [17 CFR 270]. References to 

‘‘current’’ rules relate to rules in their current form 

[17 CFR Part 270 (2009 version)], and references to 

‘‘amended’’ rules relate to rules as they will be 

amended by this Release. 

2 Money Market Fund Reform, Investment 

Company Act Release No. 28807 (June 30, 2009) [74 

FR 32688 (July 8, 2009)] (‘‘Proposing Release’’). All 

references to ‘‘proposed’’ rules relate to rules as 

proposed in the Proposing Release. 

share. Money market funds have over 

$3.3 trillion dollars in assets under 

management, and comprise over 30 

percent of the assets of registered 

investment companies.3 

All money market funds are subject to 

rule 2a–7 under the Investment 

Company Act. Rule 2a–7, among other 

things, facilitates money market funds’ 

ability to maintain a stable net asset 

value per share by permitting them to 

use the amortized cost method of 

valuation and the penny-rounding 

method of pricing.4 But for rule 2a–7, 

the Investment Company Act and our 

rules would require a money market 

fund to calculate its current net asset 

value per share by valuing portfolio 

securities at their current value (‘‘markto-market’’).5 

Under the amortized cost method, 

portfolio securities generally are valued 

at cost plus any amortization of 

premium or accumulation of discount. 

The basic premise underlying money 

market funds’ use of the amortized cost 

method of valuation is that high-quality, 

short-term debt securities held until 

maturity will eventually return to their 

amortized cost value, regardless of any 

current disparity between the amortized 

cost value and market value, and would 

not ordinarily be expected to fluctuate 

significantly in value.6 Therefore, the 

rule permits money market funds to 

value portfolio securities at their 

amortized cost so long as the deviation 

between the portfolio’s amortized cost 

3 See Investment Company Institute, Trends in 

Mutual Fund Investing, Nov. 2009, available at 

http://www.ici.org/research/stats/trends/ 

trends_11_09. 

4 Current rule 2a–7(a)(2) defines the amortized 

cost method as the method of calculating an 

investment company’s net asset value per share (or 

‘‘NAV’’) whereby portfolio securities are valued at 

the fund’s acquisition cost as adjusted for 

amortization of premium or accretion of discount 

rather than at their value based on current market 

factors. The penny-rounding method of pricing 

means the method of computing a fund’s price per 

share for purposes of distribution, redemption, and 

repurchase whereby the current net asset value per 

share is rounded to the nearest one percent. See 

current rule 2a–7(a)(18). 

5 See section 2(a)(41) of the Act (defining ‘‘value’’ 

of fund assets); rule 2a–4 (defining ‘‘current net 

asset value’’ for use in computing the current price 

of a redeemable security); 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). 

6 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 nn.3–7 and 

accompanying text; 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. 12206 (Feb. 1, 1982) [47 FR 5428 (Feb. 5, 1982)] 

at nn.3–4 and accompanying text. 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10061 

and current market value remains 

minimal and results in the computation 

of a share price that represents fairly the 

current net asset value per share of the 

fund.7 

To reduce the likelihood of a material 

deviation occurring between the 

amortized cost value of a portfolio and 

its market-based value, the rule contains 

several conditions (which we refer to as 

‘‘risk-limiting conditions’’) that limit the 

fund’s exposure to certain risks, such as 

credit, currency, and interest rate risks.8 

In addition, the rule includes certain 

procedural requirements overseen by 

the fund’s board of directors. One of the 

most important is the requirement that 

the fund periodically ‘‘shadow price’’ 

the amortized cost net asset value of the 

fund’s portfolio against the mark-tomarket net asset value of the portfolio.9 

If there is a difference of more than onehalf of one percent (or $0.005 per share), 

the fund’s board of directors must 

consider promptly what action, if any, 

should be taken, including whether the 

fund should discontinue the use of the 

amortized cost method of valuation and 

re-price the securities of the fund below 

(or above) $1.00 per share, an event 

colloquially known as ‘‘breaking the 

buck.’’ 10 

As discussed in significant detail in 

the Proposing Release, during 2007– 

2008 money market funds were exposed 

to substantial losses, first as a result of 

exposure to debt securities issued by 

structured investment vehicles (‘‘SIVs’’), 

7 See amended rule 2a–7(c)(1), (c)(8)(ii)(B)–(C) 

(requiring, among other things, that the fund’s 

board of directors promptly consider what action, 

if any, should be taken if the deviation between the 

money market fund’s current market value and the 

fund’s amortized cost price per share exceeds 1⁄2 of 

1%). 

8 For example, the current rule requires, among 

other things, that a money market fund’s portfolio 

securities meet certain credit quality requirements, 

such as being rated in the top one or two rating 

categories by nationally recognized statistical rating 

organizations (‘‘NRSROs’’). A fund, moreover, may 

only invest a limited portion of its portfolio in 

securities rated in the second highest rating 

category. See current rule 2a–7(c)(3). The current 

rule also places limits on the remaining maturity of 

securities in the fund’s portfolio. A fund generally 

may not acquire, for example, any securities with 

a remaining maturity greater than 397 days, and the 

dollar-weighted average maturity of the securities 

owned by the fund may not exceed 90 days. See 

current rule 2a–7(c)(2). 

9 See current rule 2a–7(c)(7) (requiring that such 

shadow pricing be calculated at such intervals as 

the board of directors determines appropriate and 

reasonable in light of current market conditions). 

10 See current rule 2a–7(c)(7)(ii)(B). Regardless of 

the extent of the deviation, rule 2a–7 imposes on 

the board of a money market fund a duty to take 

appropriate action whenever the board believes the 

extent of any deviation may result in material 

dilution or other unfair results to investors or 

current shareholders. Current rule 2a–7(c)(7)(ii)(C). 

See 1983 Adopting Release, supra note 6, at nn.51– 

52 and accompanying text. 

and then as a result of the default of 

debt securities issued by Lehman 

Brothers Holdings Inc. (‘‘Lehman 

Brothers’’). All but one of the funds that 

were exposed to losses from SIV and 

Lehman Brothers securities obtained 

support of some type from their advisers 

or other affiliated persons, which 

absorbed the losses or provided a 

guarantee covering a sufficient amount 

of losses to prevent the fund from 

breaking the buck. The Reserve Primary 

Fund, which held a $785 million 

position in Lehman Brothers debt, 

ultimately did not have a sponsor with 

sufficient resources to support it, and on 

September 16, 2008 the fund announced 

that it would re-price its securities at 

$0.97 per share.11 It subsequently 

suspended redemptions as of September 

17, 2008.12 

The cumulative effect of these events, 

when combined with general turbulence 

in the financial markets, led to a run 

primarily on institutional taxable prime 

money market funds, which contributed 

to severe dislocations in short-term 

credit markets and strains on the 

businesses and institutions that obtain 

funding in those markets.13 During the 

week of September 15, 2008, investors 

withdrew approximately $300 billion 

from taxable prime money market 

funds, or 14 percent of the assets held 

in those funds.14 In the final two weeks 

11 See Proposing Release, supra note 2, at n.44 

and accompanying text. The Reserve Primary Fund 

distributed the bulk of its assets, and investors have 

received more than $0.98 on the dollar. See Press 

Release, SEC, Reserve Primary Fund Distributes 

Assets to Investors (Jan. 29, 2010) available at 

http://www.sec.gov/news/press/2010/2010-16.htm. 

12 In response to a request by The Reserve Fund, 

the Commission issued an order permitting the 

suspension of redemptions in certain Reserve 

funds, to permit their orderly liquidation. See In the 

Matter of The Reserve Fund, Investment Company 

Act Release No. 28386 (Sept. 22, 2008) [73 FR 

55572 (Sept. 25, 2008)] (order). Several other 

Reserve funds also obtained an order from the 

Commission on October 24, 2008 permitting them 

to suspend redemptions to allow for their orderly 

liquidation. See Reserve Municipal Money-Market 

Trust, et al., Investment Company Act Release No. 

28466 (Oct. 24, 2008) [73 FR 64993 (Oct. 31, 2008)] 

(order). 

13 See Minutes of the Federal Open Market 

Committee, Federal Reserve Board, Oct. 28–29, 

2008, at 5, available at http:// 

www.federalreserve.gov/monetarypolicy/files/ 

fomcminutes20081029.pdf (‘‘FRB Open Market 

Committee Oct. 28–29 Minutes’’). See also Press 

Release, Federal Reserve Board, Board Announces 

Creation of the Commercial Paper Funding Facility 

(CPFF) to Help Provide Liquidity to Term Funding 

Markets (Oct. 7, 2008), available at http:// 

www.federalreserve.gov/newsevents/press/ 

monetary/20081007c.htm. 

14 See Investment Company Institute, Report of 

the Money Market Working Group, at 62 (Mar. 17, 

2009), available at http://www.ici.org/pdf/ 

ppr_09_mmwg.pdf (‘‘ICI Report’’) (analyzing data 

from iMoneyNet); see also Investment Company 

Institute, Money Market Mutual Fund Assets 

Historical Data, available at http://www.ici.org/pdf/ 

of September 2008, money market funds 

reduced their holdings of top-rated 

commercial paper by $200.3 billion, or 

29 percent.15 

On September 19, 2008, the U.S. 

Department of the Treasury (‘‘Treasury 

Department’’) and the Board of 

Governors of the Federal Reserve 

System (‘‘Federal Reserve Board’’) 

announced an unprecedented 

intervention in the short-term markets. 

The Treasury Department announced its 

Temporary Guarantee Program for 

Money Market Funds (‘‘Guarantee 

Program’’), which temporarily 

guaranteed certain investments in 

money market funds that decided to 

participate in the program.16 This 

program has now expired.17 The Federal 

Reserve Board announced the creation 

of its Asset-Backed Commercial Paper 

Money Market Mutual Fund Liquidity 

Facility (‘‘AMLF’’), through which it 

extended credit to U.S. banks and bank 

holding companies to finance their 

purchases of high-quality asset backed 

commercial paper from money market 

funds.18 These programs were effective 

in containing the run on institutional 

prime money market funds and 

providing additional liquidity to money 

market funds.19 

mm_data_2010.pdf (‘‘ICI Mutual Fund Historical 

Data’’). 

15 See Christopher Condon & Bryan Keogh, 

Funds’ Flight from Commercial Paper Forced Fed 

Move, Bloomberg, Oct. 7, 2008, available at 

http://www.bloomberg.com/apps/ 

news?pid=newsarchive&sid=a5hvnKFCC_pQ. 

16 See Press Release, Treasury Department, 

Treasury Announces Guaranty Program for Money 

Market Funds (Sept. 19, 2008), available at 

http://www.treas.gov/press/releases/hp1147.htm. 

The Program insured investments in money market 

funds, to the extent of their shareholdings as of 

September 19, 2008, if the fund chose to participate 

in the Program. We adopted, on an interim final 

basis, a temporary rule, rule 22e–3T, to facilitate the 

ability of money market funds to participate in the 

Guarantee Program. The rule permitted a 

participating fund to suspend redemptions if it 

broke the buck and liquidated under the terms of 

the Program. See Temporary Exemption for 

Liquidation of Certain Money Market Funds, 

Investment Company Act Release No. 28487 (Nov. 

20, 2008) [73 FR 71919 (Nov. 26, 2008)]. 

17 See Press Release, U.S. Department of the 

Treasury, Treasury Announces Expiration of 

Guarantee Program for Money Market Funds (Sept. 

18, 2009), available at http://www.treas.gov/press/ 

releases/tg293.htm. The Program expired on 

September 19, 2009, and rule 22e–3T expired on 

October 18, 2009. 

18 See Press Release, Federal Reserve Board, 

Federal Reserve Board Announces Two 

Enhancements to its Programs to Provide Liquidity 

to Markets (Sept. 19, 2008), available at http:// 

www.federalreserve.gov/newsevents/press/ 

monetary/20080919a.htm. The AMLF expired on 

February 1, 2010. See Press Release, Federal 

Reserve Board, FOMC Statement (Jan. 27, 2010), 

available at http://www.federalreserve.gov/ 

newsevents/press/monetary/20100127a.htm. 

19 During the week ending September 18, 2008, 

taxable institutional money market funds 

Continued 

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10062 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

The severity of the problems 

experienced by money market funds 

during 2007 and 2008 prompted us to 

review our regulation of money market 

funds. We sought to better understand 

how we might revise rule 2a–7 to reduce 

the susceptibility of money market 

funds to runs and reduce the 

consequences of a run on fund 

shareholders. Our staff consulted 

extensively with staff from other 

members of the President’s Working 

Group on Financial Markets. We talked 

to many market participants, and 

reviewed a report from a ‘‘Money Market 

Fund Working Group’’ assembled by the 

Investment Company Institute (‘‘ICI 

Report’’), which recommended a number 

of changes.20 

Our June 2009 proposals were the 

product of that review and were, we 

explained, a first step to addressing 

regulatory concerns we identified. They 

were designed to make money market 

funds more resilient and less likely to 

break a buck as a result of disruptions 

such as those that occurred in the fall 

of 2008. They would give us better tools 

to oversee money market funds. If a 

money market fund did break a buck, 

they would facilitate an orderly 

liquidation in order to protect fund 

shareholders and help contain adverse 

effects on the capital markets and other 

money market funds. In addition, 

throughout the Proposing Release we 

requested comment on additional 

regulatory changes aimed at further 

strengthening the stability of money 

market funds. 

We received approximately 120 

comments on the rule, including 

approximately 45 comments from 

investment companies and their 

representatives, 22 from debt security 

issuers, and 30 from individuals, 

including investors and academics. The 

comment letters reflected a wide variety 

of views on most of the topics discussed 

in the Proposing Release. The 

investment companies generally 

supported those aspects of the proposal 

that were similar to those recommended 

in the ICI Report.21 Most of them 

experienced net outflows of $165 billion. See 

Money Fund Assets Fell to $3.4T in Latest Week, 

Associated Press, Sept. 18, 2008. Almost $80 billion 

was withdrawn from prime money market funds 

even after the announcement of the Guarantee 

Program on September 19, 2008. See Diana B. 

Henriques, As Cash Leaves Money Funds, Financial 

Firms Sign Up for U.S. Protection, N.Y. Times, Oct. 

2, 2008, at C10. By the end of the week after the 

announcement, however, net outflows from taxable 

institutional money market funds had ceased. See 

Money Fund Assets Fell to $3.398T in Latest Week, 

Associated Press, Sept. 25, 2008. 

20 ICI Report, supra note 14. 

21 See, e.g., Comment Letter of T. Rowe Price 

Associates, Inc. (Sept. 8, 2009) (‘‘T. Rowe Price 

Comment Letter’’); Comment Letter of UBS Global 

strongly objected to changes that would 

affect the stable net asset value that 

today is the principal characteristic of a 

money market fund.22 Most debt 

security issuers who wrote to us 

objected to changes designed to increase 

the credit quality of money market fund 

portfolios by precluding funds from 

investing in second tier securities (as 

defined by the rule).23 Many fund 

commenters pointed to the historical 

stability of funds and urged us to be 

modest in our changes to rule 2a–7.24 

Some others, however, pointed to the 

near-cataclysmic events of September 

2008 in supporting more substantial 

changes.25 

As we stated in the Proposing Release, 

we recognize that the events of 2007– 

2008 raise the question of whether 

further changes to the regulatory 

structure governing money market funds 

may be warranted. Accordingly, in the 

Proposing Release we requested 

comment on additional, more 

fundamental regulatory changes, some 

of which we recognized could transform 

the business and regulatory model on 

which money market funds have been 

operating for more than 30 years.26 For 

example, we requested comment on 

whether money market funds should 

move to the ‘‘floating net asset value’’ 

used by other open-end investment 

companies.27 We received over 75 

comment letters addressing this issue. 

We have continued to explore possible 

more significant changes to the 

regulation of money market funds in 

light of these comments and through the 

staff’s work with members of the 

President’s Working Group. We expect 

Asset Management (Americas) Inc. (Sept. 8, 2009); 

Comment Letter of The Vanguard Group, Inc. (Aug. 

19, 2009) (‘‘Vanguard Comment Letter’’). 

22 See, e.g., Comment Letter of BlackRock Inc. 

(Sept. 4, 2009) (‘‘BlackRock Comment Letter’’); 

Comment Letter of the Dreyfus Corporation (Sept. 

8, 2009) (‘‘Dreyfus Comment Letter’’); Comment 

Letter of Goldman Sachs Asset Management, L.P. 

(Sept. 8, 2009) (‘‘Goldman Sachs Comment Letter’’). 

23 See, e.g., Comment Letter of American Electric 

Power Company, Inc. (Sept. 8, 2009) (‘‘Am. Elec. P. 

Comment Letter’’); Comment Letters of the U.S. 

Chamber of Commerce and Joint Treasurer 

Signatories (Sept. 3 & Sept. 24, 2009) (‘‘Chamber/ 

Tier 2 Issuers Comment Letter’’); Comment Letter of 

Dominion Resources Services, Inc. (Sept. 8, 2009) 

(‘‘Dominion Res. Comment Letter’’). 

24 See, e.g., Comment Letter of Fidelity 

Investments (Aug. 24, 2009) (‘‘Fidelity Comment 

Letter’’); T. Rowe Price Comment Letter; Comment 

Letter of USAA Investment Management Company 

(Sept. 8, 2009) (‘‘USAA Comment Letter’’). 

25 See, e.g., Comment Letter of Deutsche 

Investment Management Americas Inc. (Aug. 31, 

2009) (‘‘Deutsche Comment Letter’’); Comment 

Letter of Jeffrey N. Gordon, Professor of Law, 

Columbia Law School (Sept. 9, 2009); Comment 

Letter of John R. Jay, CFA (Sept. 8, 2009). 

26 See Proposing Release, supra note 2, at Section 

III. 

27 See id. at Section III.A. 

to issue a release addressing these issues 

and proposing further reform to money 

market fund regulation. 

II. Discussion 

Today we are adopting the 

amendments we proposed last June to 

the rules governing money market 

funds, with several changes made in 

response to the comments we received. 

As described below in more detail, we 

believe these amendments will make 

money market funds more resilient and 

less likely to break the buck. They will 

further limit the risks money market 

funds may assume by, among other 

things, requiring them to increase the 

credit quality of fund portfolios and to 

reduce the maximum weighted average 

maturity of their portfolios, and by 

requiring for the first time that all 

money market funds maintain liquidity 

buffers that will help them withstand 

sudden demands for redemptions. The 

rule amendments require fund managers 

to stress test their portfolios against 

potential economic shocks such as 

sudden increases in interest rates, heavy 

redemptions, and potential defaults. 

They provide investors with more 

timely, relevant information about fund 

portfolios to hold fund managers more 

accountable for the risks they take. They 

will improve our ability to oversee 

money market funds. And finally, they 

provide a means to wind down the 

operations of a fund that does break the 

buck or suffers a run, in an orderly way 

that is fair to the fund’s investors and 

reduces the risk of market losses that 

could spread to other funds. We believe 

that these reforms collectively will 

better protect money market fund 

investors in times of financial market 

turmoil and lessen the possibility that 

the money market fund industry will 

not be able to withstand stresses similar 

to those experienced in 2007–08. Thus, 

we believe that each of the rules and 

rule amendments we are adopting is 

necessary or appropriate in the public 

interest and consistent with the 

protection of investors and the policies 

and purposes of the Investment 

Company Act.28 

A. Portfolio Quality 

Rule 2a–7 limits a money market fund 

to investing in securities that are, at the 

time of their acquisition, ‘‘eligible 

securities,’’ which means that securities 

must have been rated in either of the 

two highest short-term debt ratings 

categories from the relevant NRSROs or 

are comparable to securities that have 

28 See section 6(c) of the Investment Company Act 

(under which rule 22e–3 and amendments to rules 

2a–7 and 17a–9 are adopted). 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10063 

been so rated in these categories.29 

Before a fund may invest in an ‘‘eligible 

security,’’ a fund’s board of directors (or 

its delegate) must also determine that 

the security presents minimal credit 

risks, which must be based on factors 

pertaining to credit quality in addition 

to any rating assigned to a security.30 

We are amending rule 2a–7 to reduce 

the amount of credit risk a money 

market fund may assume by limiting the 

securities in which money market funds 

may invest. We are also amending 

provisions of rule 2a–7 that address how 

NRSRO ratings are used in the rule. 

1. Second Tier Securities 

We are amending rule 2a–7 to further 

limit money market funds’ investments 

in ‘‘second tier securities.’’ 31 Under the 

amendments, we are reducing 

permissible money market fund 

investments in second tier securities by 

(i) lowering the permitted percentage of 

a fund’s ‘‘total assets’’ that may be 

invested in second tier securities from 

five percent to three percent and (ii) 

lowering the permitted concentration of 

its total assets in second tier securities 

of a single issuer from the greater of one 

percent or $1 million to one-half of one 

percent.32 In addition, money market 

funds will not be permitted to acquire 

any second tier security with a 

remaining maturity in excess of 45 

days.33 

Last June, we proposed to prohibit 

money market funds from acquiring 

second tier securities, based on our 

analysis of the risks that these securities 

can pose to money market funds. We 

noted that second tier securities trade in 

thinner markets, generally have a 

weaker credit quality profile, and 

exhibited credit spreads that widened 

more dramatically than those of first tier 

securities during the 2008 financial 

turmoil.34 During times of financial 

29 Amended rule 2a–7(a)(12) (eligible security). 

30 Amended rule 2a–7(c)(3)(i) (portfolio quality). 

31 Second tier securities are eligible securities 

that, if rated, have received other than the highest 

short-term term debt rating from the requisite 

NRSROs or, if unrated, have been determined by 

the fund’s board of directors to be of comparable 

quality. See amended rule 2a–7(a)(24) (defining 

‘‘second tier security’’); amended rule 2a–7(a)(23) 

(defining ‘‘requisite NRSROs’’). 

32 See amended rule 2a–7(c)(3)(ii) (portfolio 

quality—second tier securities); amended rule 2a– 

7(c)(4)(i)(C) (portfolio diversification—second tier 

securities); amended rule 2a–7(a)(27) (defining 

‘‘total assets’’). 

33 See amended rule 2a–7(c)(3)(ii) (portfolio 

quality—second tier securities). 

34 See Proposing Release, supra note 2, at Section 

II.A.1. See also Thomas K. Hahn, Commercial Paper 

(Federal Reserve Bank of Richmond, Economic 

Quarterly Vol. 79/2, Spring 1993), at Fig. 4 

(showing historical spreads between A–1/P–1 

commercial paper and A–2/P–2 commercial paper 

between 1974 and 1992, including the tendency of 

market stress, we understand that these 

securities tend to become illiquid and 

sell in the secondary market, if at all, 

only at prices substantially discounted 

from their amortized cost value.35 This 

additional risk created by the credit and 

liquidity profile of second tier securities 

increases the possibility that a fund 

holding these securities could break the 

buck in times of financial market 

turmoil, with a detrimental impact on 

fund investors. 

Commenters were evenly divided 

between those supporting our proposed 

elimination of money market funds’ 

ability to acquire second tier securities 

and those against our proposal. In 

general, most money market fund 

sponsors who commented supported 

elimination,36 while most issuers of 

second tier securities who commented 

opposed elimination.37 Those 

supporting elimination argued that it 

would be an effective way to increase 

the safety of money market funds and 

would reduce the likelihood that a fund 

would break the buck. Some 

commenters noted that the money 

market funds they manage have not 

acquired second tier securities 

historically 38 because of second tier 

issuers’ weaker credit profiles, smaller 

issuer program sizes, and lower market 

liquidity.39 A few commenters noted 

that eliminating money market funds’ 

ability to acquire second tier securities 

should result in minimal market 

such spreads to spike shortly before and during 

recessions); Comment Letter of the Investment 

Company Institute (Sept. 8, 2009) (‘‘ICI Comment 

Letter’’) (noting that the market for Tier 2 

commercial paper is less deep with fewer issuers 

than the Tier 1 market). 

35 See, e.g., Comment Letter of Invesco AIM 

Advisors, Inc. (Sept. 4, 2009) (‘‘Invesco Aim 

Comment Letter’’) (noting that it has historically 

avoided the second tier market due to, among other 

factors, the less overall market liquidity of second 

tier securities); ICI Comment Letter. See also 

Proposing Release, supra note 2, at Section II.A.1 

for a discussion of the wider credit spreads of 

second tier securities during the fall of 2008, 

indicating the extent to which such securities 

traded at a discounted price. 

36 See, e.g., Comment Letter of Bankers Trust 

Company, N.A. (Aug. 28, 2009) (‘‘Bankers Trust 

Comment Letter’’); BlackRock Comment Letter; 

Comment Letter of Charles Schwab Investment 

Management, Inc. (Sept. 4, 2009) (‘‘Charles Schwab 

Comment Letter’’); Dreyfus Comment Letter; 

Vanguard Comment Letter. But see Comment Letter 

of Federated Investors, Inc. (Sept. 8, 2009) 

(‘‘Federated Comment Letter’’); Fidelity Comment 

Letter (opposing elimination). 

37 See, e.g., Comment Letter of the American 

Securitization Forum (Sept. 8, 2009) (‘‘Am. Securit. 

Forum Comment Letter’’); Comment Letter of the 

U.S. Chamber of Commerce, Center for Capital 

Markets Competitiveness (Sept. 8, 2009) (‘‘Chamber 

Comment Letter’’); Dominion Res. Comment Letter; 

Comment Letter of XTO Energy Inc. (Sept. 3, 2009) 

(‘‘XTO Energy Comment Letter’’). 

38 See, e.g., Dreyfus Comment Letter; Invesco Aim 

Comment Letter. 

39 See, e.g., Invesco Aim Comment Letter. 

disruption because money market funds 

currently hold small amounts of such 

securities.40 

Commenters that opposed the 

proposal disagreed that second tier 

securities significantly increase risk at 

money market funds,41 argued that a 

complete ban would not be justified on 

a cost-benefit basis,42 and stated that a 

ban would have a material adverse 

impact on second tier security issuers.43 

Some commenters noted that in a report 

of default rates through 2006, second 

tier securities have default rates 

substantially similar to those of first tier 

securities.44 These commenters also 

noted that rating agencies require that 

second tier security issuers establish 

backup liquidity lines of credit 

providing 100 percent coverage for any 

issuance.45 Several commenters agreed 

40 See, e.g., ICI Comment Letter; Comment Letter 

of TD Asset Management (Sept. 8, 2009) (‘‘TDAM 

Comment Letter’’). 

41 See, e.g., Comment Letter of the Association for 

Financial Professionals (Sept. 8, 2009) (‘‘Assoc. Fin. 

Professionals Comment Letter’’); Chamber/Tier 2 

Issuers Comment Letter; Dominion Res. Comment 

Letter. 

42 See, e.g., Comment Letter of Fund Democracy 

and the Consumer Federation of America (Sept. 8, 

2009) (‘‘CFA/Fund Democracy Comment Letter’’); 

Chamber Comment Letter; Dominion Res. Comment 

Letter. But see TDAM Comment Letter (stating that 

the benefits of eliminating second tier securities 

will far outweigh any disadvantages). 

43 See, e.g., Chamber Comment Letter; Dominion 

Res. Comment Letter; Comment Letter of Treasury 

Strategies, Inc. (Sept. 8, 2009) (‘‘Treasury Strategies 

Comment Letter’’). 

44 Chamber Comment Letter; Chamber/Tier 2 

Issuers Comment Letter. These commenters were 

citing the following study: Moody’s Investors 

Service, Short-Term Corporate and Structured 

Finance Rating Transition Rates, 1972–2006 (June 

2007), available at http://www.moodys.com/cust/ 

content/content.ashx?source=staticcontent/ 

free%20pages/regulatory%20affairs/documents/ 

st_corp_and_struc_transition_rates_06_07.pdf 

(showing, for example, a default rate for P–1 rated 

commercial paper over a 365 day time horizon of 

0.02% versus a default rate for P–2 rated 

commercial paper of 0.10% over the same time 

horizon). 

45 We note, however, that commenters did not 

discuss conditions under which those issuers 

would not be permitted to draw on those backup 

liquidity facilities. It is our understanding that such 

backup liquidity facilities typically do not provide 

a full backstop of liquidity support because they 

contain conditions limiting an issuer’s ability to 

draw on the facility if the issuer has experienced 

a ‘‘material adverse change,’’ which would often 

occur if the financial situation of the issuer had 

declined due to financial market or other economic 

turmoil. See also Hahn, supra note 34 (stating that 

backup lines of credit generally will not be useful 

for a firm whose operating and financial condition 

has deteriorated to the point where it is about to 

default on its short-term liabilities because credit 

agreements often contain ‘‘material adverse change’’ 

clauses that allow banks to cancel credit lines if the 

financial condition of the firm changes 

significantly); Pu Shen, Why Has the Nonfinancial 

Commercial Paper Market Shrunk Recently?, 

Federal Reserve Bank of Kansas City Economic 

Review, at 69 (First Quarter 2003) (stating that 

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10064 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

with our statement in the Proposing 

Release that second tier securities were 

not the direct cause of strains on money 

market funds during the 2007–2008 

period.46 A few stated that banning the 

acquisition of second tier securities 

would reduce diversification of money 

market fund portfolio holdings and thus 

increase risk, noting in particular that a 

greater percentage of second tier 

security issuers are not financial 

institutions, compared to first tier 

security issuers.47 

Commenters also asserted that 

prohibiting the acquisition of second 

tier securities would have unintended 

consequences for the capital markets. 

They stated that it might discourage 

investors other than money market 

funds from investing in second tier 

securities, causing a more substantial 

reduction in the issuance of second tier 

securities.48 Some argued that if second 

commercial paper backup facilities are only meant 

to provide emergency assistance for short-term 

liquidity difficulties and not to enhance the credit 

quality of issues); Standard & Poor’s, 2008 

Corporate Criteria: Commercial Paper, at 3 (Apr. 15, 

2008) (‘‘Given the size of the CP market, backup 

facilities could not be relied on with a high degree 

of confidence in the event of widespread 

disruption.’’). 

46 See, e.g., Chamber/Tier 2 Issuers Comment 

Letter; Federated Comment Letter; Fidelity 

Comment Letter. 47 See, e.g., Treasury Strategies Comment Letter; 

USAA Comment Letter; XTO Energy Comment 

Letter. We note that while a greater percentage of 

second tier security issuers do appear to be nonfinancial companies, there are a much greater 

number of non-financial first tier issuers and thus 

it is not clear that money market funds would not 

be able to achieve sufficient diversification in their 

portfolio holdings even if limited to acquiring first 

tier securities. The Chamber/Tier 2 Issuers 

Comment Letter also states that prohibiting money 

market funds from acquiring second tier securities 

would ‘‘cut the pool of potential issuers by 43%’’ 

(emphasis added). Any diversification is not driven 

only by the number of potential issuers, however. 

It is also determined by the amount of money 

market fund assets that can be actually allocated to 

different issuers. For example, while there are over 

200 P–2 rated commercial paper programs, only 

approximately half of these programs are active in 

issuing any commercial paper and only 16 

programs have an average quarterly outstanding 

issuance in excess of $500 million. See American 

Securit. Forum Comment Letter. In addition, during 

the market turmoil of 2007 and 2008, second tier 

securities did not exhibit less risky or 

countervailing economic metrics relevant to money 

market funds maintaining a stable net asset value 

compared to first tier securities. See Proposing 

Release, supra note 2, at Section II.A.1, at n.98 and 

accompanying text and chart. In fact, AA-rated nonfinancial commercial paper did exhibit significantly 

greater price stability than A2/P2-rated nonfinancial commercial paper during the fall of 2008. 

See Federal Reserve Board, Commercial Paper Data, 

available at http://www.federalreserve.gov/ 

DataDownload/Choose.aspx?rel=CP (‘‘Federal 

Reserve Commercial Paper Data’’). See also V.V. 

Chari, L. Christiano & P. Kehoe, Facts and Myths 

about the Financial Crisis of 2008, Federal Reserve 

Bank of Minneapolis Working Paper 666, at Fig. 7B 

(Oct. 2008). 

48 See, e.g., Chamber Comment Letter; Dominion 

Res. Comment Letter; Treasury Strategies Comment 

tier issuers are not able to issue 

sufficient commercial paper, they will 

be forced to borrow more from banks, 

which is a less flexible and more costly 

alternative that will increase borrowing 

costs.49 Finally, two commenters stated 

that a complete ban on the acquisition 

of second tier securities by money 

market funds might have a negative 

effect on those issuers of first tier 

securities that are viewed as presenting 

a higher risk of being downgraded, 

because money market funds may elect 

not to invest in those securities out of 

concern that the securities might soon 

become second tier securities.50 

The focus of our concerns is and must 

be on the risk to money market funds 

and their shareholders from their 

investments in second tier securities. 

While, as commenters noted,51 second 

tier securities do not appear to be 

subject to substantially greater default 

risk than first tier securities they present 

Letter. Commenters asserted that eliminating money 

market funds’ ability to acquire second tier 

securities might have a substantially greater adverse 

impact on second tier issuers, and thus potentially 

on capital formation because other investors in 

second tier securities or lesser quality first tier 

securities might avoid investment in those 

securities as a result of our rule amendments. 

Investor behavior in this regard is difficult to 

predict. It is equally likely that investors in second 

tier paper would demand higher yields, increasing 

issuers’ financing costs. As discussed below, 

however, we are not precluding money market 

funds from investing in second tier securities. 

Accordingly, we do not need to reach a conclusion 

on this matter. 

49 See, e.g., Am. Elec. P. Comment Letter; 

Chamber/Tier 2 Issuers Comment Letter; Dominion 

Res. Comment Letter; XTO Energy Comment Letter. 

We note that money market funds hold a relatively 

low percentage of outstanding second tier 

commercial paper. See Bank of America Merrill 

Lynch, Tier-2 US Commercial Paper Market Update 

(Oct. 15, 2009) (attached to the Am. Securit. Forum 

Comment Letter) (indicating that over 75% of Tier2 commercial paper is held by insurance firms, 

corporations and banks, and that only 11% is held 

by the asset management industry, which would 

include money market funds as well as other 

mutual funds and asset managers). 

50 Fidelity Comment Letter; USAA Comment 

Letter. Two other commenters suggested that the 

Commission should consider the effect of banning 

the acquisition of second tier securities on taxexempt money market funds, and in particular 

single-State funds. See Dreyfus Comment Letter; 

Federated Comment Letter. As discussed further in 

the cost benefit analysis section of this Release, 

based on our review of money market fund 

portfolios in September 2008, very few money 

market funds, including tax-exempt funds, will be 

impacted by our amendments relating to second tier 

securities. The greatest potential impact on taxexempt funds will be the 45-day maturity limitation 

for acquisition of second tier securities. Given the 

prevalence of variable rate demand notes among 

municipal securities, however, we believe that taxexempt funds should be able to effectively manage 

the 45-day maturity limit without a substantial 

impact. Accordingly, we do not believe that a 

special accommodation for tax-exempt money 

market funds is required with respect to second tier 

securities. 

51 See supra note 44 and accompanying text. 

greater credit spread risk and trade in 

thinner markets,52 all of which can lead 

to greater price volatility and illiquidity 

in times of market stress.53 While these 

characteristics may not pose the same 

degree of risk to money market funds as 

the likelihood that a security could 

default and become worthless, they can 

adversely affect money market funds’ 

ability to maintain a stable net asset 

value. This is particularly the case given 

money market funds’ narrow margin for 

deviation between the mark-to-market 

value of their assets and the amortized 

cost value of those assets, and the 

significant negative impact on money 

market funds and their investors if a 

fund breaks the buck. 

Several commenters asserted that 

there are high-quality second tier 

securities available and that money 

market funds conducting a thorough 

credit risk analysis may conclude that 

certain second tier securities provide a 

higher yield than first tier securities 

while still maintaining a risk profile 

consistent with investment objectives 

for money market fund investment.54 In 

these circumstances, investment in 

higher yielding second tier securities 

may benefit fund investors. These 

commenters suggested that, given these 

benefits, it may be more appropriate for 

52 A few commenters argued that the increase in 

spreads of Tier 2 commercial paper over Tier 1 

commercial paper during the fall of 2008 was due 

to the Federal Reserve Board’s announcement of its 

creation of the Commercial Paper Funding Facility 

(CPFF) on October 7, 2008, which only supported 

issuance of 90-day Tier 1 commercial paper. See 

Chamber Comment Letter; Chamber/Tier 2 Issuers 

Comment Letter; Dominion Res. Comment Letter. 

We note, however, that spreads between Tier 1 and 

Tier 2 commercial paper widened significantly (by 

well over 300 basis points) immediately after the 

bankruptcy of Lehman Brothers was announced on 

September 14, 2008—well before the CPFF was 

announced on October 7. See Federal Reserve 

Commercial Paper Data, supra note 47 (comparing 

AA and A2/P2 rated 30-day and 60-day 

nonfinancial commercial paper rates). 

53 We note that second tier securities are also 

more likely to be downgraded than first tier 

securities. See Moody’s Investors Service, ShortTerm Corporate and Structured Finance Rating 

Transition Rates, supra note 44, cited in Chamber/ 

Tier 2 Issuers Comment Letter (showing that for 

each time period, commercial paper with a P–2 

rating had a greater percentage chance of being 

downgraded than commercial paper with a P–1 

rating, and that this gap widened over time—for 

example, P–2 rated commercial paper had a 1.09% 

chance of being downgraded over a 60-day period 

compared to a 0.72% chance of P–1 commercial 

paper being downgraded (a 0.37% difference); P–2 

rated commercial paper had a 2.07% chance of 

being downgraded over a 120-day period compared 

to a 1.46% chance of P–1 commercial paper being 

downgraded (a 0.61% difference); and P–2 rated 

commercial paper had a 4% chance of being 

downgraded over a 270-day period compared to a 

3.18% chance of P–1 commercial paper being 

downgraded (a 0.82% difference)). 

54 See, e.g., Fidelity Comment Letter; Comment 

Letter of Thrivent Mutual Funds (Sept. 8, 2009) 

(‘‘Thrivent Comment Letter’’). 

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us to preserve money market funds’ 

ability to invest in second tier securities, 

but to a reduced degree.55 

In light of these considerations, we 

believe that it is not necessary to 

prohibit money market funds from 

acquiring second tier securities. Instead, 

we believe that a better approach is to 

further limit money market funds’ 

exposure to the risks presented by 

second tier securities. We expect that 

this treatment will both satisfy our 

policy objectives, as further discussed 

below, while mitigating some of the 

possible negative consequences noted 

by commenters that could result from 

eliminating money market funds’ ability 

to acquire second tier securities. This 

approach is reflected in three 

amendments we are adopting to rule 2a– 

7. 

First, as suggested by some 

commenters,56 we are reducing the 

amount of second tier securities that 

money market funds can acquire from 

five to three percent of their total assets, 

in order to reduce money market funds’ 

aggregate exposure to the risks posed by 

second tier securities.57 We are 

concerned that a limit of less than three 

percent could be equivalent to 

eliminating money market funds’ ability 

to acquire second tier securities because 

we understand that investing in second 

tier securities requires an additional 

amount of credit analysis.58 

55 See, e.g., Federated Comment Letter 

(suggesting, as an alternative to eliminating money 

market funds’ ability to acquire second tier 

securities, further limitations including reducing 

the percentage of fund assets permitted to be 

invested in second tier securities and limiting the 

final maturity of permissible second tier securities). 

See also, e.g., Am. Elec. P. Comment Letter; Fidelity 

Comment Letter; USAA Comment Letter (each 

suggesting, as an alternative to eliminating money 

market funds’ ability to acquire second tier 

securities, limiting the final maturity of permissible 

second tier securities to 90 days). 

56 See Federated Comment Letter; Comment 

Letter of the Sargent Shriver National Center on 

Poverty Law (Jul. 13, 2009) (‘‘Shriver Poverty Law 

Ctr. Comment Letter’’). These commenters did not 

suggest a particular percentage level to which the 

permissible aggregate amount of second tier 

securities that could be acquired should be reduced. 

57 The amendments apply the new limit on 

second tier securities holdings to all money market 

funds, including tax-exempt funds. See amended 

rule 2a–7(c)(3). Current rule 2a–7 limits tax-exempt 

funds’ holdings of second tier securities only with 

respect to conduit securities (i.e., securities issued 

by a municipal issuer involving an arrangement or 

agreement entered into with a person other than the 

issuer that provides for or secures repayment of the 

security). See current rule 2a–7(c)(3)(ii)(B). 

58 In light of our decision not to prohibit the 

acquisition of second tier securities and after review 

of comments we received, we are persuaded that 

the current requirements regarding the rating 

standards in rule 2a–7 for certain long-term 

securities with remaining maturities of less than 

397 days (‘‘stub securities’’) are sufficient. We 

proposed to permit money market funds to acquire 

only those stub securities that had received a longAccordingly, money market funds may 

not be willing to incur the costs of this 

additional credit analysis if they could 

only acquire second tier securities in 

amounts unlikely to make a meaningful 

contribution to fund yields. 

Second, we are reducing the amount 

of second tier securities of any one 

issuer that a money market fund can 

acquire from one percent of the fund’s 

total assets or $1 million (whichever is 

greater), to one-half of one percent of the 

fund’s total assets.59 We requested 

comment in the Proposing Release on 

whether the issuer diversification 

limitations under rule 2a–7 should be 

further reduced and, if so, to what 

level.60 Most commenters focused their 

response on whether there should be a 

general increase in the diversification 

limits under rule 2a–7 for all eligible 

securities. Many argued against an 

increase because it would require funds 

to invest in securities of lower credit 

quality in order to increase the number 

of issuers of portfolio securities and 

satisfy the greater diversification 

requirement.61 One commenter, 

however, recommended that funds not 

be able to acquire more than one-half of 

term rating in the highest two categories rather than 

the highest three categories, as permitted under the 

current rule. See current rule 2a–7(a)(10(ii)A). 

Commenters largely opposed our proposal asserting 

that standards associated with long-term ratings 

referenced in the current rule generally are 

correlated with the standards associated with the 

highest categories of short-term ratings. See 

BlackRock Comment Letter; Charles Schwab 

Comment Letter; ICI Comment Letter. 

59 Amended rule 2a–7(c)(4)(i)(C). The limitation 

also applies to tax-exempt funds, which under the 

current rule are only subject to the issuer 

diversification requirement with respect to conduit 

securities that are second tier. We also are 

amending rule 2a–7(c)(4)(i)(B) to prohibit each 

‘‘single State fund’’ from acquiring more than 1⁄2 of 

1% of its total assets in second tier securities. We 

also discussed modification to the guarantor and 

demand feature diversification provisions under 

rule 2a–7 in Section II.D of the Proposing Release. 

In addition to the reduction in the ability of money 

market funds to acquire second tier securities of any 

particular issuer, we are proportionately reducing 

by half the ability of a money market fund to 

acquire ‘‘demand features’’ or ‘‘guarantees’’ of a 

single issuer that are second tier securities from 5% 

to 2.5% of the money market fund’s total assets. See 

amended rule 2a–7(c)(4)(iii)(B). We believe that this 

reduction will provide appropriate protection to 

money market funds against exposure to any 

particular guarantor or demand feature provider. 

We do not believe that we need to reduce this 

limitation to 1⁄2 of 1%, as we are doing with other 

individual second tier issuer exposures, because in 

these cases a security holder has recourse to both 

the security issuer and the issuer of the demand 

feature or guarantee, and thus there is a lesser 

chance that an individual company’s default or 

distress will adversely impact the security. We 

received no comments on this aspect of the 

Proposing Release. 

60 See Proposing Release, supra note 2, at Section 

II.D. 

61 See, e.g., Charles Schwab Comment Letter; 

Invesco Aim Comment Letter. 

one percent of their assets in second tier 

securities of any particular issuer as a 

method of limiting money market funds’ 

exposure to the risks of second tier 

securities.62 

We are adopting this commenter’s 

suggestion because we believe the 

limitation will enhance the resilience of 

money market funds. It should decrease 

the likelihood that the default of, or 

significant distress experienced by, any 

particular second tier issuer alone will 

cause a money market fund to break the 

buck. While a money market fund can 

break the buck due to simultaneous 

stresses across its portfolio, it also can 

break the buck due to a sudden decline 

in the market-based price of a particular 

security in its portfolio, as was the case 

with respect to securities of Lehman 

Brothers during September 2008.63 In 

addition, unlike in the case of imposing 

a one-half of one percent diversification 

limitation on all issuers held in a money 

market fund’s portfolio, given the other 

limitations on holdings of second tier 

securities that we are adopting today, a 

diversification limitation of one-half of 

one percent that applies only to second 

tier securities should not require money 

market funds to invest in a substantially 

greater number of issuers, and thus 

should not expose the fund to investing 

in securities of lower credit quality.64 In 

sum, we believe this tightened 

limitation on exposure to any particular 

second tier security issuer will provide 

additional protection to the stability of 

money market funds. 

Third, we are limiting money market 

funds to acquiring second tier securities 

with remaining maturities of 45 days or 

less.65 Several commenters urged us to 

adopt this approach to limiting money 

market funds’ exposure to risk from 

second tier securities.66 The risks of 

62 See Comment Letter of James J. Angel, 

Professor of Finance, Georgetown University (Sept. 

8, 2009). Two other commenters also generally 

supported greater restrictions on money market 

funds’ ability to acquire securities of any particular 

issuer. See Shriver Poverty Law Ctr. Comment 

Letter; Comment Letter of C. Stephen Wesselkamper 

(Sept. 3, 2009) (‘‘C. Wesselkamper Comment 

Letter’’). 

63 See supra text accompanying note 11. 64 Under the current rule, a taxable money market 

fund could invest the greater of 1% or $1 million 

of its assets in second tier securities of a single 

issuer. Under the amendments we are adopting 

today, a money market fund maximizing its 

investment ability in second tier securities and 

trying to concentrate its holdings in as few issuers 

as possible would hold securities of six different 

second tier security issuers, rather than five second 

tier issuers under the current rule. 

65 Amended rule 2a–7(c)(3)(ii). We requested 

comment on this approach in the Proposing 

Release. See Proposing Release, supra note 2, at 

Section II.A.1. 

66 See, e.g., Am. Elec. P. Comment Letter; Fidelity 

Comment Letter; USAA Comment Letter (all 

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10066 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

second tier securities discussed above 

can be substantially limited by 

restricting the length of time that a 

money market fund is exposed to the 

risks of that particular security. 

Securities of shorter maturity will pose 

less credit spread risk and liquidity risk 

to the fund because there is a shorter 

period of credit exposure and a shorter 

period until the security will mature 

and pay cash. Moreover, second tier 

securities with shorter maturities are 

less likely to be downgraded.67 In 

recognition of the role that a shorter 

maturity can play in reducing second 

tier securities’ risk, the market typically 

has demanded that such securities be 

issued at shorter maturities than first 

tier securities.68 We believe that limiting 

the risk arising out of second tier 

securities through limiting their 

permissible maturity is appropriate and 

that a 45-day maturity limit will provide 

additional protection to investors 

without causing undue market 

disruption.69 

suggesting that permissible second tier security 

maturities be limited to a 90-day maximum); 

Thrivent Comment Letter (suggesting that 

permissible second tier security maturities be 

limited to a 45-day maximum). Given the need for 

money market funds to adjust quickly to changes 

in market risk to avoid breaking the buck (and given 

that based on historical experience second tier 

securities are unlikely to be issued with a 90-day 

maturity limit), we believe that a 45-day maturity 

limit is more prudent than a 90-day maturity limit. 

67 See Moody’s Investors Service, Short-Term 

Corporate and Structured Finance Rating 

Transition Rates, supra note 44 (showing that P–2 

rated commercial paper had a 98.79% chance of 

being rated P–2 or higher over a 30-day period, but 

a 96.31% chance of being rated P–2 or higher over 

a 90-day period, and a 92.75% chance of 

maintaining this rating level over a 180-day period). 

68 For example, the average maturity of 

outstanding non-asset backed second tier 

commercial paper as of November 20, 2009 was 

25.6 days compared to 52.2 days for non-asset 

backed first tier commercial paper. See Federal 

Reserve Board, Average Maturity by Category for 

Outstanding Commercial Paper, available at http:// 

www.federalreserve.gov/releases/cp/maturity.htm 

(last visited Dec. 2009). The Federal Reserve Board 

also has reported that during each of 2007, 2008, 

and 2009, on average over 96% of non-financial A2/ 

P2 commercial paper had a maturity of 40 days or 

less at issuance. See Federal Reserve Board, Volume 

Statistics for Commercial Paper, A2/P2 

Nonfinancial, available at http:// 

www.federalreserve.gov/releases/cp/ 

volumestats.htm (last visited Dec. 2009). 

69 One commenter asserted that because so little 

of second tier commercial paper currently is issued 

with a maturity of greater than 45 days, imposing 

a maturity limitation of 45 days on second tier 

securities eligible for money market fund 

investment would have little effect on a fund’s 

overall exposure to credit risk. See ICI Comment 

Letter. We disagree. It is true that in recent years, 

second tier commercial paper has been issued 

largely at maturities of less than 45 days. See supra 

note 68. This fact may mean that there will be less 

cost impact from our amendments limiting money 

market funds to acquiring second tier securities 

with maturities of 45 days or less. It does not mean, 

We believe that the above 

combination of limitations on money 

market funds’ ability to acquire second 

tier securities will achieve an 

appropriate balance between reducing 

the risk that money market funds will 

not be able to maintain a stable price per 

share and allowing fund investors to 

benefit from the higher returns that 

limited exposure to second tier 

securities can provide. 

2. Eligible Securities 

We are amending rule 2a–7 to require 

that the board of directors of each 

money market fund (i) designate four or 

more NRSROs, any one or more of 

whose short-term credit ratings the fund 

would look to under the rule in 

determining whether a security is an 

eligible security, and (ii) determine at 

least once each calendar year that the 

designated NRSROs issue credit ratings 

that are sufficiently reliable for that 

use.70 In addition, funds must identify 

the designated NRSROs in the fund’s 

statement of additional information 

(‘‘SAI’’).71 Under the amendments, funds 

may, but are not required to, consider 

(or monitor) the ratings of other 

NRSROs under other provisions of the 

rule.72 

As we have stated on several 

occasions, we are concerned with the 

authority that references to NRSRO 

ratings in our rules have given certain 

rating agencies, and whether such 

references have inadvertently placed an 

‘‘official seal of approval’’ on ratings that 

could adversely affect the quality of due 

diligence and investment analysis.73 

however, that this historical maturity distribution 

will hold true in the future, and that money market 

funds will not seek in the future to invest in longer 

term second tier securities to achieve a higher yield, 

which would expose money market funds to the 

higher risks associated with longer term second tier 

securities. 

70 Amended rule 2a–7(a)(11)(i). As under the 

definition of ‘‘NRSRO’’ in current rule 2a–7, a 

designated NRSRO may not be an affiliated person 

of the issuer of, or any insurer or provider of credit 

support for, the security. Amended rule 2a– 

7(a)(11)(ii). The definition of ‘‘designated NRSRO’’ 

incorporates the definition of NRSRO in section 

3(a)(62) of the Securities Exchange Act of 1934 

(‘‘Exchange Act’’) [15 U.S.C. 78c(a)(62)]. Amended 

rule 2a–7(a)(11). 

71 Amended rule 2a–7(a)(11)(iii) (requiring the 

fund to disclose in its SAI its designated NRSROs 

and any limitations with respect to the fund’s use 

of such designation). See Part B of Form N–1A. In 

addition, funds must identify designated NRSROs 

in Form N–MFP with respect to each of the fund’s 

portfolio securities. See infra Section II.E.2. 

72 See infra notes 116–118, 121 and 

accompanying text. 

73 See, e.g., References to Ratings of Nationally 

Recognized Statistical Rating Organizations, 

Investment Company Act Release No. 28327 (July 

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

References Proposing Release’’); References to 

Ratings of Nationally Recognized Statistical Rating 

Organizations, Investment Company Act Release 

The debt crisis of 2007–2008 also has 

given us concern about the reliability of 

these ratings.74 Accordingly, we asked 

in the Proposing Release and in 2008 in 

a separate release whether we should 

eliminate or alter our use of ratings by 

NRSROs in rule 2a–7.75 

The Proposing Release requested 

comment on alternative approaches. 

One approach would have eliminated 

any references to ratings in rule 2a–7, 

the effect of which would be to 

eliminate the floor established by the 

‘‘eligible security’’ requirement and rely 

entirely on fund boards (and their 

delegates) to determine whether 

investment in a security involved 

minimal credit risks. An alternative 

approach would have maintained 

references to credit ratings in the rule, 

but shifted responsibility to fund boards 

to determine at least annually which 

NRSROs were sufficiently reliable for 

the fund to use to determine whether a 

security is an eligible security that could 

be considered for investment. Among 

other things, we requested comment on 

the minimum number of credit rating 

agencies we should require that a board 

designate for this purpose. 

Each time we have solicited 

comments, a substantial majority of 

commenters has strongly supported 

retaining the references to NRSRO 

ratings in the rule.76 Among other 

reasons, commenters argued that using 

credit ratings as a floor for credit quality 

limits money market fund advisers from 

taking greater risks that could weaken 

the rule’s risk limiting conditions and 

thus the protection of investors.77 Many 

urged us instead to address the ‘‘root 

causes’’ of ratings failures rather than 

remove the safety net provided by the 

No. 28939 (Oct. 5, 2009) [74 FR 52358 (Oct. 9, 

2009)] (‘‘NRSRO References Adopting Release’’). 

74 See NRSRO References Proposing Release, 

supra note 73, at text following n.6. 

75 See Proposing Release, supra note 2, at text 

following n.110; NRSRO References Proposing 

Release, supra note 73, at Section III.A. 

76 See, e.g., Comment Letter of Calvert Group, Ltd. 

(Sept. 8, 2009) (‘‘Calvert Comment Letter’’); 

Federated Comment Letter; ICI Comment Letter. See 

also Comment Letter of the American Bar 

Association (Committee on Federal Regulation of 

Securities and Committee on Securitization and 

Structured Finance) (Sept. 12, 2008) (available in 

File No. S7–19–08); Comment Letter of the 

Institutional Money Market Funds Association 

(Sept. 5, 2008) (available in File No. S7–19–08); 

Comment Letter of the Securities Industry and 

Financial Markets Association (Dec. 8, 2009) 

(available in File No. S7–19–08). Comment letters 

submitted in File No. S7–19–08 are available on the 

Commission’s Web site at: http://www.sec.gov/ 

comments/s7-19-08/s71908.shtml. 

77 See, e.g., Dreyfus Comment Letter; ICI 

Comment Letter; Comment Letter of J.P. Morgan 

Asset Management (Sept. 8, 2009) (‘‘J.P. Morgan 

Asset Mgt. Comment Letter’’). See also Proposing 

Release, supra note 2, at nn.108–110 and 

accompanying text. 

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credit ratings requirements of the rule.78 

Some disputed suggestions that 

inclusion of ratings in rule 2a–7 

encourages fund managers to over-rely 

on the ratings, pointing to provisions in 

the rule that specifically require 

independent analysis by fund 

managers.79 One commenter argued that 

NRSRO ratings provide ‘‘an additional, 

independent check on the investment 

manager’s judgment.’’ 80 By acting as a 

floor, the commenter argued, these 

ratings keep all money market funds 

operating at or above the same level,81 

and they restrain any particular money 

market fund from taking (and exposing 

investors to) greater risks than other 

competing money market funds in order 

to gain a competitive advantage in a 

highly yield-sensitive market.82 

Only a few commenters have 

supported removing references to 

NRSRO ratings.83 These commenters 

78 See, e.g., Comment Letter of the Northern 

Funds and Northern Institutional Funds— 

Independent Trustees (Sept. 8, 2009) (‘‘Northern 

Funds Indep. Trustees Comment Letter’’); Comment 

Letter of the Tamarack Funds Trust (Sept. 8, 2009) 

(‘‘Tamarack Funds Comment Letter’’). See also 

Comment Letter of Charles Schwab & Co., Inc. 

(Sept. 5, 2008) (available in File No. S7–19–08); 

Comment Letter of Dechert LLP (Sept. 5, 2008) 

(available in File No. S7–19–08); Comment Letter of 

Realpoint (Aug. 14, 2008) (available in File No. S7– 

19–08). We have recently adopted rule amendments 

designed to improve our regulation and oversight of 

NRSROs, which help address the integrity of their 

rating procedures and methodologies. See 

Amendments to Rules for Nationally Recognized 

Statistical Rating Organizations, Exchange Act 

Release No. 61050 (Nov. 23, 2009) [74 FR 63832 

(Dec. 4, 2009)]; Amendments to Rules for Nationally 

Recognized Statistical Rating Organizations, 

Exchange Act Release No. 59342 (Feb. 2, 2009) [74 

FR 6456 (Feb. 9, 2009)]; Oversight of Credit Rating 

Agencies Registered as Nationally Recognized 

Statistical Rating Organizations, Exchange Act 

Release No. 55857 (June 5, 2007) [72 FR 33564 (June 

18, 2007)]. 

79 See ICI Comment Letter; TDAM Comment 

Letter. 

80 See ICI Comment Letter. 

81 See, e.g., Comment Letter of State Street Global 

Advisors (Sept. 8, 2009) (‘‘State Street Comment 

Letter’’); Vanguard Comment Letter. 

82 See ICI Comment Letter. See also J.P. Morgan 

Asset Mgt. Comment Letter; Comment Letter of 

Stradley Ronon Stevens & Young, LLP (Sept. 8, 

2009) (‘‘Stradley Ronon Comment Letter’’). 

83 See Comment Letter of James B. Burnham, 

Business School Professor, Duquesne University 

(Aug. 27, 2009) (‘‘J. Burnham Comment Letter’’); 

Comment Letter of Moody’s Investors Service (Sept. 

8, 2009) (‘‘Moody’s Comment Letter’’); Comment 

Letter of James L. Nesfield (Jul. 4, 2009) (‘‘J. Nesfield 

Comment Letter’’); Comment Letter of the Shadow 

Financial Regulatory Committee (Sept. 14, 2009) 

(‘‘Shadow FRC Comment Letter’’); Comment Letter 

of John M. Winters, CFA (Jul. 23, 2009). See also 

Comment Letter of Professor Lawrence J. White 

(Sept. 5, 2008) (available in File No. S7–19–08); 

Comment Letter of Professor Frank Partnoy (Sept. 

5, 2008) (available in File No. S7–19–08); Comment 

Letter of the Government Finance Officers 

Association (Sept. 5, 2008) (available in File No. 

S7–19–08); Comment Letter of the Financial 

Economists Roundtable (Dec. 1, 2008) (available in 

File No. S7–19–08). 

principally asserted that removing 

credit ratings references would prevent 

fund boards and advisers from 

overreliance on NRSRO ratings and 

encourage advisers to make 

independent decisions about whether a 

security presents a credit risk.84 Other 

commenters, however, countered that 

eliminating NRSRO ratings from the 

rule would do nothing to prevent a fund 

manager from being highly dependent 

upon NRSRO ratings in making its 

minimal credit risk determination.85 

Commenters did, however, largely 

support the approach of allowing funds 

to designate a minimum number of 

NRSROs that the fund would look to 

under rule 2a–7 in determining whether 

a security is an eligible security. They 

asserted that NRSRO designation would 

encourage competition among NRSROs 

to achieve designation and reduce the 

cost of subscribing to all NRSROs’ 

ratings.86 They also noted that this 

approach would permit funds to focus 

better on standards, methods, and 

current ratings levels developed by 

designated NRSROs.87 Several 

commenters expressed concern, 

however, that requiring designation of 

only three NRSROs would result in 

funds designating the three largest 

NRSROs, which could further entrench 

their market dominance.88 Other 

commenters stated that designating 

NRSROs could disadvantage small 

NRSROs with well-developed 

capabilities regarding certain 

investments and suggested that the fund 

should have flexibility to rely on the 

particular NRSROs it determines have 

the best expertise to evaluate a 

particular security.89 Some commenters, 

while supporting designation of 

84 See J. Burnham Comment Letter; Moody’s 

Comment Letter; J. Nesfield Comment Letter; 

Shadow FRC Comment Letter. One commenter 

asserted that transparency of portfolio holdings was 

a better approach than using references to NRSRO 

ratings. J. Nesfield Comment Letter. We note that 

we are amending rule 2a–7 to require money market 

funds to disclose information about their portfolio 

holdings each month on their Web sites. See infra 

Section II.E.1. 

85 Stradley Ronon Comment Letter (removing the 

references would not prevent advisers from relying 

too heavily on NRSRO ratings under their own 

internal credit risk analysis). 

86 See, e.g., Federated Comment Letter; Fidelity 

Comment Letter; ICI Comment Letter. 

87 See Am. Securit. Forum Comment Letter. 

88 See, e.g., Comment Letter of DBRS Limited 

(Sept. 8, 2009) (‘‘DBRS Comment Letter’’); Comment 

Letter of Wells Fargo Funds Management, LLC 

(Sept. 8, 2009) (‘‘Wells Fargo Comment Letter’’). 

Three of the 10 NRSROs registered with the 

Commission issued approximately 97% of all 

outstanding ratings across all categories reported to 

the Commission for 2008. See SEC, Annual Report 

on Nationally Recognized Statistical Rating 

Organizations (Sept. 2008) at 10. 

89 See Tamarack Funds Comment Letter; TDAM 

Comment Letter. 

NRSROs, asserted that fund boards are 

unprepared to make such 

determinations and urged that fund 

advisers be given the responsibility.90 

The Commission is committed to 

reevaluating the use of NRSRO ratings 

in our rules. Recently we eliminated 

references to NRSRO ratings in several 

rules where we concluded that they 

were no longer warranted as serving 

their intended purposes and where the 

elimination was consistent with the 

protection of investors.91 Today, as 

discussed in more detail below, we are 

eliminating the only provision in rule 

2a–7 that limits money market funds to 

investing in a type of security only if it 

is rated.92 We continue to work to 

further the goals of the Credit Rating 

Agency Reform Act in order to improve 

the quality and reliability of securities 

ratings.93 

We have found no evidence that 

suggests that over-reliance on NRSRO 

ratings contributed to the problems that 

money market funds faced during the 

debt crisis. Our staff closely examined, 

for example, why some money market 

funds held securities issued by certain 

SIVs that became distressed in 2007. 

The staff exams appear to indicate that 

the minimal creditworthiness 

evaluations of SIVs made by advisers to 

funds that held those SIVs differed from 

the evaluations made by advisers to 

funds that did not invest in those SIVs 

in the emphasis the advisers gave to 

particular elements of the analysis.94 

Had fund managers relied too heavily 

on credit rating agencies, we would 

have expected to see far more funds 

90 See Comment Letter of the American Bar 

Association (Committee on Federal Regulation of 

Securities) (Sept. 9, 2009) (‘‘ABA Comment Letter’’); 

Comment Letter of the Mutual Fund Directors 

Forum (Sept. 8, 2009) (‘‘MFDF Comment Letter’’); 

Comment Letter of Northern Funds and Northern 

Institutional Funds (Sept. 8, 2009) (‘‘Northern 

Funds Comment Letter’’). 

91 See NRSRO References Adopting Release, 

supra note 73. 

92 Compare amended rule 2a–7(a)(12) with 

current rule 2a–7(a)(10)(i)(B). 

93 See, e.g., Proposed Rules for Nationally 

Recognized Statistical Rating Organizations, 

Exchange Act Release No. 61051 (Nov. 23, 2009) [74 

FR 63866 (Dec. 4, 2009)] (proposing rule 

amendments and a new rule requiring each NRSRO 

to: (1) Furnish an annual report describing the steps 

taken by the firm’s designated compliance officer 

during the fiscal year with respect to certain 

compliance matters; (2) disclose additional 

information about sources of revenues on Form 

NRSRO; and (3) make publicly available 

information about revenues of the NRSRO 

attributable to persons paying the NRSRO for the 

issuance or maintenance of a credit rating). 

94 See Proposing Release, supra note 2, at note 

135. 

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holding Lehman Brothers commercial 

paper when it defaulted than we did.95 

The current provisions of rule 2a–7 

were designed to prevent excess 

reliance on credit rating agencies.96 

Under rule 2a–7, adequate ratings alone 

do not provide a basis for eligibility. As 

we have noted before, a determination 

that a security is an eligible security is 

a necessary but not sufficient finding in 

order for a fund to acquire the 

security.97 The rule also requires fund 

boards (which typically rely on the 

fund’s adviser) to determine that the 

security presents 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.’’ 98 Thus, credit 

ratings provide an important but not 

exclusive input into the investment 

decision-making process, 99 and the 

unreliability or low quality of ratings 

issued by one or more NRSROs can (and 

should) be addressed by an investment 

adviser providing a thorough analysis of 

the security to determine if it involves 

minimal credit risks. The use of these 

ratings provides an independent 

perspective on the creditworthiness of 

short-term securities that we have 

considered, in part, when determining 

whether to exercise our exemptive 

authority to permit money market funds 

to use the amortized cost method of 

valuation.100 

This is not to say, however, that we 

are content with the current approach of 

95 See Fitch: Market Challenges Offer ‘Lessons’ for 

Rated Money Market Funds, Business Wire (Oct. 1, 

2008) (‘‘Most funds were able to eliminate or 

minimize their exposure to securities issued by 

SIVs and Lehman Brothers by limiting their 

absolute exposures and/or taking measures to scale 

back their risk as the credit picture deteriorated.’’). 

See Bloomberg Terminal Database, LEH (Equity) 

CRPR (historical short-term credit ratings for credit 

rating agencies, including Moody’s and Fitch, 

indicate that these agencies did not downgrade 

their ratings of Lehman Brothers debt before the 

company filed for bankruptcy); Bob Ivry, Mark 

Pittman & Christine Harper, Sleep-At-Night-Money 

Lost in Lehman Lesson Missing $63 Billion, 

Bloomberg (Sept. 8, 2009), available at http:// 

www.bloomberg.com/apps/ 

news?pid=email_en&sid=aLhi.S5xkemY (historical 

short-term credit ratings for Moody’s and Fitch 

indicate that these credit rating agencies did not 

downgrade their ratings of Lehman Brothers debt 

before the company filed for bankruptcy); David 

Segal, The Silence of the Oracle, New York Times 

(Mar. 18, 2009) (noting Moody’s rated Lehman 

Brothers’ debt A2 before the firm’s bankruptcy). 

96 See 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’’) at Section II.A. 

97 See, e.g., id. at text accompanying n.18. 

98 Current rule 2a–7(c)(3)(i). 

99 See 1991 Adopting Release, supra note 96, at 

Section II.A. 

100 See 1983 Adopting Release, supra note 6, at 

paragraphs following n.31. 

rule 2a–7. Any one of the growing 

number of NRSROs, regardless of its 

expertise in rating short-term securities 

of the type held by money market funds, 

could have deemed a security unfit for 

a money market fund to acquire or, 

conversely, deemed a security to be 

eligible for investment by a money 

market fund. To address this concern, 

we are adopting amendments to rule 

2a–7 that shift responsibility to money 

market fund boards for deciding which 

NRSROs they will use in determining 

whether a security is an eligible security 

for purposes of the rule. 

The amendments are designed, among 

other things, to foster greater 

competition among NRSROs to produce 

the most reliable ratings in order to 

obtain designation by money market 

fund boards. Accordingly, we believe 

this approach will improve the utility of 

the rule’s use of NRSRO ratings as 

threshold investment criteria, and is 

consistent with the goals of Congress in 

passing the Credit Rating Agency 

Reform Act.101 

a. Number of Designated NRSROs 

Under amended rule 2a–7, each 

money market fund must designate in 

its registration statement 102 at least four 

101 See Senate Committee on Banking, Housing, 

and Urban Affairs, Credit Rating Agency Reform 

Act of 2006, S. Rep. 109–326, at 1 (2006) (‘‘Senate 

Report No. 109–326’’) (‘‘The purpose of the ‘Credit 

Rating Agency Reform Act’ * * * is to improve 

ratings quality for the protection of investors and 

in the public interest by fostering accountability, 

transparency, and competition in the credit rating 

industry.’’). In 2007, pursuant to the Credit Rating 

Agency Reform Act, we adopted rules to implement 

a program for registration and Commission 

oversight of NRSROs (‘‘NRSRO Rules’’). Oversight of 

Credit Rating Agencies Registered as Nationally 

Recognized Statistical Rating Organizations, 

Exchange Act Release No. 55857 (June 5, 2007) [72 

FR 33564 (June 18, 2007)] (‘‘NRSRO Rules Adopting 

Release’’). Our rule amendments regarding NRSROs 

have been designed, among other things, to foster 

greater competition among NRSROs and to 

encourage more of them to enter the market. See, 

e.g., Amendments to Rules for Nationally 

Recognized Statistical Rating Organizations, 

Exchange Act Release No. 61050 (Nov. 23, 2009) [74 

FR 63832 (Dec. 4, 2009)], at nn.1–3 and 

accompanying text (citing Senate Report No. 109– 

326, at 1). 

102 The fund must disclose the designated 

NRSROs, including any limitations with respect to 

the fund’s use of such designation, in the fund’s 

SAI. Amended rule 2a–7(a)(11)(iii). In response to 

our request for comment on whether to require 

disclosure of designated NRSROs in money market 

funds’ SAI, see Proposing Release, supra note 2, at 

text accompanying n.115, several commenters 

suggested we require disclosure of designated 

NRSROs in the fund’s registration statement. See, 

e.g., Fidelity Comment Letter (recommending 

disclosure in the fund’s SAI); Invesco Aim 

Comment Letter (same); ICI Comment Letter 

(recommending disclosure in the fund’s prospectus 

or Web site). In contrast, one commenter objected 

to disclosure of designated NRSROs in the fund’s 

registration statement on the grounds that investors 

do not consider this information to be material and 

NRSROs that the fund will use to 

determine, among other things, whether 

a security is an eligible security.103 

Several commenters expressed concern 

that permitting funds to designate only 

three NRSROs (which was 

recommended by the ICI Report) would 

simply embrace the current market for 

ratings, which is dominated by three 

rating agencies.104 We share these 

commenters’ concerns and thus are 

requiring funds to designate at least four 

NRSROs, an approach recommended by 

commenters as a way to foster 

competition among NRSROs to develop 

a specialized service of providing shortterm ratings to money market funds and 

improve independent credit ratings for 

purposes of the rule.105 We also believe 

that the designation of at least four 

NRSROs will allow funds to designate 

smaller NRSROs that specialize in rating 

particular investments. 

Under the amendments, a fund could 

designate an NRSRO with respect to 

short-term credit ratings for only certain 

types of issuers or securities.106 This 

stickering the fund’s prospectus for each change in 

designation would be too costly. See Federated 

Comment Letter. We believe that the identity of 

each designated NRSRO is not essential information 

for investors, but that some investors may find it 

useful, and therefore are requiring it in the SAI. See 

generally Form N–1A at General Instruction C.2(b) 

(noting that the purpose of the SAI is to provide 

additional information about a fund that is not 

necessary to be in the prospectus but that some 

investors may find useful). 

103 Amended rule 2a–7(a)(11). A fund may 

designate only credit rating agencies that are 

registered as NRSROs with the Commission under 

the Exchange Act and the rules adopted under those 

provisions. See section 15E of the Exchange Act [15 

U.S.C. 78o–7]; 17 CFR 240.17g–1. In response to our 

request for comment, one commenter recommended 

permitting designation of unregistered credit rating 

agencies on the grounds that this could promote 

competition. See Moody’s Comment Letter. Two 

commenters opposed designation of an unregistered 

credit rating agency, and one of these commenters 

argued that the potential for introducing underresearched data into the marketplace could disrupt 

the orderly functioning of markets. See DBRS 

Comment Letter; Invesco Aim Comment Letter. In 

light of the enhanced disclosure obligations and 

ongoing rulemaking initiatives designed to improve 

the quality and reliability of ratings issued by 

registered NRSROs, we are maintaining the 

requirement that only credit rating agencies 

registered as NRSROs with the Commission may be 

designated under the rule. See, e.g., supra note 93. 

104 See, e.g., DBRS Comment Letter; Wells Fargo 

Comment Letter; C. Wesselkamper Comment Letter. 

105 See DBRS Comment Letter; Fidelity Comment 

Letter. In response to our request for comment on 

the appropriate number of NRSROs a board should 

designate, another commenter requested we require 

funds to designate at least five NRSROs as a way 

to encourage new entrants to the market. See 

Federated Comment Letter. See also Proposing 

Release, supra note 2, at text following n.113 and 

at n.117 and accompanying text (requesting 

comment). 

106 Amended rule 2a–7(a)(11)(i)(A) (providing 

that a money market fund’s board of directors may 

designate an NRSRO whose short-term credit 

ratings with respect to any obligor or security or 

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would allow a fund, for example, to 

designate an NRSRO that specializes in 

securities issued by insurance 

companies or banks.107 This approach, 

which was supported by several of the 

commenters,108 may further encourage 

new entrants among NRSROs that fund 

managers might not otherwise consider 

designating due to lack of confidence in 

ratings outside the NRSROs’ areas of 

expertise. 

b. Board Designation and Annual 

Determination 

The amendments require each money 

market fund’s board of directors to 

designate the NRSROs on which the 

fund will rely for purposes of the rule. 

In addition, the board must determine at 

least once each calendar year that each 

designated NRSRO issues credit ratings 

that are sufficiently reliable for such 

use.109 Before designating an NRSRO 

and before making its annual 

determination, a board should have the 

benefit of the adviser’s evaluation 

regarding the quality of the NRSRO’s 

short-term ratings.110 We would 

anticipate that the board’s designations 

and annual determinations would be 

based on recommendations of the fund 

adviser and its credit analysts, who 

would have evaluated each NRSRO 

based on their experiences in addition 

to any information provided by the 

NRSRO. We would expect the adviser’s 

annual evaluation to be based, among 

other things, on an examination of the 

methodology an NRSRO uses to rate 

securities, including the risks they 

measure, and the NRSRO’s record with 

respect to the types of securities in 

which the fund invests, including asset 

backed securities.111 The reliability of a 

particular obligors or securities will be used by the 

fund to determine whether a security is an eligible 

security). 

107 A fund that has designated an NRSRO to use 

in determining the eligibility of insurance 

company-issued securities need not review or 

monitor any class of ratings that the NRSRO issued 

with respect to other securities or their issuers in 

which the fund may invest. A fund adviser (under 

delegated authority) would be free (but not 

required) to consider these ratings in determining 

whether the non-insurance company-issued 

security (or its issuer) presents minimal credit risks. 

Amended rule 2a–7(c)(3)(i). 

108 See DBRS Comment Letter; Moody’s Comment 

Letter; Wells Fargo Comment Letter. 

109 Amended rule 2a–7(a)(11)(i). We are requiring 

funds to perform the annual determination once 

each calendar year to simplify compliance so that 

a fund is not in violation of the rule if the board’s 

determination occurs soon after the year 

anniversary of the previous determination. 

110 Fund boards may, however, also find an 

NRSRO’s record with respect to long-term securities 

to be helpful in evaluating the overall quality of the 

organization. 

111 See Moody’s Comment Letter (advocating that 

any board designation be ‘‘based on the board’s 

assessment of ratings’ attributes, such as quality, 

newly registered NRSRO could be 

evaluated based upon the quality and 

relevant experience of the personnel 

conducting the rating. Even with the 

recommendations of the fund adviser, 

we recognize that ultimately, a board’s 

determination whether an NRSRO’s 

ratings are ‘‘sufficiently reliable’’ for use 

in determining whether a security is an 

eligible security will be a matter of 

judgment. 

Many commenters expressed concern 

that a money market fund’s board of 

directors does not have the necessary 

expertise to designate NRSROs, and 

urged that we delegate the authority to 

fund advisers to make the 

designation.112 A number of these 

commenters seem to assume that we 

would require fund boards to engage in 

the type of analysis that we expect the 

adviser will provide the board for its 

consideration. We believe that it will be 

useful for boards to consider the 

designation of NRSROs, a role not 

unlike the role that many boards play in 

approving other matters of substantial 

significance to the operation of the 

fund.113 Board designation and 

determination (at least once a calendar 

year) will serve as a check on fund 

comparability and historical performance.’’). We 

have recently adopted rule amendments relating to 

NRSROs that should help fund advisers and their 

credit analysts in performing their evaluations. Our 

amendments require NRSROs, among other things, 

to disclose information about their ratings 

methodology, experience and performance. For 

example, NRSROs must disclose in their 

applications their ratings experience, performance 

in assessing the creditworthiness of securities and 

obligors, procedures and methodologies used in 

determining credit ratings, the types of conflicts 

NRSROs face and how they manage those conflicts, 

and the qualifications of the NRSRO’s credit 

analysts. See Items 6, 7 and Exhibits 1, 2, 6, 7, 8 

of Form NRSRO. In addition, NRSROs currently are 

required to disclose on a public Web site a random 

sample of 10% of the ratings histories of issuer paid 

ratings in each class of credit ratings for which the 

NRSRO is registered and has issued 500 or more 

issuer paid credit ratings. Rule 17g–2(a)(8) and (d) 

[17 CFR 240.17g–2(a)(8) and (d)]. In June of this 

year, these public disclosures will have to include 

ratings action histories for all credit ratings initially 

determined on or after June 26, 2007. See 

Amendments to Rules for Nationally Recognized 

Statistical Ratings Organizations, Exchange Act 

Release No. 61050 (Nov. 23, 2009) [74 FR 63832 

(Dec. 4, 2009)] at text following n.19 and 

compliance date. 

112 See, e.g., ABA Comment Letter; MFDF 

Comment Letter; Northern Funds Comment Letter. 

These commenters responded to our discussion of 

this approach in the Proposing Release. See 

Proposing Release, supra note 2, at text following 

n. 118. 

113 See, e.g., amended rule 2a–7(c)(8) (requiring 

the fund’s board of directors to establish procedures 

to stabilize the fund’s NAV, including procedures 

providing for, among other things, the board’s 

periodic review of the fund’s shadow price, the 

methods used for calculating shadow price, and 

what action, if any, the board should initiate if the 

fund’s shadow price exceeds amortized cost by 

more than 1⁄2 of 1%). 

managers that may have conflicts of 

interest in selecting an NRSRO from 

which the manager seeks a rating for the 

fund (in order to facilitate marketing the 

fund),114 or an NRSRO that may 

accommodate the fund’s investment in 

higher yielding, riskier securities.115 

c. Operation of the Rule 

Once a board has designated the 

NRSROs, the fund could look to the 

designated NRSROs whenever it has to 

consider credit ratings under rule 2a–7 

unless and until the board changes the 

designation.116 A fund must look to 

only the designated NRSROs to 

determine whether the security is an 

eligible security, a rated security,117 and 

whether it is a first tier or a second tier 

114 See Wells Fargo Comment Letter. 

115 See Moody’s Comment Letter (noting that the 

more narrowly defined the categories of ratings for 

which a designation can be obtained, the ‘‘easier it 

could be for mutual funds to game the system, e.g., 

by dropping an NRSRO from its list of designated 

NRSROs for a particular class of ratings because the 

NRSRO has introduced a more conservative ratings 

methodology.’’). 

116 We have changed the term from ‘‘NRSRO’’ to 

‘‘designated NRSRO’’ throughout the rule each time 

it is used. As a consequence, changes in the fund’s 

designated NRSROs may affect the ability of the 

fund to purchase a new security or roll over a 

current holding, and may require the fund to 

reassess promptly whether the security continues to 

present minimal creditworthiness and dispose of a 

current holding. This is because a new designation 

of an NRSRO (or a removal of a designated NRSRO) 

is now treated under the rule as the equivalent of 

a credit event requiring the fund board or adviser 

to consider the rating of the newly designated 

NRSRO (or preclude the consideration of a formerly 

designated NRSRO). For example, if a fund acquires 

an unrated security (i.e., a security (or its issuer) 

that does not have a short-term rating from a 

designated NRSRO) that the fund considered to be 

equivalent to a first tier security and the fund 

thereafter designates a new NRSRO that has rated 

the security as a second tier security, the fund must 

then treat the security as a second tier security. The 

fund would not be required to dispose of the 

security (although it would be required to perform 

a credit assessment, which might prompt it to 

dispose of the security) even if the position in the 

security exceeds the fund’s limits on second tier 

securities, because compliance with the limits on 

second tier securities is determined immediately 

after the fund acquires the security. See amended 

rule 2a–7(c)(3)(ii); 2a–7(c)(4)(i)(C). The fund could 

only roll over the position to the extent that 

immediately after the rollover the fund would meet 

the rule’s limits on second tier securities. See 

amended rule 2a–7(a)(1) (defining ‘‘acquisition’’ to 

include a rollover of a position in security). 

117 Amended rule 2a–7(a)(23) (defining the term 

‘‘requisite NRSROs’’). For purposes of determining 

whether a rated security is an eligible security and 

a first tier security, rule 2a–7 requires the fund to 

determine whether the security (or its issuer) has 

received a short-term rating from the requisite 

NRSROs. Amended rule 2a–7(a)(12)(i). Under the 

amended rule, the requisite NRSROs must be drawn 

from the designated NRSROs. Amended rule 2a– 

7(a)(23). Thus, for example, a security that is rated 

as a first tier security by two NRSROs, only one of 

which is a designated NRSRO, and as a second tier 

security by another designated NRSRO, is a splitrated security and thus a second tier security. Id. 

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10070 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

security.118 Under the amendments, a 

security is an unrated security if neither 

the security nor its issuer has received 

a short-term rating from any of the 

designated NRSROs.119 Accordingly, 

before investing in the security, the fund 

adviser must make a determination that 

the security is of comparable quality to 

a rated security.120 After a money 

market fund acquires a security, the 

fund manager must monitor only the 

ratings of designated NRSROs to 

determine whether a change in those 

ratings requires the board to reassess 

promptly whether the security 

continues to present minimal credit 

risks or to dispose of a portfolio security 

that is no longer an eligible security.121 

3. Asset Backed Securities 

We are amending rule 2a–7 to 

eliminate a requirement that an asset 

backed security (‘‘ABS’’) be rated by at 

least one NRSRO in order to be an 

eligible security that a money market 

fund may acquire.122 As a consequence, 

funds may acquire an unrated asset 

backed security that otherwise meets the 

requirements of rule 2a–7, including 

those requirements that apply to 

unrated securities.123 

In 1996, we limited funds to investing 

in rated ABSs because we thought that 

NRSROs played a beneficial role in 

118 Amended rule 2a–7(a)(12) (defining ‘‘eligible 

security’’); amended rule 2a–7(a)(14) (defining ‘‘first 

tier security’’); and amended rule 2a–7(a)(24) 

(defining ‘‘second tier security’’). 

119 Amended rule 2a–7(a)(30) (defining ‘‘unrated 

security’’ by reference to amended rule 2a–7(a)(21), 

which defines a ‘‘rated security’’ as, among other 

things, a security that has received or been issued 

by an issuer that has received a short-term rating 

by a designated NRSRO). 

120 Amended rule 2a–7(a)(12) (defining ‘‘eligible 

security’’). 

121 Amended rule 2a–7(c)(7)(i)(A) (requiring a 

fund’s board of directors to reassess promptly 

whether the security continues to present minimal 

credit risks and cause the fund to take action if: (i) 

The security ceases to be a first tier security because 

it no longer has the highest rating from the requisite 

NRSROs or, in the case of an unrated security, the 

board determines it is no longer of comparable 

quality to a first tier security, or (ii) the security is 

an unrated security or second tier security and the 

fund’s investment adviser (or portfolio manager) 

becomes aware since acquisition of the security that 

any designated NRSRO has given it a rating below 

the designated NRSRO’s second highest short-term 

rating); amended rule 2a–7(c)(7)(ii)(B) (requiring a 

fund to dispose of a security that ceases to be an 

eligible security as soon as practicable consistent 

with achieving an orderly disposition of the 

security, absent a finding by the board of directors 

that disposal of the portfolio security would not be 

in the best interests of the money market fund). 

122 We are thus amending current rule 2a– 

7(a)(10)(ii) to eliminate paragraph (B) and renumber 

paragraph 2a–7(a)(10)(ii)(A) as 2a–7(a)(12)(ii). 

123 See, e.g., amended rule 2a–7(a)(12)(ii); 

(c)(3)(iv)(C); (c)(7)(i)(A)(1). As under the current 

rule, if an asset backed security is a rated security, 

it will be required to satisfy the rule’s ratings 

criteria. Amended rule 2a–7(a)(12)(i). 

assuring that assets underlying an ABS 

were properly valued and would 

support the cash flows required to fund 

the ABS, and we were concerned that 

fund advisers may not be in as good a 

position to perform the legal, structural, 

and credit analysis that the rating 

agencies performed.124 As discussed in 

the Proposing Release, NRSROs rapidly 

downgraded ABSs from their status as 

first tier securities over a short time 

period during 2007–2008.125 The 

NRSROs thus did not seem to play a 

role in buttressing the minimal credit 

risk analysis of fund management 

sufficient to warrant a requirement that 

all ABSs be rated to be eligible for 

money market fund investment. We 

would otherwise have expected a 

slower, more orderly downgrading 

process for these ABSs, which would 

have permitted money market funds to 

gradually roll off the paper. 

We received only a few comments on 

this approach.126 One NRSRO 

commenter supported removing this 

requirement.127 Two urged us to keep 

the ratings requirement for ABSs,128 and 

one of those asserted that ratings ‘‘under 

appropriate criteria’’ enhance the 

liquidity of ABSs and provide credit 

and structural expertise and research 

that benefit investors.129 As noted 

above, we do not believe that NRSRO 

ratings of ABSs served this function 

during the 2007–2008 turmoil in the 

ABS marketplace, and we no longer 

believe that the provision of rule 2a–7 

that has required such ratings for all 

ABSs is warranted as serving its 

intended purpose, and thus we are 

eliminating this requirement.130 

124 Revisions to Rules Regulating Money Market 

Funds, Investment Company Act Release No. 21837 

(Mar. 21, 1996) [61 FR 13956 (Mar. 28, 1996)] at 

Section II.E.4; Revisions to Rules Regulating Money 

Market Funds, Investment Company Act Release 

No. 19959 (Dec. 17, 1993) [58 FR 68585 (Dec. 28, 

1993)] (‘‘1993 Proposing Release’’) at nn.110–112 

and accompanying text. 

125 See Proposing Release, supra note 2, at 

Section II.A.4. See also Standard & Poor’s, Global 

Structured Finance Default and Transition Study— 

1978–2008: Credit Quality of Global Structured 

Securities Fell Sharply in 2008 Amid Capital 

Market Turmoil (Feb. 25, 2009), available at http:// 

www2.standardandpoors.com/portal/site/sp/en/ca/ 

page.article/3,3,3,0,1204847668460.html (showing 

greater default rate and significantly greater 

downgrades in structured finance securities). 

126 We also solicited comment generally on 

whether, and if so how, we should amend rule 2a– 

7 to generally address the risks presented by ABSs. 

We received a number of comments in response to 

this request, and will consider them in developing 

further amendments to rule 2a–7. 

127 See Moody’s Comment Letter. 

128 See Am. Securit. Forum Comment Letter; 

Shriver Poverty Law Ctr. Comment Letter. 

129 See Am. Securit. Forum Comment Letter. 

130 See Statement of Lawrence J. White, SEC 

Roundtable to Examine Oversight of Credit Rating 

Agencies at 2 (Apr. 15, 2009) (initial ratings on 

We do note, however, that as part of 

the minimal credit risk analysis that any 

money market fund must conduct before 

investing in an ABS, the board of 

directors (or its delegate) should: (i) 

Analyze the underlying ABS assets to 

ensure that they are properly valued and 

provide adequate asset coverage for the 

cash flows required to fund the ABS 

under various market conditions; (ii) 

analyze the terms of any liquidity or 

other support provided by the sponsor 

of the ABS; and (iii) otherwise perform 

the legal, structural, and credit analyses 

required to determine that the particular 

ABS involves appropriate risks for the 

money market fund.131 

B. Portfolio Maturity 

We are adopting amendments to rule 

2a–7 to further restrict the maturity 

limitations on a money market fund’s 

portfolio in order to reduce the exposure 

of money market fund investors to 

certain risks, including interest rate risk, 

spread risk, and liquidity risk. First, we 

are reducing the maximum weighted 

average portfolio maturity permitted by 

the rule from 90 days to 60 days. 

Second, we are adopting a 120-day limit 

on the weighted average life of a money 

market fund’s portfolio, which will limit 

the portion of a fund’s portfolio that 

could be held in longer term adjustablerate securities. Finally, we are deleting 

a provision in the rule that permitted 

certain money market funds to acquire 

Government securities with extended 

maturities of up to 762 calendar days. 

1. Weighted Average Maturity 

We are amending rule 2a–7 to require 

that each money market fund maintain 

a dollar-weighted average portfolio 

maturity (WAM) appropriate to its 

objective of maintaining a stable net 

asset value or price per share, but in no 

case greater than 60 days.132 We believe 

that such a limit on the maximum WAM 

will result in money market funds that 

are more resilient to changes in interest 

rates that may be accompanied by other 

market shocks, and thus reduce the 

likelihood of a run and better protect 

money market fund investors. As we 

explained in the Proposing Release, a 

portfolio weighted towards securities 

with longer maturities increases the 

fund’s exposure to interest rate risk, 

amplifies spread risk, and decreases the 

bonds securitized from subprime residential 

mortgages ‘‘proved to be excessively optimistic’’— 

especially for the bonds based on mortgages 

originated in 2005 and 2006). 

131 See 1993 Proposing Release, supra note 124, 

at nn.108–111 and preceding and accompanying 

text. 

132 See amended rule 2a–7(c)(2). 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10071 

ability of a fund to pay redeeming 

shareholders.133 

Most commenters that addressed this 

proposal supported further reducing the 

maximum WAM of fund portfolios in 

order to reduce the funds’ exposure to 

related risk. Those commenters were 

divided between those supporting the 

60-day maximum WAM that we 

proposed 134 and those supporting a 

reduction to 75 days.135 Other 

commenters argued for no reduction at 

all (i.e., leaving the limit at 90 days).136 

Commenters supporting a maximum 

WAM limitation of 60 days believed 

that such a reduction would be 

appropriate to increase the stability and 

liquidity of money market funds 137 and 

would reduce funds’ exposure to 

interest rate risk.138 One asserted that a 

60-day limitation is appropriate as it 

prioritizes a money market fund’s safety 

and liquidity over yield.139 

Commenters supporting a maximum 

WAM of 75 days argued that such a 

limitation would achieve the 

Commission’s goal of reducing funds’ 

exposure to interest rate risk while 

providing funds with sufficient 

flexibility to invest in high quality 

securities when shorter term 

investments are scarce.140 Some 

expressed concern about whether a 60-

day WAM would reduce a money 

market fund’s ability to generate 

sufficient yield.141 Still others argued 

that a shorter WAM could make some 

money market funds more risky because 

of the alternative investment strategies 

they might employ as a result.142 

133 See Proposing Release, supra note 2, at 

Section II.B.1. 

134 See, e.g., Goldman Sachs Comment Letter; 

Comment Letter of the Institutional Money Market 

Funds Association (Sept. 8, 2009) (‘‘IMMFA 

Comment Letter’’); Northern Funds Indep. Trustees 

Comment Letter. 

135 See, e.g., Charles Schwab Comment Letter; 

Comment Letter of GE Asset Management 

Incorporated (Sept. 8, 2009) (‘‘GE Asset Mgt. 

Comment Letter’’); T. Rowe Price Comment Letter. 

136 See, e.g., State Street Comment Letter; 

Comment Letter of Victory Capital Management 

(Sept. 8, 2009) (‘‘Victory Cap. Mgt. Comment 

Letter’’); Wells Fargo Comment Letter. 

137 See Tamarack Funds Comment Letter. 

138 See TDAM Comment Letter. 

139 See Invesco Aim Comment Letter. 

140 See, e.g., Charles Schwab Comment Letter; GE 

Asset Mgt. Comment Letter; ICI Comment Letter. 

141 See, e.g., Charles Schwab Comment Letter; 

Comment Letter of Crane Data LLC and Money 

Fund Intelligence (Aug. 31, 2009) (‘‘Crane Data 

Comment Letter’’); T. Rowe Price Comment Letter. 

142 One commenter noted that a WAM limitation 

longer than 60 days would allow a fund to improve 

the credit profile of its portfolio by substituting 

longer term Government securities for shorter term 

corporate securities. See BlackRock Comment 

Letter. Another commenter argued that a reduction 

would lead to fund portfolios with a ‘‘barbelled’’ 

maturity structure in which the fund balanced the 

low yield offered by the large amount of very shortFinally, two commenters opposing any 

change in the maximum WAM 

permitted by rule 2a–7 argued that 

liquidity risk to funds is more 

appropriately limited by other aspects of 

our amendments to rule 2a–7, and that 

the resulting reduction in yield would 

‘‘homogenize’’ money market funds to 

such an extent that investors may be 

driven to invest in unregulated funds, 

thus increasing systemic risk.143 

We believe that the maximum WAM 

permissible for money market funds 

should be reduced to 60 days in order 

to reduce the likelihood of funds 

breaking the buck. The increased 

resilience to simultaneous stresses from 

interest rate and other risks that a 

money market fund would achieve 

through a maximum WAM of 60 days is 

significant. A fund with a 90-day WAM 

could withstand an instantaneous 

change in interest rates of 200 basis 

points before breaking the buck.144 In 

contrast, a fund with a WAM of 60 days 

could withstand an interest rate change 

of 300 basis points without breaking the 

buck.145 Although an interest rate 

change of such a magnitude may be 

unlikely to occur,146 funds must also be 

term securities it would be required to hold with 

an offsetting amount of riskier longer term 

securities, which could increase the riskiness of 

fund portfolios. See Comment Letter of Waddell & 

Reed/Ivy Fund Portfolio Managers (Sept. 8, 2009) 

(‘‘Waddell & Reed Comment Letter’’). Another stated 

that higher risk issuers tend to be limited to issuing 

shorter maturity securities, so a shorter WAM 

limitation could increase a fund’s credit risk profile. 

See Wells Fargo Comment Letter. 

143 See Fidelity Comment Letter; State Street 

Comment Letter. Several commenters also asserted 

that any reduction in WAM would increase issuers’ 

reliance on short-term funding, also increasing 

systemic risk. See, e.g., Am. Securit. Forum 

Comment Letter; State Street Comment Letter; Wells 

Fargo Comment Letter. 

144 See Fidelity Comment Letter. 

145 Our staff supplemented stress test analysis 

conducted by commenters with more data points 

and stress scenarios to illustrate the impact on a 

money market fund’s net asset value per share from 

multiple stresses on that fund’s portfolio. A fund 

with a 75-day WAM could withstand an interest 

rate change of less than 250 basis points without 

breaking the buck. We note that these scenarios also 

represent the most conservative scenarios because 

they assume that the money market fund started 

with a market-based net asset value of $1.00. It is 

our understanding that at any point in time, a large 

number of money market funds will not start from 

a market-based net asset value of $1.00—many will 

start with a market-based net asset value of less 

than a dollar and thus a smaller interest rate change 

will cause the funds to break the buck. 

146 Interest rate shocks of a 300 basis point 

magnitude over a relatively short period of time 

have occurred, although not since the late 1970s. 

See Federal Reserve Bank of New York, Historical 

Changes of the Target Federal Funds and Discount 

Rates, 1971 to present, available at http:// 

www.newyorkfed.org/markets/statistics/dlyrates/ 

fedrate.html. In low interest rate environments 

(such as today), a shock in interest rates could occur 

if the Federal Reserve determines to raise interest 

rates quickly, for example, to stave off inflation as 

able to withstand multiple shocks 

occurring simultaneously, such as those 

that occurred in September 2008 when 

there was a simultaneous increase in 

LIBOR rates and widening spreads due 

to credit deterioration and liquidity 

pressures, together with extraordinary 

redemptions.147 

A fund with a lower WAM has 

significantly greater protection in the 

circumstances described above. For 

example, a fund with a 90-day WAM 

facing a change in credit spreads of 50 

basis points and redemptions of 10 

percent would break the buck with an 

interest rate change of a little more than 

100 basis points.148 Greater shocks from 

an even larger increase in spreads or 

redemptions would only lessen that 

interest rate cushion—last fall increases 

in spreads and redemptions were 

considerably above this level.149 A fund 

with a 60-day WAM would be in a 

better position to withstand multiple 

shocks without breaking the buck than 

if it maintained a 90-day or 75-day 

WAM.150 

We disagree with those commenters 

that asserted that a reduction of 

maximum permissible WAM would 

have a significant adverse effect on 

money market funds’ investment 

strategies or yield. We have not 

observed such adverse effect in funds 

with WAMs below 60 days or a greater 

tendency to invest in riskier short-term 

the economy recovers or to strengthen the U.S. 

dollar. 

147 See Proposing Release, supra note 2, at nn.47– 

48, 53, 63, 66–67 and accompanying text. See also 

infra note 178 (discussing the increase in LIBOR 

during the financial crisis). Many money market 

fund portfolio holdings at the time were tied to 

LIBOR. 

148 This assumes a weighted average life 

limitation of 120 days. A fund with a 75-day WAM 

could withstand a 50 basis point increase in credit 

spreads across its portfolio, 10% redemptions, and 

an increase in interest rates of 125 basis points 

before breaking the buck, assuming a 120-day 

weighted average life. 

149 In addition, we note that spreads have 

widened to significant degrees in the past. See, e.g., 

Benjamin N. Friedman & Kenneth N. Kuttner, Why 

Does the Paper-Bill Spread Predict Real Economic 

Activity?, NBER Working Paper No. 3879, at Fig.1 

(Oct. 1991) (showing historical spreads for 6-month 

commercial paper over 6-month Treasury bill rates 

from 1959 to 1990). 

150 Based on staff review of various stress test 

scenarios, a fund with a 60-day WAM could 

withstand a 50 basis point increase in credit 

spreads across its portfolio, 10% redemptions, and 

an increase in interest rates of over 150 basis points 

before breaking the buck, again assuming a 

weighted average life limitation of 120 days. Others 

have recognized that exposure to multiple stresses 

may call for a lower WAM. See, e.g., Standard & 

Poor’s, Fund Ratings Criteria: Market Price 

Exposure, at 3 (2007), available at http:// 

www2.standardandpoors.com/spf/pdf/events/ 

MMX709.pdf (stating that money market funds with 

a greater liquidity risk due to a smaller asset size 

or shareholder composition may need to maintain 

a lower WAM than 60 days). 

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10072 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

securities or to follow riskier portfolio 

strategies to increase yield. These funds 

do not appear to have had great 

difficulties in creating portfolios that 

generated competitive yields and 

attracted investors.151 Indeed, many 

domestic money market funds currently 

limit their WAM to a maximum of 60 

days voluntarily, a limit they likely 

would have discontinued if they had 

experienced the management or 

competitive difficulties suggested by 

commenters.152 No commenter reported 

to us that any of these funds were doing 

so. We acknowledge that one 

consequence of our amendments may be 

to further ‘‘homogenize’’ fund portfolios 

as managers have fewer avenues to 

acquire yield by exposing the funds to 

risk, but we believe that the level of 

potential homogenization is justified to 

reduce the risk to investors that a money 

market fund will break the buck. In 

addition, we are not persuaded by 

comments that a likely consequence of 

a shortened maximum WAM will be 

riskier portfolios. Accordingly, we are 

adopting the 60-day WAM limitation as 

proposed. 

2. Weighted Average Life 

We are adopting, as proposed, a 

requirement that limits the dollarweighted average life to maturity of a 

151 Similarly, European stable value money 

market funds do not appear to have had these 

difficulties. As the Institutional Money Market 

Fund Association (IMMFA) notes in its comment 

letter, IMMFA funds (which manage a significant 

amount of stable value money market fund assets 

in Europe) have been required to maintain a 

maximum WAM of 60 days since 2002. The recent 

proposals by the European Union’s Committee of 

European Securities Regulators to create common 

requirements for European money market funds 

would impose a maximum 60-day WAM for shortterm money market funds. See Committee of 

European Securities Regulators Consultation Paper, 

A Common Definition of European Money Market 

Funds, CESR/09–850 (Oct. 20, 2009), available at 

http://www.cesr.eu/ 

index.php?page=consultation_details&id=151. 

152 For some time and through various interest 

rate and market environments a large portion of 

domestic money market funds have maintained a 

maximum WAM of less than 60 days. According to 

data provided by the ICI, from January 1998 through 

April 2009, even the 75th percentile of prime 

money market funds has maintained an average 

WAM of 53 days and the 90th percentile of prime 

money market funds has maintained an average 

WAM of 65 days. Investment Company Institute, 

Average Maturity of Taxable Prime Money Market 

Funds, 1998–2009, available at http://www.sec.gov/ 

comments/s7-11-09/s71109-14.htm. The 75th 

percentile of these funds only reported a WAM in 

excess of 60 days on 8 monthly occasions out of the 

136 monthly time periods reported. We also note 

that to obtain a top rating from an NRSRO, money 

market funds must maintain a WAM of no greater 

than 60 days. According to the iMoneyNet Money 

Market Fund Analyzer Database, as of November 

17, 2009, 61% of money market fund assets were 

held in funds that were top rated by at least one 

NRSRO and 34% of money market funds had a top 

rating from at least one NRSRO. 

money market fund’s portfolio to 120 

calendar days.153 Unlike weighted 

average maturity, the weighted average 

life (or ‘‘WAL’’) of a portfolio is 

measured without reference to any rule 

2a–7 provision that otherwise permits a 

fund to shorten the maturity of an 

adjustable-rate security by reference to 

its interest rate reset dates.154 The WAL 

limitation thus restricts the extent to 

which a fund can invest in longer term 

securities that may expose a fund to 

spread risk.155 

We proposed the WAL limitation 

because we were concerned that the 

traditional WAM limitation of rule 2a– 

7 does not require that a manager of a 

money market fund limit the spread risk 

associated with longer term adjustablerate securities.156 These securities are 

153 See amended rule 2a–7(c)(2)(iii). This 

limitation will apply to all money market funds 

(including taxable and tax-exempt funds). 

154 The Fidelity Comment Letter, the Comment 

Letter of HighMark Capital Management, Inc. (Sept. 

8, 2009) (‘‘HighMark Capital Comment Letter’’), and 

the ICI Comment Letter requested that the 

Commission amend rule 2a–7 to specify how cash 

balances held by money market funds would be 

treated under the WAM and WAL limitations. For 

purposes of the WAM and WAL limitations, cash 

balances have a maturity of one day. The Tamarack 

Funds Comment Letter also suggested that the 

Commission address extendible notes. For purposes 

of the WAM and WAL limitations, in calculating 

the final legal maturity of a security extendible at 

the option of the issuer the security should be 

deemed fully extended. See amended rule 2a–7(d) 

(final maturity is determined with reference to the 

time at which a fund will unconditionally receive 

payment); see also Revisions to Rules Regulating 

Money Market Funds, Investment Company Act 

Release No. 21837 (Mar. 21, 1996) [61 FR 13956 

(Mar. 28, 1996)] at n. 151 and accompanying text 

(discussing the unconditional right to receive 

payment with respect to demand features). 

155 See Morgan Stanley, Weighted Average Life: 

Enhancing Money Market Fund Transparency 

(2009), available at http://www.morganstanley.com/ 

msamg/msimintl/docs/en_US/common/comm/ 

200907_mm_update.pdf (‘‘[Morgan Stanley 

Investment Management is] introducing WAL to 

supplement our WAM reporting. The WAL 

calculation is based on a security’s stated final 

maturity date or, when relevant, the date of the next 

demand feature when the fund may receive 

payment of principal and interest (such as a put 

feature). Accordingly, WAL reflects how a portfolio 

would react to deteriorating credit (widening 

spreads) or tightening liquidity conditions. We 

believe that when viewed alongside WAM, the 

supplemental WAL disclosure will provide 

investors with a further degree of insight into our 

portfolios’ structure.’’). 

156 For example, if the market perceived an 

issuer’s credit risk as deteriorating, the spreads on 

that issuer’s 30-day floating-rate securities would 

likely widen to a lesser extent than the spreads on 

that issuer’s 397-day floating-rate securities because 

the longer term securities have a much longer 

exposure to the issuer’s credit risk (assuming 

neither security had a Demand Feature). Because 

the WAM limitation allows the use of interest rate 

reset dates to shorten the maturity of a security, 

each of the 397-day floating-rate securities and the 

30-day floating-rate securities would be considered 

to have a maturity of one day. In contrast, under 

the WAL limitation we are today adopting each 

adjustable-rate security without a Demand Feature 

more sensitive to credit spreads than 

short-term securities with final 

maturities equal to the reset date of the 

longer term security.157 The WAL 

limitation will provide an extra layer of 

protection for funds and their 

shareholders against spread risk, 

particularly in volatile markets. We 

proposed a 120-day limit as a prudent 

limit recommended to us in the ICI 

Report and one that we understand is 

currently used by some money market 

fund managers.158 We requested 

comment on whether a higher or lower 

WAL limitation would be more 

appropriate. 

Twenty-one commenters supported 

adding a WAL limit to the rule.159 One 

large money market fund manager, for 

example, described the WAL as ‘‘a very 

prudent addition to the rule that, 

combined with the minimum liquidity 

requirements * * * represents an 

important and substantive risk 

reduction in the permissible 

construction of a money fund 

portfolio.’’ 160 Another acknowledged 

that ‘‘the risk that such a security will 

begin to deviate significantly from its 

Amortized Cost increases with its 

maturity,’’ and agreed that ‘‘the new 120-

day WAL limit should control this 

risk.’’161 

Two commenters generally opposed a 

WAL limitation.162 One urged us to 

consider, instead, revising the maturityshortening provisions of rule 2a–7 to 

require money market funds to measure 

the maturity of adjustable-rate securities 

by reference to their final legal maturity 

date rather than the date at which the 

interest rate resets.163 Such a change 

would have a maturity equal to its final legal 

maturity. As a result, if spreads on these securities 

widen to different degrees due to changing market 

perceptions of credit risk or liquidity, the WAL 

limitation will capture these different risk 

exposures. 

157 See Proposing Release, supra note 2, at 

Section II.B.2. 

158 See, e.g., HighMark Capital Comment Letter 

(‘‘We have been calculating a WAL for years and 

believe it will more appropriately reflect the total 

interest rate and spread risk of a portfolio.’’). See 

also JPMorgan Prime Money Market Fund Quarterly 

Fact Sheet (Dec. 31, 2009), available at https:// 

www.jpmorganfunds.com/cm/BlobServer/FS-PMMP.PDF?blobcol=urldata&blobtable= 

MungoBlobs&blobkey=id&blobwhere= 

1158572105887&blobheader= 

application%2FPDF&blobheadername1=ContentDisposition&ssbinary=true&blobheadervalue1= 

inline;filename=FS-PMM-P.PDF (showing the 

fund’s WAL over the previous year). 

159 See, e.g., Bankers Trust Comment Letter; 

Goldman Sachs Comment Letter; Northern Funds 

Trustees Comment Letter. 

160 See BlackRock Comment Letter. 

161 See Federated Comment Letter. 

162 See Thrivent Comment Letter; USAA 

Comment Letter. 

163 See USAA Comment Letter. Amended rule 2a– 

7(d) allows money market funds to shorten the 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10073 

would dramatically reduce the ability of 

money market funds to invest in floating 

rate securities, and as we discuss below, 

such a reduction may be 

unnecessary.164 Another commenter 

asserted that the WAL limitation was 

unnecessarily restrictive of prime retail 

funds and disagreed with our 

assessment of the spread risk posed by 

floating-rate Government securities.165 

The commenter, however, offered no 

explanation of why the exposure to 

spread risk would have less harmful 

consequences for a prime retail fund 

than for other types of funds and thus 

be of less concern. 

Most commenters supported the 

proposed WAL limit of 120 days,166 

which the ICI comment letter described 

as ‘‘flexible enough even during ‘normal’ 

market conditions to not unduly restrict 

a fund’s ability to offer a diversified 

portfolio of short-term, high quality debt 

securities.’’167 Four commenters 

supported a WAL with a longer term, 

with two of these commenters 

suggesting a longer WAL for government 

money market funds than for other 

money market funds.168 One of these 

commenters argued that the spread risk 

associated with Government floatingrate securities is different from the 

spread risk associated with nonGovernment securities.169 Another 

commenter only supported a WAL 

limitation applicable to Government 

securities with maturities of more than 

two years, arguing that applying a 120-

day WAL to all adjustable-rate 

Government securities would disrupt 

the short-term debt markets and hinder 

maturity of an adjustable-rate portfolio security for 

purposes of the WAM limitation by referring to the 

security’s interest rate reset date, rather than the 

final legal maturity of the security, if the security 

has a final maturity of 397 days or less (for 

corporate securities) or an interest rate that adjusts 

no less frequently than every 397 days for 

Government securities. 

164 This comment also implies that rule 2a–7 

should only have a WAL limitation (and not a 

separate WAM limitation). We believe that the 

WAM and WAL limitations address different risks 

(with the WAM primarily aimed at limiting interest 

rate risk and the WAL primarily aimed at limiting 

spread risk) and thus believe having both 

limitations in rule 2a–7 protects money market 

funds and their investors. 

165 See Thrivent Comment Letter. 

166 See, e.g., BlackRock Comment Letter; Invesco 

Aim Comment Letter; Comment Letter of Ridge 

Worth Capital Management, Inc. (‘‘RidgeWorth 

Comment Letter’’). 

167 ICI Comment Letter. 

168 See Fidelity Comment Letter (supporting a 

150-day WAL for government money market funds 

and a 120-day WAL for all other money market 

funds); Victory Cap. Mgt. Comment Letter 

(supporting a 150-day WAL); C. Wesselkamper 

Comment Letter (supporting a 180-day WAL for 

government money market funds and a 150-day 

WAL for all other money market funds); Wells 

Fargo Comment Letter (supporting a 180-day WAL). 

169 See Fidelity Comment Letter. 

the ability of Government security 

issuers to meet internal funding 

needs.170 

On balance, we conclude that 120 

days is an appropriate length of time for 

the WAL limitation. A WAL limitation 

of, for example, 90 days appears to be 

unnecessarily restrictive to money 

market funds because it could 

significantly constrain the range of highquality, short-term debt securities in 

which money market funds may invest, 

particularly when combined with our 

new minimum liquidity 

requirements.171 Such a short WAL 

limitation also may provide spread risk 

protection beyond what is reasonably 

necessary to enhance the stability of 

money market funds. For a money 

market fund to break the buck while 

maintaining a WAL of 90 days, average 

spreads on all securities in the fund’s 

portfolio would have to widen beyond 

200 basis points.172 Other securities 

held by money market funds may not 

simultaneously face such spread 

widening even if the commercial paper 

market is under stress.173 Accordingly, 

protection across an entire money 

market fund portfolio against spread 

widening of the magnitude experienced 

in the commercial paper market during 

the fall of 2008 may be unnecessary. 

On the other hand, we are not 

convinced that a WAL significantly 

longer than 120 days would be 

appropriate for a money market fund 

that is seeking to maintain a stable net 

170 See Comment Letter of Fannie Mae (Sept. 3, 

2009) (‘‘Fannie Mae Comment Letter’’). One 

commenter also argued that a 120-day WAL would 

limit Government security issuers’ ability to meet 

their funding needs. See Fidelity Comment Letter. 

171 One commenter stated that the Commission 

should not impose a WAL shorter than 120 days, 

asserting that a shorter limitation would be 

unnecessarily restrictive and limit a fund’s ability 

to maintain a diversified portfolio of high quality 

short-term debt securities. See Charles Schwab 

Comment Letter. No commenters supported a 

shorter WAL than 120 days. 

172 This assumes that there are no other 

simultaneous shocks to the fund’s portfolio from 

redemption pressures or otherwise. In order to 

evaluate commenters’ discussion about the 

appropriate length of time for a WAL limitation in 

the context of the shocks a money market fund 

might face, we again referred to stress test scenarios. 

173 Such spread widening even in commercial 

paper has been rare and commercial paper typically 

only comprises a portion of money market funds’ 

portfolios. Spreads between 3-month commercial 

paper and the 3-month Treasury bill widened to 

approximately 300 basis points at the height of the 

financial crisis in the fall of 2008 and widened 

similarly in the mid-1970s, but otherwise have 

rarely widened by 200 basis points in the last 50 

years. This analysis is based on commercial paper 

spread data contained in Bradley T. Ewing, Gerald 

J. Lynch & James E. Payne, Monetary Volatility and 

the Paper-Bill Spread, in Progress in Economics 

Research (2006), at p. 58, supplemented with data 

from Bloomberg on spreads between yields of 3-

month commercial paper and the 3-month Treasury 

bill. 

asset value. For example, with a 150-day 

WAL, a money market fund would 

break the buck with a spread widening 

of just over 120 basis points (assuming 

no other simultaneous stresses on the 

fund’s portfolio).174 Historically, 

commercial paper spreads, for example, 

have widened to that extent fairly 

frequently.175 Given this limited 

resilience to spread widening, and given 

that a money market fund would break 

the buck even earlier if any other shocks 

to the fund’s portfolio occurred 

simultaneously, we have determined 

not to adopt a longer WAL, such as a 

150- or 180-day WAL. We note that the 

European Union’s Committee of 

European Securities Regulators has also 

recently proposed requiring that shortterm money market funds adhere to a 

maximum 120-day WAL.176 

Finally, we are not providing for a 

longer WAL for money market funds 

that primarily invest in Government 

securities. While some commenters 

asserted that adjustable-rate 

Government securities have a more 

benign credit risk profile,177 they are 

still exposed to widening interest rate 

spreads to the same extent as nonGovernment securities and, as we noted 

in the Proposing Release, spreads on 

certain adjustable-rate Government 

securities did widen during the fall of 

174 This is based on our staff’s analysis of stress 

test scenarios. 

175 See Ewing et al., supra note 173, at 58. 

176 See Committee of European Securities 

Regulators Consultation Paper, A Common 

Definition of European Money Market Funds, CESR/ 

09–850 (Oct. 20, 2009), available at http:// 

www.cesr.eu/ 

index.php?page=consultation_details&id=151. In 

addition, Europe’s Institutional Money Market 

Fund Association (IMMFA) recently has adopted 

changes to its code of conduct that will require 

IMMFA money market funds to adhere to a 

maximum 120-day WAL. See IMMFA Code of 

Practice, at Section 40, available at http:// 

www.immfa.org/About/Codefinal.pdf. 

We also note that the rating agencies have taken 

varied approaches to limiting the WAL of rated 

money market funds. Fitch has adopted revised 

ratings requirements limiting top-rated money 

market funds to a WAL of 120 days, but allowing 

longer WALs for lesser rated money market funds. 

See Fitch Ratings, Global Money Market Fund 

Rating Criteria (Oct. 5, 2009), available at http:// 

www.fitchratings.com/creditdesk/reports/ 

report_frame.cfm?rpt_id=470368. Standard & Poor’s 

has proposed more restrictive requirements that 

would limit top-rated money market funds to a 

WAL of 90 days, subject to upward adjustment to 

no more than 120 days depending on the extent of 

Government securities in the money market fund’s 

portfolio. See Standard & Poor’s, Principal Stability 

Fund Rating Criteria (Jan. 5, 2010), available at 

http://www2.standardandpoors.com/spf/pdf/ 

events/FITcon11410RFC.pdf. 

177 See, e.g., Fidelity Comment Letter. But see 

BlackRock Comment Letter (recent events have 

shown that spread relationships can be variable for 

agency securities); Wells Fargo Comment Letter 

(credit spreads on Government securities widened 

to a significant degree in 2008). 

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10074 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

2008.178 In addition, many prime money 

market funds also hold a sizeable 

portion of Government securities (and 

may hold even more Government 

securities after the adoption of rule 2a– 

7’s new liquidity requirements). Given 

this fact, allowing government money 

market funds to have a longer WAL 

solely because they hold more 

Government securities than prime funds 

do, does not appear to us to be an 

approach that treats the risks attendant 

to longer term, adjustable-rate 

Government securities equally, and thus 

appears inappropriate. 

3. Maturity Limit for Government 

Securities 

The Commission is deleting a 

provision of rule 2a–7 that has 

permitted a fund that relied exclusively 

on the penny-rounding method of 

pricing to acquire Government 

securities with remaining maturities of 

up to 762 days, rather than the 397-day 

limit otherwise provided by the rule.179 

As we noted in the Proposing 

Release,180 we are unaware of any 

money market fund that currently relies 

solely on the penny-rounding method of 

pricing, and none that holds fixed-rate 

Government securities with remaining 

maturities of two years, which would 

involve the assumption of a substantial 

amount of interest rate risk. We received 

one comment on this topic, which 

supported the change.181 Accordingly, 

we are adopting this change as 

proposed.182 

178 See Proposing Release, supra note 2, at 

Section II.B.2. We understand that many floatingrate securities issued by Federal agencies and 

outstanding during the financial crisis had rates 

tied to LIBOR. As noted in the Proposing Release, 

the ‘‘TED’’ spread (the difference between the U.S. 

Treasury Bill rate and LIBOR) reached a high of 463 

basis points on October 10, 2008. See id., at n.67. 

We understand that most adjustable-rate 

Government securities held by money market funds 

had a final maturity of two years or less and thus 

limiting the WAL limitation to adjustable-rate 

Government securities with final maturities greater 

than two years would not address these securities’ 

spread risk. 

179 See current rule 2a–7(c)(2)(ii). In a conforming 

change, we also are amending as proposed the 

maturity-shortening provision of the rule for 

variable-rate Government securities to require that 

the variable rate of interest is readjusted no less 

frequently than every 397 days, instead of 762 days 

as the rule has permitted. See amended rule 2a– 

7(d)(1). 

180 See Proposing Release, supra note 2, at 

Section II.B.3. 

181 See BlackRock Comment Letter. 

182 We also requested comment in the Proposing 

Release on whether we should impose a limitation 

on the maximum final legal maturity of adjustablerate Government securities that money market 

funds are permitted to acquire. We received only 

two comments on this proposal. One commenter 

encouraged us to constrain any limitation on 

adjustable-rate Government securities with a final 

legal maturity in excess of two years. See Fannie 

C. Portfolio Liquidity 

We are amending rule 2a–7 to require 

that money market funds maintain a 

sufficient degree of liquidity necessary 

to meet reasonably foreseeable 

redemption requests and reduce the 

likelihood that a fund will have to meet 

redemptions by selling portfolio 

securities into a declining market. As 

discussed in the Proposing Release, 

money market funds generally have a 

higher and less predictable volume of 

redemptions than other open-end 

investment companies.183 Their ability 

to maintain a stable net asset value will 

depend, in part, on their ability to 

convert portfolio holdings to cash to pay 

redeeming shareholders without having 

to sell them at a loss. The liquidity of 

fund portfolios became a critical factor 

in permitting them to absorb very heavy 

redemption demands in the fall of 2008 

when the secondary markets for many 

short-term securities seized up. 

Commenters generally agreed with 

our analysis of the liquidity needs of 

money market funds. They emphasized 

the importance of liquidity for money 

market funds and their ability to meet 

shareholder redemptions.184 Several 

also acknowledged the need to place 

outside limits on the risks money 

market funds may take.185 Most 

commenters supported amending the 

rule to impose more robust liquidity 

requirements, but many disagreed with 

our specific proposals.186 Some asserted 

that the proposed requirements might 

negatively affect funds’ ability to 

manage their portfolios, place excessive 

Mae Comment Letter. Another asserted that the 

WAL limitation provided a sufficient limitation on 

the risks posed by long-term adjustable-rate 

Government securities. See Federated Comment 

Letter. We are aware that WAL creates some 

limitation of this risk, but that even with a 120-day 

WAL limitation, a fund would still have some 

ability to acquire longer term adjustable-rate 

Government securities. No commenters provided us 

with any data on the extent of adjustable-rate 

Government securities outstanding from time to 

time. Two commenters indicated that these 

securities experienced variable spreads during the 

financial crisis. See BlackRock Comment Letter; 

Wells Fargo Comment Letter. In the future, we may 

reconsider whether to limit the maximum maturity 

of adjustable-rate Government securities that can be 

held by money market funds after obtaining 

additional data. 

183 See Proposing Release, supra note 2, at n.172 

and accompanying text. 

184 See, e.g., Comment Letter of the Securities 

Industry and Financial Markets Association (Sept. 

8, 2009) (‘‘SIFMA Comment Letter’’); State Street 

Comment Letter. 

185 See, e.g., Federated Comment Letter; Comment 

Letter of the Independent Directors Council (Sept. 

8, 2009) (‘‘IDC Comment Letter’’). 

186 See, e.g., State Street Comment Letter 

(opposing a general liquidity standard and different 

minimum liquidity thresholds for retail and 

institutional funds); Invesco Aim Comment Letter 

(same). 

burdens on the board of directors, and 

affect the markets of some portfolio 

securities.187 Others argued that the 

proposals are not sufficient to meet 

money market funds’ liquidity 

concerns.188 

After reviewing the comments, and 

based on our analysis of redemption 

activity during the 2008 run on money 

market funds, we are amending rule 2a– 

7 to add three new provisions, 

substantially as proposed, which 

address different aspects of portfolio 

liquidity.189 Together, we believe they 

will result in money market funds that 

are better able to absorb large amounts 

of redemptions. 

1. General Liquidity Requirement 

We are amending rule 2a–7, as 

proposed, to require that each money 

market fund hold securities that are 

sufficiently liquid to meet reasonably 

foreseeable shareholder redemptions in 

light of its obligations under section 

22(e) of the Act and any commitments 

the fund has made to shareholders (the 

‘‘general liquidity requirement’’).190 

Depending upon the volatility of its 

cash flows (particularly shareholder 

redemptions), this new provision may 

require a fund to maintain greater 

liquidity than would be required by the 

daily and weekly minimum liquidity 

requirements set forth in the rule and 

discussed below. 

Most commenters who addressed this 

proposal supported the addition of a 

general liquidity requirement.191 They 

agreed that funds should be required to 

assess appropriate levels of liquidity 

above the minimums set forth in the 

rule.192 Some commenters, however, 

expressed concerns that the proposed 

requirement was too vague,193 or was 

187 See, e.g., Fidelity Comment Letter; ICI 

Comment Letter; Shadow FRC Comment Letter. 

188 See, e.g., Fund Democracy/CFA Comment 

Letter (requesting that the Commission mandate 

private liquidity insurance for money market 

funds); HighMark Capital Comment Letter 

(suggesting a private liquidity bank or that Treasury 

continue to provide emergency liquidity as possible 

solutions to address liquidity concerns); Vanguard 

Comment Letter (asserting that the proposed rule 

does not address liquidity risk arising from factors 

other than size of accounts, such as geographical 

concentration of the shareholders); Waddell & Reed 

Comment Letter (recommending some type of 

permanent backstop be available to money market 

funds); Wells Fargo Comment Letter (suggesting the 

Federal Reserve set up a secured lending facility to 

serve as a lender of last resort). 

189 See Proposing Release, supra note 2, at 

Section II.C.1–2. 

190 Amended rule 2a–7(c)(5). 

191 See, e.g., ICI Comment Letter; Northern Funds 

Indep. Trustees Comment Letter; Tamarack Funds 

Comment Letter. 

192 See, e.g., Federated Comment Letter; ICI 

Comment Letter. 

193 See, e.g., Charles Schwab Comment Letter; 

Dreyfus Comment Letter. We note, however, that 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10075 

unnecessary in light of the minimum 

daily and weekly liquidity 

requirements.194 We disagree. Funds 

will have different liquidity needs that 

we cannot sufficiently anticipate and 

codify in a rule beyond the minimums 

we are adopting today.195 Therefore, we 

believe it is incumbent upon the 

management of each fund and its board 

of directors to evaluate the fund’s 

liquidity needs and to protect the fund 

and its shareholders from the harm that 

can occur from failure to properly 

anticipate and provide for those needs. 

To comply with this general liquidity 

requirement, we would expect money 

market fund managers to consider 

factors that could affect the fund’s 

liquidity needs, including 

characteristics of a money market fund’s 

investors and their likely 

redemptions.196 For example, some 

shareholders may have regularly 

recurring liquidity needs, such as to 

meet monthly or more frequent payroll 

requirements. Others may have liquidity 

needs that are associated with particular 

annual events, such as holidays or tax 

payment deadlines. A fund also would 

need to consider the extent to which it 

may require greater liquidity at certain 

times when investors’ liquidity needs 

may coincide. In addition, a volatile or 

more concentrated shareholder base 

would require a fund to maintain greater 

liquidity than a stable shareholder base 

consisting of thousands of retail 

investors.197 

similar general requirements in rule 2a–7 have not 

hampered fund managers. See, e.g., current rule 2a– 

7(c)(2) (requiring a money market fund to maintain 

a dollar-weighted average portfolio maturity 

appropriate to its objective of maintaining a stable 

net asset value per share or price per share). Thus, 

we do not share commenters’ concerns that the 

general liquidity standard could expose a money 

market fund to liability based on hindsight review 

of the fund’s subjective determinations and market 

events. 

194 See, e.g., TDAM Comment Letter. Another 

commenter asserted that money market funds are 

already subject to this requirement under section 

22(e) of the Act. See State Street Comment Letter. 

The general liquidity requirement, together with 

rule 2a–7’s specific obligations related to illiquid 

securities and daily and weekly liquid assets, 

identifies the liquidity obligations that are specific 

to money market funds. 

195 For example, suggestions that we require each 

fund to maintain sufficient liquidity to meet 

redemptions by the largest shareholders seem 

inadequate because they assume that only those 

shareholders will redeem. See Stradley Ronon 

Comment Letter; SIFMA Comment Letter. 

196 See Proposing Release, supra note 2, at text 

following n.205. 

197 See Thrivent Comment Letter (suggesting that 

we approach portfolio liquidity on the basis of 

concentration among a fund’s shareholders). In 

determining the amount of liquidity available to 

meet the requirements of rule 2a–7, funds should 

not consider the fund’s ability to access overdraft 

protection, lines of credit, and inter-fund borrowing 

arrangements. See Federated Comment Letter 

Thus, to comply with rule 2a–7, as 

amended, money market funds should 

adopt policies and procedures designed 

to assure that appropriate efforts are 

undertaken to identify risk 

characteristics of shareholders.198 In 

other words, fund boards should make 

sure that the adviser is monitoring and 

planning for ‘‘hot money.’’ In their 

consideration of these procedures and 

in the oversight of their implementation, 

fund boards should appreciate that, in 

some cases, fund managers’ interests in 

attracting additional fund assets may be 

in conflict with their overall duty to 

manage the fund in a manner consistent 

with maintaining a stable net asset 

value.199 We urge directors to consider 

the need for establishing guidelines that 

address this conflict. 

As some commenters noted, 

identification of these risks may be more 

challenging when share ownership is 

less transparent because the shares are 

held in omnibus accounts.200 Funds 

may seek access to information about 

the investors who hold their interests 

through omnibus accounts in addition 

to considering information about the 

omnibus accounts, including their 

aggregate historical redemption patterns 

(suggesting that we adopt the opposite approach). 

A fund that borrowed to satisfy redemptions would 

leverage its holdings, thus amplifying the risk of 

shareholder losses if the fund eventually broke the 

buck. 

198 Upon adoption of these amendments, such 

policies and procedures are, we believe, required 

under rule 38a–1 under the Investment Company 

Act (the ‘‘compliance rule’’). Although two 

commenters suggested that the requirement to 

adopt the policies and procedures should be 

incorporated in rule 2a–7, we do not see a reason 

to duplicate the requirements for policies and 

procedures encompassed in the compliance rule. 

See Dreyfus Comment Letter; Comment Letter of 

Fifth Third Asset Management, Inc. (Sept. 8, 2009) 

(‘‘Fifth Third Comment Letter’’). One commenter 

recommended that ‘‘know your customer’’ policies 

apply only to shareholders whose redemptions (in 

their entirety) would have a material impact on the 

fund’s ability to satisfy redemptions. Stradley 

Ronon Comment Letter. See also SIFMA Comment 

Letter. Another commenter argued that the relevant 

shareholder characteristics should be limited to 

clearly defined parameters such as historical net 

flows. See RidgeWorth Comment Letter. We are not 

identifying specific characteristics that should be 

addressed in a fund’s policies and procedures 

because we believe that money market funds are in 

a better position to do so. For example, concurrent 

redemptions of several shareholders may have a 

material effect on a fund’s ability to satisfy 

redemptions even if the shareholders’ individual 

redemptions alone would not have such an effect. 

Nor are we setting limits as to the scope of the 

policies and procedures because different money 

market funds may have different needs in this 

regard. 

199 See Proposing Release, supra note 2, at n.180 

and accompanying text. 

200 See, e.g., Comment Letter of the Coalition of 

Mutual Fund Investors (Sept. 10, 2009) (‘‘CMFI 

Comment Letter’’); HighMark Capital Comment 

Letter. 

and the account recordholder’s ability to 

redeem the entire account.201 

2. Limitation on Acquisition of Illiquid 

Securities 

We are amending rule 2a–7 to further 

limit a money market fund’s 

investments in illiquid securities (i.e., 

securities that cannot be sold or 

disposed of in the ordinary course of 

business within seven days at 

approximately the value ascribed to 

them by the money market fund).202 

Under the amended rule, a money 

market fund cannot acquire illiquid 

securities if, immediately after the 

acquisition, the fund would have 

invested more than five percent of its 

total assets in illiquid securities.203 

In light of the risk that liquid assets 

would become illiquid thereby 

impairing the ability of a money market 

fund to meet redemption demands, we 

proposed to prohibit funds from 

acquiring securities that were, at the 

time of their acquisition, already 

illiquid. Many fund commenters 

objected, arguing such a limitation 

could preclude them from investing in 

certain high quality illiquid securities in 

which money market funds have 

historically invested,204 make it more 

difficult for tax-exempt funds to 

construct a well-diversified, high 

quality portfolio,205 and prevent funds 

from investing in new types of securities 

that are illiquid until a market for them 

has been established.206 Others asserted 

that a ban may be unnecessary in light 

201 Some commenters argued that we should 

require greater transparency of investments held 

through financial intermediaries to allow funds to 

better monitor client profiles. See, e.g., BlackRock 

Comment Letter; CMFI Comment Letter. Funds may 

seek to access this information in contractual 

arrangements with their financial intermediaries. 

202 We have construed section 22(e) of the 

Investment Company Act, which requires registered 

investment companies to satisfy redemption 

requests within seven days, to restrict a money 

market fund from investing more than 10% of its 

assets in illiquid securities. See 1983 Adopting 

Release, supra note 6, at nn.37–38 and 

accompanying text; Acquisition and Valuation of 

Certain Portfolio Instruments by Registered 

Investment Companies (Mar. 12, 1986) [51 FR 9773 

(Mar. 21, 1986)], at n.21 and accompanying text; 

Proposing Release, supra note 2, at n.171 and 

accompanying text. 

203 Amended rule 2a–7(c)(5)(i). 

204 These include, among other securities, term 

repurchase agreements, some time deposits, and 

insurance company funding agreements. See, e.g., 

Am. Bankers Assoc. Comment Letter; Comment 

Letter of New York Life Investments (Sept. 14, 

2009); Comment Letter of Promontory Interfinancial 

Network, LLC (Sept. 8, 2009); Wells Fargo Comment 

Letter. 

205 See Stradley Ronon Comment Letter; Wells 

Fargo Comment Letter. 

206 See, e.g., Deutsche Comment Letter; Stradley 

Ronon Comment Letter; USAA Comment Letter. 

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10076 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

of the new daily and weekly liquidity 

standards.207 

These comments persuaded us that 

prohibiting funds from acquiring any 

illiquid securities may have undesirable 

consequences for money market funds. 

Instead, we are further limiting the 

circumstances under which a money 

market fund may acquire illiquid 

securities. Under the amended rule, a 

fund cannot acquire an illiquid security 

if, after the purchase, more than five 

percent of the fund’s total assets would 

consist of illiquid securities.208 Several 

commenters suggested that we lower the 

existing 10 percent limit as an 

alternative to our proposal.209 We are 

reducing by half the existing limit in 

order to strike a balance between our 

concern regarding liquidity risk, i.e., a 

fund’s ability to satisfy redemption 

demands if it is holding illiquid 

securities, and funds’ concerns that they 

retain some ability to make investments 

in high quality illiquid securities. 

We are also amending the rule to 

define the term ‘‘illiquid security’’ as a 

security that cannot be sold or disposed 

of in the ordinary course of business 

within seven days at approximately the 

value ascribed to it by the money market 

fund. At the suggestion of commenters, 

we would not treat as illiquid a security 

that could not be sold at amortized 

cost.210 

3. Minimum Daily and Weekly 

Liquidity Requirements 

The Commission is adopting new 

liquidity requirements that mandate 

each money market fund maintain a 

portion of its portfolio in cash and 

securities that can readily be converted 

207 See, e.g., Charles Schwab Comment Letter; 

TDAM Comment Letter. 208 Amended rule 2a–7(c)(5)(i). 

209 See Federated Comment Letter; J.P. Morgan 

Asset Mgt. Comment Letter; Vanguard Comment 

Letter; Wells Fargo Comment Letter (all 

recommending a 5% percent limit). See also TDAM 

Comment Letter (recommending that we reduce the 

existing limit). Other commenters argued that we 

should maintain the 10% limit. See, e.g., Charles 

Schwab Comment Letter; Deutsche Comment Letter. 

210 See amended rule 2a–7(a)(19). See, e.g., 

Charles Schwab Comment Letter; Wells Fargo 

Comment Letter. The proposed rule defined ‘‘liquid 

security’’ with reference to the security’s ‘‘amortized 

cost value.’’ See proposed rule 2a–7(a)(18). Under 

the amended rule, a money market fund using the 

amortized cost method will be able to treat as liquid 

a security that the fund can sell at a price that 

deviates from the security’s amortized cost value, as 

long as the price approximates the market-based 

value that the fund has ascribed to the security for 

purposes of determining its shadow price. Because 

the market-based value assigned by a money market 

fund to its securities is the measure that ultimately 

justifies the fund’s use of a stable net asset value, 

a money market fund should treat as illiquid any 

security that cannot be sold at a price 

approximating such market-based value. See 1983 

Adopting Release, supra note 6, at n.37 and 

paragraphs following n.39. 

into cash. More specifically, we are 

amending rule 2a–7 to require all 

taxable money market funds to hold at 

least 10 percent of their total assets in 

‘‘daily liquid assets’’ and all money 

market funds to hold at least 30 percent 

of their total assets in ‘‘weekly liquid 

assets.’’211 A money market fund must 

comply with the daily and weekly 

liquidity standards at the time each 

security is acquired.212 

As we explained in the Proposing 

Release, current liquidity standards 

applicable to money market funds 

presume that a fund is able to find a 

buyer of its securities.213 Our new 

approach would include as a ‘‘daily 

liquid asset’’ or ‘‘weekly liquid asset’’ 

only cash or securities that can readily 

be converted to cash (as discussed 

below). Thus, a fund should be able to 

use those assets to pay redeeming 

shareholders even in market conditions 

(such as those that occurred in 

September and October 2008) in which 

money market funds cannot rely on a 

secondary or dealer market to provide 

immediate liquidity. 

Commenters who addressed the issue 

largely supported the introduction of 

daily and weekly liquidity standards.214 

One large sponsor of money market 

funds asserted that it ‘‘recognize[d] that 

a meaningful and sustained level of 

liquidity has the potential to ease 

concerns of investors and may be useful 

for unforeseen events.’’215 Another 

agreed that ‘‘mandating liquidity 

requirements will bolster investor 

confidence in the ability of money 

market funds to sustain prolonged 

redemption pressures with increased 

211 See amended rule 2a–7(c)(5)(ii)-(iii). See also 

amended rule 2a–7(a)(8) (defining ‘‘daily liquid 

assets’’); 2a–7(a)(32) (defining ‘‘weekly liquid 

assets’’); infra notes 229–243 and accompanying 

text. ‘‘Total assets’’ means with respect to a money 

market fund using the amortized cost method, the 

total amortized cost of its assets and, with respect 

to any other money market fund, the total marketbased value of its assets. See amended rule 2a– 

7(a)(27). 

212 See amended rule 2a–7(a)(8); 2a–7(a)(32). One 

commenter recommended that the minimum 

liquidity standards apply on an ongoing basis, 

which could require money market funds with 

holdings that fall below the requirements to sell 

securities in order to meet the requisite daily and 

weekly liquid asset thresholds. See Fund 

Democracy/CFA Comment Letter. We do not agree 

with such an approach. A money market fund 

whose portfolio does not meet the minimum daily 

or weekly liquidity standards is not in violation of 

the rule, but may not acquire any assets other than 

daily or weekly liquid assets. See Dreyfus Comment 

Letter (requesting that the standards incorporate 

some flexibility to allow funds not to comply with 

them under unforeseeable circumstances). 

213 See Proposing Release, supra note 2, at 

Section II.C.2. 

214 See, e.g., Calvert Comment Letter; Vanguard 

Comment Letter. 

215 J.P. Morgan Asset Mgmt. Comment Letter. 

levels of immediate cash on hand, both 

on a daily and weekly basis.’’216 One 

commenter, however, urged us to rely 

solely on the general liquidity 

requirement, arguing that requiring a 

minimum requirement would require 

unnecessary levels of liquidity at times 

that will not be sufficient during a 

severe market crisis.217 

Markets can become illiquid very 

rapidly in response to events that 

money market fund managers may not 

anticipate. The failure of a single fund 

to anticipate such conditions may lead 

to a run of the sort we saw in September 

2008 affecting all or many funds. We 

think it would be ill-advised to rely 

solely on the ability of managers to 

anticipate liquidity needs, which may 

arise from events the money market 

fund manager cannot anticipate or 

control. We acknowledge our minimum 

standards alone may not establish 

sufficient liquidity to allow funds to 

meet every liquidity crisis, which is 

why we also are adopting a general 

liquidity requirement (discussed above) 

to supplement the minimum 

requirements. 

Distinguishing between Retail and 

Institutional Funds. In the Proposing 

Release, we observed that institutional 

money market funds need (and typically 

maintain) greater portfolio liquidity. 

These funds had substantially greater 

redemption pressure on them in the fall 

of 2008. During the four-week period 

ending October 8, 2008, prime 

institutional funds (or share classes) 

experienced 30 percent net outflows 

compared to only 4.6 percent outflows 

of prime retail funds, according to data 

compiled by the ICI.218 Consequently, 

we proposed to impose substantially 

lower liquidity requirements on retail 

funds because the higher thresholds 

appeared unnecessary and would have 

resulted in higher costs on them in 

terms of lower yields. For example, 

instead of 30 percent ‘‘weekly liquid 

assets,’’ we proposed to require that 

216 Invesco Aim Comment Letter. 217 See Wells Fargo Comment Letter. See also T. 

Rowe Price Comment Letter (the weekly liquidity 

standard is overly restrictive in light of the daily 

liquidity standard and other proposed changes to 

rule 2a–7). 218 See ICI, Money Market Mutual Fund Assets 

Historical Data, available at http://www.ici.org/pdf/ 

mm_data_2010.pdf. See also Proposing Release, 

supra note 2, at n.63 and accompanying text. The 

Proposing Release also noted that on September 17, 

2008, approximately 4% of prime retail money 

market funds (or share classes) and 25% of prime 

institutional money market funds had outflows 

greater than 5%; on September 18, 2008, 

approximately 5% of prime retail funds and 30% 

of prime institutional funds had outflows greater 

than 5%; and on September 19, 2008, 

approximately 5% of prime retail funds and 22% 

of prime institutional funds had outflows greater 

than 5%. Proposing Release, supra note 2, at n.185. 

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retail prime money market funds 

maintain 15 percent ‘‘weekly liquid 

assets.’’ We proposed to require that 

each money market fund’s board make 

an annual determination whether a fund 

was an institutional fund (and thus 

subject to the higher liquidity 

requirements) based on the nature of 

record owners of shares, minimum 

initial investment requirements, and 

cash flows from purchases and 

redemptions.219 

Most commenters representing money 

market funds argued against drawing 

such a regulatory distinction, asserting 

that there are inherent difficulties in 

determining the difference between the 

two types of funds within a generally 

applicable definition.220 Commenters 

asserted that many money market funds 

include both types of shareholders, and 

even if one could distinguish a fund 

with an institutional rather than a retail 

shareholder base, not all shareholders 

behave in the same manner and present 

the same liquidity challenges as their 

peers.221 Others expressed concern that 

the fund’s board is not in the best 

position to make these 

determinations.222 The difficulty in 

drawing bright lines led some 

commenters to express concern with the 

competitive consequences that might 

result when fund boards of directors 

come to different conclusions.223 

219 See proposed rule 2a–7(a)(17) (defining 

‘‘institutional fund’’); Proposing Release, supra note 

2, at Section II.C.2.a-b. 

220 See, e.g., BlackRock Comment Letter; Goldman 

Sachs Comment Letter; ICI Comment Letter; 

Comment Letter of TCW Investment Management 

Company (Sept. 4, 2009); Vanguard Comment 

Letter. A few commenters expressed support for the 

distinction. See, e.g., Dreyfus Comment Letter; 

Fidelity Comment Letter; USAA Comment Letter. 

221 See, e.g., GE Asset Mgt. Comment Letter; 

SIFMA Comment Letter; State Street Comment 

Letter. Many also argued that the nature of the 

financial intermediary record owner does not 

always correspond to the behavior of the ultimate 

investor. See, e.g., T. Rowe Price Comment Letter; 

Vanguard Comment Letter. A few commenters 

objected for other reasons. See Comment Letter of 

the Committee of Annuity Insurers (Sept. 8, 2009) 

(‘‘Committee Ann. Insur. Comment Letter’’) (the 

characterization as retail or institutional would be 

confusing for investors); J.P. Morgan Asset Mgt. 

Comment Letter (retail investors would suffer if 

they invested in an institutional fund through an 

omnibus account or a money market fund lost its 

retail status because of institutional investments in 

the fund); Comment Letter of Russell Investment 

Management Company (Sept. 8, 2009) (‘‘Russell Inv. 

Comment Letter’’) (money market funds would 

incur substantial costs to monitor and enforce the 

distinction); Waddell & Reed Comment Letter (the 

distinction is punitive for retail money market 

funds, which have a less concentrated shareholder 

base). 

222 See, e.g., IDC Comment Letter; Comment 

Letter of the New York City Bar Association (Sept. 

8, 2009) (‘‘NYC Bar Assoc. Comment Letter’’). 

223 See, e.g., Comment Letter of FAF Advisors 

(Sept. 9, 2009) (‘‘FAF Advisors Comment Letter’’) (in 

the absence of clear guidelines, boards would likely 

We anticipated these concerns and 

requested comment on alternative 

approaches. One commenter suggested 

that we treat as institutional a fund that 

has any class which offers same day 

liquidity to shareholders.224 We are 

uncertain, however, whether 

institutional investors will be willing to 

migrate to funds that offer next day 

liquidity in order to obtain additional 

yield, and if they did our purpose in 

drawing the distinction would be 

defeated. We have similar concerns that 

institutional investors might invest in 

retail funds that are defined with 

respect to minimum initial account 

sizes or maximum expense ratios, as 

suggested by other commenters.225 The 

suggestion that the distinction be based 

on average account size raises different 

concerns, including the appropriate size 

for this measure and whether it should 

be based on total assets in omnibus 

accounts or in the accounts of the 

underlying shareholders.226 

Taking into account the comments 

and after further consideration, we have 

not identified an effective way at this 

time to distinguish between types of 

money market funds to achieve our 

purpose. Therefore, we have determined 

to apply the same minimum liquidity 

standards to both institutional and retail 

money market funds.227 We believe the 

compelling need to limit the liquidity 

risk of money market funds before 

another run occurs is reason not to 

further distinguish retail from 

institutional money market funds. We 

intend, however, to consider revisiting 

our determination to apply the same 

minimum liquidity standards to all 

money market funds and reevaluate 

whether there is a workable objective 

definition that would accurately 

identify funds with lower liquidity 

needs and thus justify applying lower 

minimum standards to them.228 

characterize funds with largely the same 

shareholder base differently); Goldman Sachs 

Comment Letter (the distinction would create an 

incentive to characterize a fund as retail so that the 

fund would be subject to the lower standard); IDC 

Comment Letter (a board might take a conservative 

approach and identify more funds as institutional 

at the expense of the funds’ shareholders). 

224 See Fidelity Comment Letter. See also Charles 

Schwab Comment Letter; Waddell & Reed Comment 

Letter. 

225 See HighMark Capital Comment Letter; T. 

Rowe Price Comment Letter. 

226 See Waddell & Reed Comment Letter. Similar 

concerns would arise if we used the definition the 

ICI uses for its analysis of retail money market share 

classes, i.e., those ‘‘offered primarily to individuals 

with moderate-sized accounts.’’ See http:// 

www.ici.org/my_ici/mmf_developments/ 

faqs_money_funds. 

227 See amended rule 2a–7(c)(5)(ii)–(iii). 

228 One commenter suggested that we impose 

different minimum liquidity standards for 

government and non-government money market 

New Daily and Weekly Minimum 

Liquidity Requirements. We are 

adopting the higher minimum liquidity 

thresholds we proposed for all money 

market funds. Under the final rule, (i) 

no taxable money market fund can 

acquire any security other than a daily 

liquid asset if, immediately after the 

acquisition, the fund would have 

invested less than 10 percent of its total 

assets in daily liquid assets, and (ii) no 

money market fund can acquire any 

security other than a weekly liquid asset 

if, immediately after the acquisition, the 

fund would have invested less than 30 

percent of its total assets in weekly 

liquid assets.229 We proposed these 

liquidity levels based on the levels of 

cash and overnight repurchase 

agreements that we believe reflect the 

liquidity needs of money market funds 

with institutional investors or other 

investors with similar liquidity 

needs.230 

A few commenters supported our 

proposed levels for daily and weekly 

liquid assets, but most supported the 

lower levels recommended in the ICI 

Report of five percent of portfolios in 

daily liquid assets and 20 percent of 

portfolios in weekly liquid assets.231 

Commenters argued that when 

combined with our other proposals, 

these thresholds would provide 

sufficient protection to investors.232 

They also suggested that the lower 

levels strike an appropriate balance of 

improving funds’ liquidity while 

providing sufficient flexibility to allow 

portfolio managers to meet the 

challenges of different market 

conditions.233 

funds. See C. Wesselkamper Comment Letter. We 

believe this is unnecessary, however, given that 

most Government money market funds have 

sufficient holdings of Treasury securities and 

Government agency discount notes to satisfy the 

rule’s requirements for daily and weekly liquid 

assets. See amended rule 2a–7(a)(8) (defining ‘‘daily 

liquid assets’’); 2a–7(a)(32) (defining ‘‘weekly liquid 

assets’’). 

229 Amended rule 2a–7(c)(5)(ii)–(iii). 

230 See Proposing Release, supra note 2, at n.191 

and accompanying and following text. 

231 See, e.g., FAF Advisors Comment Letter; 

Invesco Aim Comment Letter. Others recommended 

different standards. See Crane Data Comment Letter 

(5% daily and 15% weekly liquidity for all money 

market funds); Fifth Third Comment Letter (10% 

daily liquidity and 25% weekly liquidity for all 

money market funds); J.P. Morgan Asset Mgt. 

Comment Letter (5% daily liquidity for taxable 

money market funds and 20% weekly liquidity for 

all money market funds); Vanguard Comment Letter 

(weekly liquidity requirement for institutional 

funds should not exceed 25%). 

232 See Dreyfus Comment Letter ($119 billion 

redeemed in institutional funds during the week of 

September 17, 2008 represented 5% of institutional 

fund assets as reported by iMoneyNet on August 5, 

2009); FAF Advisors Comment Letter; Goldman 

Sachs Comment Letter. 

233 See Invesco Aim Comment Letter. 

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We are concerned that the lower 

minimum liquidity levels suggested by 

commenters would be insufficient to 

establish an adequate liquidity floor for 

money market funds in the event of a 

crisis such as we experienced in 

September 2008. The five percent daily 

liquidity level would have been 

insufficient to satisfy redemptions in 

one-fifth of prime institutional funds (or 

share classes) on each of three days 

during the week of September 15, and 

the 20 percent weekly liquidity level 

would have been insufficient to address 

outflows in more than a quarter of those 

funds during that week.234 We would be 

concerned if such a large portion of 

money market funds had to increase 

their liquidity quickly in response to 

sudden market turmoil at the same time 

the overall market experiences a flight 

to liquidity.235 As we noted above, one 

fund’s inability to satisfy redemption 

requests may lead to a run on other 

money market funds.236 Accordingly, 

we believe that the floor we establish for 

minimum liquidity requirements must 

be sufficiently high to allow most 

money market funds to manage their 

liquidity risk in a crisis, particularly 

when they may experience significant 

redemption requests on successive 

days.237 For this reason, we have 

234 On September 17, 2008, approximately 25% of 

prime institutional money market funds 

experienced outflows greater than 5% of total 

assets; on September 18, 2008, approximately 30% 

of prime institutional money market funds 

experienced outflows greater than 5%; and on 

September 19, 2008, approximately 22% of prime 

institutional money market funds experienced 

outflows greater than 5%. As noted in the 

Proposing Release, during that week, approximately 

27% of prime institutional money market funds 

experienced redemptions of more than 20% of 

assets, and 22% had outflows greater than 25%. 

This is based on analysis of data from the 

iMoneyNet Money Fund Analyzer Database. 

Proposing Release, supra note 2, at n.185. 

235 As of January 20, 2010, assets in taxable 

institutional share classes represented 

approximately 63% of the total assets of money 

market funds, and assets in prime institutional 

share classes represented approximately 37% of the 

total assets of money market assets. See ICI, Money 

Market Mutual Fund Assets, available at http:// 

www.ici.org/research/stats/mmf/mm_01_21_10. 

236 See supra text following note 217. 

237 In support of its proposed lower liquidity 

levels, the ICI stated that the 5% daily and 20% 

weekly thresholds ‘‘would have met the demands of 

a large majority of the prime funds with at least one 

institutional share class’’ and noted that between 

September 10 through 24, 52% of these funds had 

outflows of less than 5 percent, and 22 percent 

experienced outflows of between 5% and 20% of 

assets, which would have been covered by the 

thresholds recommended by the ICI Report. Under 

the ICI’s analysis, however, one quarter of prime 

money market funds would not have been covered 

by the thresholds recommended by the ICI Report, 

which as discussed above, we believe is too large 

a proportion that might have to increase liquidity 

quickly in response to sudden severe economic 

stress. We are not considering the redemption levels 

of the week following September 19, when the 

adopted the higher liquidity thresholds, 

under which we estimate that 

approximately 90 percent of retail and 

institutional funds would have been 

able to satisfy the level of redemption 

demands during individual days as well 

as the week of greatest redemption 

pressure in the fall of 2008 (September 

15–19).238 At the same time, we 

appreciate commenters’ concerns that 

the proposed liquidity thresholds would 

limit funds’ flexibility to meet the 

challenges of different market 

conditions. In order to address those 

concerns as well as our concerns 

regarding liquidity risk, the 

amendments preserve funds’ ability to 

invest in a limited amount of illiquid 

securities, which is designed to permit 

funds some flexibility in dealing with 

varying market conditions.239 

Tax-Exempt Money Market Funds. As 

proposed, the final rule excludes taxexempt money market funds from the 

daily liquidity requirements.240 Several 

commenters supported the proposal, 

noting that these funds cannot engage in 

repurchase agreements and the supply 

of tax-exempt securities with daily 

demand features is extremely limited.241 

One commenter, however, argued that 

tax-exempt funds are subject to daily 

redemptions and should be subject to 

the required minimum.242 Based on the 

comments we received, we continue to 

believe that the different nature of the 

markets for tax-exempt securities 

justifies exempting tax-exempt money 

Treasury Department adopted the Guarantee 

Program, because we have no basis to estimate what 

the redemptions would have been had the Treasury 

not adopted the Program. We also note that another 

commenter that provided specific information on 

redemption flows, a large sponsor of money market 

funds, reported in its comment letter that on 

September 17, redemptions in its money market 

funds exceeded 5% and during the week of 

September 15, redemptions in the funds exceeded 

20%. Federated Comment Letter. 

238 See Proposing Release, supra note 2, at n.201 

and accompanying text. The 9% of institutional 

money market funds that had redemptions 

exceeding 30% of assets in the week after The 

Reserve Fund broke the buck accounted for 10.9% 

of all institutional funds’ total assets as of 

September 15, 2008. We estimate that under the 

minimum liquidity standards we are adopting more 

retail funds would have been able to satisfy the 

level of redemption demands than would have 

institutional funds. During the week ending 

September 19, 2008, 3% of retail funds experienced 

outflows greater than 30%. This is based on 

analysis of data from the iMoneyNet Money Fund 

Analyzer Database. 

239 See supra Section II.C.2 (limitations on 

illiquid securities). 

240 See Proposing Release, supra note 2, at 

nn.198–99 and accompanying text. 

241 See, e.g., Federated Comment Letter; ICI 

Comment Letter. 

242 See Fidelity Comment Letter. 

market funds from the daily liquidity 

requirements.243 

Definition of Daily and Weekly Liquid 

Assets. As discussed above, the new 

daily and weekly liquidity requirements 

are designed to ensure that a money 

market fund has the legal right to 

receive cash within one or five business 

days so that a fund may more easily 

satisfy redemption requests during 

times of market stress.244 Like our 

proposal, the final definition of ‘‘daily 

liquid assets’’ includes cash (including 

demand deposits), Treasury securities, 

and securities (including repurchase 

agreements) for which a money market 

fund has a legal right to receive cash in 

one business day.245 Our proposed 

definition of ‘‘weekly liquid assets’’ 

included the same assets (except that 

the fund would have had to have the 

right to receive cash in five business 

days rather than one).246 We proposed 

to include Treasury securities regardless 

of their maturity in the liquidity baskets 

because they have been the most liquid 

assets during times of market stress.247 

Indeed, we understand that the ‘‘flight to 

liquidity’’ that happens during times of 

uncertainty makes it easy to sell 

Treasury securities in even large 

quantities.248 

Commenters supported our inclusion 

of Treasury securities, but many argued 

that we should include additional 

securities.249 In particular, a number of 

243 We understand that most of the portfolios 

consist of longer term floating and variable-rate 

securities with seven-day demand features from 

which the fund obtains much of its liquidity, and 

that they are unlikely to have investment 

alternatives that would permit them to meet a daily 

liquidity requirement. See Proposing Release, supra 

note 2, at n.199 and accompanying text. 

244 See supra note 213 and accompanying and 

following text. 

245 Amended rule 2a–7(a)(8) (defining ‘‘daily 

liquid asset’’ to mean (i) cash; (ii) direct obligations 

of the U.S. Government; and (iii) securities that will 

mature or are subject to a demand feature that is 

exercisable and payable within one business day). 

246 Proposed rule 2a–7(a)(32). 

247 U.S. Treasury securities were highly liquid 

during the market turmoil in 2008. See, e.g., FRB 

Open Market Committee Oct. 28–29 Minutes, supra 

note 13, at 5; Minutes of the Federal Open Market 

Committee, Federal Reserve Board, Dec. 15–16, 

2008, at 4, available at http:// 

www.federalreserve.gov/monetarypolicy/files/ 

fomcminutes20081216.pdf. 

248 See, e.g., Francis A. Longstaff, The Flight-toLiquidity Premium in U.S. Treasury Bond Prices, 77 

J. Bus. 511 (July 2004). 

249 See, e.g., Comment Letter of the Federal Home 

Loan Banks (Sept. 8, 2009) (‘‘FHLB Comment 

Letter’’) (include Federal Home Loan Bank discount 

notes); RidgeWorth Comment Letter (include fixedrate agency discount notes with maturities of 95 

days or less); Victory Cap. Mgmt. Comment Letter 

(include fixed-rate agency discount notes with 

maturities of 397 days or less). See also Dreyfus 

Comment Letter (include bank time deposits); 

Fidelity Comment Letter (include shares of other 

money market funds). Both shares of money market 

funds and bank time deposits, which some 

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commenters argued that we should also 

include agency notes (i.e., direct 

obligations of Federal government 

agencies and government-sponsored 

enterprises) as daily or weekly liquid 

assets or in both liquid asset baskets.250 

We are persuaded, based on the 

comments we received, that the market 

for very short-term agency notes is 

likely to be sufficiently liquid under 

stressful market conditions to treat them 

as weekly liquid assets. Therefore, 

amended rule 2a–7 includes agency 

discount notes with remaining 

maturities of 60 days or less in the 

definition of weekly liquid assets.251 

Our decision to include these 

securities is based on our consideration 

of the relative liquidity of agency 

discount notes during times of extreme 

market stress.252 We compared average 

daily yields for the two weeks before 

and the two weeks after the Lehman 

Brothers bankruptcy on September 15, 

2008. Between these periods, the yields 

for 30-day Treasury bills fell 75 percent 

while yields for 30-day and 60-day 

agency discount notes remained 

essentially the same.253 The yields for 

commenters advocated we specifically include in 

the rule text, fall within the definitions of daily and 

weekly liquid assets if they satisfy the applicable 

maturity terms. 

250 See, e.g., Comment Letter of the Capital 

Management of the Carolinas (Sept. 4, 2009) (‘‘Cap. 

Mgt. Carolinas Comment Letter’’) (include discount 

notes with maturity of 397 days or less as daily 

liquid assets); Fidelity Comment Letter (include 

discount notes with maturity of 397 days or less as 

both daily and weekly liquid assets); ICI Comment 

Letter (include fixed-rate agency discount notes 

with maturity of 397 days or less as weekly liquid 

assets); C. Wesselkamper Comment Letter (include 

in daily and weekly liquid assets Government 

securities with fixed rates or fixed rate Government 

securities maturing in no more than 60 days). One 

commenter also expressed concern about the 

supply of assets that would qualify as daily or 

weekly liquid assets. See Fidelity Comment Letter. 

251 Amended rule 2a–7(a)(32) (defining ‘‘weekly 

liquid assets’’ to mean (i) cash; (ii) direct obligations 

of the U.S. Government; (iii) Government securities 

issued by a person controlled or supervised by and 

acting as an instrumentality of the Government of 

the United States pursuant to authority granted by 

the Congress of the United States, that are issued 

at a discount to the principal amount to be repaid 

at maturity and have a remaining maturity of 60 

days or less; and (iv) securities that will mature or 

are subject to a demand feature that is exercisable 

and payable within five business days). 

252 Commenters who advocated including agency 

discount notes in the liquid asset baskets stressed 

the depth of liquidity in the secondary markets for 

these securities. See, e.g., Charles Schwab Comment 

Letter; ICI Comment Letter; SIFMA Comment Letter; 

FHLB Comment Letter (comment limited to Federal 

Home Loan Bank discount notes). 

253 Between these periods, 30-day Treasury bill 

average daily yields fell from 1.53% to 0.39%; 30-

day agency discount note average daily yields held 

constant at 2.14%; and 60-day agency discount note 

average daily yields increased from 2.25% to 

2.27%. See Bloomberg Terminal Database, US 30– 

Day T–Bill USGB030Y (Index); Agency Discount 

Note 30 Day Yield AGDN030Y (Index); Agency 

Discount Note 60 Day Yield AGDN060Y (Index). 

other money market assets increased 

over the same periods. For example, the 

average daily yield for 90-day agency 

discount notes increased four percent; 

while the yield for 30-day first tier 

financial securities increased 23 

percent.254 Transaction volume in 

agency discount notes increased over 

this time period,255 which suggests to us 

that money market funds were able to 

sell their shorter maturity agency 

discount notes at amortized cost or 

higher prices. 

4. Stress Testing 

We are adopting amendments to rule 

2a–7 to require the board of directors of 

each money market fund to adopt 

procedures providing for periodic stress 

testing of the money market fund’s 

portfolio.256 Almost all of the 

commenters who addressed this matter 

supported requiring stress testing of 

fund portfolios,257 although several 

suggested changes from our proposal.258 

Under the amended rule, a fund must 

adopt procedures that provide for the 

periodic testing of the fund’s ability to 

maintain a stable net asset value per 

share based upon certain hypothetical 

We note that in September 2008, the Federal 

Reserve’s Open Market Trading Desk purchased 

discount notes issued by Fannie Mae, Freddie Mac, 

and the Federal Home Loan Banks in order to 

support market functioning. See Press Release, 

Federal Reserve Bank of New York, Statement 

Regarding Planned Purchases of Agency Debt (Sept. 

19, 2008), available at http://www.newyorkfed.org/ 

markets/operating_policy_080919.html. Data 

concerning the purchases are available at the 

Federal Reserve Bank of New York’s Permanent 

Open Market Operations Historical Search 

webpage, available at http://www.newyorkfed.org/ 

markets/pomo/display/ 

index.cfm?fuseaction=showSearchForm. 

254 Average daily yields on 90-day agency 

discount notes increased from 2.35% to 2.45%. See 

Bloomberg, Agency Discount Note 90 Day Yield 

AGDN090Y (Index). In addition, average daily 

yields on 30-day first tier financial securities 

increased from 2.40% to 2.96% and average daily 

yields on 30-day first tier non-financial securities 

increased from 2.03% to 2.16%. See Federal 

Reserve Commercial Paper Data, supra note 47 

(select rates from the preformatted data package 

menu and follow the instructions to reformat the 

date range and download). Average daily yields on 

60-day first tier financial securities increased from 

2.57% to 2.99% and average daily yields on 60-day 

first tier non-financial securities increased from 

2.03% to 2.19%. See id. 

255 See Federal Reserve Bank of New York, 

Primary Dealer Statistics, available at http:// 

www.newyorkfed.org/markets/gsds/search.cfm. 

256 See amended rule 2a–7(c)(10)(v). 

257 See, e.g., J.P. Morgan Asset Mgt. Comment 

Letter; Tamarack Funds Comment Letter. But see C. 

Wesselkamper Comment Letter (stress testing 

should be an adviser’s best practice). 

258 At the suggestions of some commenters, we 

have made the stress testing requirement applicable 

to all money market funds that employ either the 

amortized cost method of valuing portfolio 

securities or the penny-rounding method of pricing 

fund shares. See Federated Comment Letter; TDAM 

Comment Letter. We believe that few, if any, money 

market funds will be affected by this change. 

events. These include an increase in 

short-term interest rates, an increase in 

shareholder redemptions, a downgrade 

of or default on portfolio securities, and 

widening or narrowing of spreads 

between yields on an appropriate 

benchmark selected by the fund for 

overnight interest rates and commercial 

paper and other types of securities held 

by the fund.259 Commenters differed on 

whether we should specify details for 

stress testing in addition to these 

hypothetical events.260 Because 

different tests may be appropriate for 

different market conditions and 

different money market funds, we 

believe that the funds are better 

positioned to design and modify their 

stress testing systems and have not 

included more specific criteria in the 

rule.261 

The amendment requires the testing 

to be done at such intervals as the fund 

board of directors determines 

appropriate and reasonable in light of 

current market conditions.262 This is the 

same approach that rule 2a–7 takes with 

respect to the frequency of shadow 

pricing.263 The rule does not, however, 

specifically require the board to design 

the portfolio stress testing, as may have 

been suggested by our proposing 

259 Amended rule 2a–7(c)(10)(v)(A). 

260 See, e.g., Charles Schwab Comment Letter 

(opposing more specific tests in the rule); State 

Street Comment Letter (same); RidgeWorth 

Comment Letter (requesting that the Commission 

more clearly define feasible stress testing 

requirements); TDAM Comment Letter (same). 

261 See Federated Comment Letter (different types 

of money market funds should have different stress 

testing procedures); Invesco Aim Comment Letter 

(‘‘each investment adviser should have the 

discretion to determine the appropriate 

assumptions and hypothetical events for which to 

test.’’). As discussed above, amended rule 2a–7’s 

new liquidity requirements require money market 

funds to evaluate their liquidity needs based on 

their shareholder base. See supra note 195 and 

preceding and accompanying text. Money market 

funds should also incorporate this element in their 

stress testing procedures as appropriate. See 

Thrivent Comment Letter. 

262 Amended rule 2a–7(c)(10)(v)(A). Commenters 

differed in their views on the appropriate intervals 

for testing. See, e.g., J.P. Morgan Asset Mgt. 

Comment Letter (monthly or even more frequently); 

HighMark Comment Letter (quarterly under normal 

market conditions); Shriver Poverty Law Ctr. 

Comment Letter (same). We believe that a fund’s 

board of directors is best positioned to choose the 

appropriate frequency under different conditions. 

We urge funds to adopt thresholds for testing 

frequency based, in part, on the amount of the 

deviation of the funds market-based net asset value 

per share from its amortized cost value per share 

similar to many funds’ thresholds for more frequent 

shadow pricing. Thus, we would expect that if a 

fund’s shadow net asset value per share decreased 

to less than $0.9975, the fund would conduct stress 

tests at least every week, even if the fund stress tests 

less frequently under normal conditions. More 

frequent testing would likely allow the fund to 

better understand and manage the risks to which 

the fund and its shareholders are exposed. 

263 Amended rule 2a–7(c)(8)(ii)(A)(1). 

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10080 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

release.264 We agree with the many 

commenters that asserted that the board 

may not have sufficient expertise to 

construct appropriate stress tests for a 

fund.265 Each board may, of course, 

consider the extent to which it wishes 

to become involved in design of the 

stress tests. 

The rule also requires that the board 

receive a report of the results of the 

stress testing at its next regularly 

scheduled meeting, as proposed, and 

more frequently, if appropriate, in light 

of the results.266 We have added the 

requirement for more frequent reporting 

in light of results because we believe 

that the board should be apprised of test 

results when they indicate that the 

magnitude of hypothetical events 

required to cause the fund to break a 

buck (such as changes in interest rates 

or shareholder redemptions or a 

combination of factors) is slight when 

compared with actual conditions. 

As proposed, the report must include: 

(i) The date(s) on which the fund 

portfolio was tested; and (ii) the 

magnitude of each hypothetical event 

that would cause the money market 

fund to break the buck.267 The report 

also must include an assessment by the 

fund’s adviser of the fund’s ability to 

withstand the events (and concurrent 

occurrences of those events) that are 

reasonably likely to occur within the 

following year.268 Finally, as proposed, 

264 See Proposing Release, supra note 2, at text 

following n.209. 

265 See, e.g., ABA Comment Letter; HighMark 

Capital Comment Letter; IDC Comment Letter. 

266 Amended rule 2a–7(c)(10)(v)(B). We disagree 

with commenters that recommended that the 

adviser report to the board only annually and on 

an exception basis. See, e.g., Stradley Ronon 

Comment Letter; Tamarack Funds Comment Letter; 

T. Rowe Price Comment Letter. We believe that 

regular reports will allow the board more effectively 

to monitor the fund’s ability to withstand 

hypothetical events that alone or in combination 

would cause the fund to break the buck. In the 

Proposing Release, we asked whether we should 

impose minimum liquidity requirements based on 

the results of a particular stress test. See Proposing 

Release, supra note 2, at text following n.216. 

Commenters were divided on this issue. See 

Fidelity Comment Letter (against); Bankers Trust 

Comment Letter (in favor); Shriver Poverty Law Ctr. 

(same). As discussed above, we expect that money 

market funds take into consideration the results of 

their stress testing in assessing their liquidity needs 

under the general liquidity requirement of rule 2a– 

7(c)(5). See supra note 261. 

267 Amended rule 2a–7(c)(10)(v)(B)(1). 

268 Amended rule 2a–7(c)(10)(v)(B)(2). We do not 

agree with commenters who argued that advisers 

should not be required to provide an assessment of 

a fund’s ability to withstand events that are 

reasonably likely to occur within the following 

year. See Charles Schwab Comment Letter; 

Federated Comment Letter; Stradley Ronon 

Comment Letter; Vanguard Comment Letter. The 

rule does not require advisers to predict the future 

in order to determine which hypothetical events to 

use in stress testing (and we recognize that advisers 

will not always be correct in their assessments of 

funds are required to maintain records 

of the stress testing for six years, the 

first two years in an easily accessible 

place.269 

D. Repurchase Agreements 

Money market funds typically invest 

a significant portion of their assets in 

repurchase agreements, many of which 

mature the following day and provide 

an immediate source of liquidity. We 

are adopting, as proposed, two 

amendments to rule 2a–7 that affect 

fund investments in repurchase 

agreements for purposes of rule 2a–7’s 

diversification provisions.270 

First, we are limiting money market 

funds to investing in repurchase 

agreements collateralized by cash items 

or Government securities in order to 

obtain special treatment of those 

investments under the diversification 

provisions of rule 2a–7.271 This change 

is designed to reduce the risk that a 

money market fund would experience 

losses upon the sale of collateral in the 

event of a counterparty’s default.272 

Most commenters who addressed our 

proposal supported it.273 Commenters 

which events are reasonably likely to occur within 

the following year). Instead, the provision is 

designed to provide to the board some context 

within which to evaluate the assessment on the 

magnitude of each hypothetical event that would 

cause the fund to break the buck. See Proposing 

Release, supra note 2, at text following n.211. 

269 Amended rule 2a–7(c)(11)(vii). 

270 Amended rule 2a–7(c)(4)(ii)(A); Proposing 

Release, supra note 2, at Section II.E. 

271 Amended rule 2a–7(a)(5) (defining the term 

‘‘collateralized fully’’). The special treatment allows 

money market funds to consider the acquisition of 

the repurchase agreement as an acquisition of the 

underlying collateral for diversification purposes. 

See Proposing Release, supra note 2, at n.228 and 

accompanying text. Under the new rule, securities 

with the highest rating, or unrated securities of 

comparable credit quality, will no longer be 

acceptable collateral. Compare amended rule 2a– 

7(a)(5) with current rule 2a–7(a)(5). 

272 See Proposing Release, supra note 2, at n.229 

and accompanying text. 

273 See Bankers Trust Comment Letter; BlackRock 

Comment Letter; HighMark Capital Comment 

Letter; RidgeWorth Comment Letter. Two 

commenters opposed the proposal. Wells Fargo 

made a number of arguments based on the premise 

that the change will prevent money market funds 

from investing in repurchase agreements 

collateralized by non-government securities. The 

rule, however, does not restrict funds from 

investing in repurchase agreements. Instead, it 

limits the circumstances under which a fund may 

look through the repurchase agreement to the 

underlying collateral for diversification purposes. A 

money market fund will continue to be able to 

invest in repurchase agreements collateralized by 

other types of assets, although the securities will 

not be eligible for special treatment under the 

diversification provisions. Another commenter 

asserted that the limitation is unnecessary if a fund 

evaluates the creditworthiness of the counterparty 

or if it adequately values the collateral in light of 

rule 2a–7(c)’s minimal credit risk determination. 

See Am. Securit. Forum Comment Letter. As 

discussed above and in the Proposing Release, we 

are adopting this provision to protect against 

also confirmed our understanding that 

many managers of money market funds 

already look through only those 

repurchase agreements that are 

collateralized by Government securities 

or cash instruments.274 

Second, we are reinstating the 

requirement that the money market 

fund’s board of directors or its delegate 

evaluate the creditworthiness of the 

repurchase agreement’s counterparty in 

order for the fund to take advantage of 

the special look-through treatment 

under rule 2a–7’s diversification 

provisions.275 The effect of this 

amendment is to require a fund adviser 

to determine that the counterparty is a 

creditworthy institution, separate and 

apart from the value of the collateral 

supporting the counterparty’s obligation 

under the repurchase agreement.276 

We are not adopting an approach 

suggested by some of the commenters 

that the evaluation of a repurchase 

agreement should be limited to the 

credit risk determination already 

required by rule 2a–7(c)(3) with regard 

to the purchase of any security.277 That 

circumstances in which the fund may be unable to 

obtain its collateral or the full value of that 

collateral. 

274 See Federated Comment Letter (Federated has 

never relied on the diversification look-through 

approach for repurchase agreements collateralized 

by non-government securities); ICI Comment Letter 

(ICI members typically adopt the look-through 

approach only for repurchase agreements 

collateralized by cash items and government 

securities). See also Fitch Ratings, Money Market 

Funds Special Report, U.S. Prime Money Market 

Funds: Managing Portfolio Composition to Address 

Credit and Liquidity Risks (Aug. 14, 2009) (‘‘Fitch 

Report’’), at 6 available at http:// 

www.fitchratings.com/creditdesk/reports/ 

report_frame.cfm?rpt_id=462366 (reporting that 

after the end of 2008 ‘‘a number of advisors to Fitchrated U.S. prime money market funds * * * 

significantly amended their investment policies 

with respect to repurchase agreements 

counterparties and collateral schedules’’; the 

amendments include, among others, ‘‘[r]educed 

acceptance of repurchase agreement collateral other 

than U.S. Treasury and agency securities’’). 

275 See amended rule 2a–7(c)(4)(ii)(A). We 

eliminated the requirement in 2001. See Proposing 

Release, supra note 2, at nn.230–33 and 

accompanying text. Three commenters specifically 

supported the change. See BlackRock Comment 

Letter; HighMark Capital Comment Letter; Shriver 

Poverty Law Ctr. Comment Letter. 

276 A number of commenters argued that the 

evaluation should not be the board’s responsibility. 

See, e.g., IDC Comment Letter; Comment Letter of 

the North Carolina Capital Management Trust— 

Independent Trustees (Sept. 8, 2009). We note that 

rule 2a–7(e) allows a board to delegate the 

creditworthiness evaluation to the fund’s 

investment adviser or officers, under guidelines and 

procedures that the board establishes and reviews. 

277 Three commenters argued that the proposed 

creditworthiness evaluation is unnecessary because 

it is already an element of the minimal credit risk 

determination that a fund makes pursuant to rule 

2a–7(c)(3). See Federated Comment Letter; ICI 

Comment Letter; IDC Comment Letter. Two other 

commenters recommended that the applicable 

standard be the minimal credit risk evaluation. See 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10081 

approach would not require a fund to 

evaluate separately the creditworthiness 

of the counterparty in order to take 

advantage of the special look-through 

treatment for diversification purposes. 

Under that approach, the fund’s 

evaluation of a repurchase agreement 

could be based primarily or exclusively 

on the quality of the collateral. As we 

explained in the Proposing Release, in 

the midst of a market disruption caused 

by the default of a counterparty, a 

money market fund may find it difficult 

to protect fully its collateral without 

incurring losses.278 The amendment is 

designed to avoid such losses by 

requiring money market funds to 

evaluate the creditworthiness of the 

counterparty in order to limit exposure 

to less creditworthy institutions. 

E. Disclosure of Portfolio Information 

1. Public Web Site Posting 

We are amending rule 2a–7 to require 

money market funds to disclose 

information about their portfolio 

holdings each month on their Web sites. 

The disclosure will provide greater 

transparency of portfolio information in 

a manner convenient for most investors. 

The amendment is designed to give 

investors a better understanding of the 

current risks to which the fund is 

exposed, strengthening their ability to 

exert influence on risk-taking by fund 

advisers. 

Commenters generally supported 

requiring money market funds to post 

portfolio information monthly, although 

several urged us to revise the 

amendments in certain ways.279 The 

amendments we are today adopting are 

substantially similar to those we 

proposed, with modifications to (i) The 

information required to be disclosed, (ii) 

the time within which a fund must post 

its portfolio holdings information, and 

(iii) the length of time a fund must 

maintain the information on its Web 

site. We discuss each of these 

modifications below. 

Information Required to be Disclosed. 

As proposed, the amendments to rule 

2a–7 would have required a fund to 

disclose the fund’s schedule of 

investments, as prescribed by rules 12– 

12 through 12–14 of Regulation S–X,280 

identifying, among other things, the 

issuer, the title of the issue, the 

principal amount, the interest rate, the 

Fidelity Comment Letter; Stradley Ronon Comment 

Letter. 

278 Proposing Release, supra note 2, at n.233 and 

accompanying text. 

279 See, e.g., Assoc. for Fin. Professionals 

Comment Letter; SIFMA Comment Letter; Vanguard 

Comment Letter. 

280 17 CFR 210.12–12—12–14. 

maturity date, and the current amortized 

cost of the security.281 Several 

commenters asserted that requiring the 

information specified in rules 12–12 

through 12–14 of Regulation S–X would 

include information that would not be 

helpful to investors. They urged us 

instead to require information about 

money market fund portfolios that 

would better fit the needs of investors 

seeking information relevant to their 

investment decisions.282 For example, 

some commenters noted that under the 

proposed amendments a fund would be 

required to classify and subtotal 

securities by industry, provide detailed 

restricted securities disclosures, and 

provide detailed information regarding 

repurchase agreement counterparties 

and collateral. One also noted that 

under the proposal funds may be 

required to provide certain notes 

required by generally accepted 

accounting principles (‘‘GAAP’’), as 

many funds do for filings on Form N– 

Q.283 Commenters asserted that these 

requirements would unnecessarily 

complicate the disclosure, be of little 

interest or benefit to investors, be 

difficult to comply with, and would 

impose a significant additional burden 

on money market funds. They suggested 

modifying the disclosure requirements 

to exclude some of the detail.284 

We are revising the information about 

portfolio holdings that funds must 

disclose on their Web sites. Instead of 

referring to Regulation S–X as we 

proposed, we are listing in rule 2a– 

7(c)(12) the information that funds must 

disclose.285 These revisions more 

281 Proposed rule 2a–7(c)(12). As discussed 

below, all of these enumerated items are required 

under amended rule 2a–7(c)(12). 

282 See, e.g., BlackRock Comment Letter; GE Asset 

Mgt. Comment Letter; Invesco Aim Comment Letter. 

283 See ICI Comment Letter. 

284 See, e.g., BlackRock Comment Letter; Fidelity 

Comment Letter; ICI Comment Letter. 

285 Rules 12–12 through 12–14 of Regulation 

S–X require, and the proposed rule amendments 

would have required, in addition to the information 

required by rule 2a –7(c)(12), the following 

information, which we believe is not critical to be 

made available to investors on money market fund 

Web sites: (i) The subtotals for each category of 

investments, subdivided by business grouping or 

investment type, with their percentage value 

compared to net assets; (ii) for repurchase 

agreements, showing for each, among other things, 

the date of the agreement, the total amount to be 

received upon repurchase, the repurchase date, and 

a description of the securities that are subject to the 

repurchase agreement; (iii) for restricted securities 

(1) as to each such issue (a) The acquisition date, 

(b) the carrying value per unit of investment at date 

of related balance sheet, and (c) the cost of such 

securities, (2) as to each issue acquired during the 

year preceding the date of the related balance sheet, 

the carrying value per unit of investment of 

unrestricted securities of the same issuer at (a) The 

day the purchase price was agreed to, (b) the day 

on which an enforceable right to acquire such 

securities was obtained, and (c) the aggregate value 

closely tailor the required information 

to the needs of money market fund 

investors and others who seek 

information about fund holdings 

through Internet Web sites. For 

example, rule 12–12 of Regulation S–X 

requires funds to disclose the subtotal of 

each category of investments, 

subdivided by business grouping or 

investment type. We agree with 

commenters who argued that this level 

of detail, although appropriate for 

financial statements, is unnecessary in a 

fund’s Web site disclosures to 

investors.286 For investors who may 

prefer to obtain the more detailed 

information, it will continue to be 

available in money market funds’ 

quarterly Form N–CSR and Form N–Q 

filings.287 As discussed below, detailed 

information also will be available on a 

fund’s filings on Form N–MFP.288 

As amended, rule 2a–7(c)(12) will 

require funds to disclose monthly with 

respect to each security held: (i) The 

name of the issuer; (ii) the category of 

investment (e.g., Treasury debt, 

government agency debt, asset backed 

commercial paper, structured 

investment vehicle note); (iii) the CUSIP 

number (if any); (iv) the principal 

amount; (v) the maturity date as 

determined under rule 2a–7 for 

purposes of calculating weighted 

average maturity; (vi) the final maturity 

date, if different from the maturity date 

previously described; (vii) coupon or 

yield; and (viii) the amortized cost 

value.289 In addition, the amendments 

require funds to disclose their overall 

weighted average maturity and weighted 

of all restricted securities and the percentage which 

the aggregate value bears to net assets; (iv) the 

aggregate gross unrealized appreciation for all 

securities in which there is an excess of value over 

tax cost; (v) the aggregate gross unrealized 

depreciation for all securities in which there is an 

excess of tax cost over value; (vi) the net unrealized 

appreciation or depreciation; (vii) the aggregate cost 

of securities for Federal income tax purposes; (viii) 

disclosure of investments in non-securities; (ix) the 

amount of equity in net profit and loss for the 

period; and (x) the dollar amount of dividends or 

interest in investments in affiliates. 

286 See supra note 282. 

287 Money market funds must provide a full 

schedule of their portfolio holdings in quarterly 

filings to the Commission, within 60 days after the 

end of the quarter. See Form N–CSR [17 CFR 

274.128] (form used by registered management 

investment companies to file shareholder reports); 

Form N–Q [17 CFR 274.130] (form used by 

registered management investment companies to 

file quarterly reports of portfolio holdings after the 

first and third quarters). 

288 See infra Section II.E.2. 

289 Amended rule 2a–7(c)(12)(ii). We have added 

disclosure of the security’s CUSIP number as an 

item of the web disclosure, which is designed to 

help users identify the securities in the fund’s 

portfolio. We proposed and are adopting CUSIP 

number reporting on Form N–MFP, and 

commenters did not object to this reporting. See 

infra note 306 and accompanying text. 

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10082 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

average life maturity of their 

portfolios.290 The information required 

is substantially the same as was 

proposed but eliminates some of the 

details required by Regulation S–X, to 

which investors will continue to have 

access in the fund’s quarterly filings.291 

Time of Posting Information on Web 

site. The amended rule requires funds to 

post the portfolio information, current 

as of the last business day of the 

previous month, no later than the fifth 

business day of the month.292 Under the 

proposed amendments, a fund would 

have been required to post the portfolio 

information on its Web site no later than 

the second business day of the 

month.293 We have extended the time in 

response to commenters that asserted 

that the second business day deadline 

would not provide funds with enough 

time to compile, review, and post the 

required portfolio information 

accurately.294 

Maintenance of Information on the 

Web site. Portfolio information must be 

maintained on the fund’s Web site for 

no less than six months after posting.295 

290 Amended rule 2a–7(c)(12)(i). We proposed to 

require that funds disclose this information on 

Form N–MFP, which we indicated we intended to 

make public. Some commenters also recommended 

we include these disclosure items in funds’ Web 

site disclosures. See Assoc. Fin. Professionals 

Comment Letter; BlackRock Comment Letter; 

Fidelity Comment Letter. 

291 As discussed above, the proposed 

amendments to rule 2a–7 would have required 

money market funds to disclose on their Web sites 

their monthly schedule of investments in 

accordance with rules 12–12 to 12–14 of Regulation 

S–X. To avoid unnecessarily duplicative disclosure 

obligations, we also proposed to amend rule 30b1– 

5 to exempt money market funds from Item 1 of 

Form N–Q, which similarly requires funds to 

disclose their schedule of investments in 

accordance with rules 12–12 to 12–14 of Regulation 

S–X in quarterly filings with the Commission. 

Because we have revised the Web site disclosure 

requirement not to include certain items in rules 

12–12 to 12–14 of Regulation S–X, the disclosure 

requirements of rule 2a–7 and Item 1 of Form N– 

Q are no longer duplicative. As a result, we are not 

adopting the proposed amendments to rule 30b1– 

5. 

292 Amended rule 2a–7(c)(12). 293 Proposed rule 2a–7(c)(12). 294 See, e.g., BlackRock Comment Letter; Charles 

Schwab Comment Letter; T. Rowe Price Comment 

Letter; Vanguard Comment Letter. One commenter 

estimated that compliance with the proposed 

second business day deadline would cost $1.5 

million initially and $220,000 annually. See 

Fidelity Comment Letter. The recommended 

deadlines submitted by commenters ranged from 5 

business days to 15 or 30 business days after the 

end of each month. In light of the modifications we 

are making to the information that must be posted 

on the fund’s Web site, as discussed above, we 

believe that lengthening the deadline to five 

business days should provide funds sufficient time 

to compile, review, and post the portfolio holding 

information accurately. We also note that a five 

business day deadline will typically mean seven 

calendar days and, when holidays intervene, eight 

calendar days. 

295 Amended rule 2a–7(c)(12). The amended rule 

also requires funds to provide a link to a Securities 

We have reduced the maintenance 

period from the proposed twelve 

months in response to commenters.296 

Many commenters stated that the 

proposed twelve-month maintenance 

period was too long.297 Half of these 

commenters recommended a six-month 

period, asserting that historical portfolio 

holdings information could be obtained 

from publicly available semi-annual 

filings with the Commission.298 Other 

commenters recommended that no 

historical data be maintained on a 

fund’s Web site at all.299 We believe that 

it is important for investors to be able 

to compare current holdings 

information with previous holdings 

information from which they (or others 

analyzing the data) may discern trends. 

However, because historical portfolio 

holdings information is available to 

investors in semi-annual filings to the 

Commission, we have determined to 

reduce the maintenance period to six 

months.300 

2. Reporting to the Commission 

We are adopting a new rule requiring 

money market funds to provide the 

Commission a monthly electronic filing 

of more detailed portfolio holdings 

information. The information will 

permit us to create a central database of 

money market fund portfolio holdings, 

which will enhance our oversight of 

money market funds and our ability to 

respond to market events.301 As 

discussed further below, the 

information will also be made public on 

a delayed basis. 

and Exchange Commission Web page where a user 

may obtain access to the fund’s most recent 12 

months of publicly available filings on Form N– 

MFP. Amended rule 2a–7(c)(12)(iii). 

296 Proposed rule 2a–7(c)(12). 

297 See Comment Letter of Clearwater Analytics, 

LLC (Sept. 7, 2009) (‘‘Clearwater Comment Letter’’); 

Comment Letter of Data Communique ́ (Sept. 8, 

2009) (‘‘Data Communique ́ Comment Letter’’); 

Dreyfus Comment Letter; Fidelity Comment Letter; 

Fifth Third Comment Letter; GE Asset Mgt. 

Comment Letter; SIFMA Comment Letter; T. Rowe 

Price Comment Letter. 

298 See Dreyfus Comment Letter; Fifth Third 

Comment Letter; SIFMA Comment Letter; T. Rowe 

Price Comment Letter. 

299 See Clearwater Comment Letter; Data 

Communique ́ Comment Letter (investors ‘‘only 

interested in the most recent data’’); Fidelity 

Comment Letter; GE Asset Mgt. Comment Letter. 

300 Two commenters stated that retaining 

portfolio holdings information on a fund’s Web site 

for no more than six months would be consistent 

with the current requirements for portfolio holdings 

of open-end management investment companies. 

See Fifth Third Comment Letter; T. Rowe Price 

Comment Letter. 

301 As we explained in the Proposing Release, our 

current information on money market portfolio 

holdings is limited to quarterly reports filed with 

us which, due to the high turnover rate of portfolio 

securities, quickly become stale. See Proposing 

Release, supra note 2, at Section II.F.2. 

New rule 30b1–7 requires money 

market funds to report portfolio 

information on new Form N–MFP. We 

received 49 comment letters on the 

proposed rule and form, most of which 

supported enhancing our oversight 

capabilities. Many of these commenters 

suggested technical modifications, a 

number of which we are adopting, as 

discussed below.302 The rule and form 

that we are adopting today are 

substantially similar to what we 

proposed.303 

Information. Money market funds 

must report on Form N–MFP, with 

respect to each portfolio security held 

on the last business day of the prior 

month, the following items: 304 (i) The 

name of the issuer; (ii) the title of the 

issue, including the coupon or yield; 305 

(iii) the CUSIP number; 306 (iv) the 

category of investment (e.g., Treasury 

debt, government agency debt, asset 

backed commercial paper, structured 

investment vehicle note, repurchase 

agreement 307); (v) the NRSROs 

302 See, e.g., Charles Schwab Comment Letter; 

Stradley Ronon Comment Letter; Tamarack Funds 

Comment Letter. 

303 In September 2009, we adopted interim final 

temporary rule 30b1–6T. Disclosure of Certain 

Money Market Fund Portfolio Holdings, Investment 

Company Act Release No. 28903 (Sept. 18, 2009) 

[74 FR 48376 (Sept. 23, 2009)] (‘‘Rule 30b1–6T 

Release’’). We therefore have adopted proposed rule 

30b1–6 as rule 30b1–7. The portfolio securities 

information that money market funds currently 

must report each quarter (pursuant to rule 30b1–5) 

is less timely and more limited in scope, and 

includes information about the issuer, the title of 

the issue, the balance held at the close of the 

period, and the value of each item at the close of 

the period. See Item 1 of Form N–Q [17 CFR 

274.130] and Item 6 of Form N–CSR [17 CFR 

274.128] (requiring funds to include a schedule of 

investments as set forth in rule 12–12 through 12– 

14 of Regulation S–X [17 CFR 210.12–12—12–14]). 

304 We have revised the form’s general 

instructions to clarify that a filer may amend the 

form at any time. See Form N–MFP at General 

Instruction A. 

305 We understand that the title of an issue 

typically includes the coupon or yield of the 

instrument, and we have revised Item 27 to require 

this information, if applicable. 

306 Item 20 of proposed Form N–MFP would have 

required a fund to disclose the CIK of the issuer. 

Several commenters suggested that the form not 

require the issuer’s CIK because the CIK is not a 

widely used identifier for money market 

instruments and is not generally maintained by 

money market funds. See, e.g., Dreyfus Comment 

Letter; Federated Comment Letter; SIFMA Comment 

Letter. Form N–MFP, as adopted, only requires the 

issuer’s CIK number if the security does not have 

a CUSIP number and the issuer has a CIK. Item 28 

and Item 30 of Form N–MFP. If the security does 

not have a CUSIP number, the fund must provide 

a unique identifier for the security if there is one. 

Item 29 of Form N–MFP. 

307 For repurchase agreements we are also 

requiring funds to provide additional information 

regarding the underlying collateral. Item 32 of Form 

N–MFP. This information would have been 

required under our proposed amendments to rule 

2a–7 regarding the Web site disclosure of portfolio 

holdings. Although we continue to believe that the 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10083 

designated by the fund, the credit 

ratings given by each NRSRO, and 

whether each security is first tier, 

second tier, unrated, or no longer 

eligible; (vi) the maturity date as 

determined under rule 2a–7, taking into 

account the maturity shortening 

provisions of rule 2a–7(d); (vii) the final 

legal maturity date, taking into account 

any maturity date extensions that may 

be effected at the option of the issuer; 

(viii) whether the instrument has certain 

enhancement features; 308 (ix) the 

principal amount; (x) the current 

amortized cost value; 309 (xi) the 

percentage of the money market fund’s 

assets invested in the security; 310 (xii) 

whether the security is an illiquid 

security (as defined in amended rule 

2a–7(a)(19)); 311 and (xiii) ‘‘Explanatory 

information is important to understanding the risks 

associated with a repurchase agreement and should 

be readily available to investors who seek it, we 

agree with commenters who asserted that that level 

of detail may not be necessary on the Web site 

disclosure. Fidelity Comment Letter (‘‘detailed 

information regarding repurchase agreement 

counterparties and collateral’’ is contained across 

multiple systems); ICI Comment Letter. 

Accordingly, we have added the disclosure 

requirement to Form N–MFP. 

308 At the suggestion of one commenter, we are 

incorporating defined terms from amended rule 2a– 

7 into Form N–MFP. See Federated Comment 

Letter. The form requires a fund to report: (i) 

Whether the instrument has a ‘‘demand feature’’ (as 

defined in amended rule 2a–7(a)(9)); (ii) the identity 

of the issuer of the demand feature; (iii) the 

designated NRSRO(s) for the demand feature or its 

provider; (iv) the credit rating provided by each 

designated NRSRO, if any; (v) whether the 

instrument has a ‘‘guarantee’’ (as defined in 

amended rule 2a–7(a)(17)); (vi) the identity of the 

guarantor; (vii) the designated NRSRO(s) for the 

guarantee or guarantor; (viii) the credit rating 

provided by each designated NRSRO, if any; (ix) 

whether the instrument has any other 

enhancements (i.e., other than a demand feature or 

guarantee); (x) the type of enhancement; (xi) the 

identity of the enhancement provider; (xii) the 

designated NRSRO(s) for the enhancement or 

enhancement provider; and (xiii) the credit rating 

provided by each designated NRSRO, if any. See 

Items 37–39 of Form N–MFP. 

309 Under Item 37 of proposed Form N–MFP, a 

fund would have had to provide the amortized cost 

of a security to the nearest hundredth of a cent. 

Commenters pointed out that fund accounting 

systems carry costs of securities in whole cents, and 

recommended that funds therefore be required to 

report the amortized cost to the nearest cent. See, 

e.g., Dreyfus Comment Letter; ICI Comment Letter; 

State Street Comment Letter. We therefore have 

revised the form to require the amortized cost of 

each portfolio security to the nearest cent. Item 41 

of Form N–MFP. 

310 Under Item 39 of proposed Form N–MFP, a 

fund would have had to disclose the percentage of 

gross assets invested in the security. We have 

revised the form to require that funds disclose the 

percentage of net assets invested in the security 

(Item 42 of Form N–MFP) to conform to existing 

disclosure requirements. See rule 12–12 of 

Regulation S–X. 

311 See Item 44 of Form N–MFP. We have added 

this disclosure requirement at the suggestion of one 

commenter who believed that it would be useful for 

us to know if different funds have taken different 

positions regarding the liquidity of a commonly 

notes.’’ 312 Form N–MFP also requires 

funds to report to us information about 

the fund,313 including information 

about the fund’s risk characteristics 

such as the dollar weighted average 

maturity of the fund’s portfolio and its 

seven-day gross yield.314 

held security. See Federated Comment Letter. 

Conversely, we are not adopting proposed Item 38, 

which would have required funds to disclose 

whether the inputs used in determining the value 

of the securities are Level 1, Level 2, or Level 3, if 

applicable. See Financial Accounting Standards 

Board, Statement of Financial Accounting 

Standards No. 157, ‘‘Fair Value Measurement,’’ 

available at http://www.fasb.org/cs/ 

BlobServer?blobcol=urldata&blobtable= 

MungoBlobs&blobkey=id&blobwhere= 

1175818754924&blobheader=application%2Fpdf. 

Commenters explained that industry practice is to 

categorize all securities valued through reference to 

amortized cost as Level 2. See, e.g., Dreyfus 

Comment Letter; ICI Comment Letter. We 

understand that industry practice is to determine 

the value of an illiquid security using Level 3 

inputs. Requiring funds to disclose whether a 

security is illiquid will provide comparable 

information regarding the classification of the 

security. 

312 See Item 43 of Form N–MFP. This item 

permits funds to add miscellaneous information 

that may be material to other disclosure in the form. 

313 As proposed, many of the items would have 

been disclosed with regard to each series of the 

fund. As adopted, however, we are requiring that 

funds provide some of this information with regard 

to each class of the fund, where relevant (e.g., 

minimum initial investment and flow activity). We 

believe that class-specific information about these 

items will be more useful for analysis. We also 

understand that funds typically maintain this 

information with regard to each class of the fund. 

For example, funds are required to disclose classspecific information about net assets and flow 

activities in financial statements. See Rules 6–04 

and 6–09 of Regulation S–X. Therefore we do not 

believe that requiring certain information on a class 

basis will be any more burdensome than what we 

proposed. See also Clearwater Comment Letter 

(suggesting that total net asset value should be 

disclosed on a class-level basis). 

314 We also have revised or augmented some of 

the disclosure items of Form N–MFP. In addition 

to the seven-day gross yield, the form as adopted 

requires the fund’s seven-day net yield for each 

class as calculated under Item 26(a)(1) of Form N– 

1A. Item 24 of Form N–MFP. Item 15 of proposed 

Form N–MFP would have required that a fund 

provide its net shareholder flow activity for the 

month ended. As adopted, Form N–MFP requires 

the net shareholder flow information for each class 

and also requires the fund to provide the gross 

subscriptions and redemptions for the month from 

which the net shareholder flow is calculated. Item 

23 of Form N–MFP. Item 9 of proposed Form N– 

MFP would have required a fund to indicate if the 

fund was primarily used to invest cash collateral. 

One commenter stated that the term ‘‘cash 

collateral’’ is ambiguous (it could include corporate 

trust accounts and escrows as well as collateral for 

securities loans or over-the-counter derivatives) and 

that it would be difficult for a fund to know when 

it is being used ‘‘primarily’’ for these investments. 

See Federated Comment Letter. As adopted, Form 

N–MFP does not require this information. Items 12– 

14 of proposed Form N–MFP would have required 

certain assets and liabilities information to the 

nearest hundredth of a cent. We have slightly 

revised these items to conform to accounting 

conventions and added an item for the net assets 

of the class. Items 13–16 and 21–22 of Form N– 

MFP. In addition, in response to commenters’ 

Money market funds also must report 

on Form N–MFP the market-based 

values of each portfolio security 315 and 

the fund’s market-based net asset value 

per share, with separate entries for 

values that do and do not take into 

account any capital support agreements 

into which the fund may have 

entered.316 When we proposed Form 

N–MFP, we solicited comment on 

requiring funds to report market-based 

values, including the value of any 

capital support agreement, on the 

form.317 Two commenters supported 

requiring money market funds to report 

market-based values to the 

Commission.318 Other commenters 

objected to the public disclosure of 

market-based values.319 We have 

decided to require market-based 

information in the monthly reports, 

because it will assist us in our 

understanding of fund portfolio 

valuation practices as well as the 

potential risks associated with a fund, 

e.g., a fund that has a market-based net 

asset value that suggests that it may be 

at risk of breaking the buck. The 

information regarding capital support 

agreements will help show the extent to 

which the funds’ valuations depend on 

external support agreements. 

Public availability. Under rule 30b1– 

7, the information contained in the 

portfolio reports that money market 

funds file with the Commission on Form 

N–MFP will be available to the public 

60 days after the end of the month to 

which the information pertains.320 

Although the portfolio information and 

other information reported to the 

Commission on Form N–MFP is not 

assertion that fund accounting systems only carry 

costs in whole cents, Form N–MFP as adopted 

requires this information to the nearest cent. Id. 

315 See Items 45–46 of Form N–MFP. It should be 

noted that Form N–MFP requires the total marketbased value of each portfolio security, not the perunit price of the security. 

316 See Item 18 (shadow NAV of the series) and 

Item 25 of Form N–MFP (shadow NAV of each 

class). 

317 See Proposing Release, supra note 2, at 

paragraph accompanying n.253. 

318 See Fund Democracy/CFA Comment Letter 

(‘‘We strongly support the SEC’s proposal to require 

that additional information be filed with the 

Commission on a temporarily confidential basis. It 

is critical that the Commission be able to gauge the 

stability of the MMF industry on an ongoing basis. 

* * * We believe strongly that the values at which 

MMFs are carrying portfolio securities is the most 

important piece of information for monitoring 

potential liquidity problems.’’); Tamarack Funds 

Comment Letter. 

319 See, e.g., ABA Comment Letter; Dreyfus 

Comment Letter; Goldman Sachs Comment Letter; 

Tamarack Funds Comment Letter. 

320 Rule 30b1–7(b). As discussed above, money 

market fund portfolio information will be required 

to be posted on fund Web sites within five business 

days after the end of the month. See supra notes 

292–294 and accompanying text. 

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primarily designed for individual 

investors, we anticipate that many 

investors, as well as academic 

researchers, financial analysts, and 

economic research firms, will use this 

information to study money market 

fund holdings and evaluate their risk. 

Their analyses may help other investors 

and regulators better understand risks in 

money market fund portfolios.321 

Therefore we believe that it is important 

to make this information publicly 

available. 

In the Proposing Release, we stated 

that we expected to make the 

information filed on Form N–MFP 

available to the public on a delayed 

basis, and we also requested comment 

on whether the rule should require 

funds to report, and therefore disclose to 

the public, the market-based valuations 

of the portfolio securities and of the net 

asset value of the fund.322 As discussed 

further below, commenters’ objections 

to public availability of the information 

collected on Form N–MFP generally fell 

into two categories—the competitive 

effects of portfolio information and the 

potentially de-stabilizing effects of 

market-based value information. We 

address each objection in turn. 

First, some commenters objected to 

the disclosure of information filed on 

Form N–MFP because of its competitive 

effects on funds or fund managers. 

Three commenters argued that the 

information to be provided on the form 

is proprietary, sensitive, or confidential 

in nature.323 Others expressed concern 

that making the information public 

could result in ‘‘investor confusion.’’ 324 

Two other commenters, however, 

supported making Form N–MFP 

information available to the public on a 

delayed basis.325 One of them 

emphasized the positive effect that 

public disclosure can have on portfolio 

management practices.326 

321 See Proposing Release, supra note 2, at 

paragraph accompanying n.245. See also Clearwater 

Comment Letter (‘‘[R]egular disclosure will also 

allow third-party analytics and reporting providers 

to make meaningful comparisons of money funds 

and highlight certain characteristics that are of 

interest to investors and the market generally.’’). 

322 We stated that we intended to make Form N– 

MFP information public two weeks after the filing 

of the form. See Proposing Release, supra note 2, 

at paragraph accompanying n.245. 

323 See BlackRock Comment Letter; Federated 

Comment Letter; T. Rowe Price Comment Letter. 

324 See, e.g., Fidelity Comment Letter; GE Asset 

Mgt. Comment Letter; Vanguard Comment Letter. 

Some commenters stated that the monthly fund 

Web site postings would provide sufficient 

transparency for investors. See, e.g., Fifth Third 

Comment Letter; ICI Comment Letter; Vanguard 

Comment Letter. 

325 See Fund Democracy/CFA Comment Letter; 

Comment Letter of J.P. Morgan Investor Services Co. 

(Sept. 4, 2009). 

326 See Fund Democracy/CFA Comment Letter. 

We believe commenters overstated the 

competitive risks for money market 

funds of public access to the fund’s 

information. As we discussed in the 

Proposing Release, the risks of trading 

ahead of funds are severely curtailed in 

the context of money market funds, 

because of the short-term nature of 

money market fund investments and the 

restricted universe of eligible portfolio 

securities.327 For similar reasons, we 

believe that the potential for ‘‘free 

riding’’ on a money market fund’s 

investment strategies, i.e., obtaining for 

free the benefits of fund research and 

investment strategies, is minimal. 

Because shares of money market funds 

are ordinarily purchased and redeemed 

at the stable price per share, we believe 

that there would be relatively few 

opportunities for profitable arbitrage by 

investors. Moreover, most funds 

currently disclose their current 

portfolios on their Web sites, and much 

of the information contained in Form 

N–MFP is already available through 

other publicly available filings with the 

Commission, albeit on a less frequent 

basis.328 

Second, many commenters objected to 

the disclosure of the market-based 

values of portfolio securities and of fund 

net asset value per share, because of the 

possible destabilizing effects on money 

market funds. These commenters stated 

that disclosure of market-based values 

would result in investor confusion and 

alarm that could result in redemption 

requests that exacerbate pricing 

deviations.329 One commenter 

supported the disclosure of marketbased net asset values, stating that the 

disclosure could provide discipline to 

managers operating their funds near the 

level of breaking the buck, and would 

level the informational playing field for 

327 See Proposing Release, supra note 2, at n.379 

and accompanying and following text; ICI Report, 

supra note 14, at 93 (‘‘Because of the specific 

characteristics of money market funds and their 

holdings * * * the frontrunning concerns are far 

less significant for this type of fund. For example, 

money market funds’ holdings are by definition 

very short-term in nature and therefore would not 

lend themselves to frontrunning by those who may 

want to profit by trading in a money market fund’s 

particular holdings. Rule 2a–7 also restricts the 

universe of Eligible Securities to such an extent that 

frontrunning, to the extent it exists at all, tends to 

be immaterial to money market fund 

performance.’’). 

328 As noted above, money market funds must 

provide a full schedule of their portfolio holdings 

in quarterly filings to the Commission. See supra 

note 287. 

329 See, e.g., ABA Comment Letter; T. Rowe Price 

Comment Letter; USAA Comment Letter 

(redemptions might lead to greater volatility in cash 

flows and increase the instability of the fund). In 

addition, one commenter stated that the investor 

confusion might result in additional costs for funds 

due to the need to answer investor inquiries. See 

Dreyfus Comment Letter. 

less sophisticated investors.330 Another 

commenter supported only the public 

disclosure of market-based portfolio 

securities values.331 

We appreciate the risks that are 

involved with the real-time public 

disclosure of a fund’s market-based 

portfolio and net asset values. Money 

market funds normally pay redeeming 

shareholders $1.00 per share even if 

their market-based net asset value is less 

than $1.00. These redemptions can hurt 

the fund’s remaining shareholders 

because the realized and unrealized 

losses are spread across fewer shares, 

further depressing the fund’s marketbased net asset value. If enough 

shareholders redeem shares under these 

conditions, the fund, absent a capital 

contribution by its investment adviser 

or another person, can break the buck, 

causing remaining shareholders to 

receive less than $1.00 per share. We 

believe that many institutional investors 

are currently well aware of this 

dynamic. If more shareholders 

understand the mechanical relationship 

between shareholder redemptions and 

market-based net asset value, the 

disclosure of a market-based net asset 

value below $1.00 might precipitate a 

run on the fund. If one fund were to fail 

for this reason, runs might develop in 

other money market funds, even those 

with relatively high market-based net 

asset values. 

Notwithstanding these risks, we 

believe that shareholders will benefit 

from knowing the monthly marketbased net asset values of money market 

funds.332 We anticipate that the public 

availability of these values will help 

investors make better informed 

decisions about whether to invest, or 

maintain their investments, in money 

market funds. This disclosure will 

indicate the extent to which the fund is 

managing its portfolio to achieve its 

fundamental objective of maintaining a 

stable net asset value. In addition, if 

market-based prices indicate significant 

risks in a fund’s portfolio, investors, 

advisers and others can have a more 

meaningful dialogue with the fund’s 

manager about such risks and any plans 

the fund manager may have to address 

any discounts between the market-based 

net asset value and the stable net asset 

value. This type of dialogue already 

330 See Shadow FRC Comment Letter. 331 See Clearwater Comment Letter. 332 Adequate disclosure to investors is a 

fundamental principle of the Commission’s 

regulatory mandate. See, e.g., section 1(b), 1(b)(1) of 

the Investment Company Act (‘‘[N]ational public 

interest and the interests of investors are adversely 

affected * * * when investors purchase, pay for, 

exchange, * * * sell, or surrender securities issued 

by investment companies without adequate, 

accurate, and explicit information * * *.’’). 

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takes place between sophisticated 

investors and funds that disclose 

portfolio information on a current basis. 

These sophisticated, often institutional, 

investors have the resources to estimate 

current market values and make 

purchase and redemption decisions on 

the basis of information that, in the past, 

has been beyond the reach of most retail 

investors. 

As a collateral effect, we expect that 

the public disclosure of monthly 

market-based net asset values may have 

the effect of discouraging a fund’s 

portfolio manager from taking risks that 

might reduce the fund’s market-based 

net asset value.333 We also anticipate 

that such disclosure may lead to greater 

cash flows into funds that have a 

smaller discount from the $1.00 NAV 

(or less historical volatility in that 

discount). This disclosure, which will 

provide values that include and exclude 

the effect of any capital support 

agreements, might also have the effect of 

encouraging funds that have affiliates to 

request financial support or other 

appropriate measures as soon as 

problems develop. Such support or 

other measures could provide greater 

stability to money market funds. 

Nevertheless, we understand 

commenters’ concerns that the 

disclosure of certain fund information, 

including market-based values, might 

result in investor confusion and alarm, 

at least in the short term, that could 

result in redemption requests that 

exacerbate pricing deviations.334 In 

response to these and other concerns 

discussed above, we are delaying the 

public availability of the information 

filed on Form N–MFP for 60 days after 

the end of the reporting period.335 This 

60-day delay in public availability 

mirrors the current 60-day lag under 

other rules between the end of a fund’s 

reporting period and the public filing of 

portfolio information with the 

Commission.336 In addition, funds 

currently are required to file twice a 

year a public report that includes the 

fund’s market-based net asset value, 

within 60 days after the end of the 

reporting period.337 

333 See Fund Democracy/CFA Comment Letter 

(‘‘[G]reater transparency should provide a strong 

incentive for funds to avoid the excessively risky 

practices that lead to instability and encourage 

redemption.’’). 

334 See supra note 329 and accompanying text. 

335 Rule 30b1–7(b). 

336 Funds are required to file each quarter with 

the Commission portfolio holdings reports, which 

are available to the public, within 60 days after the 

end of the quarter. See supra note 287. 

337 Money market funds currently must disclose 

their mark-to-market net asset value per share, to 

four decimals, twice a year in their Form N–SAR 

filings [17 CFR 274.101]. See Sub-Item 74W of Form 

We anticipate that, during the 60 days 

between the end of the reporting period 

and public availability of the 

information, funds will take steps to 

resolve issues that may raise concerns 

with investors and analysts. In addition, 

because money market fund portfolios 

have a limited maturity, many of the 

portfolio securities will have matured 

by the time the information is released 

to the public. Thus we expect that the 

60-day delay will ameliorate many of 

the risks associated with public 

disclosure. We also expect that, over 

time, investors and analysts will become 

more accustomed to the information 

disclosed about fund portfolios, and 

thus there may be less need in the future 

to require a 60-day delay between the 

end of the reporting period and the 

public availability of the information. 

We therefore may revisit in a 

subsequent release whether to retain the 

same (or any) delay in public 

availability of this information. 

Timing. Each money market fund 

must submit Form N–MFP 

electronically to the Commission within 

five business days after the end of each 

month.338 Under the proposed rule, a 

fund would have been required to file 

Form N–MFP with the Commission no 

later than two business days after the 

end of each month. Commenters 

asserted that the second business day 

deadline would not have provided 

funds enough time to compile, review, 

and file the requested portfolio 

information accurately.339 

In response to commenters, we are 

delaying the mandatory filing date for 

several months after the effective date of 

the amendments, to permit money 

market funds to develop systems 

necessary to collect and submit the 

portfolio information on Form N– 

MFP.340 Thus, the first mandatory filing 

N–SAR. Form N–SAR must be filed with the 

Commission no later than the 60th day after the end 

of the fiscal period for which the report is being 

prepared. See General Instruction C to Form N– 

SAR. Information supplied on Form N–SAR is 

publicly available on EDGAR and in the public files 

of the Commission. See General Instruction A to 

Form N–SAR. 

338 See rule 30b1–7. 339 See, e.g., BlackRock Comment Letter; Dreyfus 

Comment Letter; Vanguard Comment Letter. The 

recommended deadlines submitted by commenters 

ranged from five business days to 15 to 30 business 

days. We are providing for an extended 

implementation period before compliance with rule 

30b1–7 is required, as discussed below, during 

which time funds will be able to build or update 

systems to compile the data and file the new form, 

test those systems, and possibly participate in the 

voluntary compliance program. Therefore, we 

believe that lengthening the deadline to five 

business days should provide funds sufficient time 

to compile, review, and file Form N–MFP 

accurately. 

340 Several commenters requested that the 

Commission allow funds at least six months before 

will be due on December 7, 2010, for 

holdings as of the end of November 

2010. For approximately two months 

before the first mandatory filing, our 

staff will accept the submission of trial 

data so that money market funds may 

voluntarily make (non-public) electronic 

submissions with us. We anticipate that 

these submissions will help money 

market funds gain experience collecting 

and submitting the information, and we 

will use these submissions and the 

experiences of the funds to make 

technical adjustments to our systems 

and provide any guidance. Because of 

the possibility of errors or mistakes in 

the information submitted, we do not 

intend to make the trial data public. 

Method of filing. As proposed, Form 

N–MFP must be filed electronically 

through the Commission’s EDGAR 

system in an eXtensible Markup 

Language (‘‘XML’’) tagged data format.341 

We understand that money market 

funds already maintain most of the 

information that will be filed on the 

form, and therefore the main 

requirement for funds will be the 

tagging of the data and filing of the 

reports with the Commission.342 Some 

commenters recommended that the 

Commission require that Form N–MFP 

be filed in an eXtensible Business 

Reporting Language (‘‘XBRL’’) format.343 

Although XBRL may allow for more 

comparative analysis or more 

opportunities for manipulation of data 

than XML allows, we believe that the 

data required by Form N–MFP will be 

clearly defined and often repetitive from 

one month to the next, and therefore the 

XML format will provide us with the 

necessary information in the most 

timely and cost-effective manner.344 

mandatory compliance with the new reporting 

requirement on Form N–MFP. See, e.g., FAF 

Advisors Comment Letter; ICI Comment Letter; J.P. 

Morgan Asset Mgt. Comment Letter. 

341 We anticipate that the XML interactive data 

file will be compatible with a wide range of open 

source and proprietary information management 

software applications. Continued advances in 

interactive data software, search engines, and other 

Web-based tools may further enhance the 

accessibility and usability of the data. 

342 We understand that many funds often provide 

this type of information in different formats to 

various information services and third-parties, 

including NRSROs. Standardizing the data format 

in Form N–MFP may encourage standardization 

across the industry, resulting in cost savings for 

money market funds. 

343 See, e.g., Comment Letter of the American 

Institute of Certified Public Accountants (Sept. 8, 

2009); Comment Letter of EDGAR Online, Inc. (July 

23, 2009); Comment Letter of XBRL US (Sept. 8, 

2009). Most commenters were neutral on the 

submission format for Form N–MFP. See, e.g., 

Clearwater Comment Letter; Fund Democracy/CFA 

Comment Letter; ICI Comment Letter. 

344 The XBRL format would require a longer 

period for implementation by the Commission and 

Continued 

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10086 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

Over time we expect these filings will 

become highly automated and involve 

minimal costs. 

3. Phase-Out of Weekly Reporting by 

Certain Funds 

We are adopting as final rule 30b1– 

6T, the temporary rule that requires the 

weekly filing of portfolio information by 

money market funds in certain 

circumstances. As adopted, the only 

change to the rule is the expiration date. 

Rule 30b1–6T will expire on December 

1, 2010, which corresponds with the 

first filing of portfolio information 

required by new rule 30b1–7. 

In September 2009, we adopted rule 

30b1–6T.345 The rule requires any 

money market fund that has a marketbased net asset value per share below 

$0.9975 to provide the Commission 

with weekly portfolio and valuation 

information. The information required 

by the rule is similar to the information 

money market funds participating in the 

Treasury Department’s Guarantee 

Program were required to provide under 

similar circumstances.346 We requested 

comments on the rule when we adopted 

it, but received none.347 

Rule 30b1–6T originally would have 

expired one year after we adopted it, 

i.e., on September 17, 2010.348 The 

information that rule 30b1–7, which we 

are adopting today, will require all 

money market funds to file on a 

monthly basis subsumes the information 

that funds with lower market-based 

NAVs were required to file under rule 

30b1–6T. Therefore we are phasing out 

the latter rule, but are extending its 

expiration date so that we will continue 

to receive weekly reports until the 

monthly reporting requirements of rule 

30b1–7 are mandatory. After that time, 

our monitoring of information filed by 

money market funds on Form N–MFP, 

as well as notifications of purchases of 

certain assets from funds in reliance on 

rule 17a–9 should enable our staff to 

funds, and would entail additional costs. However, 

the XBRL format derives from and is compatible 

with the XML format. Moreover, to the extent 

possible, we intend to follow the naming 

convention for the XBRL-tagging of the Schedule of 

Investments in the voluntary filer program. See 

Interactive Data for Mutual Fund Risk/Return 

Summary, Investment Company Act Release No. 

28617 (Feb. 11, 2009) [74 FR 7748 (Feb. 19, 2009)]. 

If the Commission determines at a future date to 

require the filing of Form N–MFP in an XBRL 

format, the Commission and funds might benefit 

from their experience with their existing XML 

technology. 

345 See Rule 30b1–6T Release, supra note 303. We 

adopted the rule on an interim final basis. See id. 

at Section II.C. 

346 See rule 30b1–6T(b)(3). See also supra note 

16. 

347 See Rule 30b1–6T Release, supra note 303, at 

Section III. 

348 Rule 30b1–6T(d). 

identify, and analyze information from, 

money market funds that exhibit signs 

of distress and the need for further 

monitoring.349 

Because the compliance date for filing 

monthly portfolio information on Form 

N–MFP is December 7, 2010, we are 

amending rule 30b1–6T so that it 

expires on December 1, 2010. The last 

date that funds will be required to file 

information under rule 30b1–6T 

therefore will be on November 30, 2010. 

F. Processing of Transactions 

We are amending rule 2a–7, 

substantially as proposed, to require 

that a fund (or its transfer agent) have 

the capacity to redeem and sell its 

securities at a price based on the fund’s 

current net asset value per share, 

including the capacity to sell and 

redeem shares at prices that do not 

correspond to the stable net asset value 

or price per share.350 This amendment 

will require that shareholder 

transactions be processed in an orderly 

manner, even under circumstances that 

require a fund to ‘‘break a dollar.’’351 

Other types of mutual funds already 

have this ability to process transactions 

at varying prices. 

Several commenters supported the 

proposed amendment, noting that it is 

important that funds be able to redeem 

shareholders at prices based on the 

current net asset value of the fund.352 

Some commenters expressed concerns 

about the costs for funds to modify their 

systems under the amendment.353 We 

noted when we proposed the 

amendment that, because funds are 

already obligated to redeem at a price 

other than the stable net asset value per 

share, there should be no new cost 

associated with the requirement that 

funds (or their transfer agents) have 

systems that can meet these 

requirements.354 It is the responsibility 

349 See infra Section II.G.2 (notification provision 

under amended rule 2a–7 concerning purchases 

undertaken in reliance on rule 17a–9). 

350 Amended rule 2a–7(c)(13). 

351 Once a fund has broken a dollar, the fund 

could no longer use penny-rounding method of 

pricing or the amortized cost method of valuing 

portfolio securities, and therefore would have to 

compute share price by reference to the market 

values of the portfolio with the accuracy of at least 

a tenth of a cent. See 1983 Adopting Release, supra 

note 6, at n.6 and accompanying text. Thus, a fund 

whose market-based net asset value was determined 

to be $0.994 would, upon ceasing to use the 

amortized cost method of valuation, begin to 

redeem shares at $0.994 (rather than at $0.990). See 

generally id. 

352 See, e.g., Dreyfus Comment Letter; Fund 

Democracy/CFA Comment Letter; MFDF Comment 

Letter. 

353 See, e.g., Federated Comment Letter; 

RidgeWorth Comment Letter. 

354 See Proposing Release, supra note 2, at 

Section V.A.6 (cost benefit analysis). 

of money market funds, as issuers of 

redeemable securities, to be able to 

satisfy redemption requests within 

seven days after tender of the securities, 

even if a fund has re-priced its net asset 

value at a price other than its stable net 

asset value per share.355 Based on our 

recent experience, we believe it is 

unlikely that a fund that breaks the 

dollar would be able to satisfy 

redemption requests within seven days 

if it did not already have the capacity to 

process redemptions at prices other than 

the stable net asset value.356 To the 

extent that funds incur costs in meeting 

the new requirement, we believe the 

benefits to shareholders justify those 

costs, which we discuss in detail in the 

cost benefit section below.357 

When we proposed the amendment, 

we proposed to require that the fund’s 

board of directors determine that the 

fund has the capacity to sell and redeem 

securities at the current net asset 

value.358 We asked for comments on the 

board’s role, and specifically whether 

the rule should require that the fund 

simply have the ability to process 

transactions at the fund’s current net 

asset value without a specific board 

determination.359 Some commenters 

preferred that the board not be required 

to make such a determination, arguing 

that the determination is operational in 

nature and more appropriate for the 

fund’s investment adviser or chief 

compliance officer to make.360 We agree 

that the focus of the rule should be on 

the fund’s ability to process 

transactions, rather than on the board’s 

determination regarding that ability, 

because the issue is operational in 

nature and need not directly involve the 

board. We have therefore revised the 

rule accordingly.361 

Some commenters raised the issue of 

whether the rule applies to third-party 

intermediaries, i.e., whether it requires 

third parties to have the capacity to 

355 See section 22(e) of the Act. 

356 As we noted in the Proposing Release, the 

inability of one money market fund in 2008 to be 

able to process securities at prices other than $1.00 

per share impeded its ability to distribute assets 

during its liquidation. See Proposing Release, supra 

note 2, at n.262 and accompanying text. Even if a 

fund were to break a dollar, decide to liquidate, and 

suspend redemptions in reliance on new rule 22e3 that we are adopting today, see infra Section II.H, 

the fund’s ability to process redemptions at prices 

other than the stable net asset value is necessary to 

facilitate the orderly liquidation of the fund. 

357 See infra Section V. 

358 Proposed rule 2a–7(c)(1) (last two sentences). 

359 See Proposing Release, supra note 2, at text 

following n.263. 

360 See, e.g., Federated Comment Letter; MFDF 

Comment Letter; NYC Bar Assoc. Comment Letter. 

361 As adopted, the new requirement is paragraph 

(c)(13) of amended rule 2a–7, titled ‘‘Processing of 

Transactions.’’ 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10087 

process transactions in a money market 

fund at prices other than the fund’s 

stable net asset value.362 The rule by its 

terms applies only to money market 

funds and their transfer agents. We note, 

however, that intermediaries themselves 

typically have separate obligations to 

investors with regard to the distribution 

of proceeds received in connection with 

investments made or assets held on 

behalf of those investors.363 

Several commenters requested that, if 

the Commission adopted the rule 

amendment, it provide ample time for 

money market funds to change their 

systems to accommodate purchases and 

redemptions at the current net asset 

value.364 We have established a 

compliance date of October 31, 2011, 

which is approximately 18 months after 

the effective date of the rule 

amendments, and more than 20 months 

after adoption of the amendments. This 

compliance period is designed to enable 

funds and those who act on their behalf 

sufficient time to come into full 

compliance with the amended rule. 

G. Exemption for Affiliate Purchases 

The Commission is adopting an 

amendment to rule 17a–9 under the 

Investment Company Act to expand the 

circumstances under which certain 

affiliated persons can purchase portfolio 

securities from a money market fund.365 

362 See, e.g., Tamarack Funds Comment Letter 

(requesting that the Commission clarify that funds 

‘‘are not responsible for ensuring that intermediaries 

have the capacity to effect share transactions at 

other than $1.00’’); Russell Inv. Comment Letter 

(stating that the proposed rule amendment would 

not apply to intermediaries); see also ICI Comment 

Letter (‘‘proposed amendments are silent with 

respect to * * * similar systems changes for brokerdealers, banks, insurance companies, trusts, 401(k) 

recordkeepers, and others that process such 

amendments’’). Some commenters raised concerns 

about the costs that third parties might bear to 

revise their computer systems to have the capacity 

to accommodate purchases and redemptions of 

money market fund shares at prices other than the 

fund’s stable net asset value. See, e.g., ICI Comment 

Letter. 

363 Cf. rule 15c3–3(e)(3) under the Securities 

Exchange Act [17 CFR 240.15c3–3(e)(3)] (requiring 

broker-dealers to periodically re-compute the value 

of bank accounts held on behalf of broker-dealer 

customers); rule 15c3–2 under the Securities 

Exchange Act [17 CFR 240.15c3–2] (prohibiting a 

broker-dealer from using proceeds from free credit 

balances unless the proceeds are payable on 

demand of the customer). See also Gilman v. Merrill 

Lynch, Pierce, Fenner & Smith, Inc., 404 N.Y.S.2d 

258, 262 (N.Y. Sup. Ct. 1978) (holding that after an 

investment is sold and proceeds belonging to the 

customer come into the broker’s possession, the 

broker becomes a fiduciary with respect to those 

proceeds and may not consciously use them to the 

detriment of his customer and for his own benefit). 

364 See, e.g., Federated Comment Letter 

(requesting at least one year); ICI Comment Letter 

(requesting at least two and a half years); SIFMA 

Comment Letter (requesting an ‘‘adequate period of 

time’’). 

365 Rule 17a–9 provides an exemption from 

section 17(a) of the Act to permit affiliated persons 

The amendment permits money market 

funds to dispose of distressed securities 

(e.g., securities depressed in value as a 

result of market conditions) quickly 

during times of market stress. The 

Commission is also adopting a related 

amendment to rule 2a–7, which requires 

funds to report all such transactions to 

the Commission. 

1. Expanded Exemptive Relief 

We are adopting the amendment to 

rule 17a–9, as proposed. The 

amendment expands the exemption 

provided by the rule from the Act’s 

prohibition on affiliated transactions to 

permit affiliated persons to purchase 

from a money market fund a portfolio 

security that has defaulted,366 but that 

continues to be an eligible security, as 

long as the conditions of the rule 

governing the purchase price are 

satisfied.367 These conditions require 

that the purchase price is paid in cash 

and is equal to the greater of the 

security’s amortized cost or its market 

value, including accrued interest.368 

We are adding a new provision to the 

rule that will more broadly permit 

affiliated persons, under the same 

conditions as discussed above, to 

purchase other portfolio securities from 

an affiliated money market fund, for any 

reason, provided that such person 

promptly remits to the fund any profit 

of a money market fund to purchase distressed 

portfolio securities from the fund. Absent a 

Commission exemption, section 17(a)(2) prohibits 

any affiliated person or promoter of or principal 

underwriter for a fund (or any affiliated person of 

such a person), acting as principal, from knowingly 

purchasing securities from the fund. Rule 17a–9 

exempts certain purchases of securities from a 

money market fund from section 17(a), if the 

purchase price is equal to the greater of the 

security’s amortized cost or market value (in each 

case, including accrued interest). For convenience, 

in this Release we refer to all of the persons who 

would otherwise be prohibited by section 17(a)(2) 

from purchasing securities of a money market fund 

as ‘‘affiliated persons.’’ ‘‘Affiliated person’’ is defined 

in section 2(a)(3) of the Act. 

366 The rule excludes an immaterial default 

unrelated to the financial condition of the issuer, 

which would make the rule unavailable in the case 

of defaults that are technical in nature, such as 

where the obligor has failed to provide a required 

notice or information on a timely basis. See 

Proposing Release, supra note 2, at n.272. Other 

provisions of rule 2a–7 currently except immaterial 

defaults unrelated to the financial condition of the 

issuer. See amended rule 2a–7(c)(7)(ii)(A). 

367 See amended rule 17a–9(a). Previously, the 

exemption was available only for the purchase of 

a portfolio security that was no longer an ‘‘eligible 

security.’’ This could occur, for example, when a 

security’s ratings are downgraded. As we explained 

in the Proposing Release, this limitation served as 

a proxy indicating that the market value of the 

security was likely less than its amortized cost 

value, and thus the resulting transaction was fair to 

the fund and did not involve overreaching. See 

Proposing Release, supra note 2, at n.269 and 

accompanying text. 

368 See amended rule 17a–9(a)(1)–(2). 

it realizes from the later sale of the 

security.369 In these circumstances there 

may not be an objective indication that 

the security is distressed and thus that 

the transaction is clearly in the interest 

of the fund. Therefore, as proposed, we 

have added the ‘‘claw back’’ requirement 

to eliminate incentives for fund advisers 

and other affiliated persons to buy 

securities for reasons other than 

protecting fund shareholders from 

potential future losses. 

Commenters supported the proposed 

amendment, agreeing that it would 

provide money market fund advisers 

with important flexibility to manage 

fund assets for the benefit of all 

shareholders during volatile periods.370 

One commenter opposed the proposed 

amendment out of concern that the 

expansion of the rule may exacerbate 

the unwarranted expectation of some 

shareholders that advisers will take 

whatever steps are necessary to 

financially support the $1.00 share price 

of their money market funds.371 While 

we appreciate the commenter’s concern, 

we do not believe that today’s action 

will materially change shareholders’ 

perceptions about money market funds 

or the likelihood of sponsor support 

during times of market turmoil. The 

amendment simply extends the existing 

rule to types of transactions that 

historically have been permitted 

through no-action assurances obtained 

from the Commission’s staff because the 

staff believed they were in the best 

interest of the fund’s shareholders.372 

The amendment to rule 17a–9 that we 

are adopting today is intended to enable 

advisers to address acute credit or 

liquidity problems in a money market 

fund portfolio by purchasing securities 

from the fund that would be difficult or 

impossible to sell on the open market at 

or near their amortized cost. We have 

crafted the conditions of the rule, 

including the pricing conditions and the 

new claw back provision, to protect 

shareholders’ interests and prevent 

overreaching by advisers. Our staff’s 

experience is that, under such 

circumstances, these transactions 

appear to be fair and reasonable and in 

the best interests of fund 

shareholders.373 Moreover, we believe 

that the alternative of funds obtaining 

no-action assurances from the 

Commission staff for these transactions, 

369 See amended rule 17a–9(b)(1)–(2). 

370 See, e.g., Dreyfus Comment Letter; Vanguard 

Comment Letter. 

371 See Federated Comment Letter. 

372 See Proposing Release, supra note 2, at 

nn.270–71 and preceding, accompanying, and 

following text. 

373 See Proposing Release, supra note 2, at text 

following n.271. 

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10088 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

particularly during times of market 

stress, is time consuming and 

inefficient. 

2. New Reporting Requirement 

We also are adopting an amendment 

to rule 2a–7 to require a money market 

fund whose securities have been 

purchased by an affiliated person in 

reliance on rule 17a–9 to provide us 

with prompt notice by electronic mail of 

the transaction and the reasons for the 

purchase.374 Such reasons might 

include, for example, that the fund’s 

adviser expected that the security would 

be downgraded, that due to the 

decreased market value of the security 

the fund was at risk of breaking the 

buck, or that the fund was experiencing 

significant redemption requests and 

wished to avoid a ‘‘fire sale’’ of assets to 

satisfy such requests. The amendment is 

intended to provide us with more 

complete information about these 

transactions and to alert us to potential 

problems the fund may be experiencing. 

All commenters who addressed the 

proposed reporting requirement agreed 

with the need to provide the 

Commission with this information.375 

At the suggestion of one,376 we have 

modified the requirement to provide 

that the notification must include the 

price at which the transaction was 

conducted and the amortized cost value 

of the security (which will be different 

if the market value is higher than the 

amortized cost), which will help us 

monitor whether the pricing conditions 

of rule 17a–9 have been satisfied.377 

H. Fund Liquidation 

The Commission is adopting new rule 

22e–3, which exempts money market 

funds from section 22(e) of the Act to 

permit them to suspend redemptions 

and postpone payment of redemption 

374 Amended rule 2a–7(c)(7)(iii)(B). We have 

clarified that not only purchases by affiliated 

persons, but also purchases by promoters and 

principal underwriters of a fund, and any affiliated 

person of such persons, which are exempt under 

rule 17a–9, must be reported to the Commission 

under the provision. Compare amended rule 2a– 

7(c)(7)(iii)(B) with proposed rule 2a–7(c)(7)(iii)(B). 

375 See, e.g., BlackRock Comment Letter, Dreyfus 

Comment Letter. One suggested that sales prices of 

any securities purchased by the adviser pursuant to 

rule 17a–9 be promptly reported to the fund’s board 

of directors as well as to the Commission. Comment 

Letter of the Independent Trustees of Fidelity Fixed 

Income Funds (Sept. 8, 2009) (‘‘Fidelity Fixed 

Income Indep. Trustees Comment Letter’’). We are 

not extending the reporting provision to include 

notification to fund boards because the provision is 

intended to enable the Commission to monitor how 

rule 17a–9 is being used. Nevertheless, we expect 

that fund boards will want to know this information 

and will request it. 

376 See Fidelity Fixed Income Indep. Trustees 

Comment Letter. 

377 See amended rule 2a–7(c)(iii)(B). 

proceeds in order to facilitate an orderly 

liquidation of the fund. The rule permits 

a fund to suspend redemptions and 

payment of redemption proceeds if (i) 

The fund’s board, including a majority 

of disinterested directors, determines 

that the deviation between the fund’s 

amortized cost price per share and the 

market-based net asset value per share 

may result in material dilution or other 

unfair results, (ii) the board, including 

a majority of disinterested directors, 

irrevocably has approved the 

liquidation of the fund, and (iii) the 

fund, prior to suspending redemptions, 

notifies the Commission of its decision 

to liquidate and suspend 

redemptions.378 The new rule replaces 

rule 22e–3T, a temporary rule that 

provided a similar exemption for money 

market funds that participated in the 

Treasury Department’s Guarantee 

Program.379 

Rule 22e–3 is intended to reduce the 

vulnerability of investors to the harmful 

effects of a run on the fund, and 

minimize the potential for disruption to 

the securities markets. Because the 

suspension of redemptions may impose 

hardships on investors who rely on their 

ability to redeem shares, the conditions 

of the rule limit the fund’s ability to 

suspend redemptions to circumstances 

that present a significant risk of a run on 

the fund and potential harm to 

shareholders. The rule is designed only 

to facilitate the permanent termination 

of a fund in an orderly manner. We are 

revising one of the conditions of the 

rule, which requires that the board 

approve the liquidation of the fund, to 

provide that the fund board must have 

irrevocably approved the liquidation of 

the fund.380 

Commenters generally supported the 

rule, which we are adopting largely as 

378 Rule 22e–3(a). A fund that intends to be able 

to rely on rule 22e–3 may also need to update its 

prospectus to disclose the circumstances under 

which it may suspend redemptions. See, e.g., Item 

6 of Form N–1A (‘‘Purchase and Sale of Fund 

Shares’’). 

379 See Temporary Exemption for Liquidation of 

Certain Money Market Funds, Investment Company 

Act Release No. 28487 (Nov. 20, 2008) [73 FR 71919 

(Nov. 26, 2008)]. The Treasury Department’s 

Guarantee Program guaranteed that shareholders of 

a participating money market fund would receive 

the fund’s stable share price for each share owned 

as of September 19, 2008, if the fund were to 

liquidate under the terms of the Program. See supra 

note 16 and accompanying text. The Program 

expired on September 19, 2009, and rule 22e–3T 

expired on October 18, 2009. 

380 Rule 22e–3(a)(2). This revision is designed to 

limit the availability of the rule to extraordinary 

circumstances, by preventing a fund from invoking 

the rule if the board determines to liquidate the 

fund but subsequently revokes its determination, 

which might, in effect, enable the fund to 

temporarily suspend redemptions. 

proposed.381 We have revised one of the 

rule’s conditions in response to 

commenters’ concerns. The proposed 

rule conditioned its relief on a fund 

breaking a dollar and re-pricing its 

shares.382 Some commenters argued that 

the rule should allow a fund to suspend 

redemptions before it breaks a dollar.383 

We are concerned that, without 

appropriate limits, fund sponsors might 

use the rule in the course of routine 

liquidations. We also recognize, 

however, that requiring a money market 

fund to actually re-price its securities 

may not be necessary in order to 

warrant the suspension of redemptions. 

Therefore, we have revised the rule’s 

condition to require that the fund’s 

board of directors, including a majority 

of disinterested directors, determine 

pursuant to rule 2a–7(c)(8)(ii)(C)384 that 

the extent of the deviation between the 

fund’s amortized cost price per share 

and its shadow price may result in 

material dilution or other unfair results 

to investors or existing shareholders.385 

In order to invoke the exemption, 

therefore, the fund’s board must make 

the same determination that it would 

make if it were deciding to break a 

dollar. We believe the revised condition 

provides fund directors with the 

appropriate amount of discretion to act 

in the interest of shareholders.386 

Paragraph (b) of rule 22e–3 allows a 

conduit fund (i.e., a fund that invests in 

a money market fund) to rely on the rule 

if the money market fund in which it 

invests has suspended redemptions 

under the rule.387 We anticipated when 

381 Commenters generally agreed that the rule 

would facilitate fair and orderly liquidations to the 

benefit of all fund shareholders. See, e.g., IDC 

Comment Letter; MFDF Comment Letter. 

382 Proposed rule 22e–3(a)(1). 

383 See, e.g., ABA Comment Letter; ICI Comment 

Letter; IMMFA Comment Letter. 

384 Amended rule 2a–7(c)(8)(ii)(C) provides that, 

if a money market fund’s board of directors believes 

that the deviation between the fund’s amortized 

cost price per share and its shadow price may result 

in material dilution or other unfair results to 

investors or existing shareholders, it shall cause the 

fund to take such action as it deems appropriate to 

eliminate or reduce to the extent practicable such 

dilution or unfair results. 

385 Rule 22e–3(a)(1). 

386 Under the final rule, the exemption applies to 

securities tendered for redemption but not yet 

priced at the time the fund begins to rely on the 

rule. Therefore, for example, if a shareholder 

submits a redemption order at noon and the fund 

decides to liquidate and suspend redemptions 

pursuant to rule 22e–3 at 2:00 pm, the shareholder 

would be entitled to receive only his or her pro rata 

share of the fund’s liquidation proceeds. This is 

also the case for shareholders who submitted 

redemption orders after the last time as of which 

the fund computed its net asset value and 

shareholders who submitted redemption orders 

after 2:00 pm. 

387 Rule 22e–3(b) also requires that the conduit 

fund promptly notify the Commission that it has 

suspended redemptions in reliance on the rule. 

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we proposed this provision that it 

would be used principally by insurance 

company separate accounts issuing 

variable insurance contracts and by 

funds participating in master-feeder 

arrangements.388 At the suggestion of 

one commenter who pointed out that 

most insurance company separate 

accounts are organized as unit 

investment trusts rather than 

management companies,389 we have 

expanded the rule to include unit 

investment trusts.390 

Paragraph (c) of the rule provides that 

the Commission may take certain steps 

to protect shareholders. It permits the 

Commission to rescind or modify the 

relief provided by the rule (and thus 

require the fund to resume honoring 

redemptions) if, for example, a 

liquidating fund has not devised, or is 

not properly executing, a plan of 

liquidation that protects fund 

shareholders. Under this provision, the 

Commission may modify the relief after 

appropriate notice and opportunity for 

hearing in accordance with section 40 of 

the Act.391 Commenters did not address 

this provision, and we are adopting it as 

proposed. 

One commenter recommended that 

the rule not require prior notice to the 

Commission.392 In light of the 

seriousness of the consequences to 

shareholders, we believe it is important 

that the Commission receive prior 

notice of a suspension of redemptions, 

particularly when the burden of 

providing such notice is minimal.393 

Another commenter suggested that the 

Commission require funds to disclose 

their plan of liquidation as a condition 

for suspending redemptions.394 We are 

reluctant to impose such a requirement 

because the time needed to formulate 

such a plan may prevent fund boards 

from acting in a timely fashion in the 

case of an emergency, but we expect 

that funds would promptly 

communicate their plan of liquidation 

to shareholders. Another commenter 

recommended that the suspension 

period be limited to 60 days.395 We have 

not modified the final rule in response 

388 See Proposing Release, supra note 2, at text 

accompanying n.289. 

389 See Committee Ann. Insur. Comment Letter. 

390 Rule 22e–3(b) (providing relief to a ‘‘registered 

investment company’’ rather than to a ‘‘fund,’’ or 

‘‘registered open-end management investment 

company,’’ as proposed). 

391 Rule 22e–3(c). 

392 See ABA Comment Letter. 

393 In addition, these prior notices will, among 

other things, help us to ascertain whether a fund 

has erroneously invoked the rule in circumstances 

for which it was not intended to be used (e.g., a 

routine liquidation). 

394 See Federated Comment Letter. 

395 See Bankers Trust Comment Letter. 

to these comments because liquidations 

will proceed differently depending on a 

fund’s particular circumstances, and we 

believe that fund management, under 

the supervision of the board, is best able 

to devise and execute a plan of 

liquidation that is in the best interest of 

fund shareholders. Furthermore, as 

discussed above, the Commission will 

retain authority under the rule to 

rescind or modify the relief (after 

appropriate notice and opportunity for 

hearing) if we conclude, for example, 

that a liquidating fund has not devised, 

or is not properly carrying out, a plan 

of liquidation that protects fund 

shareholders.396 

III. Compliance Dates 

The amendments to rules 2a–7, 17a– 

9 and 30b1–6T, and new rules 22e–3 

and 30b1–7, and new Form N–MFP 

become effective May 5, 2010. Unless 

otherwise discussed below or in this 

Release, the compliance date is the date 

of effectiveness. 

Some money market funds may have 

policies that can be changed only if 

authorized by a shareholder vote. For 

example, a money market fund may 

have a disclosed policy of maintaining 

a WAM (i.e., weighted average maturity) 

no greater than 90 days, which is less 

restrictive than the amendment the 

Commission is adopting today requiring 

a money market fund to maintain a 

WAM no greater than 60 days.397 The 

Commission believes that, in those 

circumstances where the existing policy 

is less restrictive than the amendments 

we are today adopting and does not 

conflict with those amendments, a 

money market fund would not need to 

hold a shareholder vote under sections 

8(b) or 13(a) of the Act merely to comply 

with the amendments.398 Moreover, we 

would not object if a fund were to 

amend its registration statement to 

reflect the fund’s compliance with the 

amended rule pursuant to rule 485(b) 

under the Securities Act of 1933, if 

other changes in the fund’s posteffective amendment meet the 

conditions for immediate effectiveness 

under that rule.399 

A. Portfolio Requirements 

Except as indicated below, the 

compliance date for amendments to rule 

2a–7 related to portfolio quality, 

maturity, liquidity, and repurchase 

agreements, is May 28, 2010. Funds are 

not required to dispose of portfolio 

396 See supra note 391 and accompanying 

paragraph. 

397 See supra Section II.B.1. 

398 15 U.S.C. 80a–8(b), 80a–13(a). 

399 17 CFR 230.485(b). 

securities owned, or terminate 

repurchase agreements entered into, as 

of the time of adoption of the 

amendments to comply with the 

requirements of the rule as amended. 

Fund portfolios must meet the new 

maximum WAM and WAL limits by 

June 30, 2010. 

B. Designation of NRSROs 

Each fund must disclose the 

designated NRSROs in its Statement of 

Additional Information pursuant to 

amended rule 2a–7(a)(11)(iii) no later 

than December 31, 2010. This additional 

time should permit fund boards of 

directors to evaluate and designate 

NRSROs without the need to call a 

special board meeting. Fund boards are 

free to take advantage of the rule 

amendments any time after the effective 

date. 

C. Disclosure and Reporting of Portfolio 

Information 

Web site disclosure. The compliance 

date for public Web site disclosure is 

October 7, 2010. This should provide 

each fund sufficient time to revise its 

information and other systems to ensure 

that required information is accurately 

posted and maintained on its Web site. 

Reporting to the Commission. All 

money market funds must begin filing 

information on Form N–MFP pursuant 

to rule 30b1–7 no later than December 

7, 2010. This compliance date is 

designed to permit money market funds 

to develop systems necessary to collect 

and submit the portfolio information on 

Form N–MFP. Funds filing information 

with the Commission pursuant to rule 

30b1–6T will no longer be required to 

file this information after December 1, 

2010. 

Beginning October 7, 2010, our staff 

will be able to receive trial data from 

funds, on a voluntary basis, pursuant to 

the requirements of rule 30b1–7. We 

will use these voluntary submissions 

and the experiences of funds during this 

period to make adjustments to our filing 

system and provide guidance to funds. 

We do not intend to make these 

submissions public.400 

D. Processing of Transactions 

Funds must comply with the new 

requirement to be able to process 

transactions at prices other than stable 

net asset value no later than October 31, 

2011, which is more than 20 months 

400 We do not intend to make public the 

information submitted to us on Form N–MFP as 

trial data before the mandatory compliance date 

because of the possibility of errors in the 

information submitted. See supra text following 

note 339. 

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10090 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

after adoption of the amendments.401 

This compliance period is designed to 

enable funds and those who act on their 

behalf sufficient time to come into full 

compliance with the amended rule. 

IV. Paperwork Reduction Act Analysis 

Certain provisions of the amendments 

to rules 2a–7 and 30b1–6T, new rules 

22e–3 and 30b1–7, and Form N–MFP 

under the Investment Company Act 

contain ‘‘collections of information’’ 

within the meaning of the Paperwork 

Reduction Act of 1995 (‘‘PRA’’).402 The 

titles for the existing collections of 

information that are affected by the rule 

amendments are: ‘‘Rule 2a–7 under the 

Investment Company Act of 1940, 

Money market funds’’ (OMB Control No. 

3235–0268), ‘‘Rule 30b1–6T under the 

Investment Company Act of 1940, 

Weekly portfolio report for certain 

money market funds’’ (OMB Control No. 

3235–0652), and ‘‘Rule 38a–1 under the 

Investment Company Act of 1940, 

Compliance procedures and practices of 

registered investment companies’’ (OMB 

Control No. 3235–0586). The titles for 

the new collections of information are: 

‘‘Rule 22e–3 under the Investment 

Company Act of 1940, Exemption for 

liquidation of money market funds,’’ 

‘‘Rule 30b1–7 under the Investment 

Company Act of 1940, Monthly report 

for money market funds,’’ and ‘‘Form N– 

MFP under the Investment Company 

Act of 1940, Portfolio Holdings of 

Money Market Funds.’’ We published 

notice soliciting comments on the 

collection of information requirements 

in the Proposing Release and submitted 

the proposed 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 

under the control numbers 3235–0268 

(rule 2a–7), 3235–0654 (rule 22e–3), and 

3235–0653 (rule 30b1–6 and Form N– 

MFP). OMB has approved the collection 

of information pursuant to rule 30b1–6T 

under the control number 3235–0652. 

Our amendments and new rules are 

designed to make money market funds 

more resilient to risks in the short-term 

debt markets, and to provide greater 

protections for investors in a money 

market fund that is unable to maintain 

a stable net asset value. 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. 

401 See supra text accompanying and following 

note 364. 

402 44 U.S.C. 3501–3521. 

A. Rule 2a–7 

Rule 2a–7 under the Investment 

Company Act exempts money market 

funds from the Act’s valuation 

requirements, permitting money market 

funds to maintain stable share pricing, 

subject to certain risk-limiting 

conditions. As discussed above, we are 

amending rule 2a–7 in several respects. 

Our amendments revise portfolio 

quality and maturity requirements; 

introduce liquidity requirements; 

require money market fund boards to 

adopt procedures providing for periodic 

stress testing of the fund’s portfolio; 

require funds to disclose monthly on 

their Web sites information on portfolio 

securities; and finally, require money 

market funds to have the capability to 

redeem and issue their securities at 

prices other than the fund’s stable net 

asset value per share.403 Several of the 

amendments create new collection of 

information requirements. The 

respondents to these collections of 

information will be money market funds 

or their advisers, as noted below. 

1. Designation of NRSROs 

Under the amendments to rule 2a–7, 

money market funds will be required to 

disclose designated NRSROs (including 

any limitation in the use of the 

designated NRSRO) in their SAI,404 

which constitutes a collection of 

information. Compliance with this 

disclosure requirement will be 

mandatory for any fund that holds itself 

out as a money market fund in reliance 

on rule 2a–7. This information will not 

be kept confidential. The disclosures are 

intended to provide investors and third 

party analysts with information on 

NRSROs that money market funds will 

look to when they have to consider 

credit ratings under rule 2a–7, which 

may be relevant to investors in choosing 

among funds. Many money market 

funds currently discuss credit rating 

agencies in their registration statements 

describing threshold credit ratings for 

portfolio investments, and often specify 

NRSROs that rate instruments of the 

type the fund purchases. We anticipate 

that adding one or two sentences to the 

discussion identifying designated 

NRSROs (and any limitations on the use 

of a designated NRSRO) will not result 

in additional hourly burdens or printing 

costs beyond those currently approved 

in the existing collection of information 

titled ‘‘Form N–1A under the Securities 

Act of 1933 and under the Investment 

Company Act of 1940, registration 

statement of open-end management 

403 See supra Section II.A–F. 


404 Amended rule 2a–7(a)(11)(iii). 


investment companies’’ (OMB Control 

No. 3235–0307). 

2. Portfolio Liquidity 

As discussed above, the amended rule 

includes a general liquidity 

requirement, under which each money 

market fund must hold securities that 

are sufficiently liquid to meet 

foreseeable shareholder redemptions in 

light of its obligations under section 

22(e) of the Act and any commitments 

the fund has made to shareholders. We 

also noted that in order to comply with 

this provision in amended rule 2a–7 

under the compliance rule, we expect 

that money market funds will adopt 

policies and procedures designed to 

assure that appropriate efforts are 

undertaken to identify risk 

characteristics of the fund’s 

shareholders.405 We anticipate that 

these policies and procedures may add 

additional burdens to those currently 

approved in the existing collection of 

information under rule 38a–1 under the 

Investment Company Act. Based on 

commenters’ views, we assume that 

money market funds currently monitor 

and manage daily net flows in and out 

of the funds,406 and in doing so, monitor 

the risk characteristics and likely 

redemptions of certain shareholders, 

which is a factor we would expect funds 

to consider under the general liquidity 

requirement in the amended rule. We 

believe, however, that many, if not 

most, funds may have to document the 

procedures they adopt for the 

compliance rule. For purposes of this 

PRA analysis, we estimate that funds 

would incur a one-time average burden 

of 8 hours to document policies and 

procedures to identify risk 

characteristics of the fund’s investors. In 

addition, staff estimates that the board 

of directors (as a whole) would take 1 

hour to review and adopt these policies 

and procedures. Amortized over a 3 year 

period, this would be an annual burden 

per fund complex of 3 hours. We believe 

that these characteristics would be 

applicable to and documented on behalf 

of all money market funds in a fund 

complex, and we estimate that 163 fund 

complexes with money market funds are 

subject to rule 2a–7. Accordingly, we 

estimate that the total additional burden 

to document these policies would be 

1467 hours.407 Amortized over a 3-year 

period, the estimated annual hourly 

burden would be 489 hours for all 

405 See supra note 198 and accompanying text. 

406 See Dreyfus Comment Letter; RidgeWorth 

Comment Letter. 

407 This estimate is based on the following 

calculation: (8 + 1) hours × 163 fund complexes = 

1467 hours. 

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money market fund complexes.408 We 

believe that any ongoing burdens to 

reevaluate the need for changes in the 

policies and procedures would be 

incorporated in the current estimated 

burdens for rule 38a–1. 

3. Stress Testing 

We are requiring, substantially as 

proposed, that a money market fund’s 

board of directors adopt written 

procedures that provide for the periodic 

testing of the fund’s ability to maintain 

a stable net asset value per share based 

on certain hypothetical events.409 The 

rule requires the board to determine the 

frequency of testing. The procedures 

must provide for a report of the testing 

results to be submitted to the board of 

directors at its next regularly scheduled 

meeting, or sooner if appropriate based 

on the results. The report must include 

an assessment by the fund’s adviser of 

the fund’s ability to withstand the 

events (and concurrent occurrences of 

those events) that are reasonably likely 

to occur within the following year.410 

Compliance with the new reporting 

requirement is mandatory for any fund 

that holds itself out as a money market 

fund and uses either the amortized cost 

method of valuing portfolio securities or 

the penny-rounding method of pricing 

fund shares. When provided to the 

Commission in connection with staff 

examinations or investigations, the 

information will be kept confidential to 

the extent permitted by law. 

We anticipate that stress testing will 

give fund advisers a better 

understanding of the effect of potential 

market events and shareholder 

redemptions on their funds’ ability to 

maintain a stable net asset value, the 

fund’s exposure to the risk of not 

maintaining a stable net asset value, and 

actions the adviser may need to take to 

408 PRA submissions for approval are made every 

three years. To estimate an annual burden for a 

collection of information that occurs one time, the 

total burden is amortized over the three-year period. 

409 See supra Section II.C.4. These events include, 

without limitation, a change in short-term interest 

rates, an increase in shareholder redemptions, a 

downgrade of or default on portfolio securities, and 

the widening or narrowing of spreads between 

yields on an appropriate benchmark the fund has 

selected for overnight interest rates and commercial 

paper and other types of securities held by the fund. 

See amended rule 2a–7(c)(10)(v)(A). 

410 Amended rule 2a–7(c)(10)(v)(B). The report to 

the board must include the dates on which the 

testing was performed and the magnitude of each 

hypothetical event that would cause the deviation 

of the money market fund’s net asset value 

calculated using available market quotations (or 

appropriate substitutes that reflect current market 

conditions) from its net asset value per share 

calculated using amortized cost to exceed 1⁄2 of 1%. 

mitigate the possibility of the fund 

breaking the buck.411 

Commission staff believes that in light 

of the events of the fall of 2008, most, 

if not all, money market funds currently 

conduct some stress testing of their 

portfolios as a matter of routine fund 

management and business practice.412 

These procedures likely vary depending 

on the fund’s investments. For example, 

a prime money market fund that is 

offered to institutional investors may 

test for hypothetical events such as 

potential downgrades or defaults in 

portfolio securities while a U.S. 

Treasury money market fund might 

not.413 Some funds that currently 

conduct testing may be required to 

include additional hypothetical events 

under the amended rule. These funds 

likely provide regular reports of the test 

results to senior management. We 

assumed, however, that currently most 

funds do not have written procedures 

documenting the stress testing, do not 

report the results of testing to their 

boards of directors, and do not provide 

an assessment from the fund’s adviser 

regarding the fund’s ability to withstand 

the hypothetical events reasonably 

likely to occur in the next year. 

Commission staff believes that stress 

testing procedures will be developed for 

all the money market funds in a fund 

complex by the fund adviser, and will 

address appropriate variations for 

individual money market funds within 

the complex.414 Staff estimates that it 

will take a portfolio risk analyst an 

average of 22 hours initially to draft 

procedures documenting the complex’s 

stress testing, and 3 hours for the board 

of directors (as a whole) to consider and 

adopt the written procedures.415 We 

411 See Proposing Release, supra note 2, at text 

following n.212. 

412 Commenters corroborated our staff’s belief. 

See, e.g., State Street Comment Letter; T. Rowe 

Price Comment Letter. The estimates of hour 

burdens and costs provided in the PRA and cost 

benefit analyses in the Proposing Release were 

based on staff discussions with representatives of 

money market funds and on the experience of 

Commission staff. We did not receive any comment 

on the estimates and assumptions with respect to 

stress testing included in the analysis in our 

proposal. Accordingly, we have not modified any 

of those assumptions and estimates other than as 

necessary in light of the new requirement included 

in the amended rule. 

413 See TDAM Comment Letter (noting that 

testing Treasury funds for downgrades or defaults 

would be unnecessary). 

414 We expect that the board of directors would 

be the same for all the money market funds in a 

complex, and thus could adopt the stress test 

procedures for all money market funds in the 

complex at the same meeting. 

415 We have added 1 hour to the estimate of 21 

hours in the Proposing Release to account for 

drafting procedures on when additional reports 

must be provided to the board based on the results 

of stress testing. 

therefore estimate that the total burden 

to draft these procedures initially will 

be 4075 hours.416 Amortized over a 

three-year period, this will result in an 

average annual burden of 8.33 hours for 

an individual fund complex and a total 

of 1358 hours for all fund complexes.417 

Staff estimates that a risk analyst will 

also spend an average of 6 hours per 

year revising the written procedures to 

reflect changes in the type or nature of 

hypothetical events appropriate to stress 

tests and the board will spend 1 hour to 

consider and adopt the revisions, for a 

total annual burden of 1141 hours.418 

As noted above, each report to the 

board of directors will include an 

assessment by the fund’s adviser of the 

fund’s ability to withstand reasonably 

likely hypothetical events in the coming 

year. Staff estimates that it will take on 

average: (i) 10 hours of portfolio 

management time to draft each report to 

the board and 2 hours of an 

administrative assistant’s time to 

compile and copy the report (for a total 

of 12 hours), and (ii) 15 hours for the 

fund adviser to provide its assessment. 

Under normal circumstances, the report 

must be provided at the next scheduled 

board meeting, and we estimate that the 

report and the adviser’s assessment will 

cover all money market funds in a 

complex. We assume that funds will 

conduct stress tests no less than 

monthly. With an average of 6 board 

meetings each year, we estimate that the 

annual burden for regularly scheduled 

reports would be 162 hours for an 

individual fund complex.419 Under the 

final rule, a report must be provided 

earlier if appropriate in light of the 

results of the test. Staff estimates that as 

a result of unanticipated changes in 

market conditions or other events, stress 

testing results are likely to prompt 

additional reports on average four times 

each year.420 Thus, we estimate these 

416 This estimate is based on the following 

calculation: (22 hours + 3 hours) × 163 fund 

complexes = 4075 hours. 

417 These estimates are based on the following 

calculations: (22 + 3) ÷ 3 = 8.33 hours; 8.33 × 163 

fund complexes = 1357.79 hours. PRA submissions 

for approval are made every three years. To estimate 

an annual burden for a collection of information 

that occurs one time, the total burden is amortized 

over the three-year period. 

418 This estimate is based on the following 

calculation: (6 hours (analyst) + 1 hour (board)) × 

163 fund complexes = 1141 hours. 

419 This estimate is based on the following 

calculation: (10 hours + 2 hours + 15 hours) × 6 

meetings = 162 hours. 

420 We anticipate that in many years there will be 

no need for special reports, but that in a year in 

which there is severe market stress, a fund may 

report to the board weekly for a period of 3 to 6 

months. Such reporting would generate 9 to 18 

reports in addition to the regular monthly reports. 

Assuming that this type of event may occur once 

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10092 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

reports would result in an additional 

108 hours for an individual fund 

complex each year.421 We estimate the 

total annual burden for all fund 

complexes would be 44,010 hours.422 

The amended rule requires a money 

market fund to retain records of the 

reports on stress tests for at least 6 years 

(the first two in an easily accessible 

place).423 The retention of these records 

is necessary to allow the staff during 

examinations of funds to determine 

whether a fund is in compliance with 

the stress test requirements. We estimate 

that the burden will be 10 minutes per 

fund complex per report to retain these 

records for a total annual burden of 272 

hours for all fund complexes.424 

Thus, we estimate that for the three 

years following adoption, the average 

annual burden resulting from the stress 

testing requirements will be 287 hours 

for each fund complex with a total of 

46,781 hours for all fund complexes.425 

4. Repurchase Agreements 

We are adopting, as proposed, 

amendments affecting a money market 

fund’s ability to ‘‘look through’’ a 

repurchase agreement for purposes of 

rule 2a–7’s diversification provisions.426 

One of these amendments is that a 

money market fund will be able to look 

through a repurchase agreement only if 

the fund’s board of directors or its 

delegate evaluates the counterparty’s 

creditworthiness.427 

Several commenters stated that 

money market fund boards already 

evaluate the credit quality of 

counterparties in the course of making 

an overall credit risk determination 

under rule 2a–7(c)(3)(i).428 Because we 

are adding a separate creditworthiness 

evaluation in rule 2a–7(c)(4)(ii)(A), 

funds will need to keep records of such 

evaluations pursuant to rule 2a– 

7(c)(11)(ii), which requires a money 

every five years, and additional reports would be 

generated for 6 months, a fund would produce an 

average of four additional reports per year (18 

additional reports ÷ 5 = 3.6 reports). 

421 This estimate is based on the following 

calculation: (10 hours + 2 hours + 15 hours) × 4 = 

108 hours. 

422 This estimate is based on the following 

calculation: (162 hours + 108 hours) × 163 fund 

complexes = 44,010 hours. 

423 Amended rule 2a–7(c)(11)(vii). 

424 This estimate is based on the following 

calculation: 0.1667 hours × 10 reports × 163 fund 

complexes = 271.7 hours. 

425 These estimates are based on the following 

calculations: 8.33 hours (draft procedures) + 7 

hours (revise procedures) + 120 hours (10 reports) 

+ 150 hours (10 assessments) + 1.67 hours (record 

retention) = 287 hours; 287 hours × 163 complexes 

= 46,781 hours. 

426 See supra Section II.D; Proposing Release, 

supra note 2, at Section II.E. 

427 Amended rule 2a–7(c)(4)(ii)(A). 

428 See supra note 277. 

market fund to retain a record of 

considerations and actions under the 

rule for at least 6 years (the first two in 

an easily accessible place).429 

Compliance with this recordkeeping 

requirement is mandatory for all funds 

that take advantage of the special lookthrough treatment for diversification 

purposes. We estimate that the burden 

to keep those records will be 2 hours per 

fund complex, for a total annual burden 

of 326 hours for all fund complexes.430 

5. Public Web site Posting 

The amendments require money 

market funds to post monthly portfolio 

information on their Web sites.431 We 

believe that greater transparency of fund 

portfolios will provide investors with a 

better understanding of the fund’s 

investment risks, and may allow 

investors to exert influence on risktaking by fund advisers and thus reduce 

the likelihood that a fund will break the 

buck. Information will be posted on a 

public Web site, and compliance with 

this requirement is mandatory for any 

fund that holds itself out as a money 

market fund in reliance on rule 2a–7. In 

the Proposing Release, Commission staff 

estimated that there are approximately 

750 money market funds that would be 

affected by the amendments. In 

addition, our staff noted that based on 

interviews with industry 

representatives, most money market 

funds already post portfolio information 

on their webpages at least quarterly.432 

Commission staff also estimated that 20 

percent of money market funds, or 150 

funds, do not currently post this 

information at least quarterly, and 

therefore would need to develop a 

webpage to comply with the 

amendments. Staff estimated that a 

money market fund would spend 

approximately 24 hours of internal 

money market fund staff time initially to 

develop the Web page. Staff further 

estimated that a money market fund 

would spend approximately 4 hours of 

professional time to maintain and 

update the relevant webpage with the 

required information on a monthly 

basis. 

429 Amended rule 2a–7(c)(11)(ii). 

430 This estimate is based on the following 

calculation: 2 hours × 163 fund complexes = 326 

hours. 

431 Amended rule 2a–7(c)(12). 

432 Certain of the required information is 

currently maintained by money market funds for 

regulatory reasons, such as in connection with 

accounting, tax, and disclosure requirements. We 

understand that the remaining information is 

retained by funds in the ordinary course of 

business. Accordingly, for the purposes of our 

analysis, we do not ascribe any time to producing 

the required information. 

No commenters addressed the number 

of money market funds that would be 

affected by the proposal or the estimated 

burden hours for developing, 

maintaining and updating the webpage. 

Although, as described above, we have 

revised the proposed disclosure which 

should result in less information being 

required on a fund’s Web site, 

Commission staff believes that the 

number of money market funds is 

currently 719 and that the hour burden 

per fund remains the same as previously 

estimated. Although it is possible that 

the reduced information required might 

result in a minimal decrease in the 

amount of time required to develop, 

maintain and update the webpage, 

Commission staff believes that the 

decrease would be negligible. 

One commenter stated that the funds 

that currently post portfolio holdings 

information at least quarterly on their 

Web sites would need, under the rule 

amendments, to develop the capability 

to retain previous months’ portfolio 

holdings information on their Web sites, 

resulting in an additional one-time 

burden that Commission staff did not 

include in its estimate in the Proposing 

Release.433 Based on a review of some 

of the current portfolio Web site 

disclosure by some commenters and 

follow-up discussions with some 

commenters, Commission staff estimates 

that 500 of the 575 funds that currently 

post portfolio information on their 

webpages at least quarterly will need to 

develop this capability. Commission 

staff further estimates that each of these 

500 funds will spend 12 hours to 

develop this capability, resulting in an 

additional one-time burden for all such 

funds of 6000 hours.434 

Based on an estimate of 719 money 

market funds posting their portfolio 

holdings on their webpages, including 

144 funds incurring start-up costs to 

develop a webpage and 500 funds 

incurring a one-time cost to develop the 

capability to retain previous months’ 

portfolio holdings information on their 

Web sites, we estimate that, in the 

aggregate, the amendment will result in 

a total of 37,664 average burden hours 

for all money market funds for each of 

the first three years.435 

433 See Data Communique ́ Comment Letter. Under 

our proposal, funds would have been required to 

maintain the portfolio holdings information on their 

Web sites for at least 12 months. We are adopting 

a 6-month maintenance period for portfolio holding 

information. 

434 The estimated 12 hours is one-half the time 

that we estimated that a fund would need to set up 

a new webpage (24 hours). 

435 The estimate is based on the following 

calculations. The staff estimates that 144 funds will 

require a total of 3456 hours initially to develop a 

webpage (144 funds × 24 hours per fund = 3456 

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6. Reporting of Rule 17a–9 Transactions 

We are amending rule 2a–7 to require 

a money market fund to promptly notify 

the Commission by electronic mail of 

the purchase of a money market fund’s 

portfolio security by certain affiliated 

persons in reliance on rule 17a–9 and to 

explain the reasons for, and the 

transaction price of, such purchase.436 

The reporting requirement is designed 

to assist Commission staff in monitoring 

money market funds’ affiliated 

transactions that otherwise would be 

prohibited. The new collection of 

information will be mandatory for 

money market funds that rely on rule 

2a–7 and that rely on rule 17a–9 for an 

affiliated person to purchase a money 

market fund’s portfolio security. 

Information submitted to the 

Commission related to a rule 17a–9 

transaction will not be kept 

confidential. 

We estimate that fund complexes will 

provide one notice for all money market 

funds in a particular fund complex 

holding a distressed security purchased 

in a transaction under rule 17a–9. As 

noted above, Commission staff estimates 

that there are 163 fund complexes with 

money market funds subject to rule 2a– 

7. Of these fund complexes, 

Commission staff estimates that an 

average of 25 per year will be required 

to provide notice to the Commission of 

a rule 17a–9 transaction, with the total 

annual response per fund complex, on 

average, requiring 1 hour of an in-house 

attorney’s time. We received no 

comments on this estimate and have not 

modified it. Given these estimates, the 

total annual burden of this amendment 

to rule 2a–7 for all money market funds 

would be approximately 25 hours.437 

7. Total Burden 

The currently approved burden for 

rule 2a–7 is 310,983 hours. The 

additional burden hours associated with 

the proposed amendments to rule 2a–7 

will increase the renewal estimate to 

395,779 hours annually.438 

hours) and 500 funds will require a total of 6000 

hours initially to develop the capability to maintain 

historical portfolio holding information (500 funds 

× 12 hours per fund = 6000 hours). In addition, each 

of the 719 funds would require 48 hours per year 

to update and maintain the webpage, for a total of 

34,512 hours per year (4 hours per month × 12 

months = 48 hours per year; 48 hours per year × 

719 funds = 34,512). The average annual hour 

burden for each of the first three years would thus 

equal 37,664 hours (3456 + 6000 + (34,512 × 3) ÷ 

3). 

436 See amended rule 2a–7(c)(7)(iii)(B). 

437 The estimate is based on the following 

calculation: (25 fund complexes × 1 hour) = 25 

hours. 

438 This estimate is based on the following 

calculation: 310,983 hours (current burden) + 

46,781 hours (stress testing) + 326 hours 

B. Rule 22e–3 

Rule 22e–3 permits a money market 

fund that has broken the buck, or is at 

imminent risk of breaking the buck, to 

suspend redemptions and postpone the 

payment of proceeds pending boardapproved liquidation proceedings. The 

rule also requires a money market fund 

to provide prior notification to the 

Commission of its decision to suspend 

redemption and liquidate. Rule 22e–3 is 

intended to facilitate an orderly 

liquidation, reduce the vulnerability of 

shareholders to the harmful effects of a 

run on a fund, and minimize the 

potential for market disruption. The 

notification requirement is a collection 

of information under the PRA, and is 

designed to assist Commission staff in 

monitoring a money market fund’s 

suspension of redemption. The 

respondents to this information 

collection would be money market 

funds that break the buck, or are at 

imminent risk of breaking the buck, and 

elect to rely on the exemption afforded 

by the rule. Respondents also will 

include certain conduit funds that have 

invested in money market funds that 

suspended redemptions in reliance on 

the rule. Compliance with the 

notification requirement is mandatory 

for funds and conduit funds that rely on 

rule 22e–3, and the information will not 

be kept confidential. 

In the Proposing Release, Commission 

staff estimated for purposes of the 

Paperwork Reduction Act that, on 

average, one money market fund would 

break the buck and liquidate every six 

years.439 The staff further estimated that 

a fund would spend approximately one 

hour of an in-house attorney’s time to 

prepare and submit the notice. No 

commenter addressed the estimated 

number of money market funds that 

would rely on the rule or the estimated 

burden hours associated with 

complying with the rule’s notification 

requirement. The rule permits funds 

that invest in a money market fund 

pursuant to section 12(d)(1)(E) of the 

Act (‘‘conduit funds’’) to rely on the 

rule, and requires the conduit fund to 

notify the Commission of its reliance on 

the rule.440 The proposed rule would 

have applied only to conduit funds that 

are registered open-end management 

investment companies, and in response 

to one comment we have expanded the 

provision to also permit conduit funds 

(repurchase agreements) + 37,664 hours (Web site 

posting) + 25 hours (reporting 17a–9 transactions) 

= 395,779 hours. 

439As noted above, only two money market funds 

have broken the buck since the adoption of rule 2a– 

7 in 1983. 

440See rule 22e–3(b). 

that are organized as unit investment 

trusts to rely on the rule.441 The staff 

estimates that there are a total of 780 

conduit funds that may invest in money 

market funds that suspend redemptions 

in reliance on the rule, and that an 

average of 10 conduit funds may invest 

in any money market fund.442 Given 

these estimates, the total annual burden 

of proposed rule 22e–3 for all money 

market funds and conduit funds would 

be approximately 110 minutes.443 

C. Monthly Reporting of Portfolio 

Holdings 

Rule 30b1–7 requires money market 

funds to file electronically a monthly 

report on Form N–MFP within five 

business days after the end of each 

month. The rule is intended to improve 

transparency of information about 

money market funds’ portfolio holdings 

and facilitate oversight of money market 

funds. The information required by the 

form will be data-tagged in XML format 

and filed through EDGAR. The 

respondents to rule 30b1–7 will be 

investment companies that are regulated 

as money market funds under rule 2a– 

7. Compliance with rule 30b1–7 is 

mandatory for any fund that holds itself 

out as a money market fund in reliance 

on rule 2a–7. Responses to the 

disclosure requirements will not be kept 

confidential. 

In the Proposing Release, Commission 

staff estimated that 750 money market 

funds would be required by proposed 

rule 30b1–6 to file, on a monthly basis, 

a complete Form N–MFP disclosing 

certain information regarding the fund 

and its portfolio holdings.444 No 

commenters addressed this estimate. 

For purposes of this PRA analysis, the 

burden associated with the 

requirements of rule 30b1–7 has been 

included in the collection of 

information requirements of Form 

N–MFP. 

Based on our experience with other 

interactive data filings, we estimated in 

the Proposing Release that money 

market funds would require an average 

of approximately 40 burden hours to 

compile, tag, and electronically file the 

required portfolio holdings information 

441See supra note 390 and accompanying text. 

442These estimates are based on a review of 

filings with the Commission. 

443This estimate is based on the following 

calculations: (1 hour ÷ 6 years) = 10 minutes per 

year for each fund and conduit fund that is required 

to provide notice under the rule. 10 minutes per 

year × 11 (combined number of affected funds and 

conduit funds) = 110 minutes. 

444 As noted above, in September 2009 we 

adopted interim final temporary rule 30b1–6T. In 

order to minimize confusion over rule numbering, 

we are adopting proposed rule 30b1–6 as rule 

30b1–7. 

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for the first time and an average of 

approximately 8 burden hours in 

subsequent filings.445 Two commenters 

asserted that the Commission’s 

estimates did not include time to review 

the information required in Form N– 

MFP.446 While the estimate did include 

time for the review of the information, 

we nevertheless have increased our 

estimate to include an additional 2 

hours per filing for review of the 

information to account for a full and 

careful review of the information to be 

filed. We now estimate that there are 

719 money market funds and that they 

will require an average of approximately 

42 burden hours to compile (including 

review of the information), tag and 

electronically file the required portfolio 

holdings information for the first time 

and an average of approximately 10 

burden hours in subsequent filings. 

Based on these estimates, we estimate 

the average annual burden over a threeyear period would be 131 hours per 

money market fund.447 Based on an 

estimate of 719 money market funds 

submitting Form N–MFP in interactive 

data format, each incurring 131 hours 

per year on average, we estimate that, in 

the aggregate, Form N–MFP would 

result in 94,189 burden hours, on 

445 See Proposing Release, supra note 2, at n.334 

and accompanying text. We understand that the 

required information is currently maintained by 

money market funds pursuant to other regulatory 

requirements or in the ordinary course of business. 

Accordingly, for the purposes of our analysis, we 

do not ascribe any time to producing the required 

information. 

446 See Data Communique ́ Comment Letter; 

Comment Letter of Bowne & Co. Inc. (Oct. 29, 2009) 

(‘‘Bowne Comment Letter’’). In addition, one 

commenter asserted that the Commission’s estimate 

of 128 burden hours per money market fund for the 

first year (1 filing × 40 hours + 11 filings × 8 hours) 

is far too low for subadvised funds. See Committee 

Ann. Insur. Comment Letter. The commenter, 

however, did not provide an estimate of the first 

year burden hour for subadvised funds. As 

explained below in our discussion of the effect the 

rule and form will have on competition, we do not 

believe that the one-time burden for subadvised 

funds will be much different than the burden on 

non-subadvised money market funds because the 

information already should be readily available to 

the subadviser and the lengthened time for filing 

Form N–MFP (from the proposed two business days 

to five business days after the end of each month) 

should provide subadvisers with sufficient time to 

send the information to the principal adviser 

without having to invest in new infrastructure to 

provide the information on a real-time basis. See 

also infra Section VI.D. 

447 The staff estimates that a fund will make 36 

filings in three years. The first filing will require 42 

hours and subsequent filings would require 10 

hours each, for an average annual burden of 131 

hours (1 filing × 42 hours = 42 hours; 35 filings × 

10 hours = 350 hours; 42 hours + 350 hours = 392 

hours; 392 hours ÷ 3 years = 130.66 hours). 

Thereafter, filers generally would not incur the 

start-up burdens applicable to the first filing. 

average, for all money market funds for 

each of the first three years.448 

D. Weekly Reporting of Portfolio 

Holdings 

Rule 30b1–6T requires a money 

market fund whose market-based net 

asset value is less than $0.9975 to 

electronically (i) notify the Commission 

promptly and submit a portfolio 

schedule within one business day, and 

(ii) submit a portfolio schedule within 

two business days after the end of each 

week until such time as the fund’s 

market-based net asset value equals or 

exceeds $0.9975. The rule is intended to 

facilitate our oversight of money market 

funds. We are adopting as final rule 

30b1–6T. As adopted, the only change 

to the rule is the expiration date. Rule 

30b1–6T will expire on December 1, 

2010. The respondents to rule 30b1–6T 

are investment companies that are 

regulated as money market funds under 

rule 2a–7. Compliance with the rule is 

mandatory for any money market fund 

whose market-based NAV is less than 

$0.9975. Responses to the disclosure 

requirements will be kept confidential. 

We previously estimated, based on 

past experience under the Guarantee 

Program, that at any given time 10 

money market funds will be required by 

rule 30b1–6T to provide weekly reports 

disclosing certain information regarding 

the fund’s portfolio holdings.449 We 

received no comments on our estimates. 

We estimate that money market funds 

will require an average of approximately 

6 burden hours to compile and 

electronically submit the initial required 

portfolio holdings information, and an 

average of approximately 4 burden 

hours in subsequent reports.450 Based 

on these estimates, we estimate the 

annual burden will be 210 hours per 

money market fund that is required to 

provide the information.451 Based on an 

estimate of 10 money market funds 

submitting information under the rule, 

we estimate that, in the aggregate, rule 

448 This estimate is based on the following 

calculation: 719 portfolios × 131 hours = 94,189 

hours. 449 See Rule 30b1–6T Release, supra note 303, at 

Section V. 450 We understand that the required information 

is currently maintained by money market funds 

pursuant to other regulatory requirements or in the 

ordinary course of business. Accordingly, for the 

purposes of our analysis, we do not ascribe any 

time to producing the required information. 

451 Because one report is required each week, a 

fund would submit 52 reports in one year. The first 

report would require 6 hours and subsequent 

reports would require 4 hours each. The difference 

between the hours is due to the fact that funds 

generally would not incur the additional start-up 

time applicable to the first report. The burden of the 

reporting requirement would be 210 hours (1 report 

× 6 hours = 6 hours, 51 reports × 4 hours = 204 

hours, and 6 hours + 204 hours = 210 hours). 

30b1–6T will result in 2100 burden 

hours for all money market funds 

required to submit portfolio schedules. 

V. Cost Benefit Analysis 

The Commission is sensitive to the 

costs and benefits imposed by its rules. 

We have identified certain costs and 

benefits of the amendments and new 

rules. We received comments on the 

Commission’s cost benefit analysis of 

our proposed amendments to rule 2a–7 

and on new rule 30b1–7 and Form N– 

MFP, which are discussed below. The 

Commission notes that no comments 

addressed the Commission’s analysis of 

the costs and benefits associated with 

the proposed amendments to rule 17a– 

9 and new rule 22e–3 contained in the 

Proposing Release. We also received no 

comments on the cost benefit analysis of 

rule 30b1–6T. As discussed throughout 

the release, although there are costs 

associated with the rules, we think the 

rules we are adopting will provide 

significant benefits to the investing 

public and money market funds. We 

believe these benefits justify the costs. 

A. Rule 2a–7 

1. Second Tier Securities, Portfolio 

Maturity, and Liquidity Requirements 

We are adopting several changes to 

the risk-limiting conditions of rule 2a– 

7. While we believe that these changes 

will impart substantial benefits to 

money market funds, we recognize that 

they also may also impose certain costs. 

First, we are amending rule 2a–7 to 

further restrict money market funds’ 

exposure to the risks presented by 

second tier securities. Under the 

amendments, money market funds will 

not be permitted to acquire second tier 

securities unless immediately after their 

acquisition the money market fund 

would not have invested (i) more than 

three percent of its total assets in second 

tier securities and (ii) more than 0.5 

percent of its total assets in second tier 

securities of any particular issuer.452 In 

addition, money market funds will not 

be permitted to acquire any second tier 

security with a remaining maturity in 

excess of 45 days.453 

Second, we are changing rule 2a–7’s 

portfolio maturity limits. We are 

452 See amended rule 2a–7(c)(3)(ii) (portfolio 

quality—second tier securities); amended rule 2a– 

7(a)(27) (defining ‘‘total assets’’); amended rule 2a– 

7(c)(4)(i)(C) (portfolio diversification—issuer 

diversification—second tier securities). We also are 

proportionately reducing by half the ability of a 

money market fund to acquire ‘‘demand features’’ or 

‘‘guarantees’’ of a single issuer that are second tier 

securities from 5% to 2.5% of the money market 

fund’s total assets. See amended rule 2a– 

7(c)(4)(iii)(B) and discussion of our rationale for 

making this change in note 59 supra. 

453 See amended rule 2a–7(c)(3)(ii). 

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reducing the maximum weighted 

average maturity of a money market 

fund permitted by rule 2a–7 from 90 

days to 60 days.454 We also are adopting 

a new 120-day maturity limitation on 

the ‘‘weighted average life’’ of fund 

portfolio securities that will limit the 

portion of a fund’s portfolio that can be 

held in longer term floating- or variablerate securities.455 This restriction will 

require a fund to calculate the weighted 

average maturity of its portfolio without 

regard to interest rate reset dates. 

Finally, we are deleting a provision in 

rule 2a–7 that permitted money market 

funds not relying on the amortized cost 

method of valuation to acquire 

Government securities with a remaining 

maturity of up to 762 calendar days.456 

Under the amended rule, money market 

funds cannot acquire any security with 

a remaining maturity of more than 397 

days, subject to the maturity shortening 

provisions for floating- and variable-rate 

securities and securities with a demand 

feature.457 

Third, we are adopting new liquidity 

requirements for money market funds. 

In particular, we are amending rule 2a– 

7 to (i) Require that each money market 

fund hold securities that are sufficiently 

liquid to meet reasonably foreseeable 

shareholder redemptions in light of its 

obligations under section 22(e) of the 

Act and any commitments the fund has 

made to shareholders; 458 (ii) further 

limit a money market fund’s 

investments in illiquid securities (i.e. 

securities that cannot be sold or 

disposed of in the ordinary course of 

business within seven days at 

approximately the value ascribed to 

them by the money market fund); 459 

and (iii) require a taxable money market 

fund to hold at least 10 percent of its 

total assets in ‘‘daily liquid assets’’ and 

any money market fund to hold at least 

30 percent of its total assets in ‘‘weekly 

liquid assets.’’ 460 

454 See amended rule 2a–7(c)(2)(ii). 455 See amended rule 2a–7(c)(2)(iii). 456 Compare amended rule 2a–7(c)(2)(i) with 

current rule 2a–7(c)(2)(ii). In a conforming change, 

we also are amending the maturity-shortening 

provision of the rule for variable-rate Government 

securities to require that the variable rate of interest 

is readjusted no less frequently than every 397 days, 

instead of 762 days as previously permitted. See 

amended rule 2a–7(d)(1). 

457 See amended rule 2a–7(c)(2)(i); amended rule 

2a–7(d)(1)–(5). 458 See amended rule 2a–7(c)(5). 459 See amended rule 2a–7(c)(5)(i). Under the 

amended rule, a money market fund cannot acquire 

illiquid securities if immediately after the 

acquisition, the fund would have invested more 

than five percent of its total assets in illiquid 

securities. 

460 See amended rule 2a–7(c)(5)(ii)-(iii). See also 

amended rule 2a–7(a)(8) (defining ‘‘daily liquid 

assets’’) and 2a–7(a)(32) (defining ‘‘weekly liquid 

assets’’). 

a. Benefits 

We believe that the amendments to 

rule 2a–7’s risk-limiting conditions are 

likely to produce broad benefits for 

money market fund investors. As 

discussed in Sections II.A–C above, 

commenters agreed that the proposed 

rule 2a–7 amendments concerning 

second tier securities, maturity, and 

liquidity would benefit money market 

funds and their investors.461 The 

amendments should reduce money 

market funds’ exposure to certain credit, 

interest rate, spread, and liquidity risks. 

For example, limiting money market 

funds’ ability to acquire second tier 

securities will decrease money market 

funds’ exposure to credit, spread, and 

liquidity risks. Reducing the maximum 

weighted average maturity of money 

market funds’ portfolios will further 

decrease their interest rate sensitivity. It 

also will increase their ability to 

maintain a stable net asset value in the 

face of multiple shocks to a money 

market fund, such as a simultaneous 

widening of spreads and increase in 

redemptions, such as occurred during 

the fall of 2008.462 Introducing the 

weighted average life limitation on 

money market funds’ portfolios will 

limit credit spread risk and interest rate 

spread risk to funds from longer term 

floating- or variable-rate securities. In 

addition, fund portfolios with a lower 

WAM and a 120-day maximum WAL 

will turn over more quickly, and the 

fund will be better able to increase its 

holdings of highly liquid securities in 

the face of illiquid markets than funds 

operating under a maximum 90-day 

WAM limitation. 

We believe that the new liquidity 

requirements will decrease liquidity 

risk. As discussed above, they are 

designed to increase a money market 

fund’s ability to withstand illiquid 

markets by ensuring that the fund 

further limits its acquisitions of illiquid 

securities and that a certain percentage 

of its assets are held in daily and weekly 

liquid assets.463 Under the general 

liquidity requirement, moreover, each 

money market fund must assess its 

liquidity needs on an ongoing basis and 

take additional actions as appropriate in 

order to manage its liquidity. Together, 

these requirements should decrease the 

likelihood that a fund would have to 

realize losses from selling portfolio 

461 See supra notes 36–40 and accompanying text; 

notes 137–139 and accompanying text; notes 159– 

161 and accompanying text; and notes 184–185 and 

accompanying text. 

462 See discussion in Section II.B.1 of this Release 

for an example of the size of simultaneous shocks 

that a money market fund could withstand with a 

WAM of 90 days as opposed to a WAM of 60 days. 

463 See supra Section II.C. 

securities into an illiquid market to 

satisfy redemption requests, which 

could put pressure on the fund’s ability 

to maintain a stable net asset value.464 

The minimum daily and weekly 

liquidity standards require a money 

market fund to hold cash or securities 

that can be readily converted to cash. In 

certain circumstances, funds would be 

required to increase the level of these 

assets under the general liquidity 

standard.465 We believe that these 

requirements, rather than our traditional 

notion of liquidity, which was based on 

a fund’s ability to find a buyer of a 

security, are more likely to enable 

money market fund advisers to meet 

their funds’ liquidity needs and adjust 

the funds’ portfolios to increase 

liquidity when needed.466 

We believe that a reduction of these 

credit, interest rate, spread, and 

liquidity risks will better enable money 

market funds to weather market 

turbulence and maintain a stable net 

asset value per share. The amendments 

are designed to reduce the risk that a 

money market fund will break the buck, 

and thereby prevent losses to fund 

investors. To the extent that money 

market funds are more stable, they also 

will reduce systemic risk to the capital 

markets and provide a more stable 

source of financing for issuers of shortterm credit instruments, thus promoting 

capital formation. If money market 

funds become more stable investments 

as a result of the rule amendments, they 

may attract further investment, 

increasing their role as a source of 

capital. 

b. Costs 

We recognize that our amendments 

regarding second tier securities, 

portfolio maturity, and liquidity will 

impose costs on some money market 

funds. For example, yields might 

decrease in funds depending on their 

current positions in second tier 

securities, less liquid securities, and 

longer term instruments because those 

instruments typically offer above 

average yields. We note that the yield 

offered by a security is tied to its risk. 

It is important to consider our rule 

amendments’ impact on money market 

fund yields in this context. 

Second Tier Securities. We received 

several comments on the estimated costs 

of eliminating money market funds’ 

ability to acquire second tier securities. 

One commenter stated that such an 

elimination would cost a money market 

fund 2 basis points in yield, assuming 

464 See id. 


465 See supra Section II.C.1. 


466 See supra Section II.C. 


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10096 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

that this money market fund held 5 

percent of its assets in second tier 

securities.467 This commenter stated 

that it believed that this cost would be 

appropriate to strengthen the stability of 

money market funds to weather 

potential future liquidity and credit 

crises and to promote investor 

confidence. Several commenters agreed, 

stating that they did not expect 

elimination to lead to market 

disruption.468 One commenter added 

that given the small size of the second 

tier securities market, the benefits of 

elimination would far outweigh any 

disadvantages.469 

Another commenter stated that the 

benefits of money market funds being 

able to invest in second tier securities, 

in terms of reducing portfolio 

concentration in financial institution 

securities and providing affordable 

financing for second tier security 

issuers, outweigh any potential 

increased credit risk.470 This commenter 

estimated that elimination of a money 

market fund’s ability to acquire second 

tier securities would cost it 3 basis 

points in yield, again assuming that the 

money market fund held a full 5 percent 

of its assets in second tier securities. 

Finally, a third commenter estimated 

that elimination of money market funds’ 

ability to acquire second tier securities 

would cost a retail money market fund 

4–8 basis points in yield, a non-rated 

institutional money market fund 2–4 

basis points in yield, and a rated 

institutional fund 1–3 basis points in 

yield.471 This commenter assumed that 

467 This number was obtained in discussions with 

a commenter clarifying certain aspects of its 

comment letter. See J.P. Morgan Asset Mgt. 

Comment Letter. 

468 ICI Comment Letter; TDAM Comment Letter; 

Thrivent Comment Letter. 

469 TDAM Comment Letter. 

470 See Federated Comment Letter. As discussed 

in Section II.A.1 of this Release, other commenters 

also asserted that a complete ban on acquisition of 

second tier securities would not be justified on a 

cost-benefit basis, would have a material adverse 

impact on second tier security issuers, would have 

unintended effects on the capital markets, and 

would increase borrowing costs for second tier 

security issuers. We discuss these comments, and 

provide our response, supra notes 41–53 and 

accompanying and following text. 

471 Fidelity Comment Letter. According to the 

iMoneyNet Money Market Fund Analyzer Database, 

as of November 17, 2009, 61% of money market 

fund assets were held in funds that were top rated 

by at least one NRSRO and 34% of money market 

funds had a top rating from at least one NRSRO. In 

order to retain a top rating, money market funds 

must only hold first tier securities. According to 

analysis of the iMoneyNet analyzer database, as of 

December 1, 2009, approximately 48% of money 

market funds were retail funds and 52% were 

institutional funds. Accordingly, Fidelity’s 

estimates result in a blended impact on money 

market funds of (6 basis points × 48% retail funds) 

+ (3 basis points × 34% non-rated institutional 

these money market funds held 5 

percent of their assets in second tier 

securities and 5 percent of their assets 

in lower quality first tier assets, and that 

all of these assets would not be held if 

funds’ ability to acquire second tier 

securities was eliminated. 

As discussed above, we have 

determined not to eliminate money 

market funds’ ability to acquire second 

tier securities, but instead are further 

restricting this ability. This change from 

our proposal should result in costs that 

are less than estimated in the proposal 

and less than commenters estimated for 

full-scale elimination. We believe that 

the 3 percent limitation on money 

market funds’ ability to acquire second 

tier securities will have a small impact 

on money market funds.472 Based on 

commenters’ estimates described above, 

a reduction in a money market fund’s 

investment in second tier securities 

from 5 percent to 3 percent of its total 

assets would reduce its yield on average 

by approximately 1.2 basis points.473 

However, very few money market funds 

hold more than 3 percent of their total 

assets in second tier securities, and even 

fewer hold a full 5 percent. Our staff’s 

review of money market fund portfolios 

in September 2008 found that only 4 

percent of money market funds held 

more than 3 percent of their assets in 

second tier securities. Accordingly, we 

estimate that each of only 29 money 

market funds 474 would face a reduction 

of yield of 1.2 basis points as a result of 

our amendments. 

We also are further reducing the 

ability of money market funds to acquire 

second tier securities of any particular 

issuer from the greater of 1 percent of 

assets or $1 million to 0.5 percent of 

assets. Based on our staff’s review of 

money market fund portfolios in 

September 2008, 8 percent of money 

market funds held second tier securities 

of any particular issuer in excess of 0.5 

percent of the money market fund’s 

assets. We expect that these money 

market funds, however, will simply 

reinvest this excess in the securities of 

other second tier issuers and, therefore, 

funds) + (2 basis points × 18% rated institutional 

funds) = 4.3 basis points per fund. 

472 As discussed above, we do not believe that 

further limitations on money market funds’ ability 

to acquire second tier securities will prevent their 

ability to achieve diversification benefits. See supra 

note 47 and accompanying text. 

473 This estimate is based on averaging the 2 basis 

point, 3 basis point, and 4.3 basis point estimates 

from commenters for a reduction in second tier 

securities investment from 5% to 0%, 

proportionately adjusted to reflect a reduction in 

investment from 5% to 3%. 

474 This estimate is based on the following 

calculation: 719 money market funds × 4% = 29 

money market funds. 

that there will be no loss in fund yield 

as a result of this restriction.475 Several 

commenters argued that there are many 

second tier security issuers worthy of 

investment.476 If any of these money 

market funds did not perform credit 

analysis of a large enough group of 

second tier security issuers, these funds 

may incur some administrative costs in 

tracking additional issuers.477 

Finally, we are limiting money market 

funds to only acquiring second tier 

securities with a remaining maturity of 

less than 45 days. According to Federal 

Reserve data, in 2009, only 4 percent of 

A2/P2 non-financial commercial paper 

had a maturity of greater than 40 days 

on issuance, and thus we do not expect 

that the 45-day maturity limit will have 

more than a negligible cost impact on 

taxable money market funds.478 In 

addition, based on our staff’s review of 

tax-free money market fund portfolios in 

September 2008, we estimate that very 

few money market funds held second 

tier municipal securities with a maturity 

of greater than 45 days that were second 

tier securities at the time of acquisition. 

As a result, we do not expect that the 

45-day maturity limit will have more 

than a negligible cost impact on money 

market funds. 

WAM and WAL. Three commenters 

provided cost estimates for a reduction 

in the maximum weighted average 

maturity for money market funds. One 

commenter estimated that if all money 

market funds had a WAM of 75 days 

and reduced their WAM to 60 days, it 

would cost each money market fund 2.5 

to 3 basis points in yield.479 Similarly, 

another commenter estimated that this 

same reduction would cost each money 

market fund 3 basis points in yield, and 

a reduction in WAM from 90 days to 75 

475 Commenters (for example, the Federated 

Comment Letter and the Fidelity Comment Letter) 

asserted that there are numerous quality second tier 

security issuers. Because this limitation, when 

combined with the 3% aggregate limitation on 

acquisition of second tier securities, only limits 

money market funds to holding a minimum of 6 

second tier issuers if it were to maximize the 

limitations (rather than 5 second tier issuers under 

the current rule), we do not expect that money 

market funds would have difficulty finding six 

appropriate second tier security issuers in which to 

invest. 

476 See, e.g., Chamber/Tier 2 Issuers Comment 

Letter; Federated Comment Letter; Fidelity 

Comment Letter; USAA Comment Letter. 

477 Based on discussions we had with certain 

commenters clarifying certain aspects of their 

comment letters, we understand that all of these 

larger managers track sufficient second tier security 

issuers that the 0.5% limitation per second tier 

security issuer should not create additional costs 

related to tracking additional issuers. 

478 See Federal Reserve, Volume Statistics for 

Commercial Paper, A2/P2 Nonfinancial, available 

at http://www.federalreserve.gov/releases/cp/ 

volumestats.htm. 

479 J.P. Morgan Asset Mgt. Comment Letter. 

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days would also cost a money market 

fund 3 basis points in yield.480 Finally, 

a third commenter estimated that if all 

money market funds had a WAM of 90 

days and reduced their WAM to 60 

days, it would cost each money market 

fund 5 to 10 basis points in yield.481 

According to these estimates, it would 

cost a money market fund 5 to 10 basis 

points in yield to reduce its WAM from 

90 days to 60 days. 

However, historically most money 

market funds have not maintained a 

WAM of more than 60 days. According 

to data provided by the ICI, from 

January 1998 through April 2009, even 

the 75th percentile of prime money 

market funds has maintained an average 

WAM of 53 days and the 90th percentile 

of prime money market funds has 

maintained an average WAM of 65 

days.482 As of November 17, 2009, 

despite the historically low interest rate 

environment in which money market 

funds have tended to extend WAM 

closer to the maximum limits to gain 

additional yield, only 1.5 percent of 

taxable money market funds reported a 

WAM of more than 75 days (with most 

of those having a WAM of only slightly 

over 75 days) and only 15.5 percent 

reported a WAM of 61–75 days (with 

these funds having an average WAM of 

68 days).483 We understand that most 

money market funds like to have some 

cushion by maintaining a WAM below 

the permitted maximum, but we do not 

believe that money market funds believe 

that such a large cushion must always 

be maintained. Rather, we believe that 

many money market funds have 

maintained lower WAMs than required 

because they believed that it is prudent 

management of their portfolio to do 

so.484 

Based on this data, on the WAMs of 

taxable and prime money market funds 

and on commenters’ estimates of the 

impact of a reduction in WAM, we 

estimate that 10 money market funds 

will have to reduce their WAM from 78 

days to 55 days at a cost of 6 basis 

points per fund. We further estimate 

that 70 money market funds will have 

480 Federated Comment Letter. 481 Fidelity Comment Letter. 482 Investment Company Institute, Average 

Maturity of Taxable Prime Money Market Funds, 

1998–2009, available at http://www.sec.gov/ 

comments/s7-11-09/s71109-14.htm. 483 Based on data from the iMoneyNet Money 

Market Fund Analyzer Database as of November 17, 

2009. The WAMs of the funds with WAMs over 75 

days were: 2 at 76 days, 1 at 77 days, and 3 at 78 

days. Tax-free money market funds have WAMs 

considerably lower (30% of money market funds 

were tax-free as of December 8, 2009 according to 

data from the iMoneyNet Money Market Fund 

Analyzer Database). 

484 See, e.g., supra notes 137–139 and 

accompanying text. 

to reduce their WAM from 68 days to 55 

days at a cost of 2 basis points per fund. 

Three commenters provided cost 

estimates for a reduction in the 

maximum weighted average life for 

money market funds. One commenter 

estimated that if all money market funds 

had a WAL of 180 days and reduced 

their WAL to 120 days, it would cost 

each money market fund 2 to 4 basis 

points in yield.485 Another commenter 

estimated that a WAL reduction of 150 

to 120 days would cost each money 

market fund 1 to 3 basis points in 

yield.486 Finally, a third commenter 

estimated that if all money market funds 

reduced their WAL to 120 days, it 

would cost each money market fund 3 

basis points in yield.487 According to 

these estimates, it would cost a money 

market fund 1 to 3 basis points in yield 

to reduce its WAL from 150 days to 120 

days.488 We estimate that two-thirds of 

taxable money market funds and all taxfree money market funds already 

maintain a WAL of 120 days or less and 

thus will incur no cost in transitioning 

to this amendment to rule 2a–7.489 We 

485 J.P. Morgan Asset Mgt. Comment Letter and 

subsequent Commission staff conversation with J.P. 

Morgan staff breaking down the cost estimate in the 

J.P. Morgan Asset Mgt. Comment Letter by each 

proposed amendment to rule 2a–7. 

486 Fidelity Comment Letter (focusing on 

government money market funds). 

487 Federated Comment Letter. The Federated 

Comment Letter did not specify a WAL starting 

point for its assumed reduction to a 120-day WAL. 

Rather, it evaluated instruments that it believed 

would likely be subject to greater demand or a 

shorter maturity with a 120-day maximum WAL 

requirement and estimated the increased cost to 

money market funds from those securities becoming 

more expensive as a result. 

488 Based on discussions we had with certain 

commenters clarifying certain aspects of their 

comment letters, we do not believe that more than 

a negligible number of money market funds are 

maintaining a WAL of 180 days. 

489 We are not aware of any data provider that 

tracks the WAL of all money market funds (likely 

because money market funds are not limited 

currently in the weighted average life that they 

must maintain). An analysis of the 16 largest, toprated, prime institutional money market funds 

(representing 53% of all prime institutional money 

market fund assets as of June 30, 2009) found that 

of the 14 funds providing information on the final 

maturities of their portfolio securities, all had a 

WAL of under 120 days. See Capital Advisors 

Group, How Safe are Prime Money Market Funds? 

(Nov. 1, 2009), available at http:// 

web.capitaladvisors.com/whitepapers/How%20 

Safe%20Are%20MMFs.pdf (‘‘CAG Report’’). This 

information, combined with discussions we had 

with certain commenters clarifying certain aspects 

of their comment letters, leads us to estimate that 

two thirds of money market funds currently are 

maintaining a WAL of no greater than 120 days and 

that the other third currently are maintaining a 

WAL of no greater than 150 days. We also 

understand that the majority of money market funds 

currently are in compliance with the maximum 

120-day WAL because of their voluntary 

compliance with the recommendations contained in 

the ICI Report. Because most securities held by taxfree money market funds have a demand feature 

estimate that the other third of taxable 

money market funds, or 163 funds, 

maintain a maximum WAL of no greater 

than 150 days and will incur on average 

a cost of 2 basis points per fund to 

reduce their WAL to 120 days. 

Several commenters stated that the 

new WAM limitation would reduce the 

range of securities available for money 

market fund investment and increase 

demand for shorter term securities.490 

No commenters provided any cost 

estimate for this potential impact. If this 

did occur, and if the increased demand 

was not met with increased supply of 

such securities, the new maturity 

limitations could result in additional 

incremental costs to money market 

funds. 

A few commenters also believed that 

the amended maturity limitations would 

increase security issuer costs because 

they would have to issue shorter 

maturity securities and assume greater 

risk from having to roll over their 

securities more frequently.491 No 

commenters provided any cost estimate 

for this potential impact. If security 

issuer costs do increase as a result of the 

amended maturity limitations and these 

issuers as a consequence are unable to 

obtain the same amount of financing, it 

may have a negative impact on capital 

formation. 

General Liquidity Requirement. As 

discussed above, the amended rule 

includes a general liquidity 

requirement, under which a fund’s 

management and its board must 

evaluate the funds’ liquidity needs and 

protect shareholders from the harm that 

can occur from the failure to properly 

anticipate and provide for those needs. 

We also noted that in order to comply 

with this provision in amended rule 2a– 

7 under the compliance rule, we expect 

that money market funds would adopt 

policies and procedures designed to 

assure that appropriate efforts are 

undertaken to identify risk 

characteristics of the fund’s 

shareholders.492 For purposes of the 

PRA analysis, we estimated that each 

fund complex would incur, on average, 

9 hours to document, review, and adopt 

policies and procedures for monitoring 

the risk characteristics of money market 

reducing the security’s maturity under the WAL 

calculation to a very short duration, we understand 

that tax-free money market funds do not have a 

WAL greater than 120 days. 

490 See, e.g., Charles Schwab Comment Letter; J.P. 

Morgan Asset Mgt. Comment Letter; State Street 

Comment Letter. 

491 See, e.g., Fannie Mae Comment Letter; State 

Street Comment Letter; Wells Fargo Comment 

Letter. 

492 See supra note 198 and accompanying text. 

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10098 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

fund investors.493 Based on this 

estimate, we estimate that it would cost 

a fund complex $6976 to document, 

review, and adopt these policies and 

procedures, for a total cost of 

$1,137,000.494 

Illiquid Securities. Two commenters 

provided estimates with respect to the 

proposed ban on purchases of illiquid 

securities. One commenter estimated 

that the proposed ban would decrease 

money market funds’ yields from 2 to 6 

basis points, assuming that the fund 

holds 10 percent of its total assets in 

illiquid securities.495 Another 

commenter submitted that the ban on 

illiquid securities would decrease yields 

by 3 basis points.496 Based on 

commenters’ estimates, a money market 

fund that reduces its investments in 

illiquid securities from 10 percent to 5 

percent would reduce its yield on 

average by 2 basis points.497 

Our staff’s review of money market 

funds’ portfolios in September 2008 

found that 24 percent of funds reported 

held any illiquid securities.498 Based on 

the staff’s review as applied to the 

current number of money market funds 

(719),499 we estimate current money 

market fund holdings of illiquid 

securities as follows: 

Percentage of Number of Percentage of total assets represented by illiquid securities funds funds 

10 percent ................................................................................................................................................................
 0.6 4 

9 percent ..................................................................................................................................................................
 0.4 3 

8 percent ..................................................................................................................................................................
 0.4 3 

7 percent ..................................................................................................................................................................
 0.4 3 

6 percent ..................................................................................................................................................................
 1.0 7 

5 percent or less ......................................................................................................................................................
 97.2 698 

Based on these estimated holdings, 

staff makes the following estimates: 4 

funds with 10 percent of assets invested 

in illiquid securities will experience a 

reduction in holdings of 5 percent and 

a yield impact of 2 basis points; 500 3 

funds with 9 percent of assets invested 

in illiquid securities holdings will 

experience a reduction in holdings of 4 

percent and a yield impact of 1.6 basis 

points; 501 3 funds with 8 percent of 

assets invested in illiquid securities 

holdings will experience a reduction in 

holdings of 3 percent and a yield impact 

of 1.2 basis points; 502 3 funds with 7 

percent of assets invested in illiquid 

securities holdings will experience a 

reduction in holdings of 2 percent and 

a yield impact of 0.8 basis points;503 7 

funds with 6 percent of assets invested 

in illiquid securities holdings will 

experience a reduction in holdings of 1 

493 See supra note 407 and accompanying and 

preceding text. 

494 These estimates are based on the following 

calculations: 8 hours × $372/hour (for a senior 

portfolio manager) = $2976; 1 hour × $4000 (for a 

board of directors) = $4000; ($2976 + $4000) × 163 

complexes = $1,137,088. The hourly wage used for 

senior portfolio managers is from the SIFMA Report 

on Management & Professional Salaries Data (Sept. 

2008), modified to account for an 1800-hour workyear and multiplied by 5.35 to account for bonuses, 

firm size, employee benefits, and overhead. 

495 See Fidelity Comment Letter. 

496 See Federated Comment Letter (without 

specifying the assumed holdings of illiquid 

securities). 

497 The individual reduction in basis points is 

calculated by taking the average of the estimated 

range of 2 to 6 basis points ((2+6) ÷ 2 = 4 basis 

points; 4 basis points ÷ 10% = 0.4 basis points per 

1% reduction), proportionally adjusted to reflect an 

adjustment in investment in illiquid securities from 

10% to 5% (5 x 0.4 = 2). 

498 We note that these holdings are likely to 

include some securities that were not illiquid at 

acquisition. Thus, our estimates on the impact of 

reducing holdings of illiquid securities may be 

percent and a yield impact of 0.4 basis 

points.504 

Daily Liquidity Requirements. Two 

commenters specifically addressed the 

proposed daily liquidity requirements. 

Both commenters estimated that there 

would be no yield impact as a result of 

the proposed 10 percent threshold.505 

Based on these comments, we assume 

that the 10 percent daily minimum 

liquidity standard we are adopting will 

have no impact on money market funds’ 

yield.506 

Weekly Liquidity Requirements. A few 

commenters provided estimates on the 

costs of the proposed weekly liquidity 

requirements. One commenter estimated 

that the yield impact of the proposed 30 

percent weekly liquidity standard for 

institutional funds would range from 15 

to 20 basis points,507 while another 

commenter estimated that the yield 

impact would be 10 basis points.508 A 

higher than the impact that would be experienced 

by some money market funds. 

499 The number of money market funds is based 

on Investment Company Institute, Trends in Mutual 

Fund Investing, Oct. 2009, available at http:// 

www.ici.org/research/stats/trends/trends_10_09. 

500 (10%¥5% (allowable amount remaining) = 

5%). 5 × 0.4 basis points (basis point impact per 

1%) = 2 basis points. 

501 (9%¥5% (allowable amount remaining) = 

4%). 4 × 0.4 basis points = 1.6 basis points. 

502 (8%¥5% (allowable amount remaining) = 

3%). 3 × 0.4 basis points = 1.2 basis points. 

503 (7%¥5% (allowable amount remaining) = 

2%). 2 × 0.4 basis points = 0.8 basis points. 

504 (6%¥5% (allowable amount remaining) = 

1%). 1 × 0.4 basis points = 0.4 basis points. 

505 See Federated Comment Letter; Fidelity 

Comment Letter. 

506 Our understanding is that money market 

funds’ current practice is to maintain approximately 

10% of their portfolio in daily liquid assets. See 

CAG Report, supra note 489; Fitch Report, supra 

note 274, at 6 (Fitch-rated prime money market 

funds’ aggregate exposure to sources of overnight 

liquidity, including repurchase agreements, time 

third commenter submitted that the 

proposed 30 percent weekly liquidity 

requirement would have a yield impact 

of 9 basis points, but would have no 

impact if the threshold was 20 percent 

and included agency discount notes 

with remaining maturities of 95 days or 

less.509 None of these commenters 

explained the baseline (i.e., the 

percentage of weekly liquid assets 

institutional funds currently hold) on 

which their estimated impacts on yield 

are based. A fourth commenter 

estimated that if money market funds 

had to increase their weekly liquid 

assets by 10 percent, the yield impact 

would be between 3 and 6 basis 

points.510 Thus, commenters’ estimates 

of the yield impact to institutional funds 

of maintaining 30 percent of their 

portfolio in weekly liquid assets ranged 

deposits and shares of other money market funds, 

was approximately 15% of total assets for the sixmonth period ended on May 15, 2009). 

507 See Fidelity Comment Letter (noting that 

including agency discount notes with remaining 

maturities of 397 days or less in weekly liquid 

assets would have reduced this estimate by about 

3 basis points for institutional money market 

funds). 

508 GE Asset Mgt. Comment Letter (arguing that 

the requirement could cause a more pronounced 

yield widening effect as a result of supply/demand 

dynamics, i.e., there would be an increase in 

demand for securities with 7-day maturities or less, 

which would result in a corresponding decrease in 

yield for such instruments; consequently, there 

could also be a reduced demand for longer-dated 

instruments, which would adversely impact the 

short-term financing for issuers of such 

instruments). 

509 Federated Comment Letter. 

510 J.P. Morgan Asset Mgt. Comment Letter and 

subsequent Commission staff conversation with J.P. 

Morgan staff breaking down the cost estimate in the 

J.P. Morgan Asset Mgt. Comment Letter by each 

proposed amendment to rule 2a–7. 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10099 

from 3 to 20 basis points.511 We have 

averaged these estimates to determine 

our estimated yield impact on 

institutional funds of 1.025 basis points 

per percentage increase in existing 

assets that would have to be converted 

to weekly liquid assets.512 

We estimate that half of institutional 

money market funds currently maintain 

30 percent or more of their total assets 

in weekly liquid assets and thus would 

experience no reduction in yield as a 

result of the weekly liquidity 

requirement. We further estimate that 38 

percent of institutional funds maintain 

25 percent of their assets in weekly 

liquid assets; 6 percent of institutional 

funds maintain 20 percent of their assets 

in weekly liquid assets and 6 percent of 

institutional funds maintain 15 percent 

of their assets in weekly liquid assets.513 

Based on these estimates, we estimate 

that 187 funds may experience no 

impact, 142 funds may experience a 

5.125 basis point impact on yield, 22 

funds may experience a 10.25 basis 

points, and 22 funds may experience a 

15.375 basis point impact on yield.514 

One commenter provided specific 

estimates for the impact of the proposed 

15 percent weekly liquid asset 

requirement on retail money market 

funds of between two and four basis 

points.515 Assuming that the starting 

point for these estimates was 10 percent 

of investments in weekly liquid assets, 

we estimate that the yield impact per 

percentage increase to satisfy the weekly 

511 We note that the range of these estimates is 

likely to be lower if agency discount notes with 

remaining maturities of less than 60 days are 

included. We have not adjusted for that, however, 

to maintain a conservative estimate. 

512 Our estimate is based on an average of the 

commenters’ estimated (or the midpoint of 

commenters’ estimated) impacts of 17.5, 10, 9, and 

4.5 basis points per 10% increase in weekly liquid 

assets as proportionally adjusted: 1.75 + 1.0 + 0.9 

+ 0.45 = 4.1; 4.1 basis points ÷ 4 = 1.025 basis point 

increase. See notes 507–510 and accompanying 

text. 

513 While we are not aware of any data provider 

that tracks the actual maturities of securities (as 

opposed to WAM, which estimates the maturity of 

floating rate notes based on the interest reset date 

rather than actual maturity), we are able to provide 

estimates based on the analysis of the Capital 

Advisors Group that found that on or near 

September 30, 2009, the 16 funds providing 

information on their portfolio securities averaged 

30% of assets in securities convertible to cash in 1 

to 7 days. In addition, 8 (50%) had 7-day liquidity 

of 30% or greater; 6 (38%) had 7-day liquidity of 

25%–30%; 1 (6%) had liquidity of 20%–25%, and 

1 (6%) had 7-day liquidity of 15%–20%. See CAG 

Report, supra note 489. For purposes of our 

estimates, we are assuming the funds in each 

category held the lowest level of weekly liquid 

assets in the category. 

514 As noted above, there are currently 719 money 

market funds, of which we estimate that 52% (374) 

are institutional funds. See supra notes 471 and 

499. 

515 See Fidelity Comment Letter. 

liquid asset requirement would be 0.6 

basis points.516 We estimate that all 

retail money market funds maintain 15 

percent of their total assets in weekly 

liquid assets.517 Based on this estimate, 

we estimate that the average yield 

impact for each retail money market 

fund would be 9 basis points.518 

Investors. The decreased yield that 

some money market funds may offer as 

a result of the amendments we are 

adopting today may limit the range of 

choices that individual money market 

fund investors have to select their 

desired level of investment risk. This 

might cause some investors to shift their 

assets to, among other places, bank 

deposits or offshore or other enhanced 

cash funds unregulated by rule 2a–7 

that are able to offer a higher yield.519 

Investors that choose to move to 

unregulated products may have fewer 

protections than they had in money 

market funds regulated under rule 2a– 

7. When markets come under stress, 

investors may be more likely to 

withdraw their money from these 

offshore or private funds due to their 

perceived higher risk520 and substantial 

redemptions from those funds and 

accompanying sales of their portfolio 

securities could increase systemic risk 

to short-term credit markets, which 

would impact money market funds. In 

addition, the stricter portfolio quality, 

maturity, and liquidity requirements 

may result in some money market funds 

having fewer issuers from which to 

select securities if some issuers only 

offer second tier securities, less liquid 

516 This assumes an average of 3 basis points 

proportionally adjusted for an increase of 5%. We 

assume that the commenter based its estimate on an 

increase from 10% holdings because as noted 

above, we assume that all money market funds have 

on average daily liquidity of at least 10% and the 

commenter based its estimates on the proposed 

weekly liquid asset requirement of 15% for retail 

funds. See supra note 506 and accompanying text. 

517 We believe that most retail money market 

funds currently are in voluntary compliance with 

the 20% weekly liquidity standard recommended 

by the ICI Report, which would include agency 

discount notes with original issue maturity of 95 

days or less. The final rule permits agency discount 

notes with remaining maturities of 60 days or less, 

and we are conservatively estimating that retail 

funds maintain an average of 15% of assets in 

weekly liquid assets. 

518 0.6 basis points x 15% = 9 basis points. This 

estimate may be overstated because, as noted above, 

we believe that most retail funds hold 20% of their 

assets in weekly liquid assets, and thus would have 

to convert a smaller percentage of assets to weekly 

liquid assets. 

519 Some commenters suggested this possibility. 

See, e.g., Goldman Sachs Comment Letter; State 

Street Comment Letter (making this comment with 

respect to reducing the maximum permissible 

WAM). 

520 During the market events of 2007–2008, 

investors redeemed substantial amounts of assets 

from certain bond funds and offshore money market 

funds. See ICI Report, supra note 14, at 106–07. 

securities, or a larger percentage of 

longer term securities. 

Issuers. Our new portfolio quality, 

maturity, and liquidity restrictions also 

may impact issuers. Issuers may 

experience increased financing costs to 

the extent that they are unable to find 

alternative purchasers at previous 

market rates of second tier securities, 

less liquid securities, longer term 

securities, or adjustable-rate securities 

that money market funds determine to 

no longer acquire because of the new 

restrictions. Several commenters stated 

that elimination of money market funds’ 

ability to acquire second tier securities 

would increase issuers’ borrowing costs 

and thus could increase the cost of 

capital formation.521 No commenters 

provided estimates of such costs. 

As noted earlier in this section, we do 

not believe that money market funds 

currently hold a significant amount of 

second tier securities or securities that 

are illiquid at acquisition in excess of 

the newly adopted limitations for these 

securities. Thus, we expect that the 

amendments’ impact on issuers of these 

securities will be minimal. We also 

know that few money market funds 

maintain a WAM in excess of 60 days, 

and we therefore believe that our new 

WAM restriction will not have a 

significant impact on issuers of longer 

term securities.522 To the extent that the 

new WAM limitation results in 

companies or governments issuing 

shorter maturity securities, those issuers 

may be exposed to an increased risk of 

insufficient demand for their securities 

and adverse credit market conditions 

because they must roll over their shortterm financing more frequently. We note 

that this impact could be mitigated if 

money market funds sufficiently 

staggered or ‘‘laddered’’ the maturity of 

the securities in their portfolios. 

Finally, we estimate that one third of 

taxable money market funds will have 

to reduce the WAL of their portfolio,523 

and thus it is possible that some 

adjustable-rate security issuers will 

need to shorten the maturities of some 

of the securities they offer, which may 

result in increased borrowing costs.524 

In addition, the markets for longer term 

securities may become less liquid if the 

521 See, e.g., Am. Elec. P. Comment Letter; 

Chamber/Tier 2 Issuers Comment Letter. But see ICI 

Comment Letter (stating their belief that elimination 

would have a manageable impact on second tier 

security issuers). 

522 See supra notes 482–483 and accompanying 

text. 

523 See supra note 489 and accompanying and 

following text. 

524 See supra note 491 and accompanying text for 

comments asserting this possible negative impact. 

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10100 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

rule amendments cause issuance of 

these instruments to decline.525 

Government Securities. We do not 

believe that eliminating the provision in 

rule 2a–7 that allowed money market 

funds relying solely on the pennyrounding method of pricing to hold 

Government securities with remaining 

maturities of up to 762 days will have 

a material impact on money market 

funds, investors, or issuers of longer 

term Government securities because we 

believe that substantially all money 

market funds rely on the amortized cost 

method of valuation, and not 

exclusively on the penny-rounding 

method of pricing, and thus are not 

eligible to rely on this exception. We 

received one comment on this proposal, 

which stated that they were not aware 

of any money market funds that relied 

on the penny rounding method of 

pricing.526 

2. Designation of NRSROs 

The amendments to rule 2a–7 require 

a money market fund’s board of 

directors to designate at least four 

NRSROs whose credit ratings the fund 

will use in determining the eligibility of 

portfolio securities under the rule and 

that the board determines annually 

issue credit ratings that are sufficiently 

reliable for this use.527 In addition, 

money market funds are required to 

disclose designated NRSROs in their 

registration statements.528 

We anticipate that the requirement to 

designate at least four NRSROs could 

foster competition among NRSROs to 

produce the most accurate ratings in 

order to obtain designation by money 

market fund boards. Several 

commenters agreed that designating at 

least three NRSROs could encourage 

competition among NRSROs to achieve 

designation by money market fund 

boards.529 To the extent that 

competition increases the reliability of 

the credit ratings of designated NRSROs, 

this could increase the efficiency of 

fund managers in determining eligibility 

of portfolio securities. Some 

commenters expressed concern, 

however, that a requirement to 

designate at least three NRSROs could 

result in fund boards designating only 

the three largest NRSROs that issue 

525 No commenters addressed this possibility. 

526 BlackRock Comment Letter. 

527 Amended rule 2a–7(a)(11) (defining the term 

‘‘designated NRSRO’’). 

528 Amended rule 2a–7(a)(11)(iii). The fund 

would be required to make the disclosure in its SAI, 

under Part B of Form N–1A [17 CFR 239.15A]. 

529 See, e.g., HighMark Capital Comment Letter; 

Invesco Aim Comment Letter. 

most of the ratings,530 which could 

result in decreased competition among 

NRSROs. To address this concern, in 

light of the Commission’s goal of 

increasing competition among NRSROs, 

we are requiring each fund to designate 

at least four NRSROs. In addition, 

requiring designation of four NRSROs 

may encourage new NRSROs that issue 

ratings specifically for money market 

fund instruments to enter the market. 

We recognize that the requirement to 

designate and annually evaluate at least 

four NRSROs will result in costs to the 

fund.531 For the purposes of the PRA, 

we estimate that the requirement that 

money market funds disclose this 

designation, including any limitations 

on the use of the designations, in their 

SAIs will not result in additional costs 

for funds.532 We expect that boards will 

designate NRSROs based on 

recommendations from the fund’s 

adviser and its credit analysts. 

Similarly, we believe the board’s annual 

determination regarding designated 

NRSROs will be based on 

recommendations from the adviser and 

its credit analysts. Staff estimates that it 

will take each fund’s board of directors 

approximately 6 hours each year to 

designate NRSROs and determine 

whether the NRSROs ratings are 

sufficiently reliable for such use. Based 

on an hourly rate for the board of $4000, 

we estimate that each money market 

fund will incur $24,000 and all fund 

complexes will incur $3.9 million 

annually for the boards of directors to 

initially designate and determine the 

reliability and sufficiency of the 

designated NRSROs’ credit ratings for 

use in determining eligibility of 

portfolio securities.533 

We expect that fund advisers 

currently evaluate the reliability of 

NRSRO ratings and ratings criteria as 

part of the credit analysis they perform 

(under delegated authority from the 

board) in determining the eligibility of 

530 See DBRS Comment Letter; C. Wesselkamper 

Comment Letter. We note that of the 10 registered 

NRSROs, three issued over 97% of the ratings 

across categories that NRSROs reported to the 

Commission. See SEC, Annual Report on Nationally 

Recognized Statistical Rating Organizations at 9 

(Sept. 2009). 

531 While we received comments regarding the 

designation of NRSROs, none of the comments 

discussed the costs of designation to funds or their 

advisers. 

532 See supra Section IV.A.1. 

533 This estimate is based on the following 

calculation: $24,000 × 163 (fund complexes) = 

$3,912,000. We have estimated total costs for fund 

complexes because we assume that boards of 

directors will undertake to designate and determine 

for all funds in the complex at the same time 

(although boards may designate and make annual 

determinations with respect to different NRSROs 

for different money market funds). 

portfolio securities. We also assume that 

this evaluation includes consideration 

and internal documentation of whether 

an NRSRO’s rating is sufficient for that 

use. Accordingly, while we do not 

anticipate that fund advisers will incur 

additional time to prepare their 

recommendations, we expect that fund 

advisers will incur costs to draft those 

recommendations in a presentation or 

report for board review regarding 

designation of NRSROs and the 

sufficiency of designated NRSROs’ 

ratings. Staff estimates that the 

investment adviser for each complex 

will spend 6 hours annually to prepare 

a report based on the adviser’s internal 

review and documentation that 

summarizes its recommendation with 

respect to each NRSRO that may be 

considered for designation and any 

limits on the use of that NRSRO under 

the rule at a cost per fund complex of 

$1770 and a total cost of $288,510.534 

As noted above, we understand that 

money market fund advisers currently 

evaluate NRSROs that rate securities in 

which the fund invests. We also 

understand that fund advisers monitor 

NRSROs for potential downgrades of 

portfolio securities. Prior to today’s 

amendments, if the fund invested in 

unrated or second tier securities, the 

adviser had to monitor all NRSROs in 

case there was a downgrade of a second 

tier security or an unrated security 

received a rating below one of the top 

two categories.535 Thus, we do not 

expect that limiting the number of 

NRSROs that a fund must monitor to 

four (or more, if the fund chooses) will 

result in increased costs to fund 

advisers to monitor NRSROs. 

3. Stress Testing 

As proposed, we are amending rule 

2a–7 to require that a money market 

fund’s board of directors adopt written 

procedures that provide for the periodic 

stress testing of each money market 

fund’s portfolio.536 A fund’s board of 

directors determines the frequency of 

stress testing. The procedures must 

require testing of the fund’s ability to 

534 These estimates are based on the following 

calculations: ($202/hour (intermediate portfolio 

manager) × 3 hours) + ($388/hour (senior portfolio 

manager) × 3 hours) = $1770; $1770 × 163 fund 

complexes = $288,510. Hourly wages used for 

purposes of the estimate of portfolio manager 

salaries are from the SIFMA Report on Management 

& Professional Salaries Data (Sept. 2008), modified 

to account for an 1800-hour work-year and 

multiplied by 2.93 to account for bonuses, firm size, 

employee benefits and overhead. 

535 See current rule 2a–7(c)(6)(i)(A)(2). 

536 See supra Section II.C.4. We did not receive 

any comment on the estimates and assumptions 

included in our proposal. Accordingly, we have not 

modified any of those estimates except to reflect the 

new requirement included in the amended rule. 

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maintain a stable net asset value per 

share based upon certain hypothetical 

events.537 The procedures also must 

provide for a report to be delivered to 

the fund’s board of directors at its next 

regularly scheduled meeting on the 

results of the testing, or more often as 

appropriate in light of the results.538 

The report must include an assessment 

by the fund’s adviser of the fund’s 

ability to withstand the events (and 

concurrent occurrences of those events) 

that are reasonably likely to occur 

within the following year.539 

We anticipate that stress testing will 

give fund advisers a better 

understanding of the effect of potential 

market events and shareholder 

redemptions on their funds’ ability to 

maintain a stable net asset value, the 

funds’ exposure to the risk that they 

would break the buck, and actions the 

advisers may need to take to mitigate 

the possibility of the funds breaking the 

buck.540 We believe that many funds 

currently conduct stress testing as a 

matter of routine fund management and 

business practice.541 We anticipate, 

however, that funds that do not 

currently perform stress testing and 

funds that may revise their procedures 

in light of the amended rule will give 

their managers a tool to better manage 

those risks. For fund boards of directors 

that do not currently receive stress test 

results, we believe that the regular 

reports of the testing and assessments 

will provide money market fund boards 

a better understanding of the risks to 

which the fund is exposed. 

We understand that today rigorous 

stress testing is a best practice followed 

by many money market funds.542 We 

understand that the fund complexes that 

conduct stress tests include smaller 

complexes that offer money market 

funds externally managed by advisers 

experienced in this area of 

537 As proposed, the hypothetical events 

described in the final rule include a change in 

short-term interest rates, an increase in shareholder 

redemptions, a downgrade of or default on a 

portfolio security, and widening or narrowing of 

spreads between yields on a benchmark selected by 

the fund and securities held by the fund. See 

amended rule 2a–7(c)(10)(v)(A). 

538 Amended rule 2a–7(c)(10)(v)(B). The report 

must include dates on which the testing was 

performed and the magnitude of each hypothetical 

event that would cause the deviation of the money 

market fund’s net asset value, calculated using 

available market quotations (or appropriate 

substitutes that reflect current market conditions), 

from its net asset value per share, calculated using 

amortized cost, to exceed 1⁄2 of 1%. Amended rule 

2a–7(c)(10)(v)(B)(1). 

539 Amended rule 2a–7(c)(10)(v)(B)(2). 

540 See supra note 411 and accompanying and 

preceding text. 

541 See Proposing Release, supra note 2, at 

paragraph following n.358. 

542 See id. at n.359 and accompanying text. 

management.543 Accordingly, staff 

estimates that as a result of the new 

requirement to adopt stress testing 

procedures: (i) Funds that currently 

conduct rigorous stress testing, 

including tests for hypothetical events 

listed in the amended rule (and 

concurrent occurrences of those events), 

will incur some costs to evaluate 

whether their current test procedures 

comply with the new requirement, but 

will be likely to incur relatively few 

costs to revise those procedures or 

continue the stress testing they 

currently perform; (ii) funds that 

conduct less rigorous stress testing, or 

that do not test for all the hypothetical 

events listed in the amended rule, will 

incur somewhat greater expenses to 

revise those procedures in light of the 

new requirement and maintain the 

revised testing; and (iii) funds that do 

not conduct stress testing will incur 

costs to develop and adopt stress test 

procedures and conduct stress tests. 

As noted above, we believe that there 

is a range in the extent and rigor of 

stress testing currently performed by 

money market funds. We also expect 

that stress test procedures are being or 

will be developed by the adviser to a 

fund complex for all money market 

funds in the complex, while specific 

stress tests are performed for each 

individual money market fund. We 

estimate that a fund complex that 

currently does not conduct stress testing 

will require approximately 1 month for 

2 risk management specialists and 2 

systems analysts to develop stress test 

procedures at a cost of approximately 

$155,000, 22 hours for a risk 

management specialist to draft the 

procedures, and 3 hours of board of 

directors’ time to adopt the procedures 

for a total of approximately $173,000.544 

Costs for fund complexes that will have 

to revise or fine-tune their stress test 

procedures would be less. For purposes 

of this cost benefit analysis, we estimate 

that these funds will incur half the costs 

of development, for a total of 

approximately $96,000.545 Funds that 

will not have to change their test 

543 These complexes do not, however, meet the 

definition of ‘‘small entities’’ under the Investment 

Company Act for purposes of the Regulatory 

Flexibility Act of 1980. 17 CFR 270.0–10. See infra 

note 636. 

544 This estimate is based on the following 

calculations: $275/hour × 280 hours (collectively, 2 

senior risk management specialists) + $244/hour × 

320 hours (collectively, 2 senior systems analysts) 

= $155,080; $275/hour (senior risk management 

specialist) × 22 hours = $6050; $4000/hour × 3 

hours = $12,000; $155,080 + $6050 + $12,000 = 

$173,130. 

545 This estimate is based on the following 

calculation: ($155,080 × 0.5) (revise procedures) + 

$6050 (draft procedures) + $12,000 (board approval) 

= $95,590. 

procedures will incur approximately 

$20,000 to determine compliance with 

the new requirement and to draft and 

adopt the procedures.546 We also 

anticipate that in light of the new 

demand to develop stress testing 

procedures, third parties will develop 

programs that funds will be able to 

purchase for less than our estimated 

cost to develop the programs 

themselves. 

As with the development of stress test 

procedures, the costs funds will incur 

each year as a result of the proposed 

amendments to update test procedures, 

conduct stress tests, and provide reports 

on the tests and assessments to the 

board of directors will vary. Funds that 

currently conduct stress tests already 

incur costs to perform the tests. In 

addition, some of those funds may 

currently provide reports to senior 

management (if not the board) of their 

test results. We assume, however, that 

few, if any, fund advisers provide a 

regular assessment to the board of the 

fund’s ability to withstand the events 

reasonably likely to occur in the 

following year. For that reason, we 

estimate that for routine reports, each 

fund complex will incur costs of $3000 

to provide a written report on the test 

results to the board, $4000 to provide 

the assessment in the report, and $10 to 

retain records of the reports for a total 

annual cost to a fund complex of 

$42,000.547 As noted above, however, 

the procedures must provide for 

additional reports to the board as 

appropriate based on testing results, and 

we estimate that each fund complex will 

incur costs of $28,000 for an average of 

four of these reports each year.548 We 

estimate that a portion of funds will 

incur additional costs to perform stress 

tests and update their procedures each 

546 This estimate is based on the following 

calculation: $275/hour (senior risk management 

specialist) × 8 hours = $2200; $2200 + $6050 + 

$12,000 = $20,250. 

547 See supra note 419 and preceding, 

accompanying, and following text. This estimate is 

based on the following calculation: Report: $275/ 

hour × 10 hours (senior risk management specialist) 

+ $62 × 2 hours (administrative assistant) = $2874; 

Assessment: $275/hour × 15 hours (senior risk 

management specialist) = $4125; Record retention: 

$62/hour × 0.1667 hours (administrative assistant) 

= $10.33; ($2874 + $4125 +$10) × 6 (board meetings 

per year) = $42,054. Hourly wages used for 

purposes of the estimate of administrative assistant 

salaries are from the SIFMA Report on Management 

& Professional Salaries Data (Sept. 2008), modified 

to account for an 1800-hour work-year and 

multiplied by 2.93 to account for bonuses, firm size, 

employee benefits and overhead. 

548 See supra note 420 and accompanying text. 

This estimate is based on the following calculation: 

($2874 (reports) + ($4125) (assessment) + $10 

(recordkeeping)) × 4 = $28,036. 

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year, up to a maximum of 

approximately $149,000.549 

For purposes of this cost benefit 

analysis, Commission staff has 

estimated that 25 percent of fund 

complexes (or 41 complexes) will have 

to develop stress test procedures, 50 

percent (or 81) would have stress test 

procedures, but have to revise those 

procedures, and 25 percent of 

complexes (or 41 complexes) will 

review the procedures without having to 

change them. Based on these estimates, 

staff further estimates that the total onetime costs for fund complexes to 

develop or refine existing stress test 

procedures will be approximately $16 

million.550 In addition, staff estimates 

that the annual costs to all funds to 

conduct stress tests, update test 

procedures, provide reports to fund 

boards, and retain records of the reports 

will be approximately $24 million.551 

4. Repurchase Agreements 

We are adopting, as proposed, 

changes affecting a money market fund’s 

ability to ‘‘look through’’ a repurchase 

agreement for purposes of rule 2a–7’s 

diversification provisions.552 Under the 

amended rule, a money market fund 

will be able to look through a 

repurchase agreement only if it is 

collateralized by cash items or 

Government securities, and if the fund’s 

board of directors or its delegate 

evaluates the counterparty’s 

creditworthiness. 

The changes are designed to reduce 

money market funds’ risks related to 

repurchase agreement investments so 

that funds will be better positioned to 

weather market turbulence and 

maintain a stable net asset value per 

share. A money market fund that invests 

in a repurchase agreement collateralized 

by cash items or Government securities 

is less likely to experience losses upon 

the sale of collateral in the event of a 

counterparty’s default.553 The 

creditworthiness evaluation, moreover, 

will diminish the risk that a money 

549 This estimate is based on the following 

calculations: Tests: $275/hour × 15 hours (senior 

risk management specialist) + $244/hour × 20 hours 

(senior systems analyst) = $9005; $9005 × 12 

(monthly testing) + ($9005 × 4 additional 

‘‘appropriate’’ testing) = $144,080; Update 

procedures: $275/hour × 5 hours (senior risk 

management specialist) + $4000/hour × 1 hour = 

$5375; $144,080 + $5375 = $149,455. 

550 This estimate is based on the following 

calculation: (41 × $173,000) + (81 × $95,000) + (41 

× $20,000) = $15,608,000. 

551 This estimate is based on the following 

calculation: (41 × $149,455) + (81 × $149,455 × 0.5) 

+ (163 × $70,090 (reports, including assessments)) 

= $23,605,252.5. 

552 See supra Section II.D; Proposing Release, 

supra note 2, at Section II.E. 

553 See supra note 272 and accompanying text. 

market fund in the first place enters into 

a repurchase agreement with a 

counterparty that subsequently defaults. 

We believe that the costs associated 

with these changes will be minimal. As 

confirmed by commenters, most money 

market funds typically do not look 

through repurchase agreements 

collateralized with securities other than 

Government securities.554 Under the 

amended rule, money market funds will 

be able, as they have in the past, to 

invest in such repurchase agreements, 

although the funds will not be able to 

look through the repurchase agreements 

for purposes of rule 2a–7’s 

diversification provisions.555 

With regard to the new 

creditworthiness evaluation, several 

commenters stated that money market 

funds already evaluate the credit quality 

of counterparties under rule 2a– 

7(c)(3).556 We estimate, therefore, that 

investment advisers to only 

approximately 20 percent of all 163 

fund complexes are not currently 

making such determinations. To the 

extent that boards or their delegates, in 

response to the amended rule, will make 

determinations that they would not 

otherwise make, those parties will 

expend time and/or resources in making 

those determinations. We estimate that, 

if an investment adviser were to spend 

10 hours a year making creditworthiness 

determinations that it would not 

otherwise make concerning repurchase 

agreement counterparties, it would 

spend approximately $2750 per year.557 

Therefore the total cost to all money 

market funds would be approximately 

$90,750 per year.558 In addition to these 

costs, we also estimated above, for 

purposes of the Paperwork Reduction 

Act, that funds might spend 2 hours per 

year maintaining records concerning the 

determinations made under the 

amended rule.559 We estimate the 

aggregate total costs associated with this 

recordkeeping to be $20,212 per year.560 

554 See supra note 274 and accompanying text. 555 No commenter has expressed the view that the 

new diversification requirement will increase 

money market funds’ cost of investing in 

repurchase agreements. 556 As discussed above, three commenters argued 

that the proposed creditworthiness evaluation is 

unnecessary because it is already an element of the 

minimal credit risk determination that a fund 

makes pursuant to rule 2a–7(c)(3). See supra note 

277. 

557 This estimate is based on the following 

calculation: $275/hour (senior risk management 

specialist) × 10 hours = $2750. 558 This estimate is based on the following 

calculation: $275/hour (senior risk management 

specialist) × 10 hours × 33 fund complexes = 

$90,750. 559 See supra Section IV.A.4. 560 This estimate is based on the following 

calculation: $62/hour (administrative assistant) × 2 

hours × 163 fund complexes = $20,212. 

5. Public Web site Posting 

The amendments to rule 2a–7 require 

money market funds to post monthly 

portfolio information on their Web 

sites.561 The rule amendments are 

intended to provide shareholders with 

timely information about the securities 

held by the money market fund. 

We anticipate that requiring funds to 

post monthly portfolio information on 

their Web sites will benefit investors by 

providing them a better understanding 

of their own risk exposure enabling 

them to make better informed 

investment decisions. The rule 

amendments may thus instill more 

discipline into portfolio management 

and reduce the likelihood of a money 

market fund breaking the buck. 

The Web site posting requirement will 

impose certain costs on funds. We 

estimated in the Proposing Release that 

money market funds would be required 

to spend 24 hours of internal money 

market fund staff time initially to 

develop a webpage, at a cost of $4944 

per fund.562 We also estimated that all 

money market funds would be required 

to spend 4 hours of professional time to 

maintain and update the Webpage each 

month, at a total annual cost of $9888 

per fund.563 We also stated that we 

believe, however, that our estimates 

may overstate the actual costs that 

would be incurred to comply with the 

Web site posting requirement because 

many funds currently post their 

portfolio holdings on a monthly, or 

more frequent, basis.564 For purposes of 

the cost benefit analysis in the 

Proposing Release, Commission staff 

estimated that 20 percent of money 

market portfolios (150 portfolios) did 

not post portfolio holdings information 

on their Web sites.565 We requested 

comment on these estimated costs in the 

Proposing Release.566 One commenter 

suggested that we may have 

underestimated the costs associated 

with the initial development of the Web 

page, but also may have overestimated 

the costs associated with the ongoing 

561 Amended rule 2a–7(c)(12). 

562 See Proposing Release, supra note 2, at n.374 

and accompanying text. The staff estimated that a 

webmaster at a money market fund would require 

24 hours (at $206 per hour) to develop and review 

the webpage (24 hours × $206 = $4944). 

563 See Proposing Release, supra note 2, at n.375 

and accompanying text. The staff estimated that a 

webmaster would require 4 hours (at $206 per hour) 

to maintain and update the relevant webpages on 

a monthly basis (4 hours × $206 × 12 months = 

$9888). 

564 See Proposing Release, supra note 2, at n.376 

and accompanying text. 

565 See Proposing Release, supra note 2, at text 

preceding n.377. 

566 See Proposing Release, supra note 2, at 

Section V.A.5. 

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maintenance of Web site reporting.567 

The commenter did not provide any 

cost estimates. Commission staff 

continues to believe that these cost 

estimates are appropriate. In addition, 

as discussed above, we have decided 

not to require some of the information 

required by Regulation S–X, which we 

proposed that funds post on their Web 

sites.568 We expect that eliminating the 

mandatory posting of this information, 

which we believe is not critical to be 

made available to investors, will reduce 

costs for funds and their advisers.569 

One commenter, however, stated that 

the cost estimates did not include the 

cost for the 80 percent of money market 

portfolios that currently post portfolio 

holdings information at least quarterly 

on their Web sites to develop the 

capability to retain previous months’ 

portfolio holdings information on their 

Web sites.570 Based on a review of some 

of the commenters’ current portfolio 

Web site disclosure and follow-up 

discussions with some commenters, 

Commission staff estimates that 500 

funds will need to develop this 

capability. Commission staff estimates 

that each of these 500 funds will spend 

approximately 12 hours, at a one-time 

cost of $2472 per fund, to develop this 

capability.571 

Based on these estimates, we estimate 

that the total initial costs for the Web 

site disclosure will be $1,947,936.572 In 

addition, we estimate that the annual 

costs for all money market funds to 

maintain and update their webpages 

will be $7.1 million.573 

In addition, monthly Web site 

disclosure may impose other costs on 

funds and their shareholders. For 

example, more frequent disclosure of 

portfolio holdings may arguably expand 

the opportunities for professional 

traders to exploit this information by 

engaging in predatory trading practices, 

such as front-running. However, given 

567 See Clearwater Comment Letter. 568 See supra note 285 and accompanying text. 569 Id. 570 See Data Communique ́ Comment Letter. Under 

our proposal, funds would have been required to 

maintain the portfolio holdings information on their 

Web sites for at least twelve months. We are 

adopting a six-month maintenance period for 

portfolio holding information. 

571 The staff estimates that a Webmaster at a 

money market fund would require 12 hours (at $206 

per hour) to develop the capability to retain 

previous months’ portfolio holdings information on 

their Web sites as required by the rule (12 hours × 

$206 = $2472). 

572 This calculation was based on the following 

estimate: ($4944 × 144 portfolios) (cost to develop 

webpage) + ($2472 × 500 portfolios) (cost to develop 

capability to retain previous months’ portfolio 

holdings information on existing Web sites) = 

$1,947,936. 

573 This calculation was based on the following 

estimate: ($9888 × 719 portfolios) = $7,109,472. 

the short-term nature of money market 

fund investments and the restricted 

universe of eligible portfolio securities, 

we believe that the risk of trading ahead 

is severely curtailed in the context of 

money market funds.574 For similar 

reasons, we believe that the potential for 

‘‘free riding’’ on a money market fund’s 

investment strategies, i.e., obtaining for 

free the benefits of fund research and 

investment strategies, is minimal. Given 

that shares of money market funds are 

ordinarily purchased and redeemed at 

the stable price per share, we believe 

that there would be relatively few 

opportunities for profitable arbitrage. 

Thus, we estimate that the costs of 

predatory trading practices under the 

amended rule will be minimal. 

Furthermore, as previously noted, most 

money market fund portfolios (80 

percent) already are posted on fund Web 

sites at least quarterly. 

6. Processing of Transactions 

The amendments to rule 2a–7 require 

a money market fund to have the 

capacity to redeem and sell its securities 

at a price based on the fund’s current 

net asset value per share, including the 

capacity to sell and redeem shares at 

prices that do not correspond to the 

stable net asset value or price per 

share.575 As discussed above, the events 

of fall 2008 revealed that some funds 

had not implemented automated 

systems to process redemptions at 

prices other than the funds’ stable net 

asset value per share. As a result, 

transactions were processed manually, 

which extended the time that investors 

had to wait for the proceeds from their 

redeemed shares. This experience 

showed that funds that cannot 

electronically process redemptions at 

prices other than the funds’ stable net 

asset value per share risk being unable 

to meet their obligations to redeem 

shares and pay redemption proceeds 

within seven days, as required under 

the Act. 

The amendments to rule 2a–7 mitigate 

the risk that money market funds would 

not be able to meet these obligations in 

the event the fund breaks a buck. These 

amendments benefit shareholders 

because they increase the likelihood 

that shareholders will timely receive the 

proceeds of their investments when a 

fund breaks the buck. 

Because funds have an existing 

obligation to redeem at other than their 

stable net asset value per share, we do 

not believe that this amendment to rule 

2a–7 imposes any additional costs on 

574 See ICI Report, supra note 14, at 93. 


575 Amended rule 2a–7(c)(13). 


funds or their transfer agents.576 

Nonetheless, to the extent that funds 

and transfer agents have to change their 

systems, we estimated in the Proposing 

Release that the total cost for a fund 

complex would be $39,040.577 We 

further estimated that one-third of the 

fund complexes are not currently able to 

redeem at prices other than stable net 

asset value, and thus the total cost to all 

money market funds would be 

$2,225,280.578 

Several commenters claimed that the 

costs of changing the systems would 

exceed our estimates.579 One 

commenter estimated that the costs of 

making the required changes to the core 

transfer agent and ancillary systems 

would total approximately $24 million 

for ten fund complexes, representing 63 

percent of money market fund assets, 

and two of the three largest transfer 

agent service providers.580 Based on 

those figures, we have revised our 

estimate to reflect that the total cost of 

making the required systems changes for 

all money market funds would be 

approximately $38.1 million.581 

B. Rule 17a–9 

The Commission is amending rule 

17a–9 to expand the circumstances 

under which affiliated persons can 

purchase money market fund portfolio 

securities. Under the amendment, a 

money market fund generally will be 

able to sell a portfolio security that has 

defaulted to an affiliated person for cash 

equal to the greater of the security’s 

amortized cost value or market value 

(including accrued interest), even 

though the security continues to be an 

eligible security.582 

576 See supra Section II.F. 

577 This estimate is based on the following 

calculation: $244/hour × 160 hours (senior systems 

analyst) = $39,040. 

578 This estimate was based on the following 

calculation: (171 fund complexes ÷ 3) × $39,040 = 

$2,225,280. 

579 See, e.g., HighMark Capital Comment Letter; 

ICI Comment Letter. 

580 See ICI Comment Letter. The ICI conducted a 

survey of its members and gathered data from 10 

fund complexes and 2 transfer agent service 

providers. Six of the 12 respondents indicated that 

their transfer agent system already had the 

capability to process money market fund trades at 

other than a $1.00 stable net asset value. 

581 We believe that the systems changes costs are 

correlated to the size of the fund complex. 

Accordingly, this estimate is based on the following 

calculations: $24 million ÷ 63% = $38.1 million. 

The ICI Comment Letter also provided additional 

cost estimates for changes to the systems of 

intermediaries who perform sub-transfer agency or 

similar recordkeeping functions. We do not discuss 

those additional costs here because, as discussed 

above, the rule does not impose any requirements 

on those intermediaries. See supra text preceding 

note 363. 

582 See amended rule 17a–9(a). 

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The amendment essentially codifies 

past Commission staff no-action 

letters 583 and should benefit investors 

by enabling money market funds to 

dispose of distressed securities (e.g., 

securities depressed in value as a result 

of market conditions) from their 

portfolios quickly without any loss to 

fund shareholders. It also benefits 

money market funds by eliminating the 

cost and delay of requesting no-action 

assurances in these scenarios and the 

uncertainty whether such assurances 

will be granted.584 We do not believe 

that there are any costs associated with 

this amendment, and we received no 

comments on this analysis. 

In addition, the amendment permits 

affiliated persons to purchase other 

portfolio securities from an affiliated 

money market fund, for any reason, as 

long as the security’s purchase price 

meets the rules’ other conditions and 

such person promptly remits to the fund 

any profit it realizes from the later sale 

of the security.585 Our staff provided 

temporary no-action assurances during 

the fall of 2008 to certain funds facing 

extraordinary levels of redemption 

requests for affiliated persons of such 

funds to purchase eligible securities 

from the funds at the greater of 

amortized cost or market value (plus 

accrued and unpaid interest).586 In these 

circumstances, money market funds 

may need to obtain cash quickly to 

avoid selling securities into the market 

at fire sale prices to meet shareholder 

redemption requests, to the detriment of 

remaining shareholders. The staff also 

provided no-action assurances to money 

market funds for affiliated persons of 

the fund to purchase at the greater of 

amortized cost or market value (plus 

accrued and unpaid interest) certain 

distressed securities that were 

depressed in value due to market 

conditions potentially threatening the 

stable share price of the fund, but that 

remained eligible securities and had not 

defaulted.587 Money market funds and 

their shareholders benefit if affiliated 

persons are able to purchase securities 

from the fund at the greater of amortized 

cost or market value (plus accrued and 

unpaid interest) in such circumstances 

without the time, expense, and 

uncertainty of applying to Commission 

staff for no-action assurances. 

583 See supra Section II.G.1. 

584 Commission staff estimates that the costs to 

obtain staff no-action assurances range from 

$50,000 to $100,000. 

585 See amended rule 17a–9(b). 

586 Many of the no-action letters can be found on 

our Web site. See http://www.sec.gov/divisions/ 

investment/im-noaction.shtml#money. 

587 Id. 

Affiliated persons purchasing such 

securities will have costs in creating and 

implementing a system for tracking the 

purchased securities and remitting to 

the money market fund any profit 

ultimately received as a result. We 

estimate that creating such a system on 

average would require 5 hours of a 

senior programmer’s time, at a cost of 

$1460 for each of the 163 fund 

complexes with money market funds, 

and a total cost of $237,980.588 After the 

initial creation of this system, we expect 

that the time spent noting in this system 

that a security was purchased under 

rule 17a–9 would require a negligible 

amount of compliance personnel’s time. 

Based on our experience, we do not 

anticipate that there would be many 

instances, if any, in which an affiliated 

person will be required to repay profits 

in excess of the purchase price paid to 

the fund. However, if there is a 

payment, it would be made to the fund. 

If the payment is sufficiently large, we 

believe that funds are likely to include 

it with the next distribution to 

shareholders, which would not result in 

any additional costs to the fund. We 

received no comments on this analysis. 

The Commission also is adopting a 

related amendment to rule 2a–7, which 

requires that funds report all 

transactions under rule 17a–9 to the 

Commission. We believe that this 

reporting requirement benefits fund 

investors by allowing the Commission 

to monitor the purchases for possible 

abuses and conflicts of interest on the 

part of the affiliates. It also allows the 

Commission to observe what types of 

securities are distressed and which 

money market funds are holding 

distressed securities or are subject to 

significant redemption pressures. This 

information will assist us in monitoring 

emerging risks at money market funds. 

For purposes of the Paperwork 

Reduction Act analysis, we estimate this 

amendment will impose relatively small 

reporting costs on money market funds 

of $7625 per year.589 We received no 

comments on this analysis. 

C. Rule 22e–3 

Rule 22e–3 permits a money market 

fund that has broken the buck, or is at 

imminent risk of breaking the buck, to 

suspend redemptions and postpone the 

payment of proceeds pending boardapproved liquidation proceedings. By 

facilitating orderly liquidations in 

588 This estimate is based on the following 

calculation: $292/hour × 5 hours × 163 fund 

complexes = $237,980. 

589 This estimate is based on the following 

calculation: 25 (notices) × $305/hour (attorney) × 1 

hour = $7625. See supra note 437 and 

accompanying text. 

distressed circumstances, we anticipate 

that rule 22e–3 will reduce the 

vulnerability of shareholders to the 

harmful effects of a run on a fund and 

minimize the potential for market 

disruption. The rule also enables funds 

to avoid the expense and delay of 

obtaining an exemptive order from the 

Commission, which we estimate would 

otherwise cost approximately $75,000, 

and will provide legal certainty to funds 

that wish to suspend redemptions 

during a liquidation in the interest of 

fairness to all shareholders. 

Rule 22e–3 will impose certain 

minimal costs on funds relying on the 

rule by requiring them to provide prior 

notice to the Commission of their 

decision to suspend redemptions in 

connection with a liquidation. 

Furthermore, the rule will impose 

minimal costs on certain conduit funds 

that have invested in money market 

funds that suspended redemptions in 

reliance on the rule by also requiring 

those conduit funds to provide notice to 

the Commission. We estimate that the 

total annual burden of the notification 

requirement for all money markets 

funds and conduit funds will be 110 

minutes, at a cost of $559.590 In 

addition, rule 22e–3 imposes costs on 

shareholders who seek to redeem their 

shares, but are unable to do so. In those 

instances, shareholders may have to 

borrow funds from another source, and 

thereby incur interest charges and other 

transaction fees. We believe, however, 

that the costs associated with rule 22e– 

3 are minimal because the rule provides 

a very limited exemption that is 

triggered only when a fund breaks the 

buck, or is in imminent risk of breaking 

the buck, and liquidates. 

D. Rule 30b1–7 and Form N–MFP: 

Monthly Reporting of Portfolio Holdings 

Rule 30b1–7 and Form N–MFP 

require money market funds to file with 

the Commission interactive dataformatted portfolio holdings 

information on a monthly basis. We 

expect that the rule and form will 

improve the efficiency and effectiveness 

of the Commission’s oversight of money 

market funds by enabling Commission 

staff to manage and analyze 

comprehensive money market fund 

portfolio information more quickly and 

at a lower cost than is currently 

possible. The interactive data will also 

facilitate the flow of information 

between money market funds and other 

users of this information, such as 

information services, academics, and 

590 See supra note 443 and accompanying text. 

This estimate is based on the following calculation: 

$305/hour × 110 minutes = $559. 

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investors. As a result, users of this 

information, including investors, may 

benefit by gaining a better 

understanding of money market funds’ 

risk exposure and becoming better 

informed in their investment decisions. 

As the development of software 

products to analyze the data continues 

to grow, we expect these benefits will 

increase. Finally, the portfolio reporting 

may instill more discipline into 

portfolio management and reduce the 

likelihood of a money market fund 

breaking the buck. 

Money market funds may also realize 

cost savings from the rule. Currently, 

money market funds provide portfolio 

holdings information in a variety of 

formats to different third-parties, such 

as information services and NRSROs. 

The rule may encourage the industry to 

adopt a standardized format, thereby 

reducing the burdens on money market 

funds of having to produce this 

information in multiple formats. 

The reporting requirement will also 

impose certain costs. We estimated in 

the Proposing Release, that, for the 

purposes of the PRA, these filing 

requirements (including collecting, 

tagging, and electronically filing the 

report) would impose 128 burden hours 

at a cost of $35,968 591 per money 

market fund for the first year, and 96 

burden hours at a cost of $26,976 592 per 

money market fund in subsequent 

years.593 We requested comment on 

these estimated costs in the Proposing 

Release.594 

As discussed above, two commenters 

asserted that the Commission’s cost 

estimates did not include time to review 

the information required in Form N– 

MFP.595 In response to these 

commenters, we revised our PRA 

estimates to include an additional 2 

591 See Proposing Release, supra note 2, at n.396 

and accompanying text. This estimate was based on 

the following calculation: $281/hour × 128 hours 

(senior database administrator) = $35,968. 

592 See Proposing Release, supra note 2, at n.397 

and accompanying text. This estimate was based on 

the following calculation: $281/hour × 96 hours 

(senior database administrator) = $26,976. 

593 We understand that some money market funds 

may outsource all or a portion of these 

responsibilities to a filing agent, software 

consultant, or other third-party service provider. 

We believe, however, that a fund would engage 

third-party service providers only if the external 

costs were comparable, or less than, the estimated 

internal costs of compiling, tagging, and filing the 

Form N–MFP. 

594 See Proposing Release, supra note 2, at 

paragraph following n.398. 

595 See Bowne Comment Letter; Data 

Communique ́ Comment Letter. Another commenter 

suggested that we may have underestimated the 

costs associated with the initial filing of Form N– 

MFP, but also may have overestimated the ongoing 

costs associated with subsequent filings. See 

Clearwater Comment Letter. The commenter, 

however, did not provide any cost estimates. 

hours per filing for review of the 

information.596 As a result of this 

increase, we have revised our cost 

estimates. We estimate that, for the 

purposes of the PRA, these filing 

requirements (including collecting (and 

review), tagging, and electronically 

filing the report) would impose 152 

burden hours at a cost of $42,712 597 per 

money market fund for the first year, 

and 120 burden hours at a cost of 

$33,720 598 per money market fund in 

subsequent years.599 We estimate that 

the total cost for all money market funds 

for the first year would be 

$30,709,928.600 The total annual 

estimated cost for all money market 

funds in subsequent years would be 

$24,244,680.601 

In addition, funds may incur 

additional costs as a result of the public 

availability of a fund’s market-based net 

asset value, which is required to be 

included in Form N–MFP filings. In 

particular, some commenters noted that 

if investors systematically redeem 

shares for one dollar when the marketbased net asset value is less than one 

dollar, the fund might have difficulty 

maintaining its stable price. However, in 

response to concerns about the 

disclosure of market-based values, we 

are delaying the public availability of 

the information filed on Form N–MFP 

for 60 days after the end of the reporting 

period.602 We acknowledge that 

investors might choose to sell their 

money market fund shares that have a 

low market-based net asset value, and it 

is possible that a run could develop. 

596 See supra Section IV.C. 

597 This estimate is based on the following 

calculation: $281/hour × 152 hours (senior database 

administrator) = $42,712. 

598 This estimate is based on the following 

calculation: $281/hour × 120 hours (senior database 

administrator) = $33,720. 

599 We understand that some money market funds 

may outsource all or a portion of these 

responsibilities to a filing agent, software 

consultant, or other third-party service provider. 

We believe, however, that a fund would engage 

third-party service providers only if the external 

costs were comparable, or less than, the estimated 

internal costs of compiling, tagging, and filing the 

Form N–MFP. 

600 This estimate is based on the following 

calculation: $42,712 (total estimated cost per fund 

for first year) × 719 funds = $30,709,928. 

601 This estimate is based on the following 

calculation: $33,720 (total estimated cost per fund 

after the first year) × 719 funds = $24,244,680. 

602 See rule 30b1–7(b). See also supra text 

accompanying note 320. As noted above, money 

market funds currently must disclose their mark-tomarket net asset value per share semi-annually in 

their Form N–SAR filings [17 CFR 274.101], which 

are publicly available. Form N–SAR must be filed 

with the Commission no later than the 60th day 

after the end of the fiscal period for which the 

report is being prepared. See supra note 337 and 

accompanying text. Thus, investors already have 

access to market-based portfolio value information 

on the basis of which they could make redemptions. 

Nevertheless, at least two other factors 

will reduce the risk of a run. First, 

portfolio managers may choose to follow 

less risky investment strategies in an 

effort to maintain a high market-based 

net asset value. Second, funds may be 

quicker to ask for help from their 

affiliates through, for example, rule 

17a–9 transactions. 

The money market fund industry is 

characterized by a mix of competitors 

with and without affiliates that can 

provide financial support. The 

disclosure of a fund’s market-based net 

asset value might encourage funds that 

have affiliates with the ability to 

provide financial support to request 

such support as soon as any problems 

develop. This support could provide 

stability to funds that receive the 

support. This support might also give a 

competitive advantage to funds that 

receive it because they may be more 

willing to invest in securities with 

higher risk and higher yields. However, 

the extent of this competitive advantage 

may be mitigated because the 

amendments will require the disclosure 

of the fund’s market-based NAV with 

and without capital support agreements. 

In addition, much of the extent to which 

fund managers might take advantage of 

capital support arrangements to boost 

fund yields is independent of the 

amendments we are adopting today and 

affiliated persons of money market 

funds are not obligated to support these 

funds. For the reasons outlined in the 

discussion on the monthly Web site 

posting requirement, we estimate that 

there will be minimal additional costs 

incurred from predatory trading 

practices (e.g., front-running or ‘‘free 

riding’’) as a result of the reporting 

requirement.603 

E. Rule 30b1–6T 

We adopted rule 30b1–6T to enable 

the Commission staff to continue to 

have effective oversight of money 

market funds. The rule was designed to 

improve the efficiency and effectiveness 

of the Commission’s oversight by 

providing useful information about 

money market funds that report under 

the rule, and by enabling the staff to 

manage and analyze money market fund 

portfolio information more quickly and 

at a lower cost than possible without 

electronic submissions of portfolio 

schedules. When we adopted rule 30b1– 

6T in September 2009, we requested 

603 See supra note 574 and accompanying and 

following text. 

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comments on the costs and benefits of 

the rule but received no comments.604 

Rule 30b1–6T will impose some costs 

on funds. For the purposes of the PRA, 

we estimated that the rule will result in 

an increase of 2100 burden hours per 

year. We estimate that these burden 

hours will cost a total of $590,100.605 

We do not believe that rule 30b1–6T 

will impose other significant costs, 

especially given the nonpublic nature of 

the reports required under the rule. 

VI. Competition, Efficiency, and Capital 

Formation 

Section 2(c) of the Investment 

Company Act requires the Commission, 

when engaging in rulemaking that 

requires it to consider or determine 

whether an action is consistent with the 

public interest, to consider, in addition 

to the protection of investors, whether 

the action will promote efficiency, 

competition, and capital formation.606 

A. Rule 2a–7 

1. Second Tier Securities, Portfolio 

Maturity, and Liquidity Limits 

We are adopting several amendments 

to rule 2a–7 to tighten the risk-limiting 

conditions of the rule. As discussed 

above, we are further restricting money 

market funds’ ability to acquire second 

tier securities. The amendments reduce 

the maximum weighted average 

maturity of a money market fund 

permitted by rule 2a–7 from 90 days to 

60 days.607 They also impose a new 

maturity limitation based on the 

weighted average ‘‘life’’ of fund 

securities that limits the portion of a 

fund’s portfolio that can be held in 

longer term floating- or variable-rate 

securities.608 We are deleting a 

provision in rule 2a–7 that permitted 

money market funds not relying on the 

amortized cost method of valuation to 

acquire Government securities with a 

remaining maturity of up to 762 

calendar days. 

Finally, we are adopting new liquidity 

requirements for money market funds. 

In particular, we are amending rule 2a– 

7 to (i) Require that each money market 

fund hold securities that are sufficiently 

liquid to meet reasonably foreseeable 

shareholder redemptions in light of its 

obligations under section 22(e) of the 

Act and any commitments the fund has 

made to shareholders; 609 (ii) further 

604 See Rule 30b1–6T Release, supra note 303, at 

Section VI. 

605 This estimate is based on the following 

calculation: 2100 hours × $281/hour (senior 

database administrator) = $590,100. 

606 15 U.S.C. 80a–2(c). 

607 See amended rule 2a–7(c)(2)(ii). 

608 See amended rule 2a–7(c)(2)(iii). 

609 Amended rule 2a–7(c)(5). 

limit a money market fund’s 

investments in illiquid securities (i.e. 

securities that cannot be sold or 

disposed of in the ordinary course of 

business within seven days at 

approximately the value ascribed to 

them by the money market fund); 610 

and (iii) require a taxable money market 

fund to hold at least 10 percent of its 

total assets in ‘‘daily liquid assets’’ and 

any money market fund to hold at least 

30 percent of its total assets in ‘‘weekly 

liquid assets.’’ 611 

We believe that these changes will 

reduce money market funds’ sensitivity 

to interest rate, credit, and liquidity 

risks. These changes will also limit the 

spread risk produced by longer term 

securities and second tier securities. A 

reduction of these risks will help 

individual money market funds to 

weather market turbulence and 

maintain a stable net asset value per 

share, which will increase the stability 

of the entire money market fund 

industry. To the extent that money 

market funds are more stable, the 

changes also will reduce systemic risk 

to the capital markets and ensure a 

stable source of financing for issuers of 

short-term credit instruments. We 

believe that these effects will encourage 

capital formation by encouraging 

investment in money market funds as 

well as the issuance of securities that 

money market funds can purchase. 

These changes also may reduce 

maturities of short-term credit securities 

that issuers offer, which may increase 

financing costs for these issuers who 

might have to go back more frequently 

to the market for financing. As 

discussed above, several commenters 

stated that the elimination of money 

market funds’ ability to acquire second 

tier securities could increase second tier 

security issuers’ borrowing costs and 

thus increase capital formation costs.612 

Some of these commenters also asserted 

that such a prohibition could require 

second tier security issuers to rely more 

on bank financing, which could 

negatively impact banks’ ability to lend 

to other parts of the economy.613 We 

note that these impacts should be 

mitigated given that we are limiting and 

610 Amended rule 2a–7(c)(5)(i). Under the 

amended rule, a money market fund cannot acquire 

illiquid securities if immediately after the 

acquisition, the fund would have invested more 

than five percent of its total assets in illiquid 

securities. 

611 See amended rule 2a–7(c)(5)(ii)–(iii). See also 

amended rule 2a–7(a)(8) (defining ‘‘daily liquid 

assets’’); 2a–7(a)(32) (defining ‘‘weekly liquid 

assets’’). 

612 See supra notes 48–49 and accompanying 

paragraph. 

613 See, e.g., Chamber/Tier 2 Issuers Comment 

Letter. 

not eliminating money market funds’ 

ability to acquire second tier securities. 

However, to the extent that some issuers 

are unwilling or unable to issue 

securities that match money market 

fund demand given these new 

restrictions or that banks become less 

willing to lend to finance new 

businesses, the amendments could have 

a negative impact on capital formation. 

As discussed in the cost benefit 

analysis above, we expect that the 

amendments will reduce yields that 

some money market funds are able to 

offer. The lower yields may affect the 

ability of money market funds to 

compete with other investment vehicles. 

While money market funds compete 

with each other, they also compete for 

investors on the basis of risk-return 

tradeoff with other lower-risk 

investment vehicles, such as offshore or 

unregulated money market funds, bank 

money market deposit accounts, and 

deposit accounts in general. The 

reduction in yield may cause some 

investors to move their money to, 

among other places, offshore or 

unregulated money market funds that 

do not follow rule 2a–7’s strictures and 

thus are able to offer a higher yield. 

Beyond the competitive impact, such a 

change could increase systemic risks to 

short-term credit markets and capital 

formation by increasing investment in 

less stable short-term instruments. 

Further limitations on money market 

funds’ ability to acquire second tier 

securities also may have anticompetitive 

effects on some relatively small money 

market funds that may compete with 

larger funds on the basis of yield. One 

commenter stated that elimination of 

money market funds’ ability to acquire 

second tier securities could have a 

disproportionate impact on smaller 

money market funds.614 Our review of 

money market fund holdings of second 

tier securities during September 2008 

did not reveal smaller money market 

funds holding second tier securities to 

a greater extent than larger funds, 

although smaller funds may try to 

increase their holdings of second tier 

securities in different market 

environments. Even if there were any 

anticompetitive effects on smaller 

money market funds, these effects 

should be reduced by the fact that we 

are only further limiting, and not 

eliminating, money market funds’ 

ability to acquire second tier securities. 

The further limitations on the ability 

of money market funds to invest in 

second tier securities may affect the 

capital raising ability and strategies of 

second tier security issuers or otherwise 

614 See Thrivent Comment Letter. 

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affect their financing arrangements, and 

may affect the flexibility of investing 

options for funds. As a preliminary 

matter, taking into account commenters’ 

concerns, we have determined not to 

eliminate money market funds’ ability 

to acquire second tier securities. 

Further, as noted above, second tier 

securities represent only a very small 

percentage of money market fund 

portfolios today and money market 

funds are not the primary purchasers of 

second tier securities, which suggests 

that our amendments would not in 

themselves have a material effect on 

capital formation.615 Nonetheless, we 

recognize that some non-rule 2a–7 

regulated cash management funds and 

investment pools voluntarily use rule 

2a–7 as an investment guideline.616 

However, since we are only further 

limiting, and not eliminating, money 

market funds’ ability to acquire second 

tier securities, we do not believe that the 

behavior of these non-rule 2a–7 funds 

will have a material adverse effect on 

capital formation. 

2. Designation of NRSROs 

We are adopting amendments 

requiring money market fund boards to 

designate at least four NRSROs that the 

fund will use in determining the 

eligibility of portfolio securities and that 

the board determines annually issue 

credit ratings that are sufficiently 

reliable for this use.617 As noted above, 

several commenters suggested that 

designating at least three NRSROs could 

encourage competition among NRSROs 

to achieve designation by money market 

fund boards.618 We assume that three 

NRSROs issue more than 90 percent of 

ratings of short-term debt.619 Requiring 

the designation of at least four NRSROs 

will ensure that money market funds 

will consider NRSROs beyond the 

dominant three. In addition, the 

amendment may encourage new 

NRSROs that issue ratings specifically 

for money market fund instruments to 

enter the market. To the extent that 

requiring designation of at least four 

NRSROs will further increase 

615 Based on discussions with one commenter to 

clarify certain aspects of its comment letter, 

however, we understand that money market funds 

purchase approximately 80% of the commercial 

paper of at least one second tier issuer. See 

Chamber/Tier 2 Issuers Comment Letter. We 

understand that such a significant reliance on 

money market funds to purchase a second tier 

issuer’s securities is quite unusual. 

616 See, e.g., Chamber/Tier 2 Issuers Comment 

Letter. 

617 Amended rule 2a–7(a)(11)(i). 

618 See, e.g., HighMark Capital Comment Letter; 

Invesco Aim Comment Letter. 

619 See Proposing Release, supra note 2, at text 

accompanying and following n.116. See also supra 

note 104 and accompanying text. 

competition, it also should increase the 

reliability of the credit ratings of 

designated NRSROs. Having better 

information about risk could increase 

the efficiency of fund managers in 

determining eligibility of portfolio 

securities. We do not anticipate that the 

proposed designation of NRSROs will 

have an adverse impact on capital 

formation. 

3. Stress Testing 

We are amending rule 2a–7 to require 

the board of directors of each money 

market fund to adopt procedures 

providing for periodic stress testing of 

the money market fund’s portfolio, 

reporting the results of the testing to 

fund boards, and providing an 

assessment to the board.620 We believe 

that stress testing will increase the 

efficiency of money market funds by 

enhancing their risk management and 

thus making it more likely that the fund 

will be better prepared for potential 

stress on the fund due to market events 

or shareholder behavior. Money market 

funds will likely become more stable as 

a result of the risk management benefits 

provided by stress testing, allowing 

them to expand and attract further 

investment. If so, this result will 

promote capital formation. We do not 

believe that stress testing will have an 

adverse impact on competition or 

capital formation.621 

4. Repurchase Agreements 

We are adopting, as proposed, 

changes to the conditions under which 

a money market fund may take 

advantage of the special look-through 

treatment of repurchase agreements 

under rule 2a–7’s diversification 

provisions.622 In order to obtain such 

special treatment, a money market fund 

will be limited to investing in 

repurchase agreements collateralized by 

cash items or Government securities and 

the fund’s board of directors or its 

delegate will have to evaluate the 

creditworthiness of the repurchase 

agreement’s counterparty. 

We believe that these changes will 

limit the risk that a money market fund 

incurs losses upon the sale of collateral 

in the event of a counterparty’s 

default.623 The lower risk will in turn 

increase money market funds’ ability to 

maintain a stable net asset value per 

share, thereby preventing losses to fund 

620 Amended rule 2a–7(c)(10)(v). 

621 No commenters addressed the analysis in the 

Proposing Release regarding whether the proposed 

stress testing requirements would promote 

competition, efficiency, and capital formation. 

622 See supra Section II.D; Proposing Release, 

supra note 2, at Section II.E. 

623 See supra note 272 and accompanying text. 

investors. More stable money market 

funds may attract greater investments, 

thus promoting capital formation and 

providing a greater source of financing 

in the capital markets. The changes will 

not negatively impact competition, 

efficiency, or capital formation. In 

particular, commenters noted that most 

money market funds typically do not 

look through to collateral consisting of 

non-Government securities.624 

5. Public Web Site Disclosure 

One of the amendments to rule 2a–7 

requires money market funds to disclose 

certain portfolio holdings information 

on their Web sites on a monthly 

basis.625 In the Proposing Release, we 

requested comment on what effect this 

rule amendment would have on 

competition, efficiency, and capital 

formation.626 No commenters addressed 

the effect of this amendment on 

competition, efficiency, and capital 

formation. 

The rule amendment will provide 

greater transparency of the fund’s 

investments for current and prospective 

shareholders, and may thus promote 

more efficient allocation of investments 

by investors.627 We believe the rule 

amendment may also improve 

competition, as better-informed 

investors may prompt funds managers 

to provide better services and products. 

We do not anticipate that funds would 

be disadvantaged, with respect to 

competition, because so many already 

have chosen to provide the information 

more frequently than monthly. In 

addition, the investments selected by 

money market funds are less likely than, 

for example, equity funds, to be 

investments from which competing 

funds would obtain benefit by 

scrutinizing on a monthly basis. 

The rule amendment may also 

promote capital formation by making 

portfolio holdings information readily 

accessible to investors, who may thus be 

more inclined to allocate their 

investments in a particular fund or in 

money market funds instead of an 

624 See supra note 274. Wells Fargo stated that the 

amendment would negatively affect capital 

formation because money market funds will no 

longer invest in repurchase agreements 

collateralized with securities with the highest rating 

or unrated securities of comparable quality, which 

would negatively affect counterparties and issuers 

of collateral. See Wells Fargo Comment Letter. We 

discuss those comments above. See supra note 273. 

625 See supra Section II.E.1. 

626 See Proposing Release, supra note 2, at 

Section VI.A.4. 

627 Due to the availability of the portfolio holding 

information on fund Web sites, investors may 

allocate their investments away from funds with 

riskier portfolios. Among other things, this may 

reduce systemic risks as money market funds may 

respond by investing in securities with less risk. 

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alternative product. Alternatively, the 

rule amendment might have the reverse 

effect if the portfolio holdings 

information makes investors less 

confident regarding the risks associated 

with money market funds, including the 

risk that market participants might use 

the information obtained through the 

disclosures to the detriment of the fund 

and its investors, such as by trading 

along with the fund or ahead of the fund 

by anticipating future transactions based 

on past transactions. We also recognize 

the potential for runs on money market 

funds that might result from any 

investors who compute market-based 

net asset values from the public 

disclosure of portfolio holdings. As 

discussed above, however, most money 

market funds currently disclose their 

portfolio holdings on their Web sites, 

and therefore we do not believe that our 

requirement that funds post monthly 

portfolio holdings will have a material 

effect on the ability of investors to 

compute market-based values and incite 

a run on the fund. 

6. Processing of Transactions 

The amendments to rule 2a–7 require 

a money market fund to have the 

capacity to redeem and sell its securities 

at a price based on the fund’s current 

net asset value per share, even if the 

fund’s current net asset values does not 

correspond to the fund’s stable net asset 

value or price per share. This 

amendment increases efficiency at 

money market funds that break the buck 

by increasing the speed and minimizing 

the operational difficulties in satisfying 

shareholder redemption requests in 

such circumstances. It may also reduce 

investors’ concerns that redemptions 

would be unduly delayed if a money 

market fund were to break the buck. We 

do not believe that this amendment has 

a material impact on competition or 

capital formation. 

B. Rule 17a–9 

The Commission is amending rule 

17a–9 to expand the circumstances 

under which affiliated persons can 

purchase money market fund securities. 

Under the amendments, a money market 

fund generally will be able to sell a 

portfolio security that has defaulted to 

an affiliated person for the greater of the 

security’s amortized cost value or 

market value (including accrued 

interest), even though the security 

continued to be an eligible security.628 

In addition, the amendment permits 

affiliated persons, for any reason, to 

purchase other portfolio securities from 

an affiliated money market fund on the 

628 See amended rule 17a–9(a). 

same terms as long as such person is 

required to promptly remit to the fund 

any profit it realizes from the later sale 

of the security.629 These amendments 

increase the efficiency of both the 

Commission and money market funds 

by allowing affiliated persons to 

purchase portfolio securities from 

money market funds under distress 

without having to seek no-action 

assurances from Commission staff. The 

money market fund industry is 

competitive; some money market funds 

have well-funded affiliates to support 

the money market fund while others do 

not. This amendment may increase the 

competitive advantage of money market 

funds with well-funded affiliates 

relative to other money market funds, 

which we balanced against the need to 

promote stability in money market 

funds. We do not believe that the 

amendments will have any material 

impact on capital formation. We 

received no comments on this analysis. 

C. Rule 22e–3 

Rule 22e–3 permits a money market 

fund that has broken the buck, or is at 

imminent risk of breaking the buck, to 

suspend redemptions and postpone the 

payment of proceeds pending boardapproved liquidation proceedings. We 

anticipate the rule will promote 

efficiency in the financial markets by 

facilitating the orderly disposal of assets 

during a liquidation. To the extent that 

investors choose money market funds 

over alternative investments because the 

rule provides reassurance as to the 

protection of fund assets in the event a 

money market fund breaks the buck, the 

rule also may promote capital 

formation. If, however, the possibility 

that redemptions may be suspended 

during a liquidation makes money 

market funds less appealing to 

investors, the rule may have a negative 

effect on capital formation. The rule also 

may help make investors more 

confident that they will receive the 

proceeds from their investment in the 

event of a liquidation. We do not believe 

that the rule will have any adverse effect 

on competition. We received no 

comments on this analysis. 

D. Rule 30b1–7 and Form N–MFP: 

Monthly Reporting of Portfolio Holdings 

New rule 30b1–7 and Form N–MFP 

mandate the monthly electronic filing of 

each money market fund’s portfolio 

holdings information in XML-tagged 

format. As discussed above, we believe 

the new reporting requirement will 

improve the efficiency and effectiveness 

of the Commission’s oversight of money 

629 See amended rule 17a–9(b). 

market funds. The availability, and 

usability, of this data will also promote 

efficiency for other third parties that 

may be interested in collecting and 

analyzing money market funds’ 

portfolio holdings information. Money 

market funds currently are often 

required to provide this information to 

various third parties in different 

formats. To the extent that the new 

reporting requirement may encourage a 

standardized format for disclosure or 

transmission of portfolio holdings 

information, it may promote efficiency 

for money market funds. We do not 

believe that the reporting requirement 

will have an adverse effect on capital 

formation. 

In the Proposing Release, we 

requested comment on what effect the 

proposed rule 630 would have on 

competition, efficiency, and capital 

formation.631 One commenter stated 

that the Commission’s view that the 

proposed rule would not have an 

adverse effect on competition may be 

incorrect for subadvised money market 

funds, because a number of the 

information items in Form N–MFP 

require information that typically is in 

the possession of the subadviser who 

manages the portfolio and not the 

principal adviser who, in most cases, 

would be responsible for preparing 

Form N–MFP. The commenter stated 

that obtaining the data from subadvisers 

would be costly because it would have 

to be done on a real-time basis, which 

would require a significant investment 

in new infrastructure.632 The 

information required by the items cited 

by the commenter, however, already 

should be readily available to the 

subadviser.633 The information also is 

630 The rule was proposed as rule 30b1–6. As 

noted above, in September 2009 we adopted interim 

final temporary rule 30b1–6T. We therefore have 

adopted proposed rule 30b1–6 as rule 30b1–7. 

631 See Proposing Release, supra note 2, at 

Section VI.D. 

632 See Committee Ann. Insur. Comment Letter. In 

particular, the commenter stated that the 

information required by Items 17 (dollar weighted 

average life maturity), 20 (CIK of the issuer of 

security), 26(b) (credit rating given by the NRSROs 

for the security), and 30–35 (information on 

enhancements) of proposed Form N–MFP are not 

typically in the possession of the principal adviser 

and must be obtained from the subadviser managing 

the portfolio. The commenter asserted that the 

Commission’s estimate of 128 burden hours per 

money market fund for the first year (1 filing × 40 

hours + 11 filings × 8 hours) is far too low for 

subadvised funds. For the reasons discussed below, 

we do not believe that subadvised funds would be 

subject to significant investment in new 

infrastructure and thus we believe that the burden 

estimate is not too low for subadvised funds. The 

commenter does not state that there would be any 

ongoing additional costs for compliance with Form 

N–MFP by subadvised money market funds. 

633 Subadvisers must have all of the information 

required by the particular items the commenter 

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not needed on a real-time basis by the 

principal adviser because the form 

requires information as of the last 

business day of the preceding month. 

Moreover, we have lengthened the time 

for filing Form N–MFP from the 

proposed two business days after the 

end of each month to five business days 

after the end of each month. This 

change should provide subadvisers with 

sufficient time to send the information 

to the principal adviser without having 

to invest in new infrastructure to 

provide the information on a real-time 

basis.634 We therefore continue to 

believe that the reporting requirement 

will not have an adverse effect on 

competition. 

The amendments also will require the 

public disclosure of a money market 

fund’s market-based net asset value. We 

expect that the disclosure of month-end 

market-based NAV may discourage the 

fund’s portfolio manager from taking 

certain risks that could reduce the 

fund’s market-based NAV. The money 

market fund industry is characterized by 

a mix of competitors with and without 

affiliates that can provide financial 

support. The new disclosure might 

encourage funds that have affiliates with 

the ability to provide financial support 

to request such support as soon as any 

problems develop. This support could 

provide stability to funds that receive 

the support. This support might also 

give a competitive advantage to funds 

that receive it because they may be more 

willing to invest in securities with 

higher risk and higher yields. However, 

the extent of this competitive advantage 

may be mitigated because the 

amendments will require the disclosure 

of the fund’s market-based NAV with 

and without capital support agreements. 

In addition, much of the extent to which 

fund managers might take advantage of 

capital support arrangements to boost 

fund yields is independent of the 

amendments we are adopting today and 

affiliated persons of money market 

funds are not obligated to support these 

funds. 

The disclosure of a market-based net 

asset value below $1.00 also might 

precipitate a run on the fund. If one 

fund were to fail for this reason, runs 

might develop in other money market 

specifies in order to manage the portfolio on a dayto-day basis in compliance with rule 2a–7, other 

than an issuer’s CIK. Under Form N–MFP, as 

adopted, the CIK of the issuer of the security is only 

required if the security does not have a CUSIP and 

the issuer has a CIK. Under our proposal the CIK 

number of the issuer would have been required for 

all securities. 

634 By increasing the deadline to five business 

days, filers also will have at least two non-business 

days (in addition to the extra three business days) 

in which to complete and submit the form. 

funds, even those with relatively high 

market-based net asset values. However, 

we believe that shareholders will benefit 

from knowing the monthly marketbased net asset values of money market 

funds. We anticipate that the public 

availability of these values will help 

investors make informed decisions 

about whether to invest, or maintain 

their investments, in money market 

funds. We also anticipate that retail 

investors over time will become 

acclimated to the market-based net asset 

value information that money market 

funds will be required to disclose, and 

that most of those investors will not 

likely make decisions based on 

immaterial changes to funds’ portfolio 

values. In response to concerns 

expressed by some commenters about 

the potential for harm that immediate 

public disclosure may pose for funds, 

we will delay for 60 days after the end 

of the reporting period, public 

disclosure of the information filed on 

Form N–MFP, including the marketbased net asset values.635 

E. Rule 30b1–6T 

Rule 30b1–6T is intended to facilitate 

oversight of money market funds that 

present a greater risk that they will be 

unable to maintain their primary 

investment objectives. As noted above, 

the nonpublic reports are designed to 

improve the efficiency and effectiveness 

of the Commission’s oversight of such 

money market funds, which may also 

provide reassurance to investors, which 

may in turn promote capital formation. 

We do not believe that the rule will 

have any effect on competition. 

VII. Regulatory Flexibility Act 

Certification 

The Commission certified, pursuant 

to section 605(b) of the Regulatory 

Flexibility Act of 1980 that the proposed 

amendments to rules 2a–7, 17a–9, and 

30b1–5, and proposed rules 30b1–6 and 

22e–3 under the Investment Company 

Act would not have a significant 

economic impact on a substantial 

number of small entities.636 We 

included this certification in Section VII 

of the Proposing Release. Although we 

encouraged written comments regarding 

635 See supra Section II.E.2. 

636 5 U.S.C. 605(b). Based on information in 

filings submitted to the Commission, we believe 

that there are no money market funds that are small 

entities. Under rule 0–10 under the Investment 

Company Act, an investment company is 

considered a small entity if it, together with other 

investment companies in the same group of related 

investment companies, has net assets of $50 million 

or less as of the end of its most recent fiscal year. 

this certification, no commenters 

responded to this request.637 

VIII. Statutory Authority 

The Commission is adopting 

amendments to rule 2a–7 under the 

exemptive and rulemaking authority set 

forth in sections 6(c), 8(b), 22(c), and 

38(a) of the Investment Company Act 

[15 U.S.C. 80a–6(c), 80a–8(b), 80a–22(c), 

80a–37(a)]. The Commission is adopting 

amendments to rule 17a–9 pursuant to 

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)]. The 

Commission is adopting rule 22e–3 

pursuant to the authority set forth in 

sections 6(c), 22(e) and 38(a) of the 

Investment Company Act [15 U.S.C. 

80a–6(c), 80a–22(e), and 80a–37(a)]. The 

Commission is adopting an amendment 

to rule 30b1–6T pursuant to 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)]. The Commission 

is adopting new rule 30b1–7 and Form 

N–MFP pursuant to 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)]. 

List of Subjects in 17 CFR Parts 270 and 

274 

Investment companies, Reporting and 

recordkeeping requirements, Securities. 

Text of Rules, Rule Amendments, and 

Form 

■ For reasons set out in the preamble, 

Title 17, Chapter II of the Code of 

Federal Regulations is 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, and 80a–39, unless otherwise 

noted. 

* * * * * 

■ 2. Section 270.2a–7 is revised to read 

as follows: 

§ 270.2a–7 Money market funds. 

(a) Definitions. 

(1) Acquisition (or Acquire) means 

any purchase or subsequent rollover 

(but does not include the failure to 

exercise a Demand Feature). 

637 We also certified that rule 30b1–6T would not 

have a significant economic impact on a substantial 

number of small entities. See Rule 30b1–6T Release, 

supra note 303, at Section VIII. We received no 

comment on that certification. 

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10110 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

(2) Amortized Cost Method of 

valuation means the method of 

calculating an investment company’s 

net asset value whereby portfolio 

securities are valued at the fund’s 

Acquisition cost as adjusted for 

amortization of premium or accretion of 

discount rather than at their value based 

on current market factors. 

(3) Asset Backed Security means a 

fixed income security (other than a 

Government Security) issued by a 

Special Purpose Entity (as defined in 

this paragraph), substantially all of the 

assets of which consist of Qualifying 

Assets (as defined in this paragraph). 

Special Purpose Entity means a trust, 

corporation, partnership or other entity 

organized for the sole purpose of issuing 

securities that entitle their holders to 

receive payments that depend primarily 

on the cash flow from Qualifying Assets, 

but does not include a registered 

investment company. Qualifying Assets 

means financial assets, either fixed or 

revolving, that by their terms convert 

into cash within a finite time period, 

plus any rights or other assets designed 

to assure the servicing or timely 

distribution of proceeds to security 

holders. 

(4) Business Day means any day, other 

than Saturday, Sunday, or any 

customary business holiday. 

(5) Collateralized Fully means 

‘‘Collateralized Fully’’ as defined in 

§ 270.5b–3(c)(1) except that § 270.5b– 

3(c)(1)(iv)(C) and (D) shall not apply. 

(6) Conditional Demand Feature 

means a Demand Feature that is not an 

Unconditional Demand Feature. A 

Conditional Demand Feature is not a 

Guarantee. 

(7) Conduit Security means a security 

issued by a Municipal Issuer (as defined 

in this paragraph) 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. 

Municipal Issuer means 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. 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. 

(8) Daily Liquid Assets means: 

(i) Cash; 

(ii) Direct obligations of the U.S. 

Government; or 

(iii) Securities that will mature or are 

subject to a Demand Feature that is 

exercisable and payable within one 

Business Day. 

(9) Demand Feature means: 

(i) A feature permitting the holder of 

a security to sell the security at an 

exercise price equal to the approximate 

amortized cost of the security plus 

accrued interest, if any, at the time of 

exercise. A Demand Feature must be 

exercisable either: 

(A) At any time on no more than 30 

calendar days’ notice; or 

(B) At specified intervals not 

exceeding 397 calendar days and upon 

no more than 30 calendar days’ notice; 

or 

(ii) A feature permitting the holder of 

an Asset Backed Security 

unconditionally to receive principal and 

interest within 397 calendar days of 

making demand. 

(10) Demand Feature Issued By A 

Non-Controlled Person means a Demand 

Feature 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 Demand Feature (control means 

‘‘control’’ as defined in section 2(a)(9) of 

the Act) (15 U.S.C. 80a–2(a)(9)); or 

(ii) A sponsor of a Special Purpose 

Entity with respect to an Asset Backed 

Security. 

(11) Designated NRSRO means any 

one of at least four nationally 

recognized statistical rating 

organizations, as that term is defined in 

section 3(a)(62) of the Securities 

Exchange Act of 1934 (15 U.S.C. 

78c(a)(62)), that: 

(i) The money market fund’s board of 

directors: 

(A) Has designated as an NRSRO 

whose credit ratings with respect to any 

obligor or security or particular obligors 

or securities will be used by the fund to 

determine whether a security is an 

Eligible Security; and 

(B) Determines at least once each 

calendar year issues credit ratings that 

are sufficiently reliable for such use; 

(ii) Is not an ‘‘affiliated person,’’ as 

defined in section 2(a)(3)(C) of the Act 

(15 U.S.C. 80a–2(a)(3)(C)), of the issuer 

of, or any insurer or provider of credit 

support for, the security; and 

(iii) The fund discloses in its 

statement of additional information is a 

Designated NRSRO, including any 

limitations with respect to the fund’s 

use of such designation. 

(12) Eligible Security means: 

(i) A Rated Security with a remaining 

maturity of 397 calendar days or less 

that has received a rating from the 

Requisite NRSROs in one of the two 

highest short-term rating categories 

(within which there may be subcategories or gradations indicating 

relative standing); or 

(ii) An Unrated Security that is of 

comparable quality to a security meeting 

the requirements for a Rated Security in 

paragraph (a)(12)(i) of this section, as 

determined by the money market fund’s 

board of directors; provided, however, 

that: a security that at the time of 

issuance had a remaining maturity of 

more than 397 calendar days but that 

has a remaining maturity of 397 

calendar days or less and that is an 

Unrated Security is not an Eligible 

Security if the security has received a 

long-term rating from any Designated 

NRSRO that is not within the 

Designated NRSRO’s three highest longterm ratings categories (within which 

there may be sub-categories or 

gradations indicating relative standing), 

unless the security has received a longterm rating from the Requisite NRSROs 

in one of the three highest rating 

categories. 

(iii) In addition, in the case of a 

security that is subject to a Demand 

Feature or Guarantee: 

(A) The Guarantee has received a 

rating from a Designated NRSRO or the 

Guarantee is issued by a guarantor that 

has received a rating from a Designated 

NRSRO with respect to a class of debt 

obligations (or any debt obligation 

within that class) that is comparable in 

priority and security to the Guarantee, 

unless: 

(1) The Guarantee is issued by a 

person that, directly or indirectly, 

controls, is controlled by or is under 

common control with the issuer of the 

security subject to the Guarantee (other 

than a sponsor of a Special Purpose 

Entity with respect to an Asset Backed 

Security); 

(2) The security subject to the 

Guarantee is a repurchase agreement 

that is Collateralized Fully; or 

(3) The Guarantee is itself a 

Government Security; and 

(B) The issuer of the Demand Feature 

or Guarantee, or another institution, has 

undertaken promptly to notify the 

holder of the security in the event the 

Demand Feature or Guarantee is 

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substituted with another Demand 

Feature or Guarantee (if such 

substitution is permissible under the 

terms of the Demand Feature or 

Guarantee). 

(13) Event of Insolvency means ‘‘Event 

of Insolvency’’ as defined in § 270.5b– 

3(c)(2). 

(14) First Tier Security means any 

Eligible Security that: 

(i) Is a Rated Security that has 

received a short-term rating from the 

Requisite NRSROs in the highest shortterm rating category for debt obligations 

(within which there may be subcategories or gradations indicating 

relative standing); 

(ii) Is an Unrated Security that is of 

comparable quality to a security meeting 

the requirements for a Rated Security in 

paragraph (a)(14)(i) of this section, as 

determined by the fund’s board of 

directors; 

(iii) Is a security issued by a registered 

investment company that is a money 

market fund; or 

(iv) Is a Government Security. 

(15) Floating Rate Security means a 

security the terms of which provide for 

the adjustment of its interest rate 

whenever a specified interest rate 

changes and that, at any time until the 

final maturity of the instrument or the 

period remaining until the principal 

amount can be recovered through 

demand, can reasonably be expected to 

have a market value that approximates 

its amortized cost. 

(16) Government Security means any 

‘‘Government security’’ as defined in 

section 2(a)(16) of the Act (15 U.S.C. 

80a–2(a)(16)). 

(17) Guarantee means an 

unconditional obligation of a person 

other than the issuer of the security to 

undertake to pay, upon presentment by 

the holder of the Guarantee (if required), 

the principal amount of the underlying 

security plus accrued interest when due 

or upon default, or, in the case of an 

Unconditional Demand Feature, an 

obligation that entitles the holder to 

receive upon exercise the approximate 

amortized cost of the underlying 

security or securities, plus accrued 

interest, if any. A Guarantee includes a 

letter of credit, financial guaranty (bond) 

insurance, and an Unconditional 

Demand Feature (other than an 

Unconditional Demand Feature 

provided by the issuer of the security). 

(18) Guarantee Issued By A NonControlled 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 (control means ‘‘control’’ 

as defined in section 2(a)(9) of the Act) 

(15 U.S.C. 80a–2(a)(9)); or 

(ii) A sponsor of a Special Purpose 

Entity with respect to an Asset Backed 

Security. 

(19) Illiquid Security means a security 

that cannot be sold or disposed of in the 

ordinary course of business within 

seven calendar days at approximately 

the value ascribed to it by the fund. 

(20) Penny-Rounding Method of 

pricing means the method of computing 

an investment company’s price per 

share for purposes of distribution, 

redemption and repurchase whereby the 

current net asset value per share is 

rounded to the nearest one percent. 

(21) Rated Security means a security 

that meets the requirements of 

paragraphs (a)(21)(i) or (ii) of this 

section, in each case subject to 

paragraph (a)(21)(iii) of this section: 

(i) The security has received a shortterm rating from a Designated NRSRO, 

or has been issued by an issuer that has 

received a short-term rating from a 

Designated NRSRO with respect to a 

class of debt obligations (or any debt 

obligation within that class) that is 

comparable in priority and security with 

the security; or 

(ii) The security is subject to a 

Guarantee that has received a short-term 

rating from a Designated NRSRO, or a 

Guarantee issued by a guarantor that has 

received a short-term rating from a 

Designated NRSRO with respect to a 

class of debt obligations (or any debt 

obligation within that class) that is 

comparable in priority and security with 

the Guarantee; but 

(iii) A security is not a Rated Security 

if it is subject to an external credit 

support agreement (including an 

arrangement by which the security has 

become a Refunded Security) that was 

not in effect when the security was 

assigned its rating, unless the security 

has received a short-term rating 

reflecting the existence of the credit 

support agreement as provided in 

paragraph (a)(21)(i) of this section, or 

the credit support agreement with 

respect to the security has received a 

short-term rating as provided in 

paragraph (a)(21)(ii) of this section. 

(22) Refunded Security means 

‘‘Refunded Security’’ as defined in 

§ 270.5b–3(c)(4). 

(23) Requisite NRSROs means: 

(i) Any two Designated NRSROs that 

have issued a rating with respect to a 

security or class of debt obligations of 

an issuer; or 

(ii) If only one Designated NRSRO has 

issued a rating with respect to such 

security or class of debt obligations of 

an issuer at the time the fund acquires 

the security, that Designated NRSRO. 

(24) Second Tier Security means any 

Eligible Security that is not a First Tier 

Security. 

(25) Single State Fund means a Tax 

Exempt Fund that holds itself out as 

seeking to maximize the amount of its 

distributed income that is exempt from 

the income taxes or other taxes on 

investments of a particular State and, 

where applicable, subdivisions thereof. 

(26) Tax Exempt Fund means any 

money market fund that holds itself out 

as distributing income exempt from 

regular Federal income tax. 

(27) Total Assets means, with respect 

to a money market fund using the 

Amortized Cost Method, the total 

amortized cost of its assets and, with 

respect to any other money market fund, 

the total market-based value of its 

assets. 

(28) Unconditional Demand Feature 

means 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 or securities. 

(29) United States DollarDenominated means, with reference to a 

security, that all principal and interest 

payments on such security are payable 

to security holders in United States 

dollars under all circumstances and that 

the interest rate of, the principal amount 

to be repaid, and the timing of payments 

related to such security do not vary or 

float with the value of a foreign 

currency, the rate of interest payable on 

foreign currency borrowings, or with 

any other interest rate or index 

expressed in a currency other than 

United States dollars. 

(30) Unrated Security means a 

security that is not a Rated Security. 

(31) Variable Rate Security means a 

security the terms of which provide for 

the adjustment of its interest rate on set 

dates (such as the last day of a month 

or calendar quarter) and that, upon each 

adjustment until the final maturity of 

the instrument or the period remaining 

until the principal amount can be 

recovered through demand, can 

reasonably be expected to have a market 

value that approximates its amortized 

cost. 

(32) Weekly Liquid Assets means: 

(i) Cash; 

(ii) Direct obligations of the U.S. 

Government; 

(iii) Government Securities that are 

issued by a person controlled or 

supervised by and acting as an 

instrumentality of the Government of 

the United States pursuant to authority 

granted by the Congress of the United 

States that: 

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10112 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

(A) Are issued at a discount to the 

principal amount to be repaid at 

maturity; and 

(B) Have a remaining maturity date of 

60 days or less; or 

(iv) Securities that will mature or are 

subject to a Demand Feature that is 

exercisable and payable within five 

Business Days. 

(b) Holding Out and Use of Names 

and Titles. (1) It shall be an untrue 

statement of material fact within the 

meaning of section 34(b) of the Act (15 

U.S.C. 80a–33(b)) for a registered 

investment company, in any registration 

statement, application, report, account, 

record, or other document filed or 

transmitted pursuant to the Act, 

including any advertisement, pamphlet, 

circular, form letter, or other sales 

literature addressed to or intended for 

distribution to prospective investors 

that is required to be filed with the 

Commission by section 24(b) of the Act 

(15 U.S.C. 80a–24(b)), to hold itself out 

to investors as a money market fund or 

the equivalent of a money market fund, 

unless such registered investment 

company meets the conditions of 

paragraphs (c)(2), (c)(3), (c)(4), and (c)(5) 

of this section. 

(2) It shall constitute the use of a 

materially deceptive or misleading 

name or title within the meaning of 

section 35(d) of the Act (15 U.S.C. 80a– 

34(d)) for a registered investment 

company to adopt the term ‘‘money 

market’’ as part of its name or title or the 

name or title of any redeemable 

securities of which it is the issuer, or to 

adopt a name that suggests that it is a 

money market fund or the equivalent of 

a money market fund, unless such 

registered investment company meets 

the conditions of paragraphs (c)(2), 

(c)(3), (c)(4), and (c)(5) of this section. 

(3) For purposes of this paragraph, a 

name that suggests that a registered 

investment company is a money market 

fund or the equivalent thereof shall 

include one that uses such terms as 

‘‘cash,’’ ‘‘liquid,’’ ‘‘money,’’ ‘‘ready assets’’ 

or similar terms. 

(c) Share Price Calculations. The 

current price per share, for purposes of 

distribution, redemption and 

repurchase, of any redeemable security 

issued by any registered investment 

company (‘‘money market fund’’ or 

‘‘fund’’), notwithstanding the 

requirements of section 2(a)(41) of the 

Act (15 U.S.C. 80a–2(a)(41)) and of 

§§ 270.2a–4 and 270.22c–1 thereunder, 

may be computed by use of the 

Amortized Cost Method or the PennyRounding Method; provided, however, 

that: 

(1) Board Findings. The board of 

directors of the money market fund 

shall determine, in good faith, that it is 

in the best interests of the fund and its 

shareholders to maintain a stable net 

asset value per share or stable price per 

share, by virtue of either the Amortized 

Cost Method or the Penny-Rounding 

Method, and that the money market 

fund will continue to use such method 

only so long as the board of directors 

believes that it fairly reflects the marketbased net asset value per share. 

(2) Portfolio Maturity. The money 

market fund shall maintain a dollarweighted average portfolio maturity 

appropriate to its objective of 

maintaining a stable net asset value per 

share or price per share; provided, 

however, that the money market fund 

will not: 

(i) Acquire any instrument with a 

remaining maturity of greater than 397 

calendar days; 

(ii) Maintain a dollar-weighted 

average portfolio maturity that exceeds 

60 calendar days; or 

(iii) Maintain a dollar-weighted 

average portfolio maturity that exceeds 

120 calendar days, determined without 

reference to the exceptions in paragraph 

(d) of this section regarding interest rate 

readjustments. 

(3) Portfolio Quality—(i) General. The 

money market fund shall limit its 

portfolio investments to those United 

States Dollar-Denominated securities 

that the fund’s board of directors 

determines present minimal credit risks 

(which determination must be based on 

factors pertaining to credit quality in 

addition to any rating assigned to such 

securities by a Designated NRSRO) and 

that are at the time of Acquisition 

Eligible Securities. 

(ii) Second Tier Securities. No money 

market fund shall Acquire a Second Tier 

Security with a remaining maturity of 

greater than 45 calendar days. 

Immediately after the Acquisition of any 

Second Tier Security, a money market 

fund shall not have invested more than 

three percent of its Total Assets in 

Second Tier Securities. 

(iii) Securities Subject to Guarantees. 

A security that is subject to a Guarantee 

may be determined to be an Eligible 

Security or a First Tier Security based 

solely on whether the Guarantee is an 

Eligible Security or First Tier Security, 

as the case may be. 

(iv) Securities Subject to Conditional 

Demand Features. A security that is 

subject to a Conditional Demand 

Feature (‘‘Underlying Security’’) may be 

determined to be an Eligible Security or 

a First Tier Security only if: 

(A) The Conditional Demand Feature 

is an Eligible Security or First Tier 

Security, as the case may be; 

(B) 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 

(1) 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 

(2) 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; and 

(C) The Underlying Security or any 

Guarantee of such security (or the debt 

securities of the issuer of the Underlying 

Security or Guarantee that are 

comparable in priority and security with 

the Underlying Security or Guarantee) 

has received either a short-term rating or 

a long-term rating, as the case may be, 

from the Requisite NRSROs within the 

NRSROs’ two highest short-term or 

long-term rating categories (within 

which there may be sub-categories or 

gradations indicating relative standing) 

or, if unrated, is determined to be of 

comparable quality by the money 

market fund’s board of directors to a 

security that has received a rating from 

the Requisite NRSROs within the 

NRSROs’ two highest short-term or 

long-term rating categories, as the case 

may be. 

(4) Portfolio Diversification—(i) Issuer 

Diversification. The money market fund 

shall be diversified with respect to 

issuers of securities Acquired by the 

fund as provided in paragraphs (c)(4)(i) 

and (c)(4)(ii) of this section, other than 

with respect to Government Securities 

and securities subject to a Guarantee 

Issued By A Non-Controlled Person. 

(A) Taxable and National Funds. 

Immediately after the Acquisition of any 

security, a money market fund other 

than a Single State Fund shall not have 

invested more than five percent of its 

Total Assets in securities issued by the 

issuer of the security; provided, 

however, that such a fund may invest 

up to twenty-five percent of its Total 

Assets in the First Tier Securities of a 

single issuer for a period of up to three 

Business Days after the Acquisition 

thereof; provided, further, that the fund 

may not invest in the securities of more 

than one issuer in accordance with the 

foregoing proviso in this paragraph at 

any time. 

(B) Single State Funds. With respect 

to seventy-five percent of its Total 

Assets, immediately after the 

Acquisition of any security, a Single 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10113 

State Fund shall not have invested more 

than five percent of its Total Assets in 

securities issued by the issuer of the 

security. 

(C) Second Tier Securities. 

Immediately after the Acquisition of any 

Second Tier Security, a money market 

fund shall not have invested more than 

one half of one percent of its Total 

Assets in the Second Tier Securities of 

any single issuer. 

(ii) Issuer Diversification Calculations. 

For purposes of making calculations 

under paragraph (c)(4)(i) of this section: 

(A) Repurchase Agreements. The 

Acquisition of a repurchase agreement 

may be deemed to be an Acquisition of 

the underlying securities, provided the 

obligation of the seller to repurchase the 

securities from the money market fund 

is Collateralized Fully and the fund’s 

board of directors has evaluated the 

seller’s creditworthiness. 

(B) Refunded Securities. The 

Acquisition of a Refunded Security shall 

be deemed to be an Acquisition of the 

escrowed Government Securities. 

(C) Conduit Securities. A Conduit 

Security shall be deemed to be issued by 

the person (other than the Municipal 

Issuer) ultimately responsible for 

payments of interest and principal on 

the security. 

(D) Asset Backed Securities—(1) 

General. An Asset Backed Security 

Acquired by a fund (‘‘Primary ABS’’) 

shall be deemed to be issued by the 

Special Purpose Entity that issued the 

Asset Backed Security, provided, 

however: 

(i) Holdings of Primary ABS. Any 

person whose obligations constitute ten 

percent or more of the principal amount 

of the Qualifying Assets of the Primary 

ABS (‘‘Ten Percent Obligor’’) shall be 

deemed to be an issuer of the portion of 

the Primary ABS such obligations 

represent; and 

(ii) Holdings of Secondary ABS. If a 

Ten Percent Obligor of a Primary ABS 

is itself a Special Purpose Entity issuing 

Asset Backed Securities (‘‘Secondary 

ABS’’), any Ten Percent Obligor of such 

Secondary ABS also shall be deemed to 

be an issuer of the portion of the 

Primary ABS that such Ten Percent 

Obligor represents. 

(2) Restricted Special Purpose 

Entities. A Ten Percent Obligor with 

respect to a Primary or Secondary ABS 

shall not be deemed to have issued any 

portion of the assets of a Primary ABS 

as provided in paragraph (c)(4)(ii)(D)(1) 

of this section if that Ten Percent 

Obligor is itself a Special Purpose Entity 

issuing Asset Backed Securities 

(‘‘Restricted Special Purpose Entity’’), 

and the securities that it issues (other 

than securities issued to a company that 

controls, or is controlled by or under 

common control with, the Restricted 

Special Purpose Entity and which is not 

itself a Special Purpose Entity issuing 

Asset Backed Securities) are held by 

only one other Special Purpose Entity. 

(3) Demand Features and Guarantees. 

In the case of a Ten Percent Obligor 

deemed to be an issuer, the fund shall 

satisfy the diversification requirements 

of paragraph (c)(4)(iii) of this section 

with respect to any Demand Feature or 

Guarantee to which the Ten Percent 

Obligor’s obligations are subject. 

(E) Shares of Other Money Market 

Funds. A money market fund that 

Acquires shares issued by another 

money market fund in an amount that 

would otherwise be prohibited by 

paragraph (c)(4)(i) of this section shall 

nonetheless be deemed in compliance 

with this section if the board of 

directors of the Acquiring money market 

fund reasonably believes that the fund 

in which it has invested is in 

compliance with this section. 

(iii) Diversification Rules for Demand 

Features and Guarantees. The money 

market fund shall be diversified with 

respect to Demand Features and 

Guarantees Acquired by the fund as 

provided in paragraphs (c)(4)(iii) and 

(c)(4)(iv) of this section, other than with 

respect to a Demand Feature issued by 

the same institution that issued the 

underlying security, or with respect to 

a Guarantee or Demand Feature that is 

itself a Government Security. 

(A) General. Immediately after the 

Acquisition of any Demand Feature or 

Guarantee or security subject to a 

Demand Feature or Guarantee, a money 

market fund, with respect to seventyfive percent of its Total Assets, shall not 

have invested more than ten percent of 

its Total Assets in securities issued by 

or subject to Demand Features or 

Guarantees from the institution that 

issued the Demand Feature or 

Guarantee, subject to paragraphs 

(c)(4)(iii)(B) and (C) of this section. 

(B) Second Tier Demand Features or 

Guarantees. Immediately after the 

Acquisition of any Demand Feature or 

Guarantee (or a security after giving 

effect to the Demand Feature or 

Guarantee) that is a Second Tier 

Security, a money market fund shall not 

have invested more than 2.5 percent of 

its Total Assets in securities issued by 

or subject to Demand Features or 

Guarantees from the institution that 

issued the Demand Feature or 

Guarantee. 

(C) Demand Features or Guarantees 

Issued by Non-Controlled Persons. 

Immediately after the Acquisition of any 

security subject to a Demand Feature or 

Guarantee, a money market fund shall 

not have invested more than ten percent 

of its Total Assets in securities issued 

by, or subject to Demand Features or 

Guarantees from the institution that 

issued the Demand Feature or 

Guarantee, unless, with respect to any 

security subject to Demand Features or 

Guarantees from that institution (other 

than securities issued by such 

institution), the Demand Feature or 

Guarantee is a Demand Feature or 

Guarantee Issued By A Non-Controlled 

Person. 

(iv) Demand Feature and Guarantee 

Diversification Calculations—(A) 

Fractional Demand Features or 

Guarantees. In the case of a security 

subject to a Demand Feature or 

Guarantee from an institution by which 

the institution guarantees a specified 

portion of the value of the security, the 

institution shall be deemed to guarantee 

the specified portion thereof. 

(B) Layered Demand Features or 

Guarantees. In the case of a security 

subject to Demand Features or 

Guarantees from multiple institutions 

that have not limited the extent of their 

obligations as described in paragraph 

(c)(4)(iv)(A) of this section, each 

institution shall be deemed to have 

provided the Demand Feature or 

Guarantee with respect to the entire 

principal amount of the security. 

(v) Diversification Safe Harbor. A 

money market fund that satisfies the 

applicable diversification requirements 

of paragraphs (c)(4) and (c)(6) of this 

section shall be deemed to have 

satisfied the diversification 

requirements of section 5(b)(1) of the 

Act (15 U.S.C. 80a–5(b)(1)) and the rules 

adopted thereunder. 

(5) Portfolio Liquidity. The money 

market fund shall hold securities that 

are sufficiently liquid to meet 

reasonably foreseeable shareholder 

redemptions in light of the fund’s 

obligations under section 22(e) of the 

Act (15 U.S.C. 80a–22(e)) and any 

commitments the fund has made to 

shareholders; provided, however, that: 

(i) Illiquid Securities. The money 

market fund shall not Acquire any 

Illiquid Security if, immediately after 

the Acquisition, the money market fund 

would have invested more than five 

percent of its Total Assets in Illiquid 

Securities. 

(ii) Minimum Daily Liquidity 

Requirement. The money market fund 

shall not Acquire any security other 

than a Daily Liquid Asset if, 

immediately after the Acquisition, the 

fund would have invested less than ten 

percent of its Total Assets in Daily 

Liquid Assets. This provision shall not 

apply to Tax Exempt Funds. 

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(iii) Minimum Weekly Liquidity 

Requirement. The money market fund 

shall not Acquire any security other 

than a Weekly Liquid Asset if, 

immediately after the Acquisition, the 

fund would have invested less than 

thirty percent of its Total Assets in 

Weekly Liquid Assets. 

(6) Demand Features and Guarantees 

Not Relied Upon. If the fund’s board of 

directors has determined that the fund 

is not relying on a Demand Feature or 

Guarantee to determine the quality 

(pursuant to paragraph (c)(3) of this 

section), or maturity (pursuant to 

paragraph (d) of this section), or 

liquidity of a portfolio security, and 

maintains a record of this determination 

(pursuant to paragraphs (c)(10)(ii) and 

(c)(11)(vi) of this section), then the fund 

may disregard such Demand Feature or 

Guarantee for all purposes of this 

section. 

(7) Downgrades, Defaults and Other 

Events—(i) Downgrades—(A) General. 

Upon the occurrence of either of the 

events specified in paragraphs 

(c)(7)(i)(A)(1) and (2) of this section with 

respect to a portfolio security, the board 

of directors of the money market fund 

shall reassess promptly whether such 

security continues to present minimal 

credit risks and shall cause the fund to 

take such action as the board of 

directors determines is in the best 

interests of the money market fund and 

its shareholders: 

(1) A portfolio security of a money 

market fund ceases to be a First Tier 

Security (either because it no longer has 

the highest rating from the Requisite 

NRSROs or, in the case of an Unrated 

Security, the board of directors of the 

money market fund determines that it is 

no longer of comparable quality to a 

First Tier Security); and 

(2) The money market fund’s 

investment adviser (or any person to 

whom the fund’s board of directors has 

delegated portfolio management 

responsibilities) becomes aware that any 

Unrated Security or Second Tier 

Security held by the money market fund 

has, since the security was Acquired by 

the fund, been given a rating by a 

Designated NRSRO below the 

Designated NRSRO’s second highest 

short-term rating category. 

(B) Securities To Be Disposed Of. The 

reassessments required by paragraph 

(c)(7)(i)(A) of this section shall not be 

required if the fund disposes of the 

security (or it matures) within five 

Business Days of the specified event 

and, in the case of events specified in 

paragraph (c)(7)(i)(A)(2) of this section, 

the board is subsequently notified of the 

adviser’s actions. 

(C) Special Rule for Certain Securities 

Subject to Demand Features. In the 

event that after giving effect to a rating 

downgrade, more than 2.5 percent of the 

fund’s Total Assets are invested in 

securities issued by or subject to 

Demand Features from a single 

institution that are Second Tier 

Securities, the fund shall reduce its 

investment in securities issued by or 

subject to Demand Features from that 

institution to no more than 2.5 percent 

of its Total Assets by exercising the 

Demand Features at the next succeeding 

exercise date(s), absent a finding by the 

board of directors that disposal of the 

portfolio security would not be in the 

best interests of the money market fund. 

(ii) Defaults and Other Events. Upon 

the occurrence of any of the events 

specified in paragraphs (c)(7)(ii)(A) 

through (D) of this section with respect 

to a portfolio security, the money 

market fund shall dispose of such 

security as soon as practicable 

consistent with achieving an orderly 

disposition of the security, by sale, 

exercise of any Demand Feature or 

otherwise, absent a finding by the board 

of directors that disposal of the portfolio 

security would not be in the best 

interests of the money market fund 

(which determination may take into 

account, among other factors, market 

conditions that could affect the orderly 

disposition of the portfolio security): 

(A) The default with respect to a 

portfolio security (other than an 

immaterial default unrelated to the 

financial condition of the issuer); 

(B) A portfolio security ceases to be an 

Eligible Security; 

(C) A portfolio security has been 

determined to no longer present 

minimal credit risks; or 

(D) An Event of Insolvency occurs 

with respect to the issuer of a portfolio 

security or the provider of any Demand 

Feature or Guarantee. 

(iii) Notice to the Commission. The 

money market fund shall promptly 

notify the Commission by electronic 

mail directed to the Director of 

Investment Management or the 

Director’s designee, of any: 

(A) Default or Event of Insolvency 

with respect to the issuer of one or more 

portfolio securities (other than an 

immaterial default unrelated to the 

financial condition of the issuer) or any 

issuer of a Demand Feature or Guarantee 

to which one or more portfolio 

securities is subject, and the actions the 

money market fund intends to take in 

response to such event, where 

immediately before default the 

securities (or the securities subject to 

the Demand Feature or Guarantee) 

accounted for 1⁄2 of 1 percent or more of 

the money market fund’s Total Assets; 

or 

(B) Purchase of a security from the 

fund by an affiliated person, promoter, 

or principal underwriter of the fund, or 

an affiliated person of such a person, in 

reliance on § 270.17a–9, including 

identification of the security, its 

amortized cost, the sale price, and the 

reasons for such purchase. 

(iv) Defaults for Purposes of 

Paragraphs (c)(7)(ii) and (iii). For 

purposes of paragraphs (c)(7)(ii) and (iii) 

of this section, an instrument subject to 

a Demand Feature or Guarantee shall 

not be deemed to be in default (and an 

Event of Insolvency with respect to the 

security shall not be deemed to have 

occurred) if: 

(A) In the case of an instrument 

subject to a Demand Feature, the 

Demand Feature has been exercised and 

the fund has recovered either the 

principal amount or the amortized cost 

of the instrument, plus accrued interest; 

or 

(B) The provider of the Guarantee is 

continuing, without protest, to make 

payments as due on the instrument. 

(8) Required Procedures: Amortized 

Cost Method. In the case of a money 

market fund using the Amortized Cost 

Method: 

(i) General. In supervising the money 

market fund’s operations and delegating 

special responsibilities involving 

portfolio management to the money 

market fund’s investment adviser, the 

money market fund’s board of directors, 

as a particular responsibility within the 

overall duty of care owed to its 

shareholders, shall establish written 

procedures reasonably designed, taking 

into account current market conditions 

and the money market fund’s 

investment objectives, to stabilize the 

money market fund’s net asset value per 

share, as computed for the purpose of 

distribution, redemption and 

repurchase, at a single value. 

(ii) Specific Procedures. Included 

within the procedures adopted by the 

board of directors shall be the following: 

(A) Shadow Pricing. Written 

procedures shall provide: 

(1) That the extent of deviation, if any, 

of the current net asset value per share 

calculated using available market 

quotations (or an appropriate substitute 

that reflects current market conditions) 

from the money market fund’s 

amortized cost price per share, shall be 

calculated at such intervals as the board 

of directors determines appropriate and 

reasonable in light of current market 

conditions; 

(2) For the periodic review by the 

board of directors of the amount of the 

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deviation as well as the methods used 

to calculate the deviation; and 

(3) For the maintenance of records of 

the determination of deviation and the 

board’s review thereof. 

(B) Prompt Consideration of 

Deviation. In the event such deviation 

from the money market fund’s 

amortized cost price per share exceeds 

1⁄2 of 1 percent, the board of directors 

shall promptly consider what action, if 

any, should be initiated by the board of 

directors. 

(C) Material Dilution or Unfair 

Results. Where the board of directors 

believes the extent of any deviation 

from the money market fund’s 

amortized cost price per share may 

result in material dilution or other 

unfair results to investors or existing 

shareholders, it shall cause the fund to 

take such action as it deems appropriate 

to eliminate or reduce to the extent 

reasonably practicable such dilution or 

unfair results. 

(9) Required Procedures: PennyRounding Method. In the case of a 

money market fund using the PennyRounding Method, in supervising the 

money market fund’s operations and 

delegating special responsibilities 

involving portfolio management to the 

money market fund’s investment 

adviser, the money market fund’s board 

of directors undertakes, as a particular 

responsibility within the overall duty of 

care owed to its shareholders, to assure 

to the extent reasonably practicable, 

taking into account current market 

conditions affecting the money market 

fund’s investment objectives, that the 

money market fund’s price per share as 

computed for the purpose of 

distribution, redemption and 

repurchase, rounded to the nearest one 

percent, will not deviate from the single 

price established by the board of 

directors. 

(10) Specific Procedures: Amortized 

Cost and Penny-Rounding Methods. 

Included within the procedures adopted 

by the board of directors for money 

market funds using either the Amortized 

Cost or Penny-Rounding Methods shall 

be the following: 

(i) Securities for Which Maturity is 

Determined by Reference to Demand 

Features. In the case of a security for 

which maturity is determined by 

reference to a Demand Feature, written 

procedures shall require 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 

issuer of the Demand Feature and, in the 

case of a security subject to a 

Conditional Demand Feature, the issuer 

of the security whose financial 

condition must be monitored under 

paragraph (c)(3)(iv) of this section, 

whether such data is publicly available 

or provided under the terms of the 

security’s governing documentation. 

(ii) Securities Subject to Demand 

Features or Guarantees. In the case of a 

security subject to one or more Demand 

Features or Guarantees that the fund’s 

board of directors has determined that 

the fund is not relying on to determine 

the quality (pursuant to paragraph (c)(3) 

of this section), maturity (pursuant to 

paragraph (d) of this section) or 

liquidity (pursuant to paragraph (c)(5) of 

this section) of the security subject to 

the Demand Feature or Guarantee, 

written procedures shall require 

periodic evaluation of such 

determination. 

(iii) Adjustable Rate Securities 

Without Demand Features. In the case of 

a Variable Rate or Floating Rate Security 

that is not subject to a Demand Feature 

and for which maturity is determined 

pursuant to paragraphs (d)(1), (d)(2) or 

(d)(4) of this section, written procedures 

shall require periodic review of whether 

the interest rate formula, upon 

readjustment of its interest rate, can 

reasonably be expected to cause the 

security to have a market value that 

approximates its amortized cost value. 

(iv) Asset Backed Securities. In the 

case of an Asset Backed Security, 

written procedures shall require the 

fund to periodically determine the 

number of Ten Percent Obligors (as that 

term is used in paragraph (c)(4)(ii)(D) of 

this section) deemed to be the issuers of 

all or a portion of the Asset Backed 

Security for purposes of paragraph 

(c)(4)(ii)(D) of this section; provided, 

however, written procedures need not 

require periodic determinations with 

respect to any Asset Backed Security 

that a fund’s board of directors has 

determined, at the time of Acquisition, 

will not have, or is unlikely to have, Ten 

Percent Obligors that are deemed to be 

issuers of all or a portion of that Asset 

Backed Security for purposes of 

paragraph (c)(4)(ii)(D) of this section, 

and maintains a record of this 

determination. 

(v) Stress Testing. Written procedures 

shall provide for: 

(A) The periodic testing, at such 

intervals as the board of directors 

determines appropriate and reasonable 

in light of current market conditions, of 

the money market fund’s ability to 

maintain a stable net asset value per 

share based upon specified hypothetical 

events that include, but are not limited 

to, a change in short-term interest rates, 

an increase in shareholder redemptions, 

a downgrade of or default on portfolio 

securities, and the widening or 

narrowing of spreads between yields on 

an appropriate benchmark the fund has 

selected for overnight interest rates and 

commercial paper and other types of 

securities held by the fund. 

(B) A report on the results of such 

testing to be provided to the board of 

directors at its next regularly scheduled 

meeting (or sooner, if appropriate in 

light of the results), which report shall 

include: 

(1) The date(s) on which the testing 

was performed and the magnitude of 

each hypothetical event that would 

cause the deviation of the money market 

fund’s net asset value calculated using 

available market quotations (or 

appropriate substitutes which reflect 

current market conditions) from its net 

asset value per share calculated using 

amortized cost to exceed 1⁄2 of 1 percent; 

and 

(2) An assessment by the fund’s 

adviser of the fund’s ability to withstand 

the events (and concurrent occurrences 

of those events) that are reasonably 

likely to occur within the following 

year. 

(11) Record Keeping and Reporting— 

(i) Written Procedures. For a period of 

not less than six years following the 

replacement of such procedures with 

new procedures (the first two years in 

an easily accessible place), a written 

copy of the procedures (and any 

modifications thereto) described in 

paragraphs (c)(7) through (c)(10) and (e) 

of this section shall be maintained and 

preserved. 

(ii) Board Considerations and Actions. 

For a period of not less than six years 

(the first two years in an easily 

accessible place) a written record shall 

be maintained and preserved of the 

board of directors’ considerations and 

actions taken in connection with the 

discharge of its responsibilities, as set 

forth in this section, to be included in 

the minutes of the board of directors’ 

meetings. 

(iii) Credit Risk Analysis. For a period 

of not less than three years from the date 

that the credit risks of a portfolio 

security were most recently reviewed, a 

written record of the determination that 

a portfolio security presents minimal 

credit risks and the Designated NRSRO 

ratings (if any) used to determine the 

status of the security as an Eligible 

Security, First Tier Security or Second 

Tier Security shall be maintained and 

preserved in an easily accessible place. 

(iv) Determinations With Respect to 

Adjustable Rate Securities. For a period 

of not less than three years from the date 

when the determination was most 

recently made, a written record shall be 

preserved and maintained, in an easily 

accessible place, of the determination 

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10116 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

required by paragraph (c)(10)(iii) of this 

section (that a Variable Rate or Floating 

Rate Security that is not subject to a 

Demand Feature and for which maturity 

is determined pursuant to paragraphs 

(d)(1), (d)(2) or (d)(4) of this section can 

reasonably be expected, upon 

readjustment of its interest rate at all 

times during the life of the instrument, 

to have a market value that 

approximates its amortized cost). 

(v) Determinations with Respect to 

Asset Backed Securities. For a period of 

not less than three years from the date 

when the determination was most 

recently made, a written record shall be 

preserved and maintained, in an easily 

accessible place, of the determinations 

required by paragraph (c)(10)(iv) of this 

section (the number of Ten Percent 

Obligors (as that term is used in 

paragraph (c)(4)(ii)(D) of this section) 

deemed to be the issuers of all or a 

portion of the Asset Backed Security for 

purposes of paragraph (c)(4)(ii)(D) of 

this section). The written record shall 

include: 

(A) The identities of the Ten Percent 

Obligors (as that term is used in 

paragraph (c)(4)(ii)(D) of this section), 

the percentage of the Qualifying Assets 

constituted by the securities of each Ten 

Percent Obligor and the percentage of 

the fund’s Total Assets that are invested 

in securities of each Ten Percent 

Obligor; and 

(B) Any determination that an Asset 

Backed Security will not have, or is 

unlikely to have, Ten Percent Obligors 

deemed to be issuers of all or a portion 

of that Asset Backed Security for 

purposes of paragraph (c)(4)(ii)(D) of 

this section. 

(vi) Evaluations with Respect to 

Securities Subject to Demand Features 

or Guarantees. For a period of not less 

than three years from the date when the 

evaluation was most recently made, a 

written record shall be preserved and 

maintained, in an easily accessible 

place, of the evaluation required by 

paragraph (c)(10)(ii) (regarding 

securities subject to one or more 

Demand Features or Guarantees) of this 

section. 

(vii) Reports with Respect to Stress 

Testing. For a period of not less than six 

years (the first two years in an easily 

accessible place), a written copy of the 

report required under paragraph 

(c)(10)(v)(B) of this section shall be 

maintained and preserved. 

(viii) Inspection of Records. The 

documents preserved pursuant to this 

paragraph (c)(11) shall be subject to 

inspection by the Commission in 

accordance with section 31(b) of the Act 

(15 U.S.C. 80a–30(b)) as if such 

documents were records required to be 

maintained pursuant to rules adopted 

under section 31(a) of the Act (15 U.S.C. 

80a–30(a)). If any action was taken 

under paragraphs (c)(7)(ii) (with respect 

to defaulted securities and events of 

insolvency) or (c)(8)(ii) (with respect to 

a deviation from the fund’s share price 

of more than 1⁄2 of 1 percent) of this 

section, the money market fund will file 

an exhibit to the Form N–SAR (17 CFR 

274.101) filed for the period in which 

the action was taken describing with 

specificity the nature and circumstances 

of such action. The money market fund 

will report in an exhibit to such Form 

any securities it holds on the final day 

of the reporting period that are not 

Eligible Securities. 

(12) Web Site Disclosure of Portfolio 

Holdings. The money market fund shall 

post on its Web site, for a period of not 

less than six months, beginning no later 

than the fifth Business Day of the 

month, a schedule of its investments, as 

of the last Business Day of the prior 

month, that includes the following 

information: 

(i) With respect to the money market 

fund and each class thereof: 

(A) The dollar-weighted average 

portfolio maturity; and 

(B) The dollar-weighted average 

portfolio maturity determined without 

reference to the exceptions in paragraph 

(d) of this section regarding interest rate 

readjustments; 

(ii) With respect to each security held 

by the money market fund: 

(A) Name of the issuer; 

(B) Category of investment (indicate 

the category that most closely identifies 

the instrument from among the 

following: Treasury Debt; Government 

Agency Debt; Variable Rate Demand 

Note; Other Municipal Debt; Financial 

Company Commercial Paper; Asset 

Backed Commercial Paper; Other 

Commercial Paper; Certificate of 

Deposit; Structured Investment Vehicle 

Note; Other Note; Treasury Repurchase 

Agreement; Government Agency 

Repurchase Agreement; Other 

Repurchase Agreement; Insurance 

Company Funding Agreement; 

Investment Company; Other 

Instrument); 

(C) CUSIP number (if any); 

(D) Principal amount; 

(E) Maturity date as determined under 

this section; 

(F) Final legal maturity date (taking 

into account any maturity date 

extensions that may be effected at the 

option of the issuer), if different from 

the maturity date as determined under 

this section; 

(G) Coupon or yield; and 

(H) Amortized cost value; and 

(iii) A link to a Web site of the 

Securities and Exchange Commission 

where a user may obtain the most recent 

12 months of publicly available 

information filed by the money market 

fund pursuant to § 270.30b1–7. 

(13) Processing of Transactions. The 

money market fund (or its transfer 

agent) shall have the capacity to redeem 

and sell securities issued by the fund at 

a price based on the current net asset 

value per share pursuant to § 270.22c– 

1. Such capacity shall include the 

ability to redeem and sell securities at 

prices that do not correspond to a stable 

net asset value or price per share. 

(d) Maturity of Portfolio Securities. 

For purposes of this section, the 

maturity of a portfolio security shall be 

deemed to be the period remaining 

(calculated from the trade date or such 

other date on which the fund’s interest 

in the security is subject to market 

action) until the date on which, in 

accordance with the terms of the 

security, the principal amount must 

unconditionally be paid, or in the case 

of a security called for redemption, the 

date on which the redemption payment 

must be made, except as provided in 

paragraphs (d)(1) through (d)(8) of this 

section: 

(1) Adjustable Rate Government 

Securities. A Government Security that 

is a Variable Rate Security where the 

variable rate of interest is readjusted no 

less frequently than every 397 calendar 

days shall be deemed to have a maturity 

equal to the period remaining until the 

next readjustment of the interest rate. A 

Government Security that is a Floating 

Rate Security shall be deemed to have 

a remaining maturity of one day. 

(2) Short-Term Variable Rate 

Securities. A Variable Rate Security, the 

principal amount of which, in 

accordance with the terms of the 

security, must unconditionally be paid 

in 397 calendar days or less shall be 

deemed to have a maturity equal to the 

earlier of the period remaining until the 

next readjustment of the interest rate or 

the period remaining until the principal 

amount can be recovered through 

demand. 

(3) Long-Term Variable Rate 

Securities. A Variable Rate Security, the 

principal amount of which is scheduled 

to be paid in more than 397 calendar 

days, that is subject to a Demand 

Feature, shall be deemed to have a 

maturity equal to the longer of the 

period remaining until the next 

readjustment of the interest rate or the 

period remaining until the principal 

amount can be recovered through 

demand. 

(4) Short-Term Floating Rate 

Securities. A Floating Rate Security, the 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10117 

principal amount of which, in 

accordance with the terms of the 

security, must unconditionally be paid 

in 397 calendar days or less shall be 

deemed to have a maturity of one day. 

(5) Long-Term Floating Rate 

Securities. A Floating Rate Security, the 

principal amount of which is scheduled 

to be paid in more than 397 calendar 

days, that is subject to a Demand 

Feature, shall be deemed to have a 

maturity equal to the period remaining 

until the principal amount can be 

recovered through demand. 

(6) Repurchase Agreements. A 

repurchase agreement shall be deemed 

to have a maturity equal to the period 

remaining until the date on which the 

repurchase of the underlying securities 

is scheduled to occur, or, where the 

agreement is subject to demand, the 

notice period applicable to a demand for 

the repurchase of the securities. 

(7) Portfolio Lending Agreements. A 

portfolio lending agreement shall be 

treated as having a maturity equal to the 

period remaining until the date on 

which the loaned securities are 

scheduled to be returned, or where the 

agreement is subject to demand, the 

notice period applicable to a demand for 

the return of the loaned securities. 

(8) Money Market Fund Securities. An 

investment in a money market fund 

shall be treated as having a maturity 

equal to the period of time within which 

the Acquired money market fund is 

required to make payment upon 

redemption, unless the Acquired money 

market fund has agreed in writing to 

provide redemption proceeds to the 

investing money market fund within a 

shorter time period, in which case the 

maturity of such investment shall be 

deemed to be the shorter period. 

(e) Delegation. The money market 

fund’s board of directors may delegate 

to the fund’s investment adviser or 

officers the responsibility to make any 

determination required to be made by 

the board of directors under this section 

(other than the determinations required 

by paragraphs (a)(11)(i) (designation of 

NRSROs); (c)(1) (board findings); 

(c)(7)(ii) (defaults and other events); 

(c)(8)(i) (general required procedures: 

Amortized Cost Method); (c)(8)(ii)(A) 

(shadow pricing), (B) (prompt 

consideration of deviation), (C) (material 

dilution or unfair results); (c)(9) 

(required procedures: Penny Rounding 

Method); and (c)(10)(v)(A) (stress testing 

procedures) of this section; provided 

that: 

(1) Written Guidelines. The Board 

shall establish and periodically review 

written guidelines (including guidelines 

for determining whether securities 

present minimal credit risks as required 

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

procedures under which the delegate 

makes such determinations. 

(2) Oversight. The Board shall take 

any measures reasonably necessary 

(through periodic reviews of fund 

investments and the delegate’s 

procedures in connection with 

investment decisions and prompt 

review of the adviser’s actions in the 

event of the default of a security or 

Event of Insolvency with respect to the 

issuer of the security or any Guarantee 

to which it is subject that requires 

notification of the Commission under 

paragraph (c)(7)(iii) of this section) to 

assure that the guidelines and 

procedures are being followed. 

■ 3. Section 270.17a–9 is revised to read 

as follows: 

§ 270.17a–9 Purchase of certain securities 

from a money market fund by an affiliate, 

or an affiliate of an affiliate. 

The purchase of a security from the 

portfolio of an open-end investment 

company holding itself out as a money 

market fund by any affiliated person or 

promoter of or principal underwriter for 

the money market fund or any affiliated 

person of such person shall be exempt 

from section 17(a) of the Act (15 U.S.C. 

80a–17(a)); provided that: 

(a) In the case of a portfolio security 

that has ceased to be an Eligible 

Security (as defined in § 270.2a– 

7(a)(12)), or has defaulted (other than an 

immaterial default unrelated to the 

financial condition of the issuer): 

(1) The purchase price is paid in cash; 

and 

(2) The purchase price is equal to the 

greater of the amortized cost of the 

security or its market price (in each 

case, including accrued interest). 

(b) In the case of any other portfolio 

security: 

(1) The purchase price meets the 

requirements of paragraph (a)(1) and (2) 

of this section; and 

(2) In the event that the purchaser 

thereafter sells the security for a higher 

price than the purchase price paid to the 

money market fund, the purchaser shall 

promptly pay to the fund the amount by 

which the subsequent sale price exceeds 

the purchase price paid to the fund. 

■ 4. Section 270.22e–3 is added to read 

as follows: 

§ 270.22e–3 Exemption for liquidation of 

money market funds. 

(a) Exemption. A registered open-end 

management investment company or 

series thereof (‘‘fund’’) that is regulated 

as a money market fund under § 270.2a– 

7 is exempt from the requirements of 

section 22(e) of the Act (15 U.S.C. 80a– 

22(e)) if: 

(1) The fund’s board of directors, 

including a majority of directors who 

are not interested persons of the fund, 

determines pursuant to § 270.2a– 

7(c)(8)(ii)(C) that the extent of the 

deviation between the fund’s amortized 

cost price per share and its current net 

asset value per share calculated using 

available market quotations (or an 

appropriate substitute that reflects 

current market conditions) may result in 

material dilution or other unfair results 

to investors or existing shareholders; 

(2) The fund’s board of directors, 

including a majority of directors who 

are not interested persons of the fund, 

irrevocably has approved the 

liquidation of the fund; and 

(3) The fund, prior to suspending 

redemptions, notifies the Commission of 

its decision to liquidate and suspend 

redemptions by electronic mail directed 

to the attention of the Director of the 

Division of Investment Management or 

the Director’s designee. 

(b) Conduits. Any registered 

investment company, or series thereof, 

that owns, pursuant to section 

12(d)(1)(E) of the Act (15 U.S.C. 80a– 

12(d)(1)(E)), shares of a money market 

fund that has suspended redemptions of 

shares pursuant to paragraph (a) of this 

section also is exempt from the 

requirements of section 22(e) of the Act 

(15 U.S.C. 80a–22(e)). A registered 

investment company relying on the 

exemption provided in this paragraph 

must promptly notify the Commission 

that it has suspended redemptions in 

reliance on this section. Notification 

under this paragraph shall be made by 

electronic mail directed to the attention 

of the Director of the Division of 

Investment Management or the 

Director’s designee. 

(c) Commission Orders. For the 

protection of shareholders, the 

Commission may issue an order to 

rescind or modify the exemption 

provided by this section, after 

appropriate notice and opportunity for 

hearing in accordance with section 40 of 

the Act (15 U.S.C. 80a–39). 

■ 5. Section 270.30b1–6T is amended by 

revising paragraph (d) to read as 

follows: 

§ 270.30b1–6T Weekly portfolio report for 

certain money market funds. 

* * * * * 

(d) Expiration. This section will 

expire on December 1, 2010. 

■ 6. Section 270.30b1–7 is added to read 

as follows: 

§ 270.30b1–7 Monthly report for money 

market funds. 

(a) Report. Every registered open-end 

management investment company, or 

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10118 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

series thereof, that is regulated as a 

money market fund under § 270.2a–7 

must file with the Commission a 

monthly report of portfolio holdings on 

Form N–MFP (§ 274.201 of this chapter), 

current as of the last business day of the 

previous month, no later than the fifth 

business day of each month. 

(b) Public availability. The 

Commission will make the information 

filed on Form N–MFP available to the 

public 60 days after the end of the 

month to which the information 

pertains. 

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940 

■ 7. 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. 

* * * * * 

■ 8. Section 274.201 and Form N–MFP 

(referenced in § 274.201) are added to 

read as follows: 

§ 274.201 Form N–MFP, portfolio holdings 

of money market funds. 

This form shall be used by registered 

open-end management investment 

companies that are regulated as money 

market funds under § 270.2a–7 of this 

chapter to file reports pursuant to 

§ 270.30b1–7 of this chapter no later 

than the fifth business day of each 

month. 

Note: The text of Form N–MFP will not 

appear in the Code of Federal Regulations. 

FORM N–MFP 

MONTHLY SCHEDULE OF 

PORTFOLIO HOLDINGS OF MONEY 

MARKET FUNDS 

Form N–MFP is to be used by 

registered open-end management 

investment companies, or series thereof, 

that are regulated as money market 

funds pursuant to rule 2a–7 under the 

Investment Company Act of 1940 

(‘‘Act’’) (17 CFR 270.2a–7) (‘‘money 

market funds’’), to file reports with the 

Commission pursuant to rule 30b1–7 

under the Act (17 CFR 270.30b1–7). The 

Commission may use the information 

provided on Form N–MFP in its 

regulatory, disclosure review, 

inspection, and policymaking roles. 

GENERAL INSTRUCTIONS 

A. Rule as to Use of Form N–MFP 

Form N–MFP is the public reporting 

form that is to be used for monthly 

reports of money market funds required 

by section 30(b) of the Act and rule 

30b1–7 under the Act (17 CFR 

270.30b1–7). A money market fund 

must report information about the fund 

and its portfolio holdings as of the last 

business day of the preceding month. 

The Form N–MFP must be filed with the 

Commission no later than the fifth 

business day of each month, but may be 

filed any time beginning on the first 

business day of the month. Each money 

market fund, or series of a money 

market fund, is required to file a 

separate form. If the money market fund 

does not have any classes, the fund 

must provide the information required 

by Part I.B for the series. 

A money market fund may file an 

amendment to a previously filed Form 

N–MFP at any time, including an 

amendment to correct a mistake or error 

in a previously filed form. A fund that 

files an amendment to a previously filed 

form must provide information in 

response to all items of Form N–MFP, 

regardless of why the amendment is 

filed. 

B. Application of General Rules and 

Regulations 

The General Rules and Regulations 

under the Act contain certain general 

requirements that are applicable to 

reporting on any form under the Act. 

These general requirements should be 

carefully read and observed in the 

preparation and filing of reports on this 

form, except that any provision in the 

form or in these instructions shall be 

controlling. 

C. Filing of Form N–MFP 

A money market fund must file Form 

N–MFP in accordance with rule 232.13 

of Regulation S–T. Form N–MFP must 

be filed electronically using the 

Commission’s EDGAR system. 

D. Paperwork Reduction Act 

Information 

A registrant is not required to respond 

to the collection of information 

contained in Form N–MFP unless the 

Form displays a currently valid Office of 

Management and Budget (‘‘OMB’’) 

control number. Please direct comments 

concerning the accuracy of the 

information collection burden estimate 

and any suggestions for reducing the 

burden to the Secretary, Securities and 

Exchange Commission, 100 F Street, NE, 

Washington, DC 20549–1090. The OMB 

has reviewed this collection of 

information under the clearance 

requirements of 44 U.S.C. 3507. 

E. Definitions 

References to sections and rules in 

this Form N–MFP are to the Investment 

Company Act of 1940 [15 U.S.C. 80a] 

(the ‘‘Investment Company Act’’), unless 

otherwise indicated. Terms used in this 

Form N–MFP have the same meaning as 

in the Investment Company Act or 

related rules, unless otherwise 

indicated. 

As used in this Form N–MFP, the 

terms set out below have the following 

meanings: 

‘‘Class’’ means a class of shares issued 

by a Multiple Class Fund that represents 

interests in the same portfolio of 

securities under rule 18f–3 [17 CFR 

270.18f–3] or under an order exempting 

the Multiple Class Fund from sections 

18(f), 18(g), and 18(i) [15 U.S.C. 80a– 

18(f), 18(g), and 18(i)]. 

‘‘Fund’’ means the Registrant or a 

separate Series of the Registrant. When 

an item of Form N–MFP specifically 

applies to a Registrant or a Series, those 

terms will be used. 

‘‘Master-Feeder Fund’’ means a twotiered arrangement in which one or 

more Funds (each a ‘‘Feeder Fund’’) 

holds shares of a single Fund (the 

‘‘Master Fund’’) in accordance with 

section 12(d)(1)(E) [15 U.S.C. 80a– 

12(d)(1)(E)]. 

‘‘Money Market Fund’’ means a Fund 

that holds itself out as a money market 

fund and meets the maturity, quality, 

and diversification requirements of rule 

2a–7 [17 CFR 270.2a–7]. 

‘‘Securities Act’’ means the Securities 

Act of 1933 [15 U.S.C. 77a–aa]. 

‘‘Series’’ means shares offered by a 

Registrant that represent undivided 

interests in a portfolio of investments 

and that are preferred over all other 

series of shares for assets specifically 

allocated to that series in accordance 

with rule 18f-2(a) [17 CFR 270.18f–2(a)]. 

UNITED STATES SECURITIES AND 


EXCHANGE COMMISSION 


WASHINGTON, DC 20549 


FORM N–MFP MONTHLY SCHEDULE 


OF PORTFOLIO HOLDINGS OF 


MONEY MARKET FUNDS 


Report for [Month, Day, Year] 


CIK Number of Registrant: 


EDGAR Series Identifier: 


Total number of share classes in the 


series: 

Do you anticipate that this will be the 

fund’s final filing on Form N–MFP? 

[Y/N] 

Is the fund liquidating? [Y/N] 

Is the fund merging with, or being 

acquired by, another fund? [Y/N] 

If so, identify the successor fund by 

CIK, Securities Act file number, and 

EDGAR series identifier. 

If this is not a final filing: has the fund 

acquired or merged with another fund 

since the last filing? [Y/N] 

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Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 10119 

If so, identify the acquired or merged 

fund by CIK, Securities Act file number, 

and EDGAR series identifier. 

Part I: Information about the Fund 

A. Series-Level Information 

Item 1. Securities Act File Number. 

Item 2. Investment Adviser. 

a. SEC file number of investment 


adviser. 


Item 3. Sub-Adviser. If a fund has one 

or more sub-advisers, disclose the 

name of each sub-adviser. 

a. SEC file number of each subadviser. 

Item 4. Independent Public Accountant. 

a. City and state of independent 


public accountant. 


Item 5. Administrator. If a fund has one 

or more administrators, disclose the 

name of each administrator. 

Item 6. Transfer Agent. 

a. CIK Number. 

b. SEC file number of transfer agent. 

Item 7. Master-Feeder Funds. Is this a 

feeder fund? [Y/N] 

a. Identify the master fund by CIK. 

b. Securities Act file number of the 

master fund. 

c. EDGAR series identifier of the 


master fund. 


Item 8. Master-Feeder Funds. Is this a 

master fund? [Y/N] 

a. If this is a master fund, identify all 

feeder funds by CIK or, if the fund 

does not have a CIK, by name. 

b. Securities Act file number of each 

feeder fund. 

c. EDGAR series identifier of each 

feeder fund. 

Item 9. Is this series primarily used to 

fund insurance company separate 

accounts? [Y/N] 

Item 10. Category. Indicate the category 

that most closely identifies the 

money market fund from among the 

following: Treasury, Government/ 

Agency, Prime, Single State Fund, 

or Other Tax Exempt Fund. 

Item 11. Dollar weighted average 

portfolio maturity. 

Item 12. Dollar weighted average life 

maturity. Calculate the dollar 

weighted average portfolio maturity 

without reference to the exceptions 

in rule 2a–7(d) regarding interest 

rate readjustments. 

Item 13. Total value of portfolio 

securities at amortized cost, to the 

nearest cent. 

Item 14. Total value of other assets, to 

the nearest cent. 

Item 15. Total value of liabilities, to the 

nearest cent. 

Item 16. Net assets of the series, to the 

nearest cent. 

Item 17. 7-day gross yield. Based on the 

7 days ended on the last day of the 

prior month, calculate the fund’s 

yield by determining the net 

change, exclusive of capital changes 

and income other than investment 

income, in the value of a 

hypothetical pre-existing account 

having a balance of one share at the 

beginning of the period and 

dividing the difference by the value 

of the account at the beginning of 

the base period to obtain the base 

period return, and then multiplying 

the base period return by (365/7) 

with the resulting yield figure 

carried to at least the nearest 

hundredth of one percent. The 7-

day gross yield should not reflect a 

deduction of shareholders fees and 

fund operating expenses. 

Item 18. Shadow Price of the Series. 

a. The net asset value per share most 

recently calculated using available 

market quotations (or an 

appropriate substitute that reflects 

current market conditions), 

including the value of any capital 

support agreement, to the nearest 

hundredth of a cent; 

b. The date as of which the marketbased net asset value disclosed in 

Item 18a was calculated; 

c. The net asset value per share most 

recently calculated using available 

market quotations (or an 

appropriate substitute that reflects 

current market conditions), 

excluding the value of any capital 

support agreement, to the nearest 

hundredth of a cent; and 

d. The date as of which the marketbased net asset value disclosed in 

Item 18c was calculated. 

B. Class-Level Information. For each 

Class of the Series, disclose the 

following: 

Item 19. EDGAR Class identifier. 

Item 20. Minimum initial investment. 

Item 21. Net assets of the Class, to the 

nearest cent. 

Item 22. Net asset value per share for 

purposes of distributions, 

redemptions, and repurchase, to the 

nearest cent. 

Item 23. Net shareholder flow activity 

for the month ended (subscriptions 

less redemptions), to the nearest 

cent. 

a. Gross subscriptions for the month 

ended (including dividend 

reinvestments), to the nearest cent. 

b. Gross redemptions for the month 

ended, to the nearest cent. 

Item 24. 7-day net yield, as calculated 

under Item 26(a)(1) of Form N–1A. 

Item 25. Shadow Price of each Class. 

a. The net asset value per share most 

recently calculated using available 

market quotations (or an 

appropriate substitute that reflects 

current market conditions), 

including the value of any capital 

support agreement, to the nearest 

hundredth of a cent; 

b. The date as of which the marketbased net asset value disclosed in 

Item 25a was calculated; 

c. The net asset value per share most 

recently calculated using available 

market quotations (or an 

appropriate substitute that reflects 

current market conditions), 

excluding the value of any capital 

support agreement, to the nearest 

hundredth of a cent; and 

d. The date as of which the marketbased net asset value disclosed in 

Item 25c was calculated. 

Part 2: Schedule of Portfolio Securities. 

For each security held by the money 

market fund, disclose the following: 

Item 26. The name of the issuer. 

Item 27. The title of the issue (including 

coupon or yield). 

Item 28. The CUSIP. If the security has 

a CUSIP, filers must provide the 

security’s CUSIP pursuant to this 

Item and may skip Items 29 and 30. 

Item 29. Other unique identifier, if the 

security has a unique identifier. If a 

CUSIP is provided pursuant to Item 

28, skip this Item. 

Item 30. The CIK of the issuer, if the 

issuer has a CIK. If a CUSIP is 

provided pursuant to Item 28, skip 

this Item. 

Item 31. The category of investment. 

Indicate the category that most 

closely identifies the instrument 

from among the following: Treasury 

Debt; Government Agency Debt; 

Variable Rate Demand Note; Other 

Municipal Debt; Financial 

Company Commercial Paper; Asset 

Backed Commercial Paper; Other 

Commercial Paper; Certificate of 

Deposit; Structured Investment 

Vehicle Note; Other Note; Treasury 

Repurchase Agreement; 

Government Agency Repurchase 

Agreement; Other Repurchase 

Agreement; Insurance Company 

Funding Agreement; Investment 

Company; Other Instrument. If 

Other Instrument, include a brief 

description. 

Item 32. If the security is a repurchase 

agreement: is the fund treating the 

acquisition of the repurchase 

agreement as the acquisition of the 

underlying securities (i.e., 

collateral) for purposes of portfolio 

diversification under rule 2a–7? [Y/ 

N] 

For repurchase agreements, describe 

the securities subject to the 

repurchase agreement, including: 

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10120 Federal Register / Vol. 75, No. 42 / Thursday, March 4, 2010 / Rules and Regulations 

a. The name of the issuer; 

b. Maturity date; 

c. Coupon or yield; 

d. The category of investments, 


selected from Item 31 above; 


e. The principal amount, to the 


nearest cent; 


f. Value of collateral, to the nearest 

cent. 

If multiple securities of an issuer are 

subject to the repurchase 

agreement, the securities may be 

aggregated, in which case disclose: 

(a) the total principal amount and 

value and (b) the range of maturity 

dates and interest rates. 

Item 33. Rating. Indicate whether the 

security is a rated First Tier 

Security, rated Second Tier 

Security, an Unrated Security, or no 

longer an Eligible Security. 

Item 34. Name of each Designated 

NRSRO. 

a. For each Designated NRSRO, 

disclose the credit rating given by 

the Designated NRSRO. If the 

instrument and its issuer are not 

rated by the Designated NRSRO, 

indicate ‘‘NR.’’ 

Item 35. The maturity date as 

determined under rule 2a–7. 

Determine the maturity date, taking 

into account the maturity 

shortening provisions of rule 2a– 

7(d). 

Item 36. The final legal maturity date, 

taking into account any maturity 

date extensions that may be effected 

at the option of the issuer. 

Item 37. Does the security have a 

Demand Feature? [Y/N] 

a. The identity of the Demand Feature 

issuer. 

b. Designated NRSRO(s) for the 

Demand Feature or provider of the 

Demand Feature. 

c. For each Designated NRSRO, 

disclose the credit rating given by 

the Designated NRSRO. If there is 

no rating given by the Designated 

NRSRO, indicate ‘‘NR.’’ 

Item 38. Does the security have a 

Guarantee? [Y/N] 

a. The identity of the Guarantor. 

b. Designated NRSRO(s) for the 


Guarantee or Guarantor. 


c. For each Designated NRSRO, 

disclose the credit rating given by 

the Designated NRSRO. If there is 

no rating given by the Designated 

NRSRO, indicate ‘‘NR.’’ 

Item 39. Does the security have any 

enhancements, other than those 

identified in Items 37 and 38 above, 

on which the fund is relying to 

determine the quality, maturity or 

liquidity of the security? [Y/N] 

a. The type of enhancement. 

b. The identity of the enhancement 

provider. 

c. Designated NRSRO(s) for the 


enhancement or enhancement 


provider. 


d. For each Designated NRSRO, 

disclose the credit rating given by 

the Designated NRSRO. If there is 

no rating given by the Designated 

NRSRO, indicate ‘‘NR.’’ 

Item 40. The total principal amount of 

the security held by the series, to 

the nearest cent. 

Item 41. The total current amortized 

cost, to the nearest cent. 

Item 42. The percentage of the money 

market fund’s net assets invested in 

the security, to the nearest 

hundredth of a percent. 

Item 43. Explanatory notes. Disclose any 

other information that may be 

material to other disclosures related 

to the portfolio security. 

Item 44. Is this an Illiquid Security as 

of the date of this report? [Y/N] 

Item 45. The value of the security, 

calculated using available market 

quotations (or an appropriate 

substitute that reflects current 

market conditions), including the 

value of any capital support 

agreement, to the nearest cent. 

Item 46. The value of the security, 

calculated using available market 

quotations (or an appropriate 

substitute that reflects current 

market conditions), excluding the 

value of any capital support 

agreement, to the nearest cent. 

Dated: February 23, 2010. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–4059 Filed 3–3–10; 8:45 am] 

BILLING CODE 8011–01–P