32688 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

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, will be to Title 17, Part 270 of the Code 

of Federal Regulations [17 CFR part 270]. 

2Money market funds are also sometimes called 

‘‘money market mutual funds’’ or ‘‘money funds.’’ 

3See generally 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’’). Most money market 

funds seek to maintain a stable net asset value per 

share of $1.00, but a few seek to maintain a stable 

net asset value per share of a different amount, e.g., 

$10.00. For convenience, throughout this release, 

the discussion will simply refer to the stable net 

asset value of $1.00 per share. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 270 and 274 

[Release No. IC–28807; File No. S7–11–09] 

RIN 3235–AK33 

Money Market Fund Reform 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule. 

SUMMARY: The Securities and Exchange 

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

is proposing amendments to certain 

rules that govern money market funds 

under the Investment Company Act. 

The amendments would: Tighten the 

risk-limiting 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 

weighted average maturity of portfolio 

holdings, and limiting funds to 

investing in the highest quality 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) to suspend 

redemptions to allow for the orderly 

liquidation of fund assets. In addition, 

the Commission is seeking comment on 

other potential changes in our 

regulation of money market funds, 

including whether money market funds 

should, like other types of mutual 

funds, effect shareholder transactions at 

the market-based net asset value, i.e., 

whether they should have ‘‘floating’’ 

rather than stabilized net asset values. 

The proposed 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: Comments should be received on 

or before September 8, 2009. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/proposed.shtml); or 

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

Number S7–11–09 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

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

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–11–09. This file number 

should be included on the subject line 

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

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

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

proposed.shtml). Comments are also 

available for public inspection and 

copying in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. All comments received 

will be posted without change; we do 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. 

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 proposing for public 

comment amendments to rules 2a–7 [17 

CFR 270.2a–7], 17a–9 [17 CFR 270.17a– 

9], and 30b1–5 [17 CFR 270.30b1–5], 

new rules 22e–3 [17 CFR 270.22e–3] 

and 30b1–6 [17 CFR 270.30b1–6], and 

new Form N–MFP under the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’ or ‘‘Act’’).1

Table of Contents 

I. Background 

A. Money Market Funds 

B. Market Significance 

C. Regulation of Money Market Funds 

D. Recent Developments 

II. Discussion 

A. Portfolio Quality 

1. Second Tier Securities 

2. Eligible Securities 

3. Credit Reassessments 

4. Asset Backed Securities 

B. Portfolio Maturity 

1. Weighted Average Maturity 

2. Weighted Average Life 

3. Maturity Limit for Government 

Securities 

4. Maturity Limit for Other Portfolio 

Securities 

C. Portfolio Liquidity 

1. Limitation on Acquisition of Illiquid 

Securities 

2. Cash and Securities That Can Be Readily 

Converted to Cash 

3. Stress Testing 

D. Diversification 

E. Repurchase Agreements 

F. Disclosure of Portfolio Information 

1. Public Web site Posting 

2. Reporting to The Commission 

3. Amendment to Rule 30b1–5 

G. Processing of Transactions 

H. Exemption for Affiliate Purchases 

1. Expanded Exemptive Relief 

2. New Reporting Requirement 

I. Fund Liquidation 

1. Proposed Rule 22e–3 

2. Request for Comment on Other 

Regulatory Changes 

III. Request for Comment 

A. Floating Net Asset Value 

B. In-Kind Redemptions 

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 Proposed Rules and Form 

I. Background 

A. Money Market Funds 

Money market funds are open-end 

management investment companies that 

are registered under the Investment 

Company Act and regulated under rule 

2a–7 under the Act. They invest in highquality, short-term debt instruments 

such as commercial paper, Treasury 

bills and repurchase agreements.2

Money market funds pay dividends that 

reflect prevailing short-term interest 

rates and, unlike other investment 

companies, seek to maintain a stable net 

asset value per share, typically $1.00 per 

share.3

This combination of stability of 

principal and payment of short-term 

yields has made money market funds 

one of the most popular investment 

vehicles for many different types of 

investors. Commonly offered features, 

such as check-writing privileges, 

exchange privileges, and nearimmediate liquidity, have contributed to 

the popularity of money market funds. 

More than 750 money market funds are 

registered with the Commission, and 

collectively they hold approximately 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32689 

4See Investment Company Institute, Trends in 

Mutual Fund Investing, Apr. 2009, available at 

http://www.ici.org/highlights/trends_04_09 (‘‘ICI 

Trends’’). 

5See id. 

6See Investment Company Institute, Report of the 

Money Market Working Group, at 21 (Mar. 17, 

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

ppr_09_mmwg.pdf (‘‘ICI Report’’). 

7See Investment Company Institute, 2009 

Investment Company Fact Book, at 147, Table 38 

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

2009_factbook.pdf (‘‘2009 Fact Book’’). 

8See, e.g., iMoneyNet Money Fund Report (Mar. 

20, 2009), available at http://www.imoneynet.com/ 

files/Publication_News/mfr.pdf. 

9See ICI Report, supra note 6, at 28–29, Figure 

3.7. 

10See id. at 28–29, Figure 3.6. 

11See Investment Company Institute, Money 

Market Mutual Fund Assets, June 11, 2009, 

available at http://www.ici.org/highlights/ 

mm_06_11_09. 

12See Investment Company Institute, 1999 

Mutual Fund Fact Book, at 4 (May 1999), available 

at http://www.ici.org/pdf/1999_factbook.pdf; 

Investment Company Institute, Trends in Mutual 

Fund Investing, May 28, 2009, available at http:// 

www.ici.org/highlights/trends_04_2009. 

13See Investment Company Institute, 2008 

Investment Company Fact Book, at 144, Table 35 

(May 2008) (‘‘2008 Fact Book’’); 2009 Fact Book, 

supra note 7, at 147, Table 38. 

14Federal Reserve Board, Statistical Release Z.1: 

Flow of Funds Accounts of the United States: Flows 

and Outstandings Fourth Quarter 2008, at 86, Table 

L.208 (Mar. 12, 2009), available at http:// 

www.federalreserve.gov/releases/z1/Current/z1.pdf 

(‘‘Fed. Flow of Funds Report’’). 

15See Instruments of the Money Market, at 121, 

Table 2 (Timothy Q. Cook & Robert K. Laroche eds., 

1993), available at http://www.richmondfed.org/ 

publications/research/special_reports/ 

instruments_of_the_money_market/pdf/ 

full_publication.pdf; Fed. Flow of Funds Report, 

supra note 14, at Tables L.206 and L.208. One 

commenter has called the growth of these two 

markets ‘‘inextricably linked.’’ See Leland Crabbe & 

Mitchell A. Post, The Effect of SEC Amendments to 

Rule 2a–7 on the Commercial Paper Market, at 4 

(Federal Reserve Board, Finance and Economics 

Discussion Series #199, May 1992) (‘‘Crabbe & 

Post’’). 

16These securities include securities issued or 

guaranteed by the Federal National Mortgage 

Association (‘‘Fannie Mae’’), the Federal Home 

Loan Mortgage Corporation (‘‘Freddie Mac’’) and 

the Federal Home Loan Banks. See ICI Report, 

supra note 6, at 19, Figure 2.3. See generally U.S. 

Treasury Department, FAQs on Fixed Income 

Agency Securities, available at http:// 

www.treas.gov/education/faq/markets/ 

fixedfederal.shtml. 

17See Fed. Flow of Funds Report, supra note 14 

(percentages derived from flow of funds data). 

Foreign banks also have relied substantially on U.S. 

money market funds for dollar-denominated 

funding. See Naohiko Baba, Robert N. McCauley, & 

Srichander Ramaswamy, U.S. Dollar Money Market 

Funds and non-U.S. Banks, BIS Quarterly Review, 

Mar. 2009, available at http://www.bis.org/publ/ 

qtrpdf/r_qt0903g.htm (‘‘U.S. Dollar Money Market 

Funds’’). 

$3.8 trillion of assets.4 Money market 

funds account for approximately 39 

percent of all investment company 

assets.5

Individual (or ‘‘retail’’) investors use 

money market funds for a variety of 

reasons. For example, they may invest 

in money market funds to hold cash 

temporarily or to take a temporary 

‘‘defensive position’’ in anticipation of 

declining equity markets. Money market 

funds also play an important role in 

cash management accounts for banks, 

broker-dealers, variable insurance 

products, and retirement accounts. As of 

December 2008, about one-fifth of U.S. 

households’ cash balances were held in 

money market funds.6

Different types of money market funds 

have been introduced to meet the 

differing needs of retail money market 

fund investors. Historically, most retail 

investors have invested in ‘‘prime 

money market funds,’’ which hold a 

variety of taxable short-term obligations 

issued by corporations and banks, as 

well as repurchase agreements and asset 

backed commercial paper secured by 

pools of assets.7 Prime money market 

funds typically have paid higher yields 

than other types of money market funds 

available to retail investors.8

‘‘Government money market funds’’ 

principally hold obligations of the U.S. 

Government, including obligations of 

the U.S. Treasury and federal agencies 

and instrumentalities, as well as 

repurchase agreements collateralized by 

Government securities. Some 

government money market funds limit 

themselves to holding only Treasury 

obligations. Compared to prime funds, 

government funds generally offer greater 

safety of principal but historically have 

paid lower yields. ‘‘Tax exempt money 

market funds’’ primarily hold 

obligations of state and local 

governments and their 

instrumentalities, and pay interest that 

is generally exempt from federal income 

taxes. 

Institutional investors account for a 

growing portion of investments in 

money market funds. These investors 

include corporations, bank trust 

departments, securities lending 

operations of brokerage firms, state and 

local governments, hedge funds and 

other private funds. Many corporate 

treasurers of large businesses have 

essentially ‘‘outsourced’’ cash 

management operations to money 

market funds, which may be able to 

manage cash more efficiently due both 

to the scale of their operations and their 

expertise. As of January 2008, 

approximately 80 percent of U.S. 

companies used money market funds to 

manage at least a portion of their cash 

balances.9 At year-end 2008, U.S. nonfinancial businesses held approximately 

32 percent of their cash balances in 

money market funds.10 According to the 

Investment Company Institute, about 66 

percent of money market fund assets are 

held in money market funds or share 

classes intended to be sold to 

institutional investors (‘‘institutional 

money market funds’’).11

Institutional money market funds 

hold securities similar to those held by 

prime funds and government funds. 

They typically have large minimum 

investment amounts (e.g., $1 million), 

and offer lower expenses and higher 

yields due to the large account balances, 

large transaction values, and smaller 

number of accounts associated with 

these funds. As we will discuss in more 

detail below, institutional money 

market funds also tend to have greater 

investment inflows and outflows than 

retail money market funds. 

B. Market Significance 

Due in large part to the growth of 

institutional funds, money market funds 

have grown substantially over the last 

decade, from approximately $1.4 trillion 

in assets under management at the end 

of 1998 to approximately $3.8 trillion in 

assets under management at the end of 

2008.12 During this same period, retail 

taxable money market fund assets grew 

from approximately $835 billion to 

$1.36 trillion, or 63 percent, while 

institutional taxable money market fund 

assets grew from approximately $516 

billion to $2.48 trillion, or 380 

percent.13

One implication of the growth of 

money market funds is the increased 

role they play in the capital markets. 

They are by far the largest holders of 

commercial paper, owning almost 40 

percent of the outstanding paper.14 The 

growth of the commercial paper market 

has generally followed the growth of 

money market funds over the last three 

decades.15 Today, money market funds 

provide a substantial portion of shortterm credit extended to U.S. businesses. 

Money market funds also play a large 

role in other parts of the short-term 

market. They hold approximately 23 

percent of all repurchase agreements, 65 

percent of state and local government 

short-term debt, 24 percent of short-term 

Treasury securities, and 44 percent of 

short-term agency securities.16 They 

serve as a substantial source of 

financing in the broader capital markets, 

holding approximately 22 percent of all 

state and local government debt, 

approximately nine percent of U.S. 

Treasury securities and 15 percent of 

agency securities.17

As a consequence, the health of 

money market funds is important not 

only to their investors, but also to a 

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32690 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

18See Mike Hammill & Andrew Flowers, MMMF, 

and AMLF, and MMIFF, Macroblog (Federal 

Reserve Bank of Atlanta), Oct. 30, 2008, available 

at http://www.macroblog.typepad.com/macroblog/ 

2008/10/index.html. 

19See 1983 Adopting Release, supra note 3; 

Acquisition and Valuation of Certain Portfolio 

Instruments by Registered Investment Companies, 

Investment Company Act Release No. 14983 (Mar. 

12, 1986) [51 FR 9773 (Mar. 21, 1986)] (‘‘1986 

Adopting Release’’). 

20See 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’’); Revisions to 

Rules Regulating Money Market Funds, Investment 

Company Act Release No. 21837 (Mar. 21, 1996) [61 

FR 13956 (Mar. 28, 1996)] (‘‘1996 Adopting 

Release’’). 

21See 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). 

22See Revisions to Rules Regulating Money 

Market Funds, Investment Company Act Release 

No. 17589 at n.7 and accompanying text (July 17, 

1990) [55 FR 30239 (July 25, 1990)] (‘‘1990 

Proposing Release’’). 

23The 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 

rule 2a–7(a)(18). 

24See rule 2a–7(a)(2) (defining the amortized cost 

method as 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). 

25See 1983 Adopting Release, supra note 3, at nn. 

3–7 and accompanying text; Valuation of Debt 

Instruments and Computation of Current Price Per 

Share by Certain Open-End Investment Companies, 

Investment Company Act Release No. 12206, at nn. 

3–4 and accompanying text (Feb. 1, 1982) [47 FR 

5428 (Feb. 5, 1982)] (‘‘1982 Proposing Release’’). 

26See rule 2a–7(c)(1), (c)(7)(ii)(C). 

27For example, the 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’’), and by limiting the 

portion of the fund’s portfolio that may be invested 

in securities rated in the second highest rating 

category. See rule 2a–7(c)(3). The 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 dollarweighted average maturity of the securities owned 

by the fund may not exceed 90 days. See rule 2a– 

7(c)(2). 

28See rule 2a–7(c)(7); see also supra note 21 and 

accompanying text. 

29See 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. Rule 2a–7(c)(7)(ii)(C). See 

1983 Adopting Release, supra note 3, at nn. 51–52 

and accompanying text. 

30 In September 1994, a series of a small 

institutional money market fund re-priced its shares 

below $1.00 as a result of loss in value of certain 

floating rate securities. The fund promptly 

announced that it would liquidate and distribute its 

assets to its shareholders. See 1996 Adopting 

Release, supra note 20, at n.162. 

31We made similar observations last year. See 

Temporary Exemption for Liquidation of Certain 

Money Market Funds, Investment Company Act 

Release No. 28487, at text accompanying nn. 6–7 

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

(‘‘Rule 22e–3T Adopting Release’’). 

large number of businesses and state 

and local governments that finance 

current operations through the issuance 

of short-term debt. A ‘‘break in the link 

[between borrowers and money market 

funds] can lead to reduced business 

activity and pose risks to economic 

growth.’’ 18 The regulation of money 

market funds, therefore, is important not 

only to fund investors, but to a wide 

variety of operating companies as well 

as state and local governments that rely 

on these funds to purchase their shortterm securities. 

C. Regulation of Money Market Funds 

The Commission regulates money 

market funds under the Investment 

Company Act and pursuant to rule 2a– 

7 under the Act. We adopted rule 2a– 

7 as an exemptive rule in 1983 and 

amended it in 1986 to facilitate the 

development of tax-exempt money 

market funds.19 We also amended it 

substantially in 1991 (taxable funds) 

and 1996 (tax-exempt funds) to provide 

for a more robust set of regulatory 

conditions and to expand the rule to 

apply it to any investment company 

holding itself out as a money market 

fund.20

The Investment Company Act and 

applicable rules generally require that 

mutual funds price their securities at 

the current net asset value per share by 

valuing portfolio instruments at market 

value or, if market quotations are not 

readily available, at fair value 

determined in good faith by the board 

of directors.21 As a consequence, the 

price at which funds will sell and 

redeem shares ordinarily fluctuates 

daily with changes in the value of the 

fund’s portfolio securities. These 

valuation and pricing requirements are 

designed to prevent investors’ interests 

from being diluted or otherwise 

adversely affected if fund shares are not 

priced fairly.22

Rule 2a–7, however, permits money 

market funds to use the amortized cost 

method of valuation and pennyrounding method of pricing instead, 

which facilitate money market funds’ 

ability to maintain a stable net asset 

value.23 Under the amortized cost 

method, portfolio securities generally 

are valued at cost plus any amortization 

of premium or accumulation of discount 

(‘‘amortized cost’’).24 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 the 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.25 Therefore, the 

rule permits money market funds to 

value portfolio securities at their 

amortized cost so long as the deviation 

between the amortized cost 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.26

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.27 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.28

If there is a difference of more than 1⁄2

of 1 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.’’ 29

D. Recent Developments 

Money market funds have had a 

record of stability during their more 

than 30 years of operation. Before last 

fall, only one money market fund had 

ever broken the buck.30 This record 

appears to be due primarily to three 

factors. First, the short-term debt 

markets generally were relatively stable 

during this period. Second, many fund 

advisers (and their portfolio managers 

and credit analysts) were skillful in 

analyzing the risks of portfolio 

securities and thereby largely avoiding 

significant losses that could force a fund 

to break the buck.31 Finally, fund 

managers and their affiliated persons 

have had significant sources of private 

capital that they were willing to make 

available to support the stable net asset 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32691 

32These transactions implicate section 17(a) of 

the Investment Company Act, which prohibits an 

affiliated person of a fund or an affiliated person of 

such a person from knowingly purchasing a 

security from the fund, except in limited 

circumstances. Under section 17(b) of the Act, such 

persons can apply to the Commission for an 

exemption from these prohibitions. In 1996, the 

Commission adopted rule 17a–9, which permits 

affiliated persons of funds and affiliated persons of 

such persons to purchase distressed securities in 

funds’ portfolios subject to certain conditions, 

without the need to first obtain an individual 

exemption. We are proposing certain amendments 

to rule 17a–9 in this release, as well as an 

amendment to rule 2a–7 that would require money 

market funds to notify us of any transactions under 

rule 17a–9. See infra Section II.H. 

33See 1990 Proposing Release, supra note 22, at 

nn.16–18 and accompanying text; 1996 Adopting 

Release, supra note 20, at nn. 22–23 and 

accompanying text. 

34See 1991 Adopting Release, supra note 20; 

1996 Adopting Release, supra note 20. 

35See rule 2a–7(c)(4). 

36See 1983 Adopting Release, supra note 3, at nn. 

41–42 and accompanying text; 1996 Adopting 

Release, supra note 20, at nn. 22–29 and 

accompanying text. 

37See Neil Shah, Money Market Funds Cut 

Exposure to Risky SIV Debt—S&P, Reuters, Nov. 21, 

2007, available at http://www.reuters.com/article/

bondsNews/idUSN2146813220071121. 

38We know of at least 44 money market funds 

that were supported by affiliates because of SIV 

investments. In many of these cases the affiliate 

support was provided in reliance on no-action 

assurances provided by Commission staff. Many of 

these no-action letters are available on our Web site. 

See http://www.sec.gov/divisions/investment/imnoaction.shtml#money. Unlike other asset backed 

commercial paper, SIV debt was not backed by an 

external liquidity provider. 

39See, e.g., Alistair Barr, HSBC’s Bailout Puts 

Pressure on Citi, ‘‘Superfund,’’ MarketWatch, Nov. 

26, 2007, available at http:// 

www.marketwatch.com/story/hsbcs-35-bln-sivbailout-puts-pressure-on-citi-superfund. 

40See, e.g., id. 

41See, e.g., Shannon D. Harrington & Christopher 

Condon, Bank of America, Legg Mason Prop Up 

Their Money Funds, Bloomberg, Nov. 13, 2007, 

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

news?pid=20601087&sid=aWWjLp8m3J1I&

refer=home. Under rule 17a–9, funds are not 

required to report to us all such transactions. See 

infra Section II.H. 

42See ICI Report, supra note 6, at 49. 

43 Id. 

44See Press Release, The Reserve Fund, A 

Statement Regarding The Primary Fund (Sept. 16, 

2008). The Reserve Fund subsequently stated that 

the fund had broken the buck earlier in the day on 

September 16. See Press Release, The Reserve Fund, 

Important Notice Regarding Reserve Primary Fund’s 

Net Asset Value (Nov. 26, 2008) (‘‘The Fund is 

announcing today that, contrary to previous 

statements to the public and to investors, the 

Fund’s net asset value per share was $0.99 from 11 

a.m. Eastern time to 4 p.m. Eastern time on 

September 16, 2008 and not $1.00.’’). 

45See 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). 

46See U.S. Dollar Money Market Funds, supra 

note 17, at 72; BlackRock, The Credit Crisis: U.S. 

Government Actions and Implications for Cash 

Investors (Nov. 2008), available at https://

www2.blackrock.com/webcore/litService/search/ 

getDocument.seam?venue=PUB_INS&

ServiceName=PublicServiceView&ContentID=50824 

(‘‘The Credit Crisis’’); Standard & Poor’s, Money 

Market Funds Tackle ‘Exuberant Irrationality,’ 

Ratings Direct, Sept. 30, 2008, available at http:// 

www2.standardandpoors.com/spf/pdf/media/

MoneyMarketFunds_Irrationality.pdf. 

value of a money market fund when it 

experienced losses in one or more of its 

portfolio securities. 

Since the late 1980s, fund managers 

from time to time have sought to 

prevent a money market fund from 

breaking the buck by voluntarily 

purchasing distressed portfolio 

securities from the fund, directly or 

through an affiliated person, at the 

higher of market price or amortized 

cost.32 These events occurred irregularly 

and involved a limited number of 

funds.33 In response to these events, the 

Commission tightened the risk-limiting 

conditions of the rule for taxable funds 

in 1991 and for tax exempt funds in 

1996.34 Among other things, we added 

diversification requirements to the rule, 

which limited the exposure of a fund to 

any one issuer of securities, thus 

reducing the consequences of a credit 

event affecting the value of a portfolio 

holding.35 We repeatedly emphasized 

the responsibility of fund managers to 

manage, and fund boards to oversee that 

the fund is managed, in a manner 

consistent with the investment objective 

of maintaining a stable net asset value.36

In 2007, however, losses in the 

subprime mortgage markets adversely 

affected a significant number of money 

market funds. These money market 

funds had invested in asset backed 

commercial paper issued by structured 

investment vehicles (‘‘SIVs’’), which 

were off-balance sheet conduits 

sponsored mostly by certain large banks 

and money managers.37 Although we 

understand that most SIVs had little 

exposure to sub-prime mortgages, they 

suffered severe liquidity problems and 

significant losses when risk-averse 

short-term investors (including money 

market funds), fearing increased 

exposure to liquidity risk and 

residential mortgages, began to avoid 

the commercial paper the SIVs issued.38

Unable to roll over their short-term debt, 

SIVs were forced to liquidate assets to 

pay off maturing obligations and began 

to wind down operations.39 In addition, 

NRSROs rapidly downgraded SIV 

securities, increasing downward price 

pressures already generated by these 

securities’ lack of liquidity. The value of 

the commercial paper fell, which 

threatened to force several money 

market funds to break the buck. 

Money market funds weathered this 

storm. In some cases, bank sponsors of 

SIVs provided support for the SIVs.40 In 

other cases, money market fund 

affiliates voluntarily provided support 

to the funds by purchasing the SIV 

investments at their amortized cost or 

providing some form of credit 

support.41 Money market funds also 

benefited from strong cash flows into 

money market funds, as investors fled 

from riskier markets. During the period 

from July 2007 to August 2008, more 

than $800 billion in new cash was 

invested in money market funds, 

increasing aggregate fund assets by onethird.42 Eighty percent of these 

investments came from institutional 

investors.43

As financial markets continued to 

deteriorate in 2008, however, money 

market funds came under renewed 

stress. This pressure culminated the 

week of September 15, 2008 when the 

bankruptcy of Lehman Brothers 

Holdings Inc. (‘‘Lehman Brothers’’) led 

to heavy redemptions from about a 

dozen money market funds that held 

Lehman Brothers debt securities. On 

September 15, 2008, The Reserve Fund, 

whose Primary Fund series held a $785 

million position in commercial paper 

issued by Lehman Brothers, began 

experiencing a run on its Primary Fund, 

which spread to the other Reserve 

funds. The Reserve funds rapidly 

depleted their cash to satisfy 

redemptions, and began offering to sell 

the funds’ portfolio securities into the 

market, further depressing their 

valuations. Unlike the other money 

market funds that held Lehman Brothers 

debt securities (and SIV commercial 

paper), The Reserve Primary Fund 

ultimately had no affiliate with 

sufficient resources to support the $1.00 

net asset value. On September 16, 2008, 

The Reserve Fund announced that as of 

that afternoon, its Primary Fund would 

break the buck and price its securities 

at $0.97 per share.44 On September 22, 

2008, 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.45

These events led many investors, 

especially institutional investors, to 

redeem their holdings in other prime 

money market funds and move assets to 

Treasury or government money market 

funds.46 This trend was intensified by 

turbulence in the market for financial 

sector securities as a result of the 

bankruptcy of Lehman Brothers and the 

near failure of American International 

Group, whose commercial paper was 

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47See ICI Report, supra note 6, at 62 (analyzing 

data from iMoneyNet); see also Investment 

Company Institute, Money Market Mutual Fund 

Assets Historical Data, Apr. 30, 2009, available at 

http://www.ici.org/pdf/mm_data_2009.pdf (‘‘ICI 

Mutual Fund Historical Data’’). 

48See ICI Mutual Fund Historical Data, supra 

note 47. 

49See Philip Swagel, ‘‘The Financial Crisis: An 

Inside View,’’ Brookings Papers on Economic 

Activity, at 31 (Spring 2009) (conference draft), 

available at http://www.brookings.edu/economics/ 

bpea/∼/media/Files/Programs/ES/BPEA/2009_

spring_bpea_papers/2009_spring_bpea_swagel.pdf. 

50See 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. 

51See 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’’) (stating that 

following The Reserve Fund’s announcement that 

the Primary Fund would break the buck, ‘‘risk 

spreads on commercial paper rose considerably and 

were very volatile’’ and ‘‘[c]onditions in short-term 

funding markets improved somewhat following the 

announcement of * * * a number of mutual 

initiatives by the Federal Reserve and the Treasury 

to address the pressures on money market funds 

and the commercial paper market’’). See also Press 

Release, Federal Reserve 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 (‘‘The commercial paper 

market has been under considerable strain in recent 

weeks as money market mutual funds and other 

investors, themselves often facing liquidity 

pressures, have become increasingly reluctant to 

purchase commercial paper, especially at longerdated maturities. As a result, the volume of 

outstanding commercial paper has shrunk, interest 

rates on longer term commercial paper have 

increased significantly, and an increasingly high 

percentage of outstanding paper must now be 

refinanced each day. A large share of outstanding 

commercial paper is issued or sponsored by 

financial intermediaries, and their difficulties 

placing commercial paper have made it more 

difficult for those intermediaries to play their vital 

role in meeting the credit needs of businesses and 

households.’’). 

52See Matthew Cowley, Burnt Money Market 

Funds Stymie Short-Term Debt, Dow Jones 

International News, Oct. 1, 2008; Anusha 

Shrivastava, Commercial-Paper Market Seizes Up, 

The Wall Street Journal, Sept. 19, 2008, at C2. 

53See Federal Reserve Board data, available at 

http://www.frbatlanta.org/econ_rd/macroblog/ 

102808b.jpg (charting three-month commercial 

paper spreads over three-month Treasury bill); see 

also Federal Reserve Board Chairman Ben S. 

Bernanke, Testimony before the Committee on 

Financial Services, U.S. House of Representatives 

(Nov. 18, 2008), available at http:// 

www.federalreserve.gov/newsevents/testimony/ 

bernanke20081118a.htm. 

54Commission staff provided no-action 

assurances allowing 100 money market funds in 18 

different fund complexes to enter into such 

arrangements during the period from September 16, 

2008 to October 1, 2008. See, e.g., http:// 

www.sec.gov/divisions/investment/imnoaction.shtml#money. 

55See Press Release, U.S. Department of the 

Treasury, Treasury Announces Guaranty Program 

for Money Market Funds (Sept. 19, 2008), available 

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

The Program insures investments in money market 

funds, to the extent of their shareholdings as of 

September 19, 2008, if the fund has chosen to 

participate in the Program. The Guarantee Program 

is due to expire on September 18, 2009. 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 permits a participating fund to 

suspend redemptions if it breaks a buck and 

liquidates under the terms of the Program. See Rule 

22e–3T Adopting Release, supra note 31. The 

temporary rule will expire on October 18, 2009. We 

discuss this rule in more detail in infra Section II.I. 

56See 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 will expire 

on February 1, 2010, unless extended. See Press 

Release, Federal Reserve Board, Federal Reserve 

Announces Extensions of and Modifications to a 

Number of Its Liquidity Programs (June 25, 2009), 

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

newsevents/press/monetary/20090625a.htm (‘‘2009 

Federal Reserve Extension and Modification 

Announcement’’). 

57See 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. At one point the Federal 

Reserve had purchased about one-fifth of all 

commercial paper outstanding in the U.S. market. 

See Bryan Keogh, GE Leads Commercial Paper 

‘‘Test’’ as Fed’s Buying Ebbs, Bloomberg, Jan. 27, 

2009, available at http://www.bloomberg.com/apps/ 

news?pid=newsarchive&sid=aHWA87Aa2aQQ. The 

CPFF will expire on February 1, 2010, unless 

extended. See 2009 Federal Reserve Extension and 

Modification Announcement, supra note 56. 

Although the CPFF did not directly benefit money 

market funds, it did indirectly benefit them by 

stabilizing the commercial paper market. See, e.g., 

Richard G. Anderson, The Success of the CPFF? 

(Economic Synopses No. 18, Federal Reserve Bank 

of St. Louis, 2009), at 2, available at http:// 

www.research.stlouisfed.org/publications/es/09/ 

ES0918.pdf. 

58See, e.g., Guarantee Agreement that money 

market funds participating in the Treasury’s 

Guarantee Program were required to sign, at 2, 10, 

available at http://www.treas.gov/offices/domesticfinance/key-initiatives/money-market-docs/ 

Guarantee-Agreement_form.pdf (under which 

money market funds were required to state that they 

operated in compliance with rule 2a–7 to be eligible 

to initially participate in the program and must 

continue to comply with rule 2a–7 to continue to 

held by many prime money market 

funds. 

During the week of September 15, 

2008, investors withdrew approximately 

$300 billion from prime (taxable) money 

market funds, or 14 percent of the assets 

held in those funds.47 Most of the 

heaviest redemptions were from 

institutional funds, which depleted cash 

positions and threatened to force a fire 

sale of portfolio securities that would 

have placed widespread pressure on 

fund share prices.48 Fearing further 

redemptions, money market fund (and 

other cash) managers began to retain 

cash rather than invest in commercial 

paper, certificates of deposit or other 

short-term instruments.49 In the final 

two weeks of September 2008, money 

market funds reduced their holdings of 

top-rated commercial paper by $200.3 

billion, or 29 percent.50

As a consequence, short-term markets 

seized up, impairing access to credit in 

short-term private debt markets.51 Some 

commercial paper issuers were only 

able to issue debt with overnight 

maturities.52 The interest rate premium 

(spread) over three-month Treasury bills 

paid by issuers of three-month 

commercial paper widened significantly 

from approximately 25–100 basis points 

before the September 2008 market 

events to approximately 200–350 basis 

points, and issuers were exposed to the 

costs and risks of having to roll over 

increasingly large amounts of 

commercial paper each day.53 Many 

money market fund sponsors took 

extraordinary steps to protect funds’ net 

assets and preserve shareholder 

liquidity by purchasing large amounts of 

securities at the higher of market value 

or amortized cost and by providing 

capital support to the funds.54

On September 19, 2008, the U.S. 

Department of the Treasury and the 

Board of Governors of the Federal 

Reserve System (‘‘Federal Reserve 

Board’’) announced an unprecedented 

market intervention by the federal 

government in order to stabilize and 

provide liquidity to the short-term 

markets. The Department of the 

Treasury 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.55

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.56 In 

addition, the Federal Reserve Board’s 

Commercial Paper Funding Facility 

(‘‘CPFF’’) provided support to issuers of 

commercial paper through a conduit 

that purchased commercial paper from 

eligible issuers, although the CPFF did 

not purchase commercial paper from 

money market funds.57 The Commission 

and its staff worked closely with the 

Treasury Department and the Federal 

Reserve Board to help design these 

programs, most of which relied in part 

on rule 2a–7 to tailor the program and/ 

or condition the terms of a fund’s 

participation in the program, and we 

also assisted in administering the 

Guarantee Program.58 Our staff also 

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participate in the program); see also http:// 

www.sec.gov/divisions/investment/ 

mmtempguarantee.htm. 

59See Investment Company Institute, SEC Staff 

No-Action Letter (Sept. 25, 2008) (relating to the 

AMLF); Investment Company Institute, SEC Staff 

No-Action Letter (Oct. 8, 2008) (relating to the 

Guarantee Program). These no-action letters are 

available on our Web site at http://www.sec.gov/ 

divisions/investment/im-noaction.shtml#money. 

60 During the week ending September 18, 2008, 

taxable institutional money market funds 

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. However, by the end of the week 

following the announcement, 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. 

61See Press Release No. 2008–234, Securities and 

Exchange Commission, Office of the Chief 

Accountant and FASB Staff Clarifications on Fair 

Value Accounting (Sept. 30, 2008), available at 

http://www.sec.gov/news/press/2008/2008-234.htm. 

62 Investment Company Institute, SEC Staff NoAction Letter (Oct. 10, 2008). This letter is available 

on our Web site at http://www.sec.gov/divisions/ 

investment/noaction/2008/ICI101008.htm. The 

letter by its terms did not apply, however, to 

shadow pricing if particular circumstances (such as 

the impairment of the creditworthiness of the 

issuer) suggested that amortized cost was not 

appropriate. The staff position also was limited to 

portfolio securities that were ‘‘first tier securities’’ 

under rule 2a–7 and that the fund reasonably 

expected to hold to maturity. The letter applied to 

shadow pricing procedures through January 12, 

2009. 

63On September 10, 2008, six days prior to The 

Reserve Fund’s announcement, approximately 

$1.38 trillion was invested in institutional prime 

(taxable) money market funds. See ICI Mutual Fund 

Historical Data, supra note 47. On October 8, 2008, 

approximately $962 billion was invested in those 

funds. See id. In addition, between September 10 

and September 17, the assets of these funds fell by 

approximately $193 billion. See id. 

64This estimate is based on no-action requests 

and other conversations with our staff during this 

time period. 

65The Credit Crisis, supra note 46, at 1 (‘‘After 

experiencing more than $400 billion in outflows 

over a short period of time, money funds had little 

appetite for commercial paper; even quality issuers 

discovered they could not access the commercial 

paper market * * *.’’). 

66An interest rate spread measures the difference 

in interest rates of debt instruments with different 

risk. See Markus K. Brunnermeier, Deciphering the 

Liquidity and Credit Crunch 2007–2008, 23 J. Econ. 

Perspectives 77, 85, Winter 2009 (‘‘Brunnermeier’’). 

67See id.; David Oakley, LIBOR Hits Record Low 

as Credit Fears Ease, Fin. Times, May 5, 2009. For 

example, the ‘‘TED’’ spread (the difference between 

the risk-free U.S. Treasury Bill rate and the riskier 

London Interbank Offering Rate (‘‘LIBOR’’)), 

normally around 50 basis points, reached a high of 

463 basis points on October 10, 2008. See David 

Serchuk, Banks Led by the TED, Forbes, Jan. 12, 

2009. 

68Taxable money market fund average weighted 

average maturities shortened to 40–42 days during 

October 2008 from 45–46 days shortly prior to this 

period based on analysis of data from the 

iMoneyNet Money Fund Analyzer database. 

69The TED spread was 52 basis points on May 

29, 2009. The LIBOR–OIS spread (the difference 

between three-month dollar London Interbank 

Offered Rate and the overnight index swap rate) 

was 45 basis points. See Lukanyo Mnyanda, Libor 

Declines for Second Day on Signs Economic Slump 

is Easing, Bloomberg, May 29, 2009, available at 

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

news?pid=20670001&sid=agpZArg2paJE. Prior to 

the start of the financial turbulence in the summer 

of 2007, the TED spread averaged approximately 

25–50 basis points and the three-month LIBOR–OIS 

spread averaged 7–9 basis points. See historical 

chart of TED spread available at http:// 

www.bloomberg.com/apps/ 

cbuilder?ticker1=.TEDSP%3AIND; Simon Kwan, 

Behavior of LIBOR in the Current Financial Crisis, 

FRBSF Economic Letter (Federal Reserve Bank of 

San Francisco), Jan. 23, 2009, at 2–3, available at 

http://www.frbsf.org/publications/economics/letter/ 

2009/el2009-04.pdf. 

70See Bryan Keogh, John Detrixhe & Gabrielle 

Coppola, Coca-Cola Flees Commercial Paper for 

Safety in Bonds, Bloomberg, Mar. 17, 2009, 

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

news?pid=newsarchive&sid=atxKQSJUp6RE (noting 

that certain companies are issuing long-term debt to 

replace commercial paper to avoid the risk of not 

being able to roll over their commercial paper, 

given the instability in short-term credit markets); 

Michael McKee, Fed Credit Has Stabilized Markets, 

Not Fixed Them, Study Says, Bloomberg, Mar. 6, 

2008, available at http://www.bloomberg.com/apps/ 

news?pid=newsarchive&sid=aRGBZuGYE78Y. 

71This information is based on analysis of data 

from the iMoneyNet Money Fund Analyzer 

database. 

72See Press Release, U.S. Department of the 

Treasury, Treasury Announces Extension of 

Temporary Guarantee Program for Money Market 

Funds (Nov. 24, 2008), available at http:// 

www.treas.gov/press/releases/hp1290.htm; Press 

Release, U.S. Department of the Treasury, Treasury 

Announces Extension of Temporary Guarantee 

Program for Money Market Funds (Mar. 31, 2009), 

Continued 

worked with sponsors of money market 

funds to provide regulatory relief they 

requested to participate fully in these 

programs.59

These steps helped to stanch the tide 

of redemptions from institutional prime 

money market funds,60 and provided 

liquidity to money market funds that 

held asset backed commercial paper. 

Commercial paper markets remained 

illiquid, however, and, as a result, 

money market funds experienced 

significant problems pricing portfolio 

securities. Institutional as well as retail 

money market funds with little 

redemption activity and no distressed 

securities reported to our staff that they 

nevertheless faced the prospect of 

breaking the buck as a consequence of 

their reliance on independent pricing 

services that reported prices based on 

models with few reliable inputs. The 

Commission’s Office of Chief 

Accountant and the Financial 

Accounting Standards Board provided 

funds and others guidance on 

determining fair value of securities in 

turbulent markets,61 but it appeared that 

fund boards remained reluctant to 

deviate from the prices received from 

their vendors. On October 10, 2008, our 

Division of Investment Management 

issued a letter agreeing not to 

recommend enforcement action if 

money market funds met the ‘‘shadow 

pricing’’ obligations of rule 2a–7 by 

pricing certain of their portfolio 

securities with a remaining final 

maturity of less than 60 days by 

reference to their amortized cost.62

Over the four weeks after The Reserve 

Fund’s announcement, assets in 

institutional prime money market funds 

shrank by 30 percent, or approximately 

$418 billion (from $1.38 trillion to $962 

billion).63 No money market fund other 

than The Reserve Primary Fund broke 

the buck, although money market fund 

sponsors or their affiliated persons in 

many cases committed extraordinary 

amounts of capital to support the $1.00 

net asset value per share. Our staff 

estimates that during the period from 

August 2007 to December 31, 2008, 

almost 20 percent of all money market 

funds received some support from their 

money managers or their affiliates.64

During this time period, short-term 

credit markets became virtually frozen 

as market participants hoarded cash and 

generally refused to lend on more than 

an overnight basis.65 Interest rate 

spreads increased dramatically.66 After 

shrinking to historically low levels as 

credit markets boomed in the mid2000s, interest rate spreads surged 

upward in the summer of 2007 and 

peaked after the bankruptcy of Lehman 

Brothers in September 2008.67 Money 

market funds shortened the weighted 

average maturity of their portfolios to be 

better positioned in light of increased 

liquidity risk to the funds.68

Although the crisis money markets 

faced last fall has abated, the problems 

have not disappeared. Today, while 

interest rate spreads have recently 

declined considerably, they remain 

above levels prior to the crisis,69 and 

short-term debt markets remain 

fragile.70 Although the average weighted 

average maturity of taxable money 

market funds (as a group) had risen to 

53 days as of the week ended June 16, 

2009,71 we understand that the longterm securities that account for the 

longer weighted average maturity are 

not commercial paper and corporate 

medium term notes (as they were before 

the crisis), but instead are 

predominantly government securities, 

which suggests that money market 

funds may still be concerned about 

credit risk. 

The Treasury Guarantee Program has 

been extended twice, but is set to expire 

on September 18, 2009.72 Programs 

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available at http://www.treas.gov/press/releases/ 

tg76.htm. 

73The AMLF and the CPFF will expire on 

February 1, 2010. See Press Release, Federal 

Reserve (June 25, 2009), available at http:// 

www.federalreserve.gov/newsevents/press/ 

monetary/20090625a.htm. The use of the AMLF 

peaked on October 1, 2008, with holdings of $152.1 

billion. See Federal Reserve Board, Statistical 

Release H.4.1: Factors Affecting Reserve Balances 

(Oct. 2, 2008), available at http:// 

www.federalreserve.gov/releases/h41/20081002. 

AMLF holdings as of April 29, 2009 stood at $3.699 

billion. See Federal Reserve Board, Statistical 

Release H.4.1: Factors Affecting Reserve Balances 

(Apr. 30, 2009), available at http:// 

www.federalreserve.gov/releases/h41/20090430. 

74See ICI Trends, supra note 4. 

75See ICI Mutual Fund Historical Data, supra 

note 47. 

76See id. 

77The Reserve Primary Fund did not make an 

initial partial pro rata distribution of assets until 

October 30, 2008. See Press Release, The Reserve 

Fund, Reserve Primary Fund Makes Initial 

Distribution of $26 Billion to Primary Fund 

Shareholders (Oct. 30, 2008). The fund has 

distributed approximately 90 percent of its assets. 

See Press Release, The Reserve Fund, Court Issues 

Order Setting Objection and Hearing Dates on 

Securities and Exchange Commission’s Proposed 

Plan for Distribution of Reserve Primary Fund’s 

Assets (June 15, 2009). 

78See SEC v. Reserve Management Co., Inc., et 

al., Litigation Release No. 21025 (May 5, 2009), 

available at http://www.sec.gov/litigation/ 

litreleases/2009/lr21025.htm. We note that we also 

have filed fraud charges against several entities and 

individuals who operate The Reserve Primary Fund 

alleging that they failed to provide key material 

facts to investors and trustees about the fund’s 

vulnerability as Lehman Brothers sought 

bankruptcy protection. See id. 

79See infra Section II.I. 

80 ICI Report, supra note 6. 

81We note that we accomplished the reforms of 

money market fund regulation we initiated in 1990 

in two steps. See 1990 Proposing Release, supra 

note 22 (taxable money market funds); Revisions to 

Rules Regulating Money Market Funds, Investment 

Company Act Release No. 19959 (Dec. 17, 1993) [58 

FR 68585 (Dec. 28, 1993)] (tax exempt money 

market funds) (‘‘1993 Proposing Release’’). 

82See infra Section III.A. 

83Rule 2a–7(c)(3)(i). Although rule 2a–7 refers to 

determinations to be made by a fund or its board, 

many of these determinations under the rule may 

be delegated to the investment adviser or fund 

officers pursuant to written guidelines that the 

board establishes and oversees to assure that the 

applicable procedures are being followed. Rule 2a– 

7(e). 

84Rule 2a–7(a)(10)(i) (defining ‘‘eligible 

security’’). If the securities are unrated, they must 

be of comparable quality. Rule 2a–7(a)(10)(ii). The 

term ‘‘requisite NRSROs’’ is defined in paragraph 

(a)(21) of the rule to mean ‘‘(i) Any two NRSROs 

that have issued a rating with respect to a security 

or class of debt obligations of an issuer; or (ii) If 

only one NRSRO has issued a rating with respect 

to such security or class of debt obligations of an 

issuer at the time the fund Acquires the security, 

that NRSRO.’’ Thus, a security can satisfy the 

ratings requirement in one of four ways: (1) It is 

rated in the same (top two) category by any two 

NRSROs; (2) if it is rated by at least two NRSROs 

in either of the top two categories, but no two 

established by the Federal Reserve 

Board to support liquidity in the shortterm market are set to expire early next 

year.73 Total money market fund assets 

have continued to grow and now 

amount to approximately $3.8 trillion.74

However, the composition of those 

assets has changed dramatically. 

Between September 10 and October 8, 

2008, government money market fund 

assets increased by about 47 percent 

compared to a decrease of about 21 

percent in taxable prime money market 

fund assets.75 Since that time, prime 

money market fund assets have begun to 

grow again, although they remain below 

pre-September 2008 levels and 

government money market fund assets 

remain elevated.76

Finally, The Reserve Primary Fund 

has yet to distribute all of its remaining 

assets to shareholders, many of whom 

were placed in financial hardship as a 

result of losing access to their 

investments.77 The dissolution of the 

fund has been affected by several 

factors, including operational 

difficulties and lack of liquidity in the 

secondary markets, and by legal 

uncertainties over the disposition of the 

remaining assets. We recently instituted 

an action in federal court seeking to 

ensure that the liquidation is effected on 

a fair and equitable basis,78 and propose 

in this release regulatory changes 

designed to protect investors in a fund 

that breaks a dollar in the future.79

II. Discussion 

The severe problems experienced by 

money market funds since the fall of 

2007 and culminating in the fall of 2008 

have prompted us to review our 

regulation of money market funds. 

Based on that review, including our 

experience with The Reserve Fund, we 

today are proposing for public comment 

a number of significant amendments to 

rule 2a–7 under the Investment 

Company Act. 

In formulating these proposals, 

Commission staff has consulted 

extensively with other members of the 

President’s Working Group on Financial 

Markets, and in particular the 

Department of Treasury and the Federal 

Reserve Board, which provided support 

to money market funds and the shortterm debt markets last fall, and which 

continue to administer programs from 

which money market funds and their 

shareholders benefit. We have consulted 

with managers of money market funds 

and other experts to develop a deeper 

understanding of the stresses 

experienced by funds and the impact of 

our regulations on the readiness of 

money market funds to cope with 

market turbulence and satisfy heavy 

demand for redemptions. In March, we 

received an extensive report from a 

‘‘Money Market Working Group’’ 

assembled by the Investment Company 

Institute (‘‘ICI Report’’), which 

recommended a number of changes to 

our rule 2a–7 that it believes could 

improve the safety and oversight of 

money market funds.80 We have also 

drawn from our experience as a 

regulator of money market funds under 

rule 2a–7 for more than 25 years and 

particularly since autumn 2007. 

Our proposals, which we discuss in 

more detail below, are designed to 

increase the resilience of money market 

funds to market disruptions such as 

those that occurred last fall. The 

proposed rules would reduce the 

vulnerability of money market funds to 

breaking the buck by, among other 

things, improving money market funds’ 

ability to satisfy significant demands for 

redemptions. If a particular fund does 

break the buck and determines to 

liquidate, the proposed rules would 

facilitate the orderly liquidation of the 

fund in order to protect the interests of 

all fund shareholders. These changes 

together should make money market 

funds (collectively) less susceptible to a 

run by diminishing the chance that a 

money market fund will break a dollar 

and, if one does, provide a means for the 

fund to orderly liquidate its assets. 

Finally, our proposals would improve 

our ability to oversee money market 

funds by requiring funds to submit to us 

current portfolio information. 

Our proposals represent the first step 

in addressing issues we believe merit 

immediate attention.81 Throughout this 

release, we ask comment on other 

possible regulatory changes aimed at 

further strengthening the stability of 

money market funds. In addition, we 

ask comment on some more far-reaching 

changes that could transform the 

business and regulatory model on which 

money market funds have operated for 

more than 30 years, including whether 

money market funds should move to a 

floating net asset value.82 We expect to 

benefit from the comments we receive 

before deciding whether to propose 

further changes. 

A. Portfolio Quality 

To limit the amount of credit risk to 

which money market funds can be 

exposed, rule 2a–7 limits them to 

investing in securities that a fund’s 

board of directors (or its delegate 

pursuant to written guidelines) 

determines present minimal credit 

risks.83 In addition, securities must at 

the time of acquisition be ‘‘eligible 

securities,’’ which means in part that 

they must have received the highest or 

second highest short-term debt ratings 

from the ‘‘requisite NRSROs.’’ 84

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NRSROs assign the same rating, the lower rating is 

assigned; (3) it is rated by only one NRSRO, in one 

of the top two categories; or (4) it is an unrated 

security that the board or its delegate determines to 

be of comparable quality to securities satisfying the 

rating criteria. The terms ‘‘rated security’’ and 

‘‘unrated security’’ are defined in paragraphs (a)(19) 

and (a)(28) of rule 2a–7, respectively. 

85Rule 2a–7(c)(3)(ii)(A). See also rule 2a–7(a)(10) 

(defining ‘‘eligible security’’), (a)(22) (defining 

‘‘second tier security’’ as any eligible security that 

is not a first tier security), and (a)(12) (defining 

‘‘first tier security’’ as, among other things, any 

eligible security that, if rated, has received the 

highest short-term term debt rating from the 

requisite NRSROs or, if unrated, has been 

determined by the fund’s board of directors to be 

of comparable quality). See also 1990 Proposing 

Release, supra note 22, at Section II.1.b. 

86Rule 2a–7(c)(3)(ii)(B). See also rule 2a–7(a)(7) 

(defining ‘‘conduit security’’). 

87Credit Rating Agency Reform Act of 2006, Pub. 

L. 109–291, 120 Stat. 1327. 

88See rule 2a–7(a)(1) (defining acquisition (or 

acquire) as any purchase or subsequent rollover, but 

not including the failure to exercise a demand 

feature); proposed rule 2a–7(a)(11)(iii) (defining 

eligible security); proposed rule 2a–7(c)(3) 

(portfolio quality). Because eligible securities would 

no longer be divided into first tier and second tier 

securities, both of those terms would be deleted 

from the rule, as would provisions relating 

specifically to second tier securities. See rule 2a– 

7(a)(12), (a)(22), (c)(3)(ii), (c)(4)(i)(C), (c)(4)(iii)(B), 

(c)(6)(i)(A), and (c)(6)(i)(C). We would therefore 

amend the definition of eligible security to require 

that securities receive ‘‘the highest,’’ as opposed to 

‘‘one of the two highest’’ short-term rating 

categories, as the current definition provides, and 

delete other references in the rule to the second 

highest rating category. See proposed rule 2a– 

7(a)(11)(iii). The definition of eligible security also 

would be expanded to include two types of 

securities, securities issued by a money market fund 

and ‘‘Government securities,’’ that were formerly 

part of the definition of first tier securities. See 

proposed rule 2a–7(a)(11)(i) and (ii); see also rule 

2a–7(a)(14) (defining Government security). 

Unrated securities determined by the board of 

directors of the fund or its delegate to be of 

comparable quality also would still be eligible 

securities. See proposed rule 2a–7(a)(11)(iv). 

89See rule 2a–7(c)(6)(ii); proposed rule 2a– 

7(c)(7)(ii). 

90See rule 2a–7(c)(3)(ii)(A), (c)(4)(i)(C)(1). See 

also 1991 Adopting Release, supra note 20. 

91See 1991 Adopting Release, supra note 20, at 

n.36 and accompanying text. Most commenters 

representing the mutual fund industry supported or 

did not oppose the limitations we proposed. Id. at 

n.35 and accompanying text. 

92See id. at text following n.35. 

93See id. at n.35–37 and accompanying text; 1990 

Proposing Release, supra note 22, at n.33 and 

accompanying text. 

94 ICI Report, supra note 6, at 101. 

95 Id. at 100. 

96See Federal Reserve Board Commercial Paper 

Outstanding Chart, available at http://

www.federalreserve.gov/releases/cp/

outstandings.htm (showing weekly levels of rule 

2a–7-eligible commercial paper outstanding). 

97See Federal Reserve Board Commercial Paper 

Data Download Program, available at http://

www.federalreserve.gov/DataDownload/

Choose.aspx?rel=CP (select year-end outstandings 

from the preformatted data package menu and 

follow the instructions for download). Over the last 

eight years, the market for second tier securities on 

average has represented only 4.6 percent of the rule 

2a–7-eligible commercial paper market. 

98See Federal Reserve Board Commercial Paper 

Rates Chart, available at http://www.federal

reserve.gov/releases/cp/default.htm. See also Frank 

J. Fabozzi, The Handbook of Fixed Income 

Securities, at 4 (7th ed. 2005) (‘‘Default risk or 

credit risk refers to the risk that the issuer of a bond 

may be unable to make timely payment of principal 

or interest payments * * *. The spread between 

Treasury securities and non-Treasury securities that 

are identical in all respects except for quality is 

referred to as a credit spread or quality spread.’’). 

Because of the additional credit risk that 

generally is represented by securities 

rated in the second highest, rather than 

the highest, NRSRO rating category, a 

taxable money market fund may not 

invest more than five percent of its total 

assets in ‘‘second tier securities.’’ 85 Tax 

exempt money market funds are limited 

in the same manner only with respect to 

second tier ‘‘conduit securities,’’ i.e., 

municipal securities backed by a private 

issuer.86

We are also proposing a change to the 

provisions of rule 2a–7 that limit money 

market funds to investing in high 

quality securities. We propose to 

generally limit money market fund 

investments to securities rated in the 

highest NRSRO ratings category. In 

addition, we are seeking comment on 

whether to modify provisions of the rule 

that incorporate minimum ratings by 

NRSROs to reflect changes made to the 

federal securities laws by the Credit 

Rating Agency Reform Act of 2006 

(‘‘Rating Agency Reform Act’’).87

1. Second Tier Securities 

We propose to amend rule 2a–7 to 

allow money market funds to invest 

only in first tier securities. Under the 

proposed amendments, money market 

funds could ‘‘acquire’’ only ‘‘eligible 

securities,’’ which would be re-defined 

to include securities receiving only the 

highest (rather than the highest two) 

short-term debt ratings from the 

‘‘requisite NRSROs.’’ 88 Funds would 

not have to immediately dispose of a 

security that was downgraded by the 

requisite NRSROs but, under existing 

provisions of rule 2a–7, the fund would 

have to dispose of the security ‘‘as soon 

as practicable consistent with achieving 

an orderly disposition of the security’’ 

unless the fund’s board of directors 

finds that such disposal would not be in 

the best interest of the fund.89

We have considered previously the 

extent to which money market funds 

should be permitted to invest in second 

tier securities. In 1991, following 

distress at several money market funds 

that held defaulted commercial paper, 

the Commission, among other things, 

limited a taxable money market fund’s 

total investment in second tier securities 

to five percent of the fund’s portfolio 

assets and limited the investment in any 

particular issuer of second tier securities 

to no more than the greater of one 

percent of the fund’s portfolio assets or 

$1 million.90 At that time, commenters 

in favor of eliminating money market 

funds’ investment in second tier 

securities argued that such securities 

may undergo a rapid deterioration and 

thus may pose risks to the fund holding 

such securities as well as to investor 

confidence in money market funds in 

general.91 On the other hand, issuers of 

second tier securities urged the 

Commission not to limit money market 

funds’ holdings of second tier securities, 

arguing that the Commission’s concerns 

regarding the creditworthiness of 

second tier securities were misplaced 

and that restrictions would raise issuers’ 

borrowing costs and discourage money 

market funds from holding any second 

tier securities.92 Based principally on 

the potential risk to money market 

funds of holding second tier securities, 

we adopted the five percent and one 

percent limitations to limit (but not 

eliminate) exposure of money market 

funds to second tier securities and any 

one issuer of second tier securities.93

Second tier securities were not 

directly implicated in the recent strains 

on money market funds. The ICI’s 

Money Market Working Group 

expressed concern to us, however, that 

these securities may present an 

‘‘imprudent’’ risk to the stable value of 

money market funds because they 

present ‘‘weaker credit profiles, smaller 

overall market share, and smaller issuer 

program sizes * * *’’ 94 Our 

examination of the data discussed below 

suggests support for their 

recommendation that money market 

funds no longer be permitted to invest 

in these securities.95

Compared to the market for first tier 

securities, the market for second tier 

securities is relatively small. As of June 

24, 2009, there was $1082.5 billion in 

rule 2a–7-eligible commercial paper 

outstanding, consisting of $1035.8 

billion (95.7 percent) of first tier and 

$46.7 billion (4.3 percent) of second 

tier.96 The size of the second tier market 

has remained consistently small over 

time.97

In addition, second tier securities 

present potentially substantially more 

risk than first tier securities. As the 

following chart shows, during the 

market disruptions of last fall, second 

tier securities experienced significantly 

wider credit spreads than first tier 

securities.98

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99See Standard & Poor’s, CreditStats: 2007 

Adjusted Key U.S. Industrial and Utility Financial 

Ratios, at 6, Table 3 (Sept. 10, 2008), available at 

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

fixedincome/CreditStats_2007_Adjusted_Key_

Financial_Ratios.pdf (showing A–2 rated 

commercial paper had EBIT interest coverage of 

7.2x, free operating cash flow to debt of 16.7%, and 

debt to debt plus equity of 45.1%, compared to 

A–1 averages of 11.5x, 31.3%, and 37.1%, 

respectively, represented as three-year (2005–2007) 

averages). 

100See Crabbe & Post, supra note 15, at 11, Table 

2. 

101See id. at 11–12. 102See ICI Report, supra note 6, at 100–101. 

Second tier securities as an asset class 

also are of weaker credit quality in 

terms of interest coverage ratios, debt 

coverage ratios, and debt to equity 

ratios.99 These data strongly suggest that 

second tier securities generally present 

additional risks to a money market fund. 

This is a conclusion that may have been 

reached by money market fund 

managers, most of which (as described 

below) do not invest in second tier 

securities. In light of the risks that 

second tier securities generally present 

to money market funds, and the 

consequences to funds and fund 

investors of breaking a dollar, we are 

proposing to limit funds to investing in 

first tier securities. We believe such a 

limitation would make it less likely that 

a money market fund would hold a 

problematic security, or a security that 

would lose significant value as a result 

of market disruptions. 

It does not appear that amending rule 

2a–7 to eliminate money market funds’ 

ability to acquire second tier securities 

would be materially disruptive to funds. 

Prior to our amendments to rule 2a–7 in 

1991, non-government money market 

funds held more than eight percent of 

their assets in second tier securities.100

After we restricted the amount of 

second tier securities money market 

funds could buy, the funds soon 

reduced their holdings to almost 

zero.101 Our staff’s review of money 

market fund portfolios in September 

2008 found that second tier securities 

represented only 0.4 percent of the $3.6 

trillion held by the funds 

(approximately $14.6 billion). 

We request comment on our proposal 

to eliminate the ability of money market 

funds to invest in second tier securities. 

What would be the impact on funds? 

Would the benefit of reducing credit 

risk by eliminating the ability of money 

market funds to invest in second tier 

securities outweigh any potential 

diversification benefits that second tier 

securities may otherwise provide to 

money market funds? What, if any, 

diversification benefits do money 

market funds currently receive from 

investing in second tier securities? 

Would this change have a significant 

effect on yields? 

Would there be a proportionately 

greater impact of eliminating second tier 

securities on smaller or less established 

money market funds or on particular 

types of funds (e.g., single-state tax 

exempt funds)? If the proposal to 

eliminate funds’ ability to hold second 

tier securities is adopted, what 

transition period should we provide 

money market funds to dispose of their 

existing second tier holdings in an 

orderly manner? Should we allow funds 

that hold second tier securities after the 

amended rule becomes effective to 

continue to hold such securities until 

maturity? 

Are there alternatives to eliminating 

entirely the ability of a money market 

fund to invest in second tier securities? 

For example, should money market 

funds instead be limited to investing in 

second tier securities (i) with a 

maximum maturity of, for example, 45 

days, or (ii) as a smaller portion of fund 

assets, such as two percent of the total 

assets, or (iii) a combination of both? A 

security with a shorter maturity presents 

less credit risk to a fund (because the 

exposure is shorter) and less liquidity 

risk (because cash will be available 

sooner). Would such an approach 

address, or at least partly address, the 

concerns raised by the ICI Report and in 

this Release? 102 Could additional credit 

risk analysis or other procedures be 

imposed with respect to second tier 

securities to address these concerns? 


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103See supra note 84 and accompanying text. A 

‘‘rated security’’ generally means a security that (i) 

has received a short-term rating from an NRSRO, or 

whose issuer has received a short-term rating from 

an NRSRO with respect to a class of debt 

obligations that is comparable in priority and 

security with the security; or (ii) is subject to a 

guarantee that has received a short-term rating from 

an NRSRO, or a guarantee whose issuer has 

received a short-term rating from an NRSRO with 

respect to a class of debt obligations that is 

comparable in priority and security with the 

guarantee. Rule 2a–7(a)(19). 

104The 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.’’ Rule 2a–7(c)(3)(i). 

105See, 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 Proposal’’). 

106See, e.g., Comment Letter of Fidelity 

Investments (July 25, 2003) (File No. S7–12–03). 

Comment letters on File No. S7–12–03 are available 

at http://www.sec.gov/rules/concept/s71203.shtml. 

107Comment Letter of Denise Voigt Crawford, 

Securities Commissioner, Texas State Securities 

Board (July 28, 2003) (File No. S7–12–03). 

108See, e.g., Comment Letter of T. Rowe Price 

Family of Funds (Sept. 5, 2008) (File No. S7–19– 

08). Comment letters on File No. S7–19–08 are 

available at http://www.sec.gov/comments/s7-19- 

08/s71908.shtml. 

109See ICI Report, supra note 6, at 81. 

110See Comment Letter of Professor Frank 

Partnoy (received Sept. 5, 2008) (File No. S7–19– 

08). 

111Commenters on our NRSRO References 

Proposal and the ICI Report recommended similar 

approaches. See Comment Letter of Federated 

Investors, Inc. (Sept. 5, 2008) (File No. S7–19–08) 

(suggesting that rule 2a–7 require the board or its 

delegate to select by security type at least three 

NRSROs on which the fund would rely under the 

rule); Comment Letter of OppenheimerFunds, Inc. 

(Sept. 4, 2008) (File No. S7–19–08) (suggesting the 

rule allow fund boards to designate (presumably 

after considering any recommendations of the 

investment manager) the identity and number of 

NRSROs whose ratings will be used to determine 

eligible portfolio securities); ICI Report, supra note 

6, at 82 (recommending the fund designate three or 

more NRSROs that the fund would use in 

determining the eligibility of portfolio securities). 

See also Comment Letter of Stephen A. Keen on 

behalf of Federated Investors, Inc. (Mar. 12, 2007) 

(File No. S7–04–07) (in response to our 2007 

proposal on oversight of NRSROs, asserting that 

investment advisers should be free to choose which 

NRSROs they will rely upon and monitor only their 

ratings). 

112The only time that funds would be required 

to look to all NRSROs under this approach would 

be, as under the current rule, in determining 

whether a long-term security with a remaining 

maturity of 397 calendar days or less that does not, 

and whose issuer does not, have a short-term rating 

is an eligible security. See infra section II.A.2.b. 

113See Senate Committee on Banking, Housing, 

and Urban Affairs, Credit Rating Agency Reform 

Act of 2006, S. Rep. No. 109–326, at 2 (2006) 

(‘‘Senate Report 109–326’’) (purposes of the Act 

include improving the quality of NRSRO credit 

ratings by fostering accountability, transparency, 

and competition in the credit rating industry). 

114See supra note 111. 

115See Part B of Form N–1A. 

116The staff’s belief is based on its report that 

three NRSROs issued almost 99 percent of all the 

outstanding ratings across all categories that were 

Continued 

2. Eligible Securities 

a. Use of NRSROs 

As discussed above, rule 2a–7 

currently requires a money market fund 

to limit its portfolio investments to 

eligible securities, i.e., short-term 

securities that at the time of acquisition 

have received ratings from the 

‘‘requisite NRSROs’’ in one of the two 

highest short-term debt rating categories 

and securities that are comparable to 

rated securities.103

A determination that a security is an 

eligible security as a result of its NRSRO 

ratings is a necessary but not sufficient 

finding in order for a fund to acquire the 

security.104 References to NRSRO 

ratings in rule 2a–7 and other 

regulations were designed to provide a 

clear reference point to regulators and 

market participants. The reliability of 

credit ratings, however, has been 

questioned, in particular in light of 

developments during the recent 

financial crisis. As a result, there have 

been calls to produce higher quality 

ratings. Last year, we proposed to 

eliminate the use of NRSRO ratings in 

rules under the Investment Company 

Act, including rule 2a–7, and instead to 

rely solely on the fund manager’s credit 

risk determination.105 In 2003, in a 

concept release seeking comment on 

various issues relating to credit rating 

agencies, we also asked whether credit 

ratings should be used as a minimum 

objective standard in rule 2a–7. Most 

commenters who addressed the specific 

question in 2003 supported retaining 

the ratings requirement in rule 2a–7.106

One commenter asserted that ‘‘[t]he 

combination of this objective test with 

the ‘subjective test’ (credit analysis 

performed by the adviser to the money 

market fund) provides an important 

complementary rating structure under 

Rule 2a–7.’’ 107 Similarly, in our 

proposal last year, a substantial majority 

of commenters disagreed with the 

proposed elimination of the ratings 

requirement.108 The ICI Report summed 

up the views of many of these 

commenters, asserting that elimination 

of the NRSRO ratings’ ‘‘floor * * * 

would remove an important investor 

protection from Rule 2a–7, introduce 

new uncertainties and risks, and 

abandon a regulatory framework that 

has proven to be highly successful.’’ 109

A few commenters supported removing 

the ratings requirement in 2003 and as 

proposed in 2008, however. One of 

these commenters noted that ‘‘one of the 

core causes of the sub-prime crisis was 

dependence on inaccurate and 

unsupportable credit ratings.’’ 110

In light of recent market 

developments, we request that 

commenters again address whether or 

not the approach we proposed last year 

would provide safeguards with respect 

to credit risk that are comparable to the 

continued inclusion of NRSRO 

references in the rule. What other 

alternatives could we adopt to 

encourage more independent credit risk 

analysis and meet the regulatory 

objectives of rule 2a–7’s requirement of 

NRSRO ratings? Are there additional 

factors that we should consider with 

respect to last year’s proposal? Should 

we consider establishing a roadmap for 

phasing in the eventual removal of 

NRSRO references from the rule? We are 

also considering an approach under 

which a money market fund’s board 

would designate three (or more) 

NRSROs that the fund would look to for 

all purposes under rule 2a–7 in 

determining whether a security is an 

eligible security.111 In addition, the 

board would be required to determine at 

least annually that the NRSROs it has 

designated issue credit ratings that are 

sufficiently reliable for that use.112 We 

request comment on an approach in 

which the fund board designates 

NRSROs. Would the inclusion of a 

number of ‘‘designated NRSROs’’ 

improve rule 2a–7’s use of NRSRO 

ratings as a threshold investment 

criterion and be consistent with the 

goals of Congress in passing the Rating 

Agency Reform Act? 113 What are the 

advantages and disadvantages of such 

an approach? Should funds be required 

to designate a minimum number of 

NRSROs to use in determining 

thresholds for Eligible Securities or in 

monitoring ratings? If so, would at least 

three be the appropriate number, as 

some have suggested? 114 Would more 

be appropriate to address these 

purposes (e.g., four, five or six)? Should 

we permit fund boards to designate 

different NRSROs with respect to 

different types of issuers of securities in 

which the fund invests? Should the 

funds be required to disclose these 

designated NRSROs in their statements 

of additional information? 115

What impact would a requirement 

that the fund board designate NRSROs 

have on competition among NRSROs? 

Would NRSROs compete through 

ratings to achieve designation by money 

market funds? Given that the staff 

believes it is reasonable to assume that 

the three NRSROs that issued almost 99 

percent of all outstanding ratings across 

all categories that were issued by the 10 

registered NRSROs as of June 2008,116

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issued by the 10 registered NRSROs as of June 2008. 

See SEC, Annual Report on Nationally Recognized 

Statistical Rating Organizations at 35 (June 2008) 

(‘‘2008 NRSRO Report’’). 

117According to the ICI Report, requiring money 

market funds to designate at least three NRSROs 

whose ratings the fund would use in determining 

eligible portfolio securities could encourage 

competition among NRSROs to achieve designation 

by money market funds. See ICI Report, supra note 

6, at 82. 

118See 15 U.S.C. 78o–7; 17 CFR 240.17g–1 (rules 

governing the registration of NRSROs). 

119Rule 2a–7(a)(10)(ii)(A). Nonetheless, the 

security may be an eligible security if it has 

received a long-term rating from the requisite 

NRSROs in one of the three highest long-term rating 

categories and (as with any unrated security that is 

an eligible security) is of comparable quality to a 

rated security. Id. 

120See 1991 Adopting Release, supra note 20, at 

text accompanying nn.65–68. 

121Proposed rule 2a–7(a)(11)(iv)(A). Similar to 

the provision in the current rule, the security might 

be an eligible security even if it received a longterm rating below the two highest long-term rating 

categories if the requisite NRSROs rate the security 

in one of the two highest long-term rating 

categories. Id. 

122Proposed rule 2a–7(a)(11)(iv). 

123Rule 2a–7(c)(6)(i)(A)(1) and (2). 

124Proposed rule 2a–7(c)(7)(i)(A). As under the 

current rule, the proposed rule amendment would 

not require, and we would not expect, investment 

advisers to subscribe to every rating service 

publication in order to comply with the 

requirement that the board reassess when the fund’s 

adviser becomes aware that any NRSRO has rated 

an unrated security below its highest rating. We 

would expect an investment adviser to become 

aware of a subsequent rating if it is reported in the 

national financial press or in publications to which 

the adviser subscribes. See 1991 Adopting Release, 

supra note 20, at n.71. 

125An asset backed security is defined very 

generally to mean a fixed income security that 

entitles its holders to receive payments that depend 

primarily on the cash flow from financial assets 

underlying the asset backed security. See rule 2a– 

7(a)(3). 

126See rule 2a–7(a)(10)(ii)(B). 

127See rules 2a–7(a)(8)(ii) and 2a–7(d). 

128See rule 2a–7(c)(4)(ii)(D). 

also issued well over 90 percent of all 

outstanding ratings of short term debt, 

and in light of concerns about 

enhancing competition among NRSROs, 

should the minimum number of 

designated NRSROs be greater than 

three, such as four, five, or six? 117 What 

are the advantages and disadvantages of 

requiring boards to monitor the ratings 

issued by all NRSROs? Should rule 2a– 

7 specify certain minimum policies and 

procedures for monitoring NRSROs? 

Should money market fund boards be 

permitted to designate credit rating 

agencies or credit evaluation providers 

that are not registered as NRSROs with 

the Commission under the Securities 

Exchange Act of 1934 and the rules we 

have adopted under those 

provisions? 118 Should a board be solely 

responsible for designating and 

annually reviewing a designated NRSRO 

or should we permit delegation of this 

responsibility? How many NRSROs 

would money market fund boards be 

likely to evaluate before making their 

designations? After a fund board had 

designated NRSROs, what incentives 

would the board have to change the 

designated NRSROs? 

We request comment on the impact of 

any of these approaches on funds and 

their ability to maintain a stable net 

asset value. Would any particular 

requirement help funds to better 

determine whether a security is an 

eligible security? We also request 

comment on the potential impact on 

competition among NRSROs. 

b. Long-Term Unrated Securities 

Rule 2a–7 permits money market 

funds to invest in a long-term security 

with a remaining maturity of 397 

calendar days or less (‘‘stub security’’) 

that is an unrated security (i.e., neither 

the security nor its issuer or guarantor 

has a short-term rating) unless the 

security has received a long-term rating 

from any NRSRO that is not within the 

NRSRO’s three highest categories of 

long-term ratings.119 Under rule 2a–7, 

the measure of quality is the rating 

given to the issuer’s short-term debt. In 

the absence of a short-term rating, the 

minimum long-term rating is designed 

to provide an independent check on a 

fund’s quality determination.120 In light 

of the changes we are proposing above 

to increase the portfolio quality 

standards of the rule, we propose to 

permit money market funds to acquire 

such securities only if they have 

received long-term ratings in the highest 

two ratings categories to more narrowly 

limit the credit risk to which a money 

market fund may be exposed.121 As 

under the current rule, fund boards 

would continue to be required to 

determine that such a security is ‘‘of 

comparable quality’’ to a rated security 

if it met these proposed conditions.122

We request comment on this proposed 

change. Given our proposal to increase 

the quality standards of the rule, is the 

proposed change appropriate? Should 

we consider permitting funds to acquire 

these stub securities only if they have 

received long-term ratings in the highest 

rating category? What impact would the 

proposed amendment have on money 

market funds’ current portfolio 

holdings? We request commenters 

expressing views on this change to 

provide us with data identifying the 

relationship between the long-term 

ratings on these stub securities and 

short-term ratings. 

3. Credit Reassessments 

Rule 2a–7 currently requires a money 

market fund’s board of directors to 

promptly reassess whether a portfolio 

security continues to present minimal 

credit risks if, subsequent to its 

acquisition by the fund, (i) the security 

has ceased to be a first tier security (e.g., 

the security is downgraded to second 

tier by one of the requisite NRSROs), or 

(ii) the fund’s adviser becomes aware 

that an unrated or second tier security 

has received a rating from any NRSRO 

below the second highest short-term 

rating category.123 In light of the 

proposed elimination of second tier 

securities from the definition of eligible 

security, we propose to amend rule 2a– 

7 so the only circumstance in which the 

fund’s board of directors would be 

required to reassess whether a security 

continues to present minimal credit 

risks would be if, subsequent to its 

acquisition by the fund, the fund’s 

money market fund adviser becomes 

aware that an unrated security has 

received a rating from any NRSRO 

below the highest short-term rating 

category.124

We request comment on whether 

these are appropriate circumstances 

under which to require a reassessment 

in light of our proposal to eliminate the 

ability of money market funds to invest 

in second tier securities. 

4. Asset Backed Securities 

Rule 2a–7 contains provisions that 

specifically address asset backed 

securities (‘‘ABSs’’),125 including the 

circumstances under which an ABS is 

an eligible security,126 the maturity of 

an ABS,127 and how a fund must treat 

such an investment under the 

diversification provisions.128 The rule, 

however, does not specifically address 

how a fund board (or its delegate) 

should determine that an investment in 

an ABS (or other potential portfolio 

investment) presents minimal credit 

risks, nor does it specifically address 

liquidity issues presented by a money 

market fund’s investment in an ABS. 

Both such matters were raised in 2007 

by money market funds’ investment in 

SIVs, which we discussed briefly above. 

SIVs issued commercial paper to 

finance a portfolio of longer term, higher 

yielding investments, including 

residential mortgages. Unlike other 

commercial paper programs, SIVs 

typically did not have access to 

liquidity facilities to protect commercial 

paper investors (including money 

market funds) against the risk of the 

issuer’s inability to reissue (or 

‘‘rollover’’) commercial paper caused by 

either a credit event of the issuer or a 

disruption in the commercial paper 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32699 

129For a discussion of the evolution of the asset 

backed commercial paper market and SIV securities 

during this period, see generally Jim Croke, New 

Developments in Asset-Backed Commercial Paper 

(2008), at 2–4, available at http://www.orrick.com/ 

fileupload/1485.pdf. 

130Rule 2a–7(c)(3)(i). 

131 1993 Proposing Release, supra note 81, at text 

accompanying nn.108–109. 

132 Id. at nn.110–112 and accompanying text. 

133The ICI Report recommended that we amend 

rule 2a–7 to require money market fund advisers to 

adopt a ‘‘new products committee.’’ See ICI Report, 

supra note 6, at 79–80. Although such committees 

may be useful, their usefulness would turn on what 

might be a ‘‘new product’’ as well as the judgment 

of its members, whose judgment is today required 

to be brought to bear on whether the security 

presents minimal credit risks. 

134See infra Section II.C. 

135The staff’s recent examinations of money 

market funds indicate that credit analysts for money 

market funds that invested in SIVs that 

subsequently defaulted appear to have had access 

to the same basic set of information on SIVs as did 

analysts at money market funds that did not and 

that the judgment of these credit analysts regarding 

minimal creditworthiness of the SIVs that 

subsequently defaulted appeared to have been 

different. The staff’s exams also appear to indicate 

that credit analysts for money market funds that 

invested in SIVs that subsequently defaulted placed 

less emphasis on the length of time that payment 

experience was available on assets in the collateral 

pool and they were willing to accept sub-prime 

mortgage credits as a seasoned asset class. In 

addition, their decision, in part, may have been 

influenced by the greater amount of overcollateralization of the collateral pools and the high 

yields paid by notes supported by sub-prime 

credits. 

136Rule 2a–7(a)(26) defines an ‘‘unconditional 

demand feature’’ as a ‘‘demand feature’’ that by its 

terms would be readily exercisable in the event of 

a default in payment of principal or interest on the 

underlying security or securities. 

137See rule 2a–7(c)(2)(iii). 

138See 1983 Adopting Release, supra note 3, at 

n.7 and accompanying text. 

market.129 When they could no longer 

rollover their debt beginning in 2007, 

those SIVs, unable to secure liquidity 

support from sponsoring banks, were 

forced to begin selling the vehicles’ 

assets into depressed markets to pay 

maturing debt and to begin winding 

down their operations. SIV credit 

ratings deteriorated rapidly as they 

deleveraged, placing pressure on 

valuations of SIV securities held by 

money market funds. We understand 

that eventually most funds holding SIV 

securities not supported by a large bank 

entered into agreements with affiliates 

of the fund to support the fund’s stable 

net asset value per share. 

We request comment on whether, and 

if so how, we should amend rule 2a–7 

to address risks presented by SIVs or 

similar ABSs. As discussed above, rule 

2a–7 requires that money market funds 

only invest in securities that the board 

of directors or its delegate determines 

present minimal credit risks.130 The 

Commission has stated that 

‘‘[d]etermining that an ABS presents 

minimal credit risks requires an 

examination of the criteria used to select 

the underlying assets, the credit quality 

of the put providers, and the conditions 

of the contractual relationships among 

the parties to the arrangement. When an 

ABS consists of a large pool of financial 

assets, such as credit card receivables or 

mortgages, it may not be susceptible to 

conventional means of credit risk 

analysis because credit quality is based 

not on a single issuer but on an actuarial 

analysis of a pool of financial 

assets.’’ 131 We also said, however, that 

we were concerned that ‘‘fund credit 

analysts may be unable to perform the 

thorough legal, structural and credit 

analyses required to determine whether 

a particular ABS involves inappropriate 

risks for money market funds’’ and, as 

a result, required that any ABS in which 

a money market fund invested be rated 

by an NRSRO because of NRSROs’ role 

in assuring that the underlying ABS 

assets are properly valued and provide 

adequate asset coverage for the cash 

flows required to fund ABSs.132

As discussed above, beginning in 

2007, SIV securities were rapidly 

downgraded by NRSROs revealing 

money market funds’ varying minimal 

credit risk determinations with respect 

to these securities. In light of this 

experience, should we provide 

additional guidance to money market 

funds on the required minimal credit 

risk evaluation with respect to ABSs? 

We believe that part of this analysis, 

when evaluating any security, should 

include an evaluation of the issuer’s 

ability to maintain its promised cash 

flows which, in the case of an asset 

backed security, would entail an 

analysis of the underlying assets, their 

behavior in various market conditions, 

and the terms of any liquidity or other 

support provided by the sponsor of the 

security.133 Should we amend rule 2a– 

7 to remove the requirement that any 

ABS be rated by an NRSRO in order to 

be an eligible security for money market 

funds in light of the NRSROs’ recent 

rapid downgrading of these securities? 

Under our proposed liquidity 

requirements (discussed below), the 

liquidity features of an ABS would have 

to be considered in determining 

whether the fund holds sufficiently 

liquid assets to meet shareholder 

redemptions.134

We request comment on whether rule 

2a–7 should explicitly require fund 

boards of directors (or their delegates) to 

evaluate whether the security includes 

any committed line of credit or other 

liquidity support. Are there other factors 

that we should require money market 

fund boards to evaluate when 

determining whether SIV investments or 

other new financial products pose 

minimal credit risks? We note that some 

money market funds invested more 

significantly in SIV securities while 

other money market funds avoided such 

investments entirely. Are there facets of 

the credit analysis that led certain 

money market funds to avoid such 

investments that should be incorporated 

explicitly into rule 2a–7? 135 Should we 

limit money market funds to investing 

in ABSs that the manager concludes can 

be paid upon maturity with existing 

cash flow, i.e., the payment upon 

maturity is not dependent on the ability 

of the special purpose entity to rollover 

debt? Alternatively, should the rule 

itself require ABSs to be subject to 

unconditional demand features to be 

eligible securities? 136

B. Portfolio Maturity 

Rule 2a–7 restricts the maximum 

remaining maturity of a security that a 

money market fund may acquire, and 

the weighted average maturity of the 

fund’s portfolio, in order to limit the 

exposure of money market fund 

investors to certain risks, including 

interest rate risk. The Commission is 

proposing changes to the rule’s maturity 

limits to further reduce such risks, as 

discussed below. First, we propose to 

reduce the maximum weighted average 

portfolio maturity permitted by the rule. 

Second, we propose a new maturity test 

that would limit the portion of a fund’s 

portfolio that could be held in longer 

term variable- or floating-rate securities. 

Third, we propose to delete a provision 

in the rule that permits certain money 

market funds to acquire Government 

securities with extended maturities of 

up to 762 calendar days. We are also 

requesting comment on other ways of 

adjusting the rule’s maturity provisions 

in order to accomplish our goal of 

decreasing the risks associated with a 

money market fund holding longer term 

investments. 

1. Weighted Average Maturity 

Rule 2a–7 requires a money market 

fund to maintain a dollar-weighted 

average portfolio maturity appropriate 

to its objective of maintaining a stable 

net asset value or price per share, but in 

no case greater than 90 days.137 We 

adopted this provision because 

securities that have shorter periods 

remaining until maturity (and are of 

higher quality) generally exhibit a low 

level of volatility and thus provide a 

greater assurance that the money market 

fund will continue to be able to 

maintain a stable share price.138

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32700 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

139See 1990 Proposing Release, supra note 22, at 

text accompanying n.60. See also Standard & 

Poor’s, Money Market Fund Ratings Criteria, at 21 

(2007) available at http://

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

MMX709.pdf (‘‘S&P 2007 Ratings Criteria’’) (‘‘The 

portfolio’s weighted average maturity (WAM) is a 

key determinant of the tolerance of a fund’s 

investments to rising interest rates. In general, the 

longer the WAM, the more susceptible the fund is 

to rising interest rates. A fund comprised entirely 

of Treasury securities with a WAM of 45 days could 

withstand approximately twice the interest rate 

increase than could a fund with a 90-day WAM, 

leaving all other factors aside.’’); Fabozzi, supra 

note 98, at 4 (‘‘[T]he volatility of a bond’s price is 

closely associated with maturity: Changes in the 

market level of [interest] rates will wrest much 

larger changes in price from bonds of long maturity 

than from otherwise similar debt of shorter life.’’). 

140See also supra notes 65–71 and accompanying 

text. 

141According to monthly statistics kept by the 

Investment Company Institute, during the past 10 

years, the weighted average maturities of funds in 

the longest maturity categories (the 90th percentile 

of all taxable prime money market funds) seldom 

have exceeded 75 days. As of April 30, 2009, these 

funds maintained an average weighted maturity of 

67 days. These statistics are available in File No. 

S7–11–09. 

142See, e.g., U.S. Department of the Treasury, 

Daily Treasury Yield Curve Rates, available at 

http://www.treasury.gov/offices/domestic-finance/

debt-management/interest-rate/yield_historical_

main.shtml. 

143See ICI Report, supra note 6, at 77. 

144 2008 Fact Book, supra note 13, at Table 38. In 

2009, the ICI Fact Book began presenting this 

information separately for taxable government and 

taxable non-government money market funds, 

which had average maturities of 49 days and 47 

days, respectively, in 2008. 2009 Fact Book, supra 

note 7, at 150–51, Tables 41 & 42. 

145See Money Fund Report, iMoneyNet, May 7, 

2008. Average maturity for tax exempt money 

market funds (as a group) is even lower—24 days 

as of June 16, 2009. Id. 

146See Irish Financial Services Regulatory 

Authority, Valuation of Assets of Money Market 

Funds, 2008 Guidance Note 1/08 (Aug. 2008), 

available at http://www.financialregulator.ie/

industry-sectors/funds/Documents/

Guidance%20Note%20108%20

Valuation%20of%20Assets%20of%20Money%20

Market%20Funds.pdf (‘‘Financial Regulator 

Guidance Note 1/08’’). As of April 2009, money 

market funds registered in Ireland managed 

approximately Ö317 billion ($419 billion) in assets. 

See Irish Financial Regulator statistics available at 

http://www.irishfunds.ie/money_marketfunds.htm. 

In addition, the Institutional Money Market Funds 

Association (‘‘IMMFA’’) requires the triple-A rated 

institutional money market funds sponsored by its 

members to comply with a Code of Practice that 

generally limits portfolio maturity to 60 days. See 

IMMFA, Code of Practice, Part IV., ¶ 22 (2005), 

available at http://www.immfa.org/about/ 

Codefinal.pdf. As of February 13, 2009, IMMFAmember constant net asset value money market 

funds managed approximately $493 billion in 

assets. See IMMFA statistics, available at http://

www.immfa.org/stats/IMFR130209.pdf. See also ICI 

Report, supra note 6, at 184, Appendix H. 

147See S&P 2007 Ratings Criteria, supra note 139, 

at 21; Moody’s Investors Service, Frequently Asked 

Questions about Moody’s Ratings of Managed 

Funds, at 4 (July 20, 2005), available at http://

www.moodys.com/moodys/cust/research/

MDCdocs/20/2003600000425726.pdf?search=5&

searchQuery=Frequently+Asked+

Questions+about+Moody; Fitch Ratings, U.S. 

Money Market Fund Ratings, at 4 (Mar. 3, 2006), 

available at http://www.fitchresearch.com/

creditdesk/reports/report_frame.cfm?rpt_

id=266376. 

148See proposed rule 2a–7(c)(2)(ii). 

149See proposed rule 2a–7(c)(2)(iii). 

150While the proposed rule would ignore interest 

rate resets for purposes of calculating the fund’s 

weighted average life to maturity, a security’s 

demand features could continue to be used in this 

calculation. See, e.g., rule 2a–7(d)(3) and (d)(5). 

151See rule 2a–7(d). 

152 Id. We added maturity shortening provisions 

to the rule in 1986; they are particularly important 

for tax exempt funds, which invest in municipal 

obligations, most of which are issued with longer 

maturities. See 1986 Adopting Release, supra note 

19, at nn.9–10 and accompanying text. 

Having a portfolio weighted towards 

securities with longer maturities poses 

several risks to a money market fund. 

First, as we have noted in the past, a 

longer weighted average maturity 

increases a fund’s exposure to interest 

rate risk.139 Second, and as we discuss 

in more detail below, longer maturities 

also amplify the effect of widening 

credit and interest rate spreads on a 

fund.140 Finally, a fund holding 

securities with longer maturities 

generally is exposed to greater liquidity 

risk, because fewer securities mature on 

a daily or weekly basis. Perhaps in 

recognition of these risks, few fund 

managers maintain weighted average 

maturity at or near the maximum 

permissible 90 days.141

In view of the extraordinary market 

conditions we have witnessed recently, 

the Commission is concerned that the 

90-day maximum weighted average 

maturity under the rule may be too long. 

Particularly during the market events of 

last fall, funds with shorter portfolio 

maturities were much better positioned 

to withstand heavy redemptions, 

because a greater portion of their 

portfolios matured each week and 

provided cash to pay to redeeming 

investors. They also were better able to 

withstand increased credit spreads in 

certain financial sector notes because of 

the shorter period of exposure to such 

distressed securities. Finally, interest 

rate spreads on longer maturity 

securities widened to a much greater 

degree than interest rate spreads on 

shorter maturity securities.142

The ICI Report recommended 

reducing the maximum weighted 

average maturity to 75 days.143

Historically, however, most funds have 

maintained shorter maturities. During 

the last 20 years, the average weighted 

average maturity of taxable money 

market funds (as a group) has never 

exceeded 58 days.144 As of June 16, 

2009, it was 53 days.145 Some money 

market funds have, from time to time, 

extended their maturities substantially 

longer than the average to gain a yield 

advantage, anticipating declining or 

stable interest rates. By doing so, these 

funds assumed greater risk and would 

be more likely to experience losses that 

could result in their breaking the buck 

if interest rates rise, credit markets do 

not behave as they expect, or they 

receive substantial redemption requests. 

Most European money market funds 

with stable share prices (many of which 

are domiciled in Ireland) are limited to 

60-day weighted average maturities.146

So are money market funds rated highly 

by the NRSROs.147 In light of these 

considerations, we believe that a shorter 

period may be appropriate. Accordingly, 

we propose that rule 2a–7 be amended 

to impose a 60-day weighted average 

maturity limit.148

We request comment on the proposed 

60-day weighted average maturity limit. 

Would it decrease portfolio volatility 

and increase fund liquidity, as we 

suggest? What would be the anticipated 

effect on money market fund yields? 

Would a negative effect on yields make 

money market funds less attractive to 

investors? Should a different weighted 

average maturity limit apply, such as 45 

days or 75 days? We request that 

commenters provide us with data 

demonstrating the effect that alternative 

weighted average maturity limits would 

have had on portfolios of money market 

funds during the recent economic 

turmoil. 

2. Weighted Average Life 

We propose to add to rule 2a–7 a new 

maturity test, which would limit the 

weighted average life maturity of 

portfolio securities to 120 days.149 As 

explained further below, the weighted 

average life of a portfolio would be 

measured without regard to a security’s 

interest rate reset dates, and thus would 

limit the extent to which a fund could 

invest in longer term securities that may 

expose a fund to interest rate spread risk 

and credit spread risk.150

Generally, under rule 2a–7 the 

maturity of a portfolio security is the 

period remaining until the date on 

which the principal must 

unconditionally be repaid according to 

its terms (its final ‘‘legal’’ maturity) or, 

in the case of a security called for 

redemption, the date on which the 

redemption payment must be made.151

The rule contains exceptions from this 

general approach for specific types of 

securities, which are referred to as the 

‘‘maturity shortening’’ provisions.152

Among these exceptions are three 

provisions that allow a fund to treat a 

variable- or floating-rate security as 

having a maturity equal to the time 

remaining to the next interest rate reset 

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153See rule 2a–7(a)(13) (defining ‘‘floating rate 

security’’) and (a)(29) (defining ‘‘variable rate 

security’’). The interest rate for a variable-rate 

security is established on set dates, whereas the 

interest rate for a floating-rate security adjusts 

whenever a specified interest rate changes. We also 

may refer to variable- and floating-rate securities 

collectively in this Release as ‘‘adjustable-rate’’ 

securities. 

154See rule 2a–7(d)(2). See also rule 2a–7(a)(8) 

(definition of ‘‘demand feature’’). 

155See rule 2a–7(d)(4). 

156See rule 2a–7(d)(1) (allowing a variable-rate 

Government security where the variable rate is 

readjusted no less frequently than every 762 days 

to be deemed to have a maturity equal to the period 

remaining until the next readjustment of the 

interest rate, and a floating-rate Government 

security to be deemed to have a remaining maturity 

of one day). 

157See ICI Report, supra note 6, at 77. 

158 Interest rate spreads can widen because a 

variable-rate note has a fixed period of time to the 

next interest reset date and during that time the 

benchmark interest rate will likely change. Interest 

rate spreads can also widen because market 

conditions change after the security is issued such 

that investors may demand a greater margin to hold 

the security. See Fabozzi, supra note 98, at 196. 

159See ICI Report, supra note 6, at text 

accompanying n.140. 

160The proposed rule would require a money 

market fund to maintain a weighted average 

maturity not to exceed 120 days, determined 

without reference to the exceptions in paragraph (d) 

of the rule regarding interest rate resets. See 

proposed rule 2a–7(c)(2)(iii). 

161See 1983 Adopting Release, supra note 3, at 

n.16. 

date.153 First, a fund may treat a shortterm variable-rate security (i.e., one with 

a remaining maturity of 397 days or 

less), as having a maturity equal to the 

earlier of the interest rate reset date or 

the time it would take the fund to 

recover the principal by exercising a 

demand feature.154 Second, a fund may 

treat a short-term floating-rate security 

(i.e., one with a remaining maturity of 

397 days or less) as having a maturity 

of one day.155 Third, a variable- or 

floating-rate Government security 

generally may be deemed to have a 

maturity equal to the next reset date 

even if it is a long-term security.156 For 

purposes of calculating weighted 

average maturity, the rule effectively 

treats short-term variable- and floatingrate securities and all adjustable-rate 

Government securities as if they were a 

series of short-term obligations that are 

continually ‘‘rolled over’’ on the reset 

dates at the current short-term interest 

rates. 

As the ICI Report explains, however, 

longer term adjustable-rate securities are 

more sensitive to credit spreads (the 

amount of additional yield demanded 

by purchasers above a risk-free rate of 

return to compensate for the credit risk 

of the issuer) than short-term securities 

with final maturities equal to the reset 

date of the longer term security.157

Longer term adjustable-rate securities 

also are subject for a longer period of 

time to risk from widening interest rate 

spreads.158 As a result, prices of longer 

term adjustable-rate securities could fall 

more than prices of comparable shortterm securities in times of market 

turbulence. The ICI Report also notes 

that while adjustable-rate securities do 

protect a fund against changes in 

interest rates, permitting maturity 

shortening based on interest rate resets 

does not protect against liquidity risk to 

the portfolio.159

We are concerned that the traditional 

weighted average maturity measurement 

of rule 2a–7 does not require that a 

manager of a money market fund limit 

these risks. We understand that some 

money market fund portfolio managers, 

to protect the fund, have already begun 

using a weighted average maturity 

measurement that ignores interest rate 

resets. 

The ICI Report confirms our 

observations of the behavior of prices 

for certain securities last fall, when 

money market funds found it difficult to 

sell at amortized cost longer term 

adjustable-rate securities, including 

securities issued by agencies of the 

federal government. We believe that the 

use of the measurement the ICI 

recommends, which we will call the 

‘‘weighted average life’’ to maturity of a 

money market fund portfolio, appears to 

be a prudent limitation on the structure 

of a money market fund portfolio and 

would limit credit and interest rate 

spread risks not encompassed by the 

weighted average maturity restriction of 

rule 2a–7. As suggested by the ICI 

Report, we are proposing that money 

market funds maintain a weighted 

average life of no more than 120 days.160

The Commission believes that a 120-day 

weighted average life requirement 

would provide a reasonable balance 

between strengthening the resilience of 

money market funds to market stress 

(e.g., interest rate increases, widening 

spreads, and large redemptions) while 

not unduly restricting the funds’ ability 

to offer a diversified portfolio of shortterm, high quality debt securities. 

One of the effects of a limit on the 

weighted average life of a portfolio 

would appear to be on funds that hold 

longer term floating-rate Government 

securities, which are issued by federal 

agencies. Consider a money market fund 

with a portfolio consisting 50 percent of 

overnight repurchase agreements and 50 

percent of two-year Government agency 

floating-rate obligations that reset daily 

based on the federal funds rate. Using 

the reset dates as permitted by the rule’s 

maturity shortening provisions, the 

portfolio would have a weighted average 

maturity of one day. In contrast, by 

applying a measurement that does not 

recognize resets, the portfolio would 

have a weighted average life of 365.5 

days (i.e., half of the portfolio has a one 

day maturity and half has a two-year 

maturity), which would be considerably 

longer than the 120-day limit we are 

proposing. The weighted average life 

limitation would provide an extra layer 

of protection for funds and their 

shareholders against spread risk, 

particularly in volatile markets. 

We request comment on all aspects of 

the proposed weighted average life 

limitation. Is this new maturity test 

appropriate? Is 120 days an appropriate 

limit? What would be the effect on 

yield? Does it place too much of a 

constraint on the ability of money 

market fund advisers to effectively 

manage fund portfolios? Does it permit 

funds to assume too much risk? Would 

a different limit be more appropriate, 

such as 90 days or 150 days? Would the 

proposed weighted average life 

limitation have a material impact on the 

issuers of short-term debt and, if so, 

what would it be? 

We request comment on whether 

there are alternative approaches to 

measuring these risks. We understand 

that some fund managers use an 

alternative maturity test that focuses 

solely on credit spread risk. Such a test 

not only disregards interest rate resets, 

but also excludes Government securities 

from the weighted average maturity 

calculation. Would this test provide a 

clearer indication of the overall credit 

spread risk of the portfolio? Are there 

other advantages to such an approach? 

If so, what would be an appropriate 

limit? Should it be the same as proposed 

weighted average life limitation of 120 

days, or should it be different, such as 

90 days or 150 days? We request that 

commenters provide us with data 

demonstrating the effect of such 

alternative credit limitations and/or 

weighted average life limitations on 

their portfolios during the recent 

economic turmoil. 

When the Commission first adopted 

rule 2a–7, we explained that we were 

allowing Government securities to use 

resets for purposes of the maturity 

limitations under the rule because we 

understood that the volatility of such 

instruments would be no greater than 

the volatility of fixed interest rate 

instruments having a maturity equal to 

the period before the security’s interest 

rate reset.161 The Commission noted, 

however, that this position was based 

entirely upon experience with Small 

Business Administration guaranteed 

debentures—at the time the only 

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162See id. 

163See id. 

164See Jody Shenn, Fannie Mae Debt Spreads Hit 

Records as GMAC Seeks Bank Status, Bloomberg, 

Nov. 20, 2008; Jody Shenn, Agency Mortgage-Bond 

Spreads Head for Worst Month on Record, 

Bloomberg, Oct. 31, 2008, available at http:// 

www.bloomberg.com/apps/ 

news?pid=newsarchive&sid=aSc8k8D7ZMw0. 

165See rule 2a–7(a)(13) and (a)(29). 

166See rule 2a–7(c)(2)(ii). We added this 

provision in 1991. See 1991 Adopting Release, 

supra note 20, at nn.53–57 and accompanying text. 

In a conforming change, we also propose to revise 

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 currently permitted. See rule 2a–7(d)(1); 

proposed rule 2a–7(d)(1). 

167See rule 2a–7(a)(10)(i) and (c)(2)(i). 

168A maturity limit of 270 days would be 

consistent with the exemption for commercial 

paper under section 3(a)(3) of the Securities Act of 

1933 [15 U.S.C. 77c(a)(3)]. 

169We note that, while posing less credit risk, 

Government securities are subject to much the same 

risks as corporate securities from rising spreads 

between their market price and money market 

benchmarks, whether due to liquidity concerns, 

changes in interest rates, or other factors. For this 

reason some rating agencies have imposed 

limitations on remaining maturities of adjustablerate Government securities held by money market 

funds. See, e.g., S&P 2007 Ratings Criteria, supra 

note 139, at 30 (setting a two-year limit for 

remaining maturities of floating- or variable-rate 

Government securities held by money market funds 

for the fund to maintain the highest rating). 170See 1983 Adopting Release, supra note 3 at 

n.37 and accompanying text (‘‘[Rule 2a–7] does not 

limit a money market fund’s portfolio investments 

solely to negotiable and marketable instruments 

* * *.’’). 

171See, e.g., id. at nn.37–38 and accompanying 

text; 1986 Adopting Release, supra note 19, at n.21 

and accompanying text. 

172See, e.g., 1986 Adopting Release, supra note 

19, at text preceding and accompanying n.22; 1983 

Adopting Release, supra note 3, at text following 

n.39. 

adjustable-rate Government securities of 

which the Commission was aware.162

The Commission stated that it would 

consider amending this provision if 

market experience indicates that such 

treatment is inappropriate.163

Since 1983, the number and variety of 

adjustable-rate Government securities 

have grown and, in particular, the 

issuance of such securities by Freddie 

Mac and Fannie Mae increased 

significantly with the growth in 

mortgage-backed securities. While 

adjustable-rate securities historically 

have maintained market values similar 

to equivalent short-term fixed-rate 

securities, last fall these Government 

securities experienced increased credit 

and interest rate spreads and greater 

volatility than Government securities 

with maturities similar to the reset dates 

of the adjustable-rate securities.164

Further, as noted above, other shortterm adjustable-rate securities also 

experienced increased credit and 

interest rate spreads and greater 

volatility than securities with maturities 

similar to the reset dates. 

Currently, rule 2a–7 permits funds to 

rely on these reset provisions to shorten 

portfolio maturities only if boards or 

their delegates can reasonably expect 

that the security’s market value will 

approximate its amortized cost on the 

reset date.165 However, recent 

experience suggests that in times of 

market stress, this expected 

performance may not hold true. Would 

the weighted average life to maturity 

limitation adequately address this risk? 

Are there other alternative limitations or 

tests that would have mitigated this risk 

last fall? Should we restrict a fund’s 

ability to use the maturity-shortening 

provisions of the rule to those 

adjustable-rate securities, including 

Government securities, with maximum 

final maturities of no more than two 

years, three years, or four years? What 

would be the impact of the weighted 

average life limitation on longer term 

adjustable-rate Government securities 

issuers? 

3. Maturity Limit for Government 

Securities 

The Commission is proposing to 

delete a provision of the rule that 

permits a fund that relies 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.166 We are unaware 

of money market funds today that rely 

solely on the penny-rounding method of 

pricing, and none that hold fixed-rate 

Government securities with remaining 

maturities of two years, which we are 

concerned would involve the 

assumption of a substantial amount of 

interest rate risk. We request comment 

on our proposal to delete the provision. 

Are we correct that funds no longer use 

it? If not, are there reasons why we 

should retain it? 

4. Maturity Limit for Other Portfolio 

Securities 

Currently, in order to qualify as an 

eligible security under rule 2a–7, an 

individual security generally cannot 

have a remaining maturity that exceeds 

397 days.167 We request comment on 

whether we should consider reducing 

the maximum maturity for individual 

non-Government securities acquired by 

a money market fund from 397 days to, 

for example, 270 days.168

The length of time remaining before a 

security matures affects its sensitivity to 

increases in interest rates. In addition, a 

shorter maturity decreases the amount 

of time a fund is exposed to potential 

investment losses for a particular 

security. On the other hand, it is less 

clear that such a change would produce 

a significant increase in the safety and 

stability of money market funds if we 

were to adopt it in addition to adopting 

the proposed 60-day weighted average 

maturity and 120-day weighted average 

life limitations. Moreover, unlike the 

weighted average maturity and weighted 

average life limitations, a stricter 

maturity limitation on individual 

securities could have a substantially 

greater adverse impact on issuers of 

short-term obligations other than 

commercial paper, including issuers of 

tax exempt municipal securities. 

What would be the effects on money 

market funds and the capital markets of 

shortening the maturity limit on 

individual portfolio securities to 270 

days? Would there be benefits to funds 

from shortening the maturities of 

individual securities beyond the 

benefits that would be attained through 

the 60-day weighted average maturity 

and 120-day weighted average life 

limitations? What would be the likely 

impact on money market fund yields? 

What effect, if any, would shortening 

the maturity limit have on the supply of 

rule 2a–7-eligible securities? Should 

Government securities be excluded from 

a 270-day maturity limit?169 If we were 

to adopt a maximum 270-day maturity 

for individual securities, should we 

include or exclude securities issued by 

municipalities, which typically issue 

debt securities with maturities of a year 

or more? 

C. Portfolio Liquidity 

Rule 2a–7 does not contain any 

provisions limiting the ability of a 

money market fund to hold or acquire 

illiquid assets.170 Money market funds 

are, however, subject to section 22(e) of 

the Act, which requires registered 

investment companies to satisfy 

redemption requests in no more than 

seven days—a requirement we have 

construed as restricting a money market 

fund from investing more than 10 

percent of its assets in illiquid 

securities.171 Since rule 2a–7 was first 

adopted we have emphasized the 

importance of a money market fund 

holding sufficiently liquid securities. 

Money market funds often have a 

greater, and perhaps less predictable, 

volume of redemptions than other openend investment companies.172 And 

because many promise to provide 

redemptions sooner than other types of 

open-end funds—often on the same day 

that the redemption request is 

received—money market funds need 

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173See 1983 Adopting Release, supra note 3, at 

text following n.39. 

174 Id. at text preceding, accompanying and 

following nn.37–39. 

175 Id. at text preceding section titled ‘‘Obligation 

of the Board to Maintain Stable Price.’’ 

176S&P 2007 Ratings Criteria, supra note 139, at 

21. 

177See Board of Governors of the Federal Reserve, 

Report Pursuant to Section 129 of the Emergency 

Economic Stabilization Act of 2008: Asset-Backed 

Commercial Paper Money Market Mutual Fund 

Liquidity Facility (undated), available at http:// 

www.federalreserve.gov/monetarypolicy/files/ 

129amlf.pdf at 1–2 (‘‘In ordinary circumstances, 

MMMFs would have been able to meet these 

redemption demands by selling assets. At the time 

of the establishment of the AMLF, however, many 

money markets were extremely illiquid, and the 

forced liquidation of assets by MMMFs was placing 

increasing stress on already strained financial 

markets.’’); see generally Board of Governors of the 

Federal Reserve, Monetary Policy Report to the 

Congress (Feb. 24, 2009), Part 2, http:// 

www.federalreserve.gov/monetarypolicy/ 

mpr_20090224_part2.htm. 

178See ICI Mutual Fund Historical Data, supra 

note 47 (in the week ending September 17, the day 

after the Reserve Primary Fund announced that it 

would break a dollar, institutional money market 

fund assets fell by more than $119 billion while 

retail money market fund assets fell by $1.1 billion). 

179Proposed rule 2a–7(c)(5). ‘‘Liquid security’’ 

would be defined in proposed rule 2a–7(a)(19). Last 

year in the NRSRO References Proposal, we 

proposed to define ‘‘liquid security’’ as a security 

that can be sold or disposed of in the ordinary 

course of business within seven days at 

approximately the cost ascribed to it by the money 

market fund. See supra note 105, at n.28 and 

accompanying text. See also 1986 Adopting 

Release, supra note 19, at text following n.21 (‘‘The 

term ‘illiquid security’ generally includes any 

security which cannot be disposed of promptly and 

in the ordinary course of business without taking 

a reduced price.’’). The one comment we received 

on the proposed definition recommended the 

definition refer to the ‘‘shadow price’’ rather than 

the ‘‘value’’ ascribed to the security by the money 

market fund. Most funds that rely on rule 2a–7 

value their securities using the amortized cost 

method and thus would be required to acquire 

securities that can be sold or disposed of in the 

ordinary course of business within seven days at 

approximately amortized cost value. 

180See Money Market Funds Tackle ‘‘Exuberant 

Irrationality,’’ Standard & Poor’s, RatingsDirect 

(Sept. 30, 2008), available at http:// 

www2.standardandpoors.com/spf/pdf/media/ 

MoneyMarketFunds_Irrationality.pdf (‘‘It is likely 

that certain yield-sensitive institutions commonly 

referred to as ‘hot money’ accounts, moved money 

from one investment to another to capture a higher 

yielding, or seemingly safer, option. For example, 

after Lehman Bros. filed for bankruptcy, 

corporations that issued commercial paper (CP) to 

fund their business operations were forced to pay 

a significantly higher premium to obtain funding 

because of investor concerns with holding debt 

from any nongovernment issuer. The subsequent 

‘flight to quality’ pushed some overnight and 30- 

day CP rates up by 0.5% (to approximately 3.5%) 

for issuers whose credit or financial/risk profile did 

not seem to change. As a result, these hot money 

accounts moved their investments from money 

market funds yielding less than 2.75%.’’). 

sufficient liquidity to meet redemption 

requests on a more immediate basis.173

By holding illiquid securities, a 

money market fund exposes itself to a 

risk that it may be unable to satisfy 

redemption requests promptly, without 

selling illiquid securities at a loss that 

could impair its ability to maintain a 

stable net asset value per share.174

Illiquid securities also complicate the 

valuation of the fund’s portfolio.175

Moreover, illiquid securities are subject 

to greater price volatility, exposing the 

fund to greater risk of breaking a buck 

as a result of net asset values eroding in 

a declining market.176

We have not included a specific 

provision in rule 2a–7 regarding 

liquidity because, until recently, money 

market funds had not experienced a 

severe liquidity shortfall. As discussed 

above, in September 2008, the markets 

for both traditional and asset-backed 

commercial paper essentially seized up. 

Large portions of many money market 

fund portfolios became illiquid when 

buyers of asset-backed and traditional 

commercial paper fled the market.177 At 

the same time, many money market 

funds—principally institutional money 

market funds—received substantial 

redemption requests.178 The ability of 

these funds to maintain a stable net 

asset value turned on their ability to 

convert portfolio holdings to cash 

without selling them at ‘‘fire sale’’ 

prices. 

These events suggest to us that rule 

2a–7 should be amended to address 

liquidity risks that money market funds 

face. We propose to amend rule 2a–7 to 

add new risk-limiting conditions 

designed to improve money market 

funds’ ability to meet significant 

redemption demands. 

1. Limitation on Acquisition of Illiquid 

Securities 

We propose to prohibit money market 

funds from acquiring securities unless, 

at the time acquired, they are liquid, i.e., 

securities that can be sold or disposed 

of in the ordinary course of business 

within seven days at approximately 

their amortized cost value.179 In light of 

the risk to the fund of securities 

becoming illiquid as a result of market 

events, such as those that occurred last 

fall, investing any portion of the fund in 

securities that are already illiquid may 

be imprudent and thus should be 

prohibited by rule 2a–7. 

We request comment on our proposal 

to preclude funds from acquiring 

illiquid securities. We understand that 

some funds make very limited 

investments in securities that, at the 

time of acquisition, are illiquid, such as 

insurance company funding agreements, 

loan participations, and structured notes 

that have no demand features. Would 

this proposed provision (which would 

not prohibit funds from continuing to 

hold securities that become illiquid after 

their purchase) have a significant 

impact on money market funds? What 

would be the impact on funds of not 

being able to buy illiquid securities? 

Would there be a material impact on 

yield? 

2. Cash and Securities That Can Be 

Readily Converted to Cash 

As discussed above, liquidity of a 

money market fund portfolio is critical 

to the fund’s ability to maintain a stable 

net asset value. Our traditional notions 

of liquidity incorporated into our 

guidelines (discussed above) appear to 

be inadequate to meet the needs of a 

money market fund because the 

guidelines assume that a fund has time 

(up to seven days) to sell securities and 

that there will be a market for the 

securities. As noted above, money 

market funds typically undertake to pay 

their investors more quickly (frequently 

the same or following day). As the 

events of last fall demonstrated, money 

market funds may be unable to rely on 

a secondary or dealer market ready to 

provide immediate liquidity at 

amortized cost under all market 

conditions. Therefore we are proposing 

new liquidity tests that would be based 

on the fund’s legal right to receive cash 

rather than its ability to find a buyer of 

the security. 

The amount of liquidity a fund will 

need will vary from fund to fund and 

will turn on cash flows resulting from 

purchases and redemptions of shares. 

As a general matter, a fund that has 

some large shareholders, any one of 

which could redeem its entire position 

in a single day, will have greater 

liquidity needs than a retail fund that 

has thousands of relatively small 

shareholders. A fund that competes for 

yield-sensitive shareholders (e.g., ‘‘hot 

money’’) through electronic ‘‘portals’’ 

will have substantially greater liquidity 

needs than a fund holding the cash of 

commercial enterprises that have 

predictable needs (such as payrolls).180

Our proposed formulation of a new 

liquidity standard is designed to take 

into consideration each of these factors. 

The proposed daily and weekly 

standards, discussed immediately 

below, would be minimum standards; 

the proposed general standard (which 

we discuss after the minimum 

standards) may require a fund to 

maintain a higher portion of its 

portfolios in cash or securities that can 

readily be converted into cash. 

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32704 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

181Proposed rule 2a–7(c)(5)(iii). 

182A ‘‘demand feature’’ means a feature 

permitting (i) 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, and 

(ii) the holder of an asset backed security 

unconditionally to receive principal and interest 

within 397 calendar days of making demand. Rule 

2a–7(a)(8). 

183U.S. Treasury securities were highly liquid 

last fall. See, e.g., FRB Open Market Committee Oct. 

28–29 Minutes, supra note 51, at 5 (‘‘Yields on 

short-term nominal Treasury coupon securities 

declined over the intermeeting period, reportedly as 

a result of substantial flight-to-quality flows and 

heightened demand for liquidity. In contrast, higher 

term premiums and expectations of increases in the 

supply of Treasury securities associated with the 

Emergency Economic Stabilization Act and other 

initiatives seemed to put upward pressure on longer 

term nominal Treasury yields. Yields on longer 

term inflation-indexed Treasury securities, which 

are relatively illiquid, rose more sharply than did 

those on nominal securities.’’); Minutes of the 

Federal Open Market Committee, Federal Reserve 

Board, Dec. 15–16, 2008, at 5, available at http:// 

www.federalreserve.gov/monetarypolicy/files/

fomcminutes20081029.pdf (‘‘FRB Open Market 

Committee Oct. 28–29 Minutes’’) (Dec. 15–16, 

2008), at 4, available at http://

www.federalreserve.gov/monetarypolicy/files/

fomcminutes20081216.pdf (‘‘Yields on nominal 

Treasury coupon securities declined significantly 

over the intermeeting period in response to safehaven demands as well as the downward revisions 

in the economic outlook and the expected policy 

path. Meanwhile, yields on inflation-indexed 

Treasury securities declined by smaller amounts, 

leaving inflation compensation lower. Although the 

decline in inflation compensation occurred amid 

sharp decreases in inflation measures and energy 

prices, it was likely amplified by increased investor 

preference for the greater liquidity of nominal 

Treasury securities relative to that of inflationprotected Treasury securities.’’). 

184The term ‘‘daily liquid assets’’ is defined in 

proposed rule 2a–7(a)(8). A ‘‘retail fund’’ would be 

defined as any fund other than an institutional 

fund. Proposed rule 2a–7(a)(24). For a discussion of 

the definition of ‘‘institutional fund,’’ see infra text 

preceding, accompanying and following note 196. 

‘‘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. Rule 2a–7(a)(27). 

185See supra note 178. On September 17, 2008, 

approximately 4% of prime retail money market 

funds 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%. This information is based on analysis of 

data from the iMoneyNet Money Fund Analyzer 

database. 

186See ICI Report, supra note 6, at 74. 

187See rule 2a–7(a)(26) (defining ‘‘unconditional 

demand feature’’); rule 2a–7(a)(6) (defining 

‘‘conditional demand feature’’). 

188See rule 2a–7(d)(3), (5). 

189This is also the approach rule 2a–7 takes with 

respect to money market fund credit quality and 

diversification requirements. See rule 2a–7(c)(3), 

(4). 

190Proposed rule 2a–7(c)(5)(iii). 

a. Minimum Daily Liquidity 

Requirement 

Taxable Retail Funds. We propose to 

require each taxable retail money 

market fund to invest at least five 

percent of its assets in cash, U.S. 

Treasury securities, or securities that 

can provide the fund with daily 

liquidity, i.e., securities that the fund 

can reasonably expect to convert to cash 

within a day.181 Unlike our liquidity 

guidelines discussed above, which 

allow for a period during which a fund 

would be expected to seek buyers in a 

secondary market, these daily liquidity 

requirements would be significantly 

more demanding, requiring a portion of 

the funds’ assets be held in ‘‘daily liquid 

assets,’’ which the rule would define as: 

(i) Cash (including demand deposits); 

(ii) securities (including repurchase 

agreements) for which the fund has a 

contractual right to receive cash within 

one business day either because the 

security will mature or the fund can 

exercise a demand feature; 182 or (iii) 

U.S. Treasury securities, which have 

historically traded in deep, liquid 

markets, even in times of market 

distress.183

Under the proposed amendments, a 

money market fund that is a ‘‘retail 

fund’’ could not acquire any securities 

other than daily liquid assets if, 

immediately after the acquisition, the 

fund would have invested less than five 

percent of its total assets in those assets 

(‘‘minimum daily liquidity 

requirement’’).184 Compliance with the 

daily liquidity requirement would be 

determined at the time each security is 

acquired, and thus a fund would not 

have to dispose of less liquid securities 

(and potentially realize an immediate 

loss) if the portion of the fund held in 

highly liquid securities fell below five 

percent as a result of redemptions. 

Retail money market funds 

experienced relatively modest 

redemption demands last fall, even in 

the midst of substantial market 

turbulence.185 Thus we believe that a 

five percent requirement, which was 

recommended in the ICI Report, may be 

sufficient.186 We request comment on 

our analysis, and whether a five percent 

standard is appropriate in light of the 

liquidity needs of retail money market 

funds (which we distinguish from 

institutional money market funds in the 

next section of this release). Should we 

consider a higher percentage, such as 10 

percent or 15 percent, or a lower 

percentage, such as two percent or three 

percent? Do our proposed amendments 

strike the right balance between 

reducing liquidity risk and limiting the 

impact on yield? What would be the 

effect on yields of a lower or higher 

minimum daily liquidity requirement? 

There may be a number of factors that 

influence the lower redemption rates 

among retail investors, including 

investment purposes and practices, size 

of investments and possible differences 

in the information that retail as opposed 

to institutional investors obtain and the 

time when they obtain the information. 

We solicit comment on whether these 

factors did or would in the future 

influence the level of retail 

redemptions. If so, how should the 

proposed rule be revised to address 

such factors? 

We also request comment on the 

definition of ‘‘daily liquid assets.’’ Are 

there other securities that are 

sufficiently liquid that should be 

included in the definition? 

A fund’s contractual rights to cash 

will be different if the fund is relying on 

an unconditional demand feature rather 

than a conditional demand feature, 

which the fund may not be able to 

exercise if there is a default or other 

credit event with respect to the issuer of 

the securities.187 Rule 2a–7 permits both 

to be used to shorten the maturity of an 

instrument.188 For purposes of 

determining the daily liquidity 

requirement, should the rule distinguish 

between securities subject to 

conditional and unconditional demand 

features? 

As discussed above, compliance with 

the daily liquidity requirement would 

be determined at the time each security 

is acquired. A fund could acquire only 

daily liquid assets until the portfolio 

investments met the five percent daily 

liquidity test.189 Because the 

requirement applies only at the time of 

acquisition, a money market fund would 

not have to maintain a specified 

percentage of its assets in daily liquid 

assets at all times (subject to the general 

liquidity requirement discussed below), 

even though the fund is exposed to 

liquidity risk at all times. We request 

comment on whether to impose a 

minimum liquidity maintenance 

requirement, i.e., require that a money 

market fund maintain five percent of its 

portfolio at all times in daily liquid 

assets. What are the advantages and 

disadvantages of each approach? 

Taxable Institutional Funds. We 

propose to limit a taxable institutional 

fund to acquiring daily liquid assets 

unless, immediately after acquiring a 

security, the fund holds at least 10 

percent of its total assets in daily liquid 

assets.190 Institutional money market 

funds typically maintain a greater 

portion of their assets in cash and 

overnight repurchase agreements than 

retail funds, which reflects the greater 

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191This information is based on analysis of data 

from the iMoneyNet Money Fund Analyzer 

database. 

192See supra note 178. 

193See, e.g., ICI, Frequently Asked Questions 

About Money Market Funds, http://www.ici.org/

faqs/faqs_money_funds (describing (i) institutional 

money market funds as ‘‘held primarily by 

businesses, governments, institutional investors, 

and high-net worth households’’ that as of July 

2008, held 63 percent of all money market fund 

assets and (ii) retail money market funds as ‘‘offered 

primarily to individuals with moderate-sized 

accounts’’ that as of July 2008, held around 37 

percent of all money market fund assets); 

iMoneyNet home page, http://imoneynet.com/ 

(separates information and analysis on money 

market funds into institutional and retail 

categories); Crane Data, Money Fund Intelligence 

(June 2009) at 30, http://www.cranedata.us/

products/money-fund-intelligence/ (select issue 

2009–06–01 (Vol.4, #6)) (classifying money market 

funds as institutional or individual based on 

expense ratio, minimum investment and ‘‘who 

they’re sold to’’). 194A ‘‘master-feeder fund’’ is an arrangement in 

which one or more funds with identical investment 

objectives (‘‘feeder funds’’) invest all their assets in 

a single fund (‘‘master fund’’) with the same 

investment objective. Investors purchase securities 

in the feeder fund, which is an open-end fund and 

a conduit to the master fund. See H.R. Rep. No. 622, 

104th Cong., 2d Sess., at 41 (1996) (‘‘H.R. Rep. No. 

622’’); see generally Exemption for Open-End 

Management Investment Companies Issuing 

Multiple Classes of Shares; Disclosure by Multiple 

Class and Master Feeder Funds; Voting on 

Distribution Plans; Final Rules and Proposed Rule, 

Investment Company Act Release No. 20915 (Feb. 

23, 1995) [60 FR 11876, 11876–77 (Mar. 2, 1995)]. 

195Proposed rule 2a–7(c)(5)(v). 

196Proposed rule 2a–7(a)(18) (defining 

‘‘institutional fund’’). 

197Proposed rule 2a–7(a)(24) would define ‘‘retail 

fund’’ as any money market fund that the board of 

directors has not determined within the calendar 

year is an institutional fund. 

198Proposed rule 2a–7(c)(5). Rule 2a–7 defines a 

‘‘tax exempt fund’’ as a money market fund that 

holds itself out as distributing income exempt from 

regular federal income tax. Rule 2a–7(a)(24). 

liquidity needs of these funds.191 These 

greater needs were demonstrated last 

fall, when (as discussed above) 

institutional funds were subject to 

substantially greater redemption 

pressure than retail funds.192 We 

understand that some of these 

institutional funds had cash positions of 

almost 50 percent in their portfolios in 

anticipation of substantial redemptions 

following the large amount of inflows 

during 2007 through August 2008. 

We request comment on whether 

institutional money market funds 

should be subject to a higher daily 

liquidity requirement (10 percent) than 

retail funds (five percent). Should we 

consider a higher percentage, such as 15 

or 20 percent? Ten percent daily 

liquidity could seem high for a money 

market fund that reserved the right to 

delay payment of redemptions for seven 

days. We are not proposing to adjust the 

appropriate minimum daily liquidity 

requirement for institutional or retail 

funds solely by reference to the seven 

day period, however, because many 

money market funds undertake to pay 

redemption proceeds on the same day or 

the next day, and an announcement by 

a fund of a delay in payment of 

redemption could itself precipitate a run 

on funds. We request comment on 

whether a five percent daily liquidity 

requirement for retail funds or a 10 

percent daily liquidity requirement for 

institutional funds should turn on the 

representations the money market fund 

has made to its investors regarding the 

timing of payments of redemption 

proceeds. 

We propose to add two new 

definitions to rule 2a–7 to distinguish 

between retail and institutional money 

market funds. Although the ICI and 

others who compile data about money 

market funds have traditionally 

distinguished between retail and 

institutional money market funds, in 

practice the distinctions are not always 

clear.193 An institutional fund may have 

investors who invest on behalf of retail 

investors. For example, institutional 

money market funds commonly have 

investors that are bank sweep accounts 

or master funds in master-feeder 

arrangements.194 Although these 

investors ordinarily provide cash flows 

to the fund that are more similar to 

retail funds, a single decision-maker 

may be in a position to redeem all of the 

shares of the money market fund and 

move the sweep account to another 

money market fund. In addition, some 

funds have a single portfolio but issue 

separate classes of shares to retail and 

institutional investors that bear different 

expenses. In these cases, the cost of 

managing the institutional share class’s 

relatively greater cash flow volatility is 

shared with the retail investors. 

Our proposed amendments would 

require that a money market fund’s 

board determine, no less frequently than 

once each calendar year, whether the 

fund is an institutional money market 

fund for purposes of meeting the 

liquidity requirements.195 In particular, 

the fund’s board of directors would 

determine whether the money market 

fund is intended to be offered to 

institutional investors or has the 

characteristics of a fund that is intended 

to be offered to institutional investors, 

based on the: (i) Nature of the record 

owners of fund shares; (ii) minimum 

amount required to be invested to 

establish an account; and (iii) historical 

cash flows, resulting or expected cash 

flows that would result, from purchases 

and redemptions.196 The provision is 

designed to permit fund directors to 

evaluate the overall characteristics of 

the fund based on relevant factors.197

Under the provision, a fund offered 

through two classes, a majority of whose 

shares are held by retail investors, 

should nonetheless be deemed to be an 

institutional fund by the fund board if 

the cash flows from purchases and 

redemptions and the portfolio 

management required to meet liquidity 

needs based on those cash flows are 

more characteristic of an institutional 

money market fund. 

We request comment on our proposed 

definitions. The differences today in the 

liquidity management of institutional 

and retail money market funds suggest 

to us that fund managers (and perhaps 

fund boards) currently distinguish 

between retail and institutional funds. 

Would our proposed definition permit 

them to continue to draw the 

distinctions they draw today? Are there 

additional factors the board should 

consider in determining whether a fund 

is an institutional fund? Would a 

different approach result in better 

distinctions? If we cannot distinguish 

between retail and institutional funds, 

should we amend rule 2a–7 to apply the 

minimum daily liquidity requirements 

we propose for institutional funds to all 

funds? Would setting the same 

minimum daily liquidity requirement 

for institutional and retail funds impose 

unnecessary costs (in terms of lower 

yields) on retail investors in light of 

retail funds’ reduced liquidity needs? 

Might one effect of the proposed 

amendments be that funds currently 

offering two classes of shares, one retail 

and one institutional, would decide to 

divide the fund into two funds and 

manage them differently? Would one of 

the advantages of such a result be that 

retail investors would not bear the cost 

of maintaining liquidity for institutional 

investors? Would a disadvantage be the 

loss to retail investors of the economies 

of scale in these multi-class funds? 

What additional advantages and 

disadvantages do commenters foresee? 

Retail investors may not be aware of the 

higher redemption rates that 

institutional funds experienced last fall. 

Should we consider requiring 

institutional funds to provide additional 

disclosures regarding the risk to the 

fund of large redemptions? 

Tax Exempt Money Market Funds. We 

propose to exempt tax exempt funds 

from the minimum daily liquidity 

requirements.198 We understand that 

most of the portfolios of tax exempt 

funds consist of longer term floatingand variable-rate securities with seven 

day demand features from which the 

fund obtains much of its liquidity. We 

understand that these funds are unlikely 

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32706 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

199See ICI Report, supra note 6, at 74. 

200Proposed rule 2a–7(c)(5)(iv). The term 

‘‘weekly liquid assets’’ would be defined in 

proposed rule 2a–7(a)(32). 

201 During the week of September 15–19, 2008, 

approximately 6% of retail funds had net 

redemptions that exceeded 15%, and 9% of 

institutional money market funds had redemptions 

that exceeded 30% of assets. In addition, in the 52 

weeks preceding September 17, 2008, roughly the 

same portion of redemption requests in institutional 

and retail funds (less than 2%) would have 

exceeded the weekly liquidity requirements. This 

information is based on analysis of data from 

iMoneyNet Money Fund Analyzer database. 

202We note that for most weeks during the past 

year, prime institutional money market funds 

maintained over 30% of their assets in securities 

maturing in seven days or less. This information is 

based on analysis of data from iMoneyNet Money 

Fund Analyzer database. 

203Compare proposed rule 2a–7(a)(8) with 

proposed rule 2a–7(a)(32). 

204See ICI Report, supra note 6, at 74. 

205Proposed rule 2a–7(c)(5)(ii). Our proposal is 

similar to the liquidity standard we proposed last 

year in the proposal on NRSRO references. See 

NRSRO References Proposal, supra note 105, at 

Section III.A.2. Among the commenters that 

specifically addressed that proposed standard, two 

suggested that codification of the standard was not 

needed because money market fund advisers 

already understand and adhere to the current 

standards. See Comment Letter of Fidelity 

Management & Research Company (Aug. 29, 2008) 

(File No. S7–19–2008); Comment Letter of the 

Securities Industry and Financial Markets 

Association Credit Rating Agency Task Force (Sept. 

4, 2008) (File No. S7–19–2008). A third suggested 

eliminating the standard because it involves 

‘‘subjective, forward-looking estimates,’’ while 

retaining a proposed maximum level for illiquid 

securities holdings to ‘‘preserve a clearer bright-line 

test’’). See Comment Letter of Morrison & Foerster 

(Sept. 5, 2008) (File No. S7–19–2008). 

206We do not mean to suggest that each money 

market fund should minimize the volatility of cash 

flows, but rather should limit its liquidity risks. 

Some money market funds with the most volatile 

shareholder base manage liquidity risk by, for 

example, investing exclusively in overnight 

repurchase agreements or Treasury debt. 

to have investment alternatives that 

would permit them to meet a daily 

liquidity requirement.199 We request 

comment on whether tax exempt money 

market funds could meet a daily 

liquidity requirement, such as we have 

proposed for taxable retail funds. Do tax 

exempt retail money market funds 

nevertheless have similar liquidity 

requirements as taxable retail funds? If 

so, should rule 2a–7 treat them 

differently and how? 

b. Minimum Weekly Liquidity 

Requirement 

We propose that all money market 

funds (including tax exempt funds) also 

be subject to a minimum weekly 

liquidity requirement (‘‘minimum 

weekly liquidity requirement’’). 

Specifically, retail and institutional 

funds could not acquire any securities 

other than U.S. Treasury securities or 

securities (including repurchase 

agreements) that mature or are subject to 

a demand feature exercisable and 

payable in five business days (together 

with cash, ‘‘weekly liquid assets’’) if, 

immediately after the acquisition, (i) the 

retail fund would have invested less 

than 15 percent of its total assets in 

weekly liquid assets and (ii) the 

institutional fund would have invested 

less than 30 percent of its total assets in 

weekly liquid assets.200

The proposed minimum weekly 

liquidity requirement would 

supplement the proposed minimum 

daily liquidity requirement (discussed 

above) and give greater assurance that 

money market funds could meet their 

statutory obligations to redeem 

shareholders in times of market 

turbulence. We estimate that under our 

proposed minimum weekly liquidity 

requirement, approximately 93 percent 

of retail funds and 91 percent of 

institutional funds would have been 

able to satisfy the level of redemption 

demands during the periods of greatest 

redemption pressure last fall without 

having to sell portfolio securities.201

We request comment on the minimum 

weekly liquidity requirements. Would a 

minimum daily liquidity requirement 

alone be sufficient to allow funds to 

adequately manage risk in the event of 

unexpected shareholder redemptions in 

excess of the daily threshold and market 

illiquidity? Are the proposed minimums 

of 15 percent of a retail fund’s total 

assets and 30 percent of an institutional 

fund’s total assets sufficient? 202 Should 

we, as the ICI Report suggests, adopt the 

same (20 percent of total assets) test for 

both retail and institutional funds? As 

discussed above, we designed our 

minimum weekly liquidity 

requirements so that more than 90 

percent of retail and institutional funds 

could have met redemption requests 

during the week of September 15–19, 

2008 without selling portfolio securities. 

Should we set the threshold lower, such 

as at 80 percent or 70 percent? Should 

we set the threshold higher at 95 

percent or 100 percent? The weekly 

liquidity requirement would be 

essentially the same as the daily 

liquidity requirement, except that the 

fund must be able to access cash on a 

weekly rather than daily basis. 

Compliance with the test would be 

determined upon the acquisition of a 

security, and demand features could be 

used to determine the maturity of a 

portfolio security for purposes of the 

test. 

We propose to treat as weekly liquid 

assets for purposes of the weekly 

liquidity requirements, the same 

securities that would be daily liquid 

assets except that the requirement for 

maturing securities or demand features 

would be five business days rather than 

one.203 The ICI Report suggests that we 

ought to treat as a weekly liquid asset 

a security issued by an agency of the 

U.S. Government that, when originally 

issued, had a maturity of 95 days or 

less.204 Is there a basis on which to treat 

these agency securities as weekly liquid 

assets? If so, why should the maturity of 

the security be 95 days based on original 

issue rather than specifying a period 

remaining to maturity? We urge 

commenters supporting such treatment 

to submit market data to support their 

views. 

c. General Liquidity Requirement 

As discussed above, the daily and 

weekly liquidity requirements would be 

minimum requirements a fund would 

have to satisfy upon acquisition of a 

security. A fund’s liquidity needs, 

however, depending upon the volatility 

of its cash flows, may be greater. 

Therefore, we also propose to require 

that a money market fund at all times 

hold highly liquid securities sufficient 

to meet reasonably foreseeable 

redemptions in light of its obligations 

under section 22(e) of the Act and any 

commitments the fund has made to 

shareholders, such as undertaking to 

pay redemptions more quickly than 

seven days.205

To comply with this condition, we 

would expect money market funds to 

consider a number of factors that could 

affect the fund’s liquidity needs. For 

example, a money market fund would 

have to understand the characteristics of 

its investors and their likely liquidity 

needs. A volatile investor base, e.g., one 

consisting of a few relatively larger 

investors that are likely to make 

significant redemptions, would require 

a fund to maintain greater liquidity than 

a stable investor base, which is 

generally associated with a retail fund 

with many hundreds or thousands of 

smaller investors. With this information, 

a fund manager could take different 

steps to protect the fund from greater 

liquidity risk. For example, the fund 

manager could increase the amount of 

daily or weekly liquid assets above 

those required by the daily and weekly 

requirements, or could decline to accept 

new investments from investors whose 

liquidity needs are inconsistent with the 

objectives of the management of the 

fund.206

We request comment on this proposed 

requirement for liquidity. Should we 

consider incorporating specific objective 

standards for liquidity in this 

requirement? Should we provide 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32707 

207See rule 38a–1(a)(1) (requiring funds to adopt 

and implement written policies and procedures 

reasonably designed to prevent violation of the 

federal securities laws by the fund). 208Proposed rule 2a–7(c)(8)(ii)(D)(1). 

209Rule 2a–7(c)(7)(ii)(A)(1). 

210Proposed rule 2a–7(c)(8)(ii)(D)(2). 

211Proposed rule 2a–7(c)(8)(ii)(D)(3). 

212Proposed rule 2a–7(c)(11)(vii). 

213 ICI Report, supra note 6, at 75. 

214See Institutional Money Market Funds 

Association, Stress Testing for Money Market Funds 

(Feb. 2009). 

215See, e.g., Standard & Poor’s, Fund Ratings 

Criteria, at 9 (2007), available at http://

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

FundRatingsCriteria.pdf. See also Financial 

Regulator Guidance Note 1/08, supra note 146, at 

5 (requirements of the Irish Financial Services 

Authority for money market funds domiciled in 

Ireland include stress testing: ‘‘A money market 

fund is expected to be subject to monthly portfolio 

analysis incorporating stress testing to examine 

portfolio returns under various market scenarios to 

determine if the portfolio constituents are 

appropriate to meet pre-determined levels of credit 

risk, interest rate risk, market risk and investor 

redemptions.’’). 

guidance regarding the steps fund 

advisers could take to evaluate the 

fund’s liquidity needs? If so, what 

should the guidance be? 

Because the obligation would be 

ongoing, we believe a fund should adopt 

policies and procedures to assure that 

appropriate efforts are undertaken to 

identify risk characteristics of 

shareholders, particularly those that 

hold their securities through omnibus 

accounts, or access the fund through 

‘‘portals’’ or through other arrangements 

that provide the fund with little or no 

transparency with respect to the 

beneficial shareholder. We are not 

proposing to amend rule 2a–7 to require 

that funds adopt specific procedures 

because we believe those procedures 

would be required by rule 38a–1, the 

‘‘compliance rule’’ under the Investment 

Company Act, if we adopt the proposed 

general liquidity requirement.207 Should 

the Commission provide guidance to 

funds to assist them in determining the 

adequacy of their policies and 

procedures? Should we consider 

specifying any particular aspects of the 

policies and procedures? 

In their consideration of these 

procedures and in their oversight of 

their implementation, fund directors 

should understand that fund managers’ 

interest in increasing fund assets, and 

thus their advisory fees, may lead them 

to accept investors who present greater 

risks to the fund than they might 

otherwise have accepted. We urge 

directors to consider the need for 

establishing guidelines for advisers to 

money market funds that address this 

potential conflict. We are aware of more 

than one occasion in which a fund 

adviser (or its affiliate that served as the 

principal underwriter to the fund) has 

marketed the fund to ‘‘hot money’’ in 

order to increase fund assets, which has 

exposed the fund to substantially higher 

risks. 

3. Stress Testing 

We are also proposing to amend rule 

2a–7 to require the board of directors of 

each money market fund using the 

amortized cost method to adopt 

procedures providing for periodic stress 

testing of the money market fund’s 

portfolio.208 The procedures would 

require testing of the fund’s ability to 

maintain a stable net asset value per 

share based upon certain hypothetical 

events, including an increase in shortterm 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 an appropriate 

benchmark selected by the fund for 

overnight interest rates and commercial 

paper and other types of securities held 

by the fund. 

Our proposal would require funds to 

test for certain hypothetical events, but 

would not specify other details of the 

stress testing. The proposal would 

require that stress tests be conducted at 

intervals that the board of directors 

determines appropriate and reasonable 

in light of current market conditions. 

This is the same approach that rule 2a– 

7 currently takes with respect to the 

frequency of shadow pricing.209

The proposed amendments also 

would leave to the money market fund’s 

board of directors (and the fund 

manager) the specifics of the scenarios 

or assumptions on which the tests are 

based. Boards should, for example, 

consider procedures that require the 

fund to test for the concurrence of 

multiple hypothetical events, e.g., 

where there is a simultaneous increase 

in interest rates and substantial 

redemptions. The proposed 

amendments also would require that the 

board receive a report of the results of 

the testing at its next regularly 

scheduled meeting, which 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.210 Thus, a fund 

must test each hypothetical event to a 

degree of severity that it would result in 

the market-based per share net asset 

value of the fund to fall below $0.995 

(in the case of a fund that is maintaining 

a stable net asset value at $1.00). The 

proposed amendment also would 

require the written procedures to 

include the provision of an assessment 

by the 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.211 The adviser’s 

assessment would provide the fund 

board context within which to evaluate 

the magnitude of the events that would 

cause the fund to break the buck. 

Finally, funds would be required to 

maintain records of the stress testing for 

six years, the first two years in an easily 

accessible place.212

We believe that the proposed stress 

testing procedures would provide 

money market fund boards a better 

understanding of the risks to which the 

fund is exposed and would give 

managers a tool to better manage those 

risks. We understand that stress testing 

is already a best practice followed by 

many money market funds. The ICI 

Report recommends that rule 2a–7 

require money market funds regularly to 

‘‘stress test’’ their portfolios, although it 

does not suggest a particular means of 

stress testing.213 The Institutional 

Money Market Funds Association 

provides guidance for its members in 

stress testing money market fund 

portfolios,214 and the ratings agencies 

stress test the portfolios of money 

market funds they rate.215

We request comment on our proposed 

stress test requirement. Would this 

requirement allow fund managers to 

better understand and manage the risks 

to which the fund is exposed? Have we 

identified the correct stress events? If 

not, what additional or alternative 

scenarios or assumptions should we 

require the fund to test? Should we 

specify at least one base-line stress test 

that would test the fund portfolio 

against a combination of two or more 

events? For example, the rule could 

require that the market value per share 

of the fund be tested against an assumed 

50 basis point increase in LIBOR and a 

redemption of 15 percent of fund shares. 

Are there alternative base-line tests we 

should consider requiring? 

We request comment on our proposal 

to require that the board receive a report 

on these tests. Would the report help the 

board identify when a fund adviser is 

exposing the fund to greater risks? 

Should the board only receive a report 

when the tests indicate a particular level 

of risk? If so, what particular level of 

risk should the rule identify? Should we 

consider including additional 

information in the report, and if so, 

what should it be? Should the rule 

provide for a minimum frequency of 

testing? If so, what should be the 

frequency (e.g., monthly, weekly, or a 

shorter period)? Should we consider 

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32708 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

216See ICI Report, supra note 6, at 75. 

217Rule 2a–7(c)(4)(i). The diversification 

requirements of rule 2a–7 differ in significant 

respects from the requirements for diversified 

management investment companies under section 

5(b)(1) of the Act. A money market fund that 

satisfies the applicable diversification requirements 

of the paragraphs (c)(4) and (c)(5) of the rule is 

deemed to have satisfied the requirements of 

section 5(b)(1). Rule 2a–7(c)(4)(v). Subchapter M of 

the Internal Revenue Code contains other 

diversification requirements for a money market 

fund to be a ‘‘regulated investment company’’ for 

federal income tax purposes. 26 U.S.C. 851 et seq. 

See also 1990 Proposing Release, supra note 22, at 

n.25. 

218Rule 2a–7(c)(4)(i)(A). The rule contains a safe 

harbor where a taxable and national tax exempt 

fund may invest up to 25 percent of its assets in 

the first tier securities of a single issuer for a period 

of up to three business days after acquisition (but 

a fund may use this exception for only one issuer 

at a time). Rule 2a–7(c)(4)(i)(A). 219Rule 2a–7(c)(4)(iii). With respect to 25 percent 

of total assets, holdings of a demand feature or 

guarantee provider may exceed the 10 percent limit 

subject to certain conditions. See rule 2a– 

7(c)(4)(iii)(A), (B), and (C). See also rule 2a–7(a)(8) 

(definition of ‘‘demand feature’’) and (a)(15) 

(definition of ‘‘guarantee’’). 

220See 1990 Proposing Release, supra note 22, at 

II.1. (‘‘Diversification limits investment risk to a 

fund by spreading the risk of loss among a number 

of securities.’’). 

221The positions held by funds in distressed 

securities were in almost all cases well below the 

rule’s diversification limits. 

222See, e.g., Brunnermeier, supra note 66, at 87. 

223See, e.g., U.S. Dollar Money Market Funds, 

supra note 17, at 67 (mid-2008 holdings of 15 

largest prime money market funds showed they had 

invested $1 trillion, or half of their portfolios, with 

non-U.S. banks). 

224 In 1992, our staff observed that ‘‘the current 

[statutory] treatment of ‘concentration’ suffers from 

problems of industry definition. There is no clear 

standard to determine what constitutes an 

‘industry,’ much less ‘a group of industries.’ Indeed, 

as the boundaries between different industries 

erode and the trend toward corporate 

diversification and conglomeration continues, it is 

often difficult to fit companies into distinct 

industry categories * * *.’’ Division of Investment 

Management, U.S. Securities and Exchange 

Commission, Protecting Investors: A Half Century 

of Investment Company Regulation, at n.103 (May 

1992). 

225 In 2008, repurchase agreements accounted for 

26.4% of taxable Government money market funds’ 

total net assets and 9.1% of taxable nonGovernment money market funds’ total net assets. 

See 2009 Fact Book, supra note 7, at 150–51, Tables 

41 & 42. 

226See rule 2a–7(c)(4)(ii)(A). We have allowed 

this ‘‘look-through’’ treatment, for diversification 

purposes, based on the notion that a money market 

fund looks to the collateral rather than the 

counterparty as the ultimate source of repayment. 

See Treatment of Repurchase Agreements and 

Refunded Securities as an Acquisition of the 

Underlying Securities, Investment Company Act 

different intervals for different types of 

money market funds? If so, what 

intervals would be appropriate for what 

types of money market funds? Should 

the frequency depend upon the marketbased value of the fund portfolio or 

other criteria or events? 

We note that certain of the 

hypothetical events we propose funds 

include in their testing may not be 

meaningful for some money market 

funds. For example, U.S. Treasury 

money market funds (i.e., funds that 

invest solely in direct obligations of the 

U.S. government such as U.S. Treasury 

bills and other short term securities 

backed by the full faith and credit of the 

U.S. government) are not likely to 

experience downgrades of or defaults on 

those securities. Should these money 

market funds be exempted from testing 

certain hypothetical events, such as a 

downgrade of or default on a portfolio 

security, that may not present risks to 

the fund? Are there other money market 

funds that we should exempt from 

testing for certain of the proposed 

hypothetical events? If so, which funds 

should have exemptions and which 

events should be exempted from their 

testing? 

The ICI Report suggests that the 

results of stress testing could be used to 

evaluate whether a money market fund’s 

liquidity thresholds need to be 

adjusted.216 Should we consider 

imposing minimum liquidity 

requirements based on the results of a 

particular stress test? For example, 

should we require that a fund invest 50 

percent of its portfolio in daily or 

weekly liquid assets if a five percent 

increase in shareholder redemptions 

would cause the fund to break the buck? 

If we considered imposing minimum 

liquidity requirements, should they be 

different for retail and institutional 

funds? 

D. Diversification 

Rule 2a–7 requires a money market 

fund’s portfolio to be diversified, both 

as to the issuers of the securities it 

acquires and to the guarantors of those 

securities.217 Generally, money market 

funds must limit their investments in 

the securities of any one issuer (other 

than Government securities), to no more 

than five percent of fund assets.218 They 

must also generally limit their 

investments in securities subject to a 

demand feature or a guarantee to no 

more than ten percent of fund assets 

from any one provider.219 The 

Commission adopted these 

requirements in order to limit the 

exposure of a money market fund to any 

one issuer or guarantor.220

The issuer diversification provisions 

of the rule generally were not 

implicated by the market turbulence last 

fall.221 The Reserve Primary Fund, for 

example, held only 1.2 percent of its 

assets in Lehman Brothers commercial 

paper, well below what rule 2a–7 

permits. The market turbulence did, 

however, implicate the guarantor and 

demand feature diversification 

provisions—many funds (particularly 

tax exempt funds) were heavily exposed 

to bond insurers, and some were heavily 

exposed to a few major securities firms 

that served as liquidity providers.222

Should we propose to further restrict 

the diversification limits of the rule? If 

so, by how much should we reduce 

them? Should the five percent 

diversification limit for issuers be 

reduced to, for example, three percent? 

Would it be possible to further reduce 

the guarantor diversification limits 

without reducing the quality of portfolio 

securities? Even a diversification 

limitation of one percent would not 

preclude a fund from breaking a buck if 

the security should sustain sufficient 

losses as did the securities issued by 

Lehman Brothers. Moreover, such a 

diversification limit may force funds to 

invest in relatively lower quality 

securities. If so, might lower 

diversification limits increase the 

likelihood of a default or other credit 

event affecting a money market fund 

while diminishing the impact of such an 

event on the fund? We request that 

commenters address the tradeoffs of 

lower diversification limits for different 

types of money market funds. 

Last fall, money market funds did 

appear to be extensively exposed to 

securities issued by participants in the 

financial sector, which contributed 

significantly to the difficulties they 

experienced.223 Money market funds are 

not subject to any industry 

concentration limitations under rule 2a– 

7. Should we consider proposing such 

a limitation? If we did, what should the 

concentration limit be? Are distinctions 

among industry sectors sufficiently clear 

that a concentration limitation would be 

meaningful? 224

E. 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.225 In 

a typical repurchase agreement, a fund 

purchases securities from a brokerdealer or a bank (‘‘counterparty’’), upon 

an agreement that the counterparty will 

repurchase the same securities at a 

specified price, at a later date. The 

securities purchased serve as the 

collateral for the agreement. 

Money market funds may treat the 

acquisition of a repurchase agreement as 

an acquisition of the collateral 

underlying the repurchase agreement for 

purposes of meeting rule 2a–7’s 

diversification requirement, provided 

that the repurchase agreement is 

‘‘collateralized fully.’’ 226 A repurchase 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32709 

Release No. 25058 (July 5, 2001) [66 FR 36156 (July 

11, 2001)] (‘‘2001 Repo Rule Adopting Release’’), at 

Background. Rule 5b–3 allows the same treatment 

for purposes of section 5 and section 12(d)(3) of the 

Act. The rule 5b–3(c)(1) definition of collateralized 

fully, which is cross-referenced by rule 2a–7(a)(5), 

sets forth the related conditions. Money market 

funds may enter into repurchase agreements that 

are not collateralized fully. Any agreement or 

portion of agreement that is not collateralized fully 

would be deemed an unsecured loan. As such the 

loan itself would have to meet the quality 

requirements set forth in rule 2a–7, both with 

respect to the minimal credit risk and the high 

quality rating, as well as the five percent 

diversification test. See 1991 Adopting Release, 

supra note 20, at n.31. 227See rule 5b–3(c)(1)(v). 228Proposed rule 2a–7(a)(5). Under the current 

definition of collateralized fully, a money market 

fund may look through repurchase agreements 

collateralized with cash items, Government 

securities, securities with the highest rating or 

unrated securities of comparable credit quality. 

Rule 5b–3(c)(1)(iv). Repurchase agreements have 

traditionally been collateralized with U.S. Treasury 

and agency securities, but over the years borrowers 

have increasingly used investment grade corporate 

bonds, mortgage-backed securities and other 

potentially illiquid securities. See Martin Duffy et 

al., supra note 191, at 3. Our staff’s examination of 

the portfolio holdings in the 15 largest money 

market fund complexes last spring indicated that 

approximately 75% of the collateral supporting 

repurchase agreements held by the funds consisted 

of Government securities (48.3% agencies and 

26.4% U.S. Treasuries). The exam further indicated 

that the remaining collateral consisted of a variety 

of instruments, such as equities, commercial paper, 

corporate notes, and mortgage loan obligations. 229 If the counterparty defaults, a money market 

fund might be required to dispose of the collateral 

as soon as possible to the extent that the collateral, 

now part of the fund’s portfolio, does not meet the 

fund’s maturity or liquidity requirements. Such 

requirements do not apply to the collateral when it 

is not part of the fund’s portfolio. See 1991 

Adopting Release, supra note 20, at n.33 and 

accompanying text. 

230Proposed rule 2a–7(c)(4)(ii)(A). It appears that 

this evaluation is already being made in many fund 

complexes. See ICI Report, supra note 6, at n.90. 

231See 2001 Repo Rule Adopting Release, supra 

note 226, at nn.18–20 and accompanying text. 

232We understand that a number of money 

market funds discontinued entering into repurchase 

agreements with The Bear Stearns Companies Inc. 

(‘‘Bear Stearns’’) when it was threatened with 

collapse in March 2008. ICI Report, supra note 6, 

at 51. 

233See Stephen Morris & Hyun Song Shin, 

Financial Regulation in a System Context, 

Brookings Papers on Economic Activity, Fall 2008, 

at 229, 239 (noting that ‘‘if Bear Stearns had become 

illiquid, and the assets pledged as collateral 

reverted to the money market funds, they would 

have been forced to sell those assets quickly, 

possibly at a large loss.’’). Cf. Calyon N.Y. Branch 

v. Am. Home Mortg. Corp. (In re Am. Home Mortg., 

Inc.), 379 B.R. 503, 520–22 (Bankr. D. Del. 2008) 

(Holding that seller in bankruptcy was not required 

to transfer to the buyer the right to service the 

collateral of the repurchase agreement. The court 

found that the servicing provisions of the agreement 

were severable from the repurchase provisions, 

dismissing the buyer’s argument that without the 

servicing rights the buyer’s ability to liquidate the 

collateral would have been impaired.). 

234 17 CFR 210.12–12 to 12–14. 

235Proposed rule 2a–7(c)(12). 

236 Id. 

237Money market funds must provide a full 

schedule of their portfolio holdings in quarterly 

filings to the Commission. 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). 

238See Colleen Sullivan & Mike Schnitzel, Money 

Funds Move to Update Holdings Faster, Fund 

Action, Sept. 29, 2008, available at http://

www.fundaction.com/pdf/FA092908.pdf. 

239See id. 

agreement collateralized fully must, 

among other things, qualify for an 

exclusion from any automatic stay of 

creditors’ rights against the counterparty 

under applicable insolvency law.227 We 

propose two amendments to rule 2a–7 

affecting a money market fund’s 

investment in repurchase agreements. 

First, we propose to limit money 

market funds to investing in repurchase 

agreements collateralized by cash items 

or Government securities in order to 

obtain special treatment under the 

diversification provisions of rule 2a– 

7.228 Such a limitation would make it 

less likely that, in the event of the 

default of a counterparty during a 

period of market turmoil such as last 

fall, a money market fund would 

experience losses upon the sale of 

collateral that had become illiquid. 

Such a consequence is more likely in 

the case of a default by a large 

counterparty when, as a result, many 

investors in repurchase agreements seek 

to liquidate similar collateral at the 

same time.229

We request comment on this 

amendment. We understand that most 

money market funds that take advantage 

of the diversification ‘‘look-through’’ 

provision enter into repurchase 

agreements that are collateralized by 

Government securities. Is our 

understanding correct? If so, would this 

amendment have a significant impact on 

money market funds? Would the 

amendment significantly reduce the risk 

of losses upon the default of a 

repurchase agreement counterparty? 

Would it negatively impact money 

market funds’ yields? Should we apply 

this limitation to repurchase agreements 

that are not collateralized fully, and 

thus do not qualify for the special ‘‘lookthrough’’ treatment? 

Second, we propose to require that 

the money market fund’s board of 

directors or its delegate evaluate the 

creditworthiness of the counterparty, 

regardless of whether the repurchase 

agreement is collateralized fully.230 We 

eliminated this requirement in 2001 in 

light of amendments to relevant 

bankruptcy law that protected funds 

from the automatic stay of creditors’ 

rights under applicable bankruptcy 

law.231 The events of last fall, which 

involved the failure of a large 

investment bank holding company that 

served as a counterparty, suggest we 

should revisit this determination.232 We 

are concerned that in the midst of a 

crisis following the bankruptcy of a 

counterparty, a money market fund may 

find it difficult to protect fully its 

interests in the collateral without 

incurring losses.233 A fund should seek 

to avoid such a crisis by limiting its 

counterparties to those that are 

creditworthy. We request comment on 

this proposed amendment. 

F. Disclosure of Portfolio Information 

1. Public Website Posting 

The Commission is proposing to 

amend rule 2a–7 to require money 

market funds to disclose information 

about their portfolio holdings each 

month on their websites. Specifically, a 

fund would be required to disclose the 

fund’s schedule of investments, as 

prescribed by rules 12–12 to 12–14 of 

Regulation S–X,234 identifying, among 

other things, the issuer, the title of the 

issue, the principal amount of the 

security, and its current amortized 

cost.235 The fund would be required to 

post the information no later than the 

second business day of the month, 

current as of the last business day of the 

previous month, and would have to 

maintain the information on the website 

for at least twelve months.236

Currently, money market funds must 

report portfolio holdings information to 

us four times a year, no earlier than 

within 60 days of the close of the 

covered period.237 Many funds today 

provide this information to their 

investors much more frequently on their 

websites, with some funds updating 

information each day.238

We understand that the greater 

transparency provided by many funds 

today responds to demands from 

investors, particularly institutional 

investors, who wish to have a better 

understanding of the current risks to 

which the fund is exposed.239 Those 

investors find that the quarterly reports 

are too infrequent in light of the rapid 

turnover of money market fund 

portfolios. We believe that the greater 

transparency of fund portfolios is a 

positive development by which 

investors can exert influence on risktaking by fund advisers, and thus reduce 

the likelihood that a fund will break the 

buck. 

We request comment on the proposed 

monthly portfolio disclosure 

requirement. Should we require more 

information from funds than what we 

have proposed? If so, what additional 

information should we require? Should 

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240See ICI Report, supra note 6, at 93. 

241Proposed rule 30b1–6. 

242 In 1995, the Commission proposed, but did 

not adopt, a similar rule that would have required 

money market funds to file quarterly reports of 

portfolio holdings. Money Market Fund Quarterly 

Reporting, Investment Company Act Release No. 

21217 (July 19, 1995) [60 FR 38467 (July 26, 1995)]. 

See also Rulemaking Petition from Fund 

Democracy, et al. (Jan. 16, 2008) (File No. 4–554) 

(recommending that the Commission require money 

market funds to make nonpublic monthly electronic 

filings of their portfolio holdings). 

243The Treasury’s Guarantee Program requires a 

participating money market fund to provide a 

schedule of its portfolio holdings if its market-based 

net asset value falls below 99.75 percent of its stable 

net asset value. See U.S. Department of the 

Treasury, ‘‘Guarantee Agreement (Stable Value),’’ 

¶ 5(b), available at http://www.treas.gov/offices/

domestic-finance/key-initiatives/money-marketdocs/Guarantee_Agreement_Stable-Value.pdf. 

244See, e.g., supra note 68. 

245As discussed above, we understand the 

confidentiality of certain portfolio holdings 

information is not of critical importance to money 

market funds. Accordingly, the proposed 

amendments to rule 2a–7 would require money 

market funds to disclose certain monthly portfolio 

holdings information on their websites within two 

days after the end of month. See also ICI Report, 

supra note 6, at 93 (recommending that funds 

disclose monthly portfolio holdings information 

after a two-day delay). Here, however, the more 

detailed information included in the filing to the 

Commission may present more significant concerns. 

we require that money market funds 

also post their market-based net asset 

value per share and the market-based 

prices of their portfolio securities? This 

information would enable investors to 

understand the fund’s exposure to 

distressed securities (the market value 

of which would be less than the 

amortized cost). In addition, it could 

help investors understand the risk that 

the fund may be unable to maintain a 

$1.00 stable net asset value. Currently, 

only larger, more sophisticated investors 

may be able to gauge this risk, by 

themselves estimating the market value 

of portfolio securities disclosed on fund 

websites. Thus, a requirement that 

funds disclose the market-based values 

may help to level the playing field for 

all investors. On the other hand, we 

acknowledge that disclosure of shadow 

pricing could cause certain investors to 

redeem their holdings once the shadow 

price drops below a certain threshold 

and thus potentially introduce greater 

instability. 

We request comment on how 

investors might react to the disclosure of 

market-based values and the 

consequences to funds and shareholders 

if such information were disclosed. 

Would investors seek to redeem their 

shares when the fund’s market-based 

net asset value falls below a certain 

threshold because of concerns that other 

investors may seek to redeem? Would 

market analysts follow and report this 

information and thereby cause investors 

to redeem if the fund’s market-based net 

asset value falls below a certain 

threshold? Would the disclosure of 

market-based values, in addition to 

amortized cost, confuse investors, 

particularly retail investors? Are there 

costs to disclosing this information, and, 

if so, what are they? Alternatively, 

would this information provide 

shareholders with useful information 

regarding the fund’s risk characteristics? 

Would it enable investors to make better 

informed investment decisions? Would 

this information benefit investors, and, 

if so, how? If the market-based values 

were required to be disclosed, how 

frequently should they be disclosed? 

Would monthly disclosure be frequent 

enough for investors to understand how 

often and to what extent a money 

market fund’s market-based share price 

deviates from the $1.00 stable share 

price? 

Should we omit any of the proposed 

disclosure requirements? If so, what 

information should be omitted from the 

proposed requirement, and why? 

Each money market fund would have 

to update its portfolio schedule as of the 

end of each month and post the update 

no later than two business days after the 

end of the month. Should we provide 

for a longer delay to prevent cash 

investors other than shareholders from 

trading along with the fund, to the 

possible detriment of the fund and its 

shareholders? The ICI Report 

recommended monthly disclosure with 

a two-day delay, asserting that ‘‘front 

running’’ concerns are less of a risk for 

money market funds than other types of 

mutual funds.240 We understand that 

funds that already post portfolio 

schedules frequently have come to the 

same conclusion. Should funds be 

required to provide more frequent 

disclosure of portfolio holdings (e.g., 

weekly or biweekly)? 

The amendments would require that a 

fund post the information on its website 

for at least 12 months. Should the 

information be accessible on the website 

for a longer or shorter time period? 

Should we require this information 

somewhere other than on the fund’s 

website? Do all money market funds 

have websites? 

2. Reporting to the Commission 

We are also proposing a new rule 

requiring money market funds to 

provide the Commission a monthly 

electronic filing of more detailed 

portfolio holdings information.241 The 

information would enable the 

Commission to create a central database 

of money market fund portfolio 

holdings, which could enhance our 

oversight of money market funds and 

our ability to respond to market 

events.242

Our current information on money 

market fund portfolios is limited to 

quarterly reports filed with us which, as 

noted above, quickly become stale. 

Moreover, the reports are not filed in a 

format that allows us to search 

expeditiously across portfolios or within 

a portfolio to identify securities that 

may raise concerns. In 2007, our staff 

was not able to ascertain quickly which 

money market funds held SIVs, and last 

fall we had to engage in lengthy and 

time-consuming inquiries to determine 

which money market funds held 

commercial paper issued by Lehman 

Brothers after it declared bankruptcy. 

Further, if we had had such data 

immediately available to us, we could 

have provided additional assistance to 

the Treasury Department or the Federal 

Reserve Board in structuring the 

programs they put into place to protect 

investors.243 In preparing this release 

we have relied in part on data about 

money market funds available only 

through industry associations and 

publications.244

Proposed rule 30b1–6 would provide 

us information that would assist our 

staff in analyzing the portfolio holdings 

of money market funds, and thus 

enhance our understanding of the risk 

characteristics of individual money 

market funds and money market funds 

as a group and industry trends. We 

would be able to identify quickly those 

funds that are holding certain types of 

securities or specific securities, such as 

distressed securities, and funds that 

have unusual portfolios that may 

involve greater risks than are typical 

(e.g., funds that have higher gross 

yields). 

Although the portfolio reports to the 

Commission are not primarily designed 

for individual investors, we would 

expect to make the information 

available to the public two weeks after 

their filing. We anticipate that academic 

researchers, financial analysts and 

economic research firms would use this 

information to study money market 

fund holdings and evaluate their risk 

information. Their analyses may further 

help investors and regulators better 

understand risks in money market 

funds. In addition, we believe that 

delaying the public availability of this 

information would alleviate possible 

concerns about the public disclosure of 

the detailed portfolio holdings 

information contained in the filing, 

without compromising its utility.245

Proposed rule 30b1–6 would require 

money market funds to file a monthly 

portfolio holdings report on new Form 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32711 

246The portfolio securities information that 

money market funds currently must report is 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 Form N–Q, Item 1 

[17 CFR 274.130]; Rules 12–12 to 12–14 of 

Regulation S–X [17 CFR 210.12–12 to 12.14]. 

247See 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. 

248 In addition, proposed Form N–MFP would 

include an ‘‘Explanatory Notes’’ item to permit 

funds to add miscellaneous information that may be 

material to other disclosure in the form. 

249See also infra Section V. 

250We anticipate that the XML interactive data 

file would 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. 251We 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 proposed Form N–MFP may encourage 

standardization across the industry, resulting in 

cost savings for money market funds. 

252See Rulemaking Petition from Fund 

Democracy, supra note 242 (recommending that the 

Commission require money market funds to 

disclose to the Commission, among other things, the 

percentage of an issue owned by a fund and its 

affiliates and the last trade price and trade volume 

for each portfolio security). 

253See supra discussion at paragraph following 

note 239 and paragraph preceding note 240. 

254See section 30(c)(2)(A) of the Investment 

Company Act (requiring Commission to consider 

and seek public comment on feasible alternatives to 

the required filing of information that minimize 

reporting burdens on funds). 

255See section 30(c)(2)(B) of the Investment 

Company Act (requiring Commission to consider 

and seek public comment on the utility of 

information, documents and reports to the 

Commission in relation to the associated costs). 

N–MFP (for ‘‘money fund portfolio’’ 

reporting) no later than the second 

business day of each month, current as 

of the last business day of the previous 

month.246 Proposed Form N–MFP 

would require the fund to report, with 

respect to each portfolio security held 

on the last business day of the prior 

month, among other things: (i) The 

name and CIK number of the issuer; (ii) 

the title of the issue; (iii) the CUSIP 

number or other unique identifier; (iv) 

the category of investment (e.g., 

Treasury debt, government agency debt, 

corporate commercial paper, structured 

investment vehicle notes, etc.); (v) the 

current credit ratings of the issuer and 

the requisite NRSROs giving the ratings; 

(vi) the maturity date as determined 

under rule 2a–7; (vii) the final legal 

maturity date; (viii) whether the 

maturity date is extendable; (ix) whether 

the instrument has certain enhancement 

features; (x) the identity of any 

enhancement provider; (xi) the current 

credit rating of the enhancement 

provider; (xii) the principal amount; 

(xiii) the current amortized cost value; 

(xiv) certain valuation information (i.e., 

whether the inputs used in determining 

the value of the securities are Level 1, 

Level 2 or Level 3,247 if applicable); and 

(xv) the percentage of the money market 

fund’s assets invested in the security.248

In addition, Form N–MFP would require 

funds to report to us information about 

the fund’s risk characteristics, such as 

the fund’s dollar weighted average 

maturity of its portfolio and its 7-day 

gross yield. 

Given the rapidly changing 

composition of money market fund 

portfolios, which is largely the result of 

securities maturing, we believe that 

monthly reports would improve the 

timeliness and relevance of portfolio 

information. Once a money market fund 

has established a system for tagging and 

filing a Form N–MFP, we expect the 

marginal costs of filing additional 

reports would be minimal.249

Under the proposed rule, Form N– 

MFP would be filed electronically 

through the Commission’s EDGAR 

system in an eXtensible Markup 

Language (‘‘XML’’) tagged data 

format.250 We understand that money 

market funds already maintain the 

requested information, and therefore 

would need only to tag the data and file 

the reports with the Commission.251 We 

anticipate that, in the future, many 

funds may be able to collect, tag, and 

file this information with the 

Commission through even more 

efficient, automated processes, thereby 

minimizing the related costs and 

potential for clerical error. 

We request comment on the proposed 

monthly portfolio reporting 

requirement. Should we require funds 

to file the portfolio holdings report on 

a more frequent basis? As discussed 

above, we intend to make this 

information publicly available two 

weeks after the report is filed with the 

Commission. Would such a delay 

alleviate concerns about possible frontrunning or other possible harms that 

might be caused by making the 

information public? Should the lag time 

between the filing of the form and its 

public availability be longer or shorter? 

Should the information be immediately 

available to the public upon filing? 

Should we instead provide that all or a 

portion of the requested information be 

submitted in nonpublic reports to the 

Commission? If so, please identify the 

specific items that should remain 

nonpublic and explain why. 

Proposed Form N–MFP requires 

money market funds to disclose certain 

items that would be relevant to an 

evaluation of the risk characteristics of 

the fund and its portfolio holdings. 

Should we require additional or 

alternative information, such as the 

fund’s client concentration levels, the 

percentage of the issue held by the fund, 

or last trade price and trade volume for 

each security? 252 Should we require 

funds to disclose market-based values 

(including the value of any credit 

support agreement), which would allow 

us to identify funds that have marketbased net asset values that sufficiently 

deviate from their amortized cost that 

they present a risk of breaking the buck? 

Would the two-week delay in making 

the information publicly available 

mitigate any concerns about the 

disclosure of this information? 

Alternatively, should we require funds 

to provide the market-based values 

information to us on a nonpublic 

basis? 253 If funds were required to 

provide market-based values 

information to us on a nonpublic basis, 

should we require funds to provide this 

information more frequently once the 

fund’s net asset value per share falls 

below a certain threshold? If so, how 

frequently should funds be required to 

provide this information (e.g., weekly or 

daily) and what should be the threshold 

(e.g., $0.9975)? 

Should we omit any proposed 

disclosure requirement? Are there 

specific items that the proposed form 

would require that are unnecessary or 

otherwise should not be required? 

We request comment on feasible 

alternatives that would minimize the 

reporting burdens on money market 

funds.254 We also request comment on 

the utility of the reports to the 

Commission in relation to the costs to 

money market funds of providing the 

reports.255 In addition, we request 

comment on whether funds should be 

permitted to post a human readable 

version of their Forms N–MFP on their 

Web sites to satisfy the proposed 

monthly Web site disclosure 

requirement. 

The Commission anticipates that the 

data to be required by proposed Form 

N–MFP would be clearly defined and 

often repetitive from one month to the 

next. Therefore, we believe the XML 

format would provide us with the 

necessary information in the most 

timely and cost-effective manner. 

Should the Commission allow or require 

the form to be provided in a format 

other than XML, such as eXtensible 

Business Reporting Language (‘‘XBRL’’)? 

Is there another format that is more 

widely used or would be more 

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32712 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

256 Item 1 of Form N–Q requires funds to file the 

schedule of investments, as of the close of the 

reporting period, in accordance with rules 12–12— 

12–14 of Regulation S–X. 

257 17 CFR 274.130. 

258See supra note 237. 

259Proposed rule 2a–7(c)(1) (new last two 

sentences). 

260Once a fund has broken the buck, the fund 

could no longer use 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 3, 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. 

261 Item 2(c)(1)(ii) of Form N–1A [17 CFR 

239.15A, 274.11A]. Similar disclosure is required in 

money market fund advertisements and sales 

literature. See rule 482(b)(4) under the Securities 

Act of 1933 [17 CFR 230.482]; rule 34b–1(a). 

262See Press Release, The Reserve Fund, 

Timeframe for Initial Distribution Payment of 

Reserve Primary Fund (Sept. 30, 2008) (explaining 

that ‘‘[m]oney market management systems * * * 

are programmed to accommodate a constant $1.00 

NAV [and that making] a distribution to holders 

that have made redemption requests since 

September 15, 2008 necessitated a series of system 

modifications designed to ensure an accurate and 

equitable distribution of funds’’); Press Release, The 

Reserve Fund, Reserve Primary Fund Disbursement 

Update (Oct. 15, 2008) (explaining that Reserve 

Fund investors were ‘‘supported by complex 

technology at The Reserve as well as their own 

systems, which had to be adjusted due to the 

decline of the net asset value below $1.00 on 

September 16 * * * [and that The Reserve Fund 

was] working diligently to enhance * * * existing 

software and add new programs to hasten the 

distribution process’’). See also Press Release, The 

Reserve Fund, Statement About The Reserve Yield 

Plus Fund (Oct. 17, 2008) (‘‘apologiz[ing] for the 

delay in meeting redemption requests’’ in a shortterm bond fund, and explaining that the fund’s 

sponsor needed to ‘‘first move the Fund to a 

different computer platform that’s able to account 

for a share price below $1.00 * * * [which] wasn’t 

anticipated when the Fund was created’’). 

263Proposed 2a–7(c)(1) (new third sentence). 

264Absent 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). 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. 

appropriate for the required data? Is 

there a need for more detailed categories 

of data? What would be the costs to 

funds of providing data in the XML 

format? Would there be a 

disproportionate cost burden on smaller 

fund companies? Is there another format 

that would be less costly but still allow 

investors and analysts easily to view (or 

download) and analyze the data from a 

central database? Should the 

Commission use the EDGAR database or 

should it create a new database? Should 

the Commission consider the 

implementation of reporting on Form 

N–MFP initially through a voluntary 

pilot program? 

3. Amendment to Rule 30b1–5 

To avoid unnecessarily duplicative 

disclosure obligations, we propose to 

amend rule 30b1–5 to exempt money 

market funds from the requirement to 

file their schedules of investments 

pursuant to Item 1 of Form N–Q, a 

quarterly schedule of portfolio holdings 

of management investment 

companies.256 We request comment on 

this exemption. We are not proposing to 

exempt money market funds from the 

controls and procedures and 

certification requirements of Form N–Q. 

Should we also exempt money market 

funds from Item 2 of Form N–Q, which 

requires disclosure of certain 

information about a fund’s controls and 

procedures, and/or Item 3 of Form N– 

Q, which requires certain fund officers 

to file a certification as an exhibit to the 

form? 257 Should we exempt money 

market funds from the portions of Items 

2 and 3 that pertain to the schedule of 

investments required by Form N–Q? 

Alternatively, should we amend Form 

N–Q and/or rule 30b1–5 to apply 

similar controls and procedures and 

certification requirements to the 

proposed monthly reporting 

requirement? Should we exempt money 

market funds from requirements to 

provide portfolio schedules in Form 

N–CSR? 258

G. Processing of Transactions 

We are proposing to require that each 

money market fund’s board determine 

in good faith, at least once each calendar 

year, that the fund (or its transfer agent) 

has the capacity to redeem and sell its 

securities at a price based on the current 

net asset value per share.259 This 

proposed amendment would require 

money funds to have the operational 

capacity to ‘‘break a dollar’’ and 

continue to process investor 

transactions in an orderly manner.260

Money market funds that seek to 

maintain a stable net asset value do not 

guarantee that they will be able to 

maintain the stable net asset value. 

Indeed, each money market fund 

prospectus must disclose that an 

investor may lose money by investing in 

the fund.261 Nonetheless, we 

understand that some money market 

funds do not have in place systems to 

process purchases and redemptions at 

prices other than the funds’ stable net 

asset value. In other words, the systems 

of these money market funds and their 

transfer agents are ‘‘hardwired’’ to 

process shareholder transactions at only 

the stable net asset value. 

The consequences of such an 

operational limitation contributed to the 

delays in redeeming shareholders of The 

Reserve Primary Fund after that fund 

broke the buck in September 2008. We 

understand that all transactions 

thereafter had to be processed manually, 

a time-consuming and expensive 

process that extended the time that 

shareholders had to wait for the 

proceeds from their shares.262

We believe that money market funds 

that do not have the operational 

capacity to price shares according to 

market values expose their shareholders 

to unnecessary risks—risks that may 

render a money market fund unable to 

meet its obligations under section 22(e) 

of the Act to pay the proceeds of a 

redemption within seven days. 

Therefore, we propose to amend rule 

2a–7 to require that a money market 

fund’s board determine in good faith, no 

less frequently than once each calendar 

year, that the fund (or its transfer agent) 

has the capacity to redeem and sell fund 

shares at prices based on the current net 

asset value per share. The proposed 

amendment also clarifies that this 

capacity includes the capacity to sell 

and redeem shares at prices that do not 

correspond to the stable net asset value 

or price per share.263

We request comment on this proposed 

amendment. Is it appropriate? Should 

the board play a role in this 

determination? Should we instead 

revise the risk-limiting conditions of the 

rule to require that the fund simply have 

the capacity to redeem and sell 

securities at market-based prices? 

Alternatively, should the rule require 

that the board determine that the fund 

has adopted procedures adequate to 

enable the fund to redeem and sell 

securities at market-based prices? Or 

should the rule require that the board 

approve such procedures? If the rule 

requires a determination by the board, is 

an annual determination appropriate? 

Should the determination be more 

frequent (e.g., quarterly) or less frequent 

(e.g., every three years)? 

H. Exemption for Affiliate Purchases 

The Commission is proposing to 

amend rule 17a–9, which provides an 

exemption from section 17(a) of the Act 

to permit affiliated persons of a money 

market fund to purchase distressed 

portfolio securities from the fund.264

The amendment would expand the 

circumstances under which affiliated 

persons can purchase money market 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32713 

265The proposed expansion of the rule would not 

include ‘‘capital support agreements’’ supporting 

the net asset value per share of money market 

funds, which support fund affiliates provided in 

several instances in reliance on no-action 

assurances by our staff. See supra note 38. Unlike 

direct purchases of securities by affiliates, the 

nature and terms of these agreements are highly 

customized and terminate after a limited period of 

time. As a result, these situations do not readily 

lend themselves to being addressed in a rule of 

general applicability. 

266Rule 17a–9(a) and (b). See 1996 Adopting 

Release, supra note 20, at nn.190–94 and 

accompanying text. 

267See 1996 Adopting Release, supra note 20, at 

nn.190–92 and accompanying text. 

268See id. 

269See id. at text following n.194 (‘‘The rule, as 

adopted, is available for transactions involving 

securities that are no longer eligible securities 

because they no longer satisfy either the credit 

quality or maturity limiting provisions (e.g., the 

securities are long-term adjustable-rate securities 

whose market values no longer approximate their 

par values on the interest rate readjustment 

dates).’’). 

270See, e.g., Fixed Income Shares—Allianz 

Dresdner Daily Asset Fund, SEC Staff No-Action 

Letter (May 5, 2008); First American Funds, Inc.— 

Prime Obligation Fund, SEC Staff No-Action Letter 

(Dec. 3, 2007); MainStay VP Series Fund—MainStay 

VP Cash Management Portfolio, SEC Staff NoAction Letter (Oct. 22, 2008); Institutional Liquidity 

Trust—Prime Master Series, SEC Staff No-Action 

Letter (Apr. 30, 2008); Penn Series Funds, Inc.— 

Money Market Fund, SEC Staff No-Action Letter 

(Oct. 22, 2008); Phoenix Opportunities Trust— 

Phoenix Money Market Fund and Phoenix Edge 

Series Fund—Phoenix Money Market Series, SEC 

Staff No-Action Letter (Oct. 22, 2008); USAA 

Mutual Funds Trust—USAA Money Market Fund, 

SEC Staff No-Action Letter (Oct. 22, 2008). SEC staff 

no-action letters are available on the SEC Web site 

at http://www.sec.gov/divisions/investment/imnoaction.shtml under the hyperlink for the relevant 

letter. 

271See, e.g., Dreyfus Money Funds, SEC Staff NoAction Letter (Oct. 20, 2008); Mount Vernon 

Securities Lending Trust, Inc.—Mount Vernon 

Securities Lending Prime Portfolio, SEC Staff NoAction Letter (Oct. 22, 2008); Morgan Stanley 

Money Market Funds, SEC Staff No-Action Letter 

(Oct. 22, 2008); Reserve New York Municipal 

Money-Market Trust—New York Municipal MoneyMarket Fund, SEC Staff No-Action Letter (Nov. 18, 

2008); Russell Investment Company—Russell 

Money Market Fund, SEC Staff No-Action Letter 

(Oct. 20, 2008). 

272Proposed rule 17a–9(a). Other provisions of 

rule 2a–7 currently except immaterial defaults 

unrelated to the financial condition of the issuer. 

See rule 2a–7(c)(6)(ii)(A). As we have noted in the 

past, this exception is intended to exclude 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 1991 Adopting 

Release, supra note 20, at Section II.E.2. 

273Proposed rule 17a–9(a)(1) and (2). 

274Proposed rule 17a–9(b)(2). 

fund portfolio securities.265 The 

Commission is also proposing a related 

amendment to rule 2a–7, which would 

require that funds report all such 

transactions to the Commission. 

1. Expanded Exemptive Relief 

In 1996, the Commission adopted rule 

17a–9 under the Act to permit affiliated 

persons to purchase a security from an 

affiliated money market fund that is no 

longer an eligible security under rule 

2a–7, as long as the purchase price is 

paid in cash and is equal to the 

amortized cost of the security or its 

market price, whichever is greater.266

The rule codified a series of staff noaction letters in which the staff agreed 

not to recommend enforcement action to 

the Commission if affiliated persons of 

a money market fund purchased 

portfolio securities from the fund in 

order prevent the fund from realizing 

losses on the securities that may 

otherwise have caused it to break the 

buck.267 When we adopted the rule we 

explained that experience had shown 

that such transactions appeared to be 

fair, reasonable, in the best interests of 

fund shareholders, and consistent with 

the requirement that money market 

funds dispose of a defaulted security in 

an orderly manner as soon as 

practicable.268

The current rule exempts only 

purchases of securities that are no 

longer ‘‘eligible securities’’ under rule 

2a–7 because, for example, their ratings 

have been downgraded. 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.269 Since rule 17a–9 was 

adopted, our staff has responded to 

several emergency requests for no-action 

relief for transactions involving 

portfolio securities that remained 

eligible securities. In some cases, the 

fund’s adviser anticipated that the 

securities would be downgraded and 

sought to arrange a purchase by an 

affiliate as a preventive measure before 

the distressed security could impact the 

fund’s market-based net asset value.270

In other cases, markets for portfolio 

securities had become illiquid and the 

affiliated person sought to provide the 

fund with cash to satisfy redemptions 

by purchasing portfolio securities.271 In 

all cases, the terms of the transactions 

met all the requirements of rule 17a–9 

except that the securities were eligible 

securities. 

Our staff’s experience is that these 

transactions appear to be similarly fair 

and reasonable and in the best interest 

of shareholders. We are therefore 

proposing to extend the exemption to 

additional types of transactions, which 

will eliminate the need for affiliated 

persons to seek no-action assurances 

from our staff for these transactions 

when the delay would not be in the best 

interests of shareholders. 

Currently, under rule 17a–9 a security 

must no longer be an eligible security 

for an affiliated person of a money 

market fund to purchase such security. 

Under the proposed amendment, a 

money market fund could sell a 

portfolio security that has defaulted 

(other than an immaterial default 

unrelated to the financial condition of 

the issuer), to an affiliated person, even 

though the security continued to be an 

eligible security.272 Any such 

transaction would have to satisfy the 

existing requirements of rule 17a–9.273

In addition, we propose to add a new 

provision to rule 17a–9 that would 

permit affiliated persons, for any reason, 

to purchase other portfolio securities 

(e.g., eligible securities that have not 

defaulted) from an affiliated money 

market fund for cash at the greater of its 

amortized cost value or market value, 

provided that such person promptly 

remits to the fund any profit it realizes 

from the later sale of the security.274

Because 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), the proposed ‘‘claw-back’’ 

provision would eliminate incentives 

for fund advisers and other affiliated 

persons to buy securities for reasons 

other than protecting fund shareholders 

from potential future losses. 

We request comment on all aspects of 

the proposed expansion of rule 17a–9. 

Should we instead expand the 

exemption to include only those 

portfolio securities that fall within 

enumerated categories (e.g., securities 

have defaulted, have become illiquid, 

have been determined by the board of 

directors to no longer present minimal 

credit risk)? If so, what would those 

categories be and why? Would any 

additional conditions be needed with 

respect to particular categories of 

purchases to control for potential 

conflicts of interest on the part of the 

adviser? Is so, what conditions should 

we include? Is it appropriate to subject 

only eligible securities that have not 

defaulted to the proposed claw-back 

provision? Is such a provision necessary 

and fair? Should we provide a time limit 

after purchase when the required clawback provision would no longer apply? 

Should we exclude from the claw-back 

requirement potential payments to 

money market funds that are 

subsequently liquidated? 

2. New Reporting Requirement 

The Commission is also proposing an 

amendment to rule 2a–7 that would 

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 of 

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275Proposed rule 2a–7(c)(7)(iii)(B). The electronic 

mail notification would be directed to the Director 

of our Division of Investment Management, or the 

Director’s designee. Proposed rule 2a–7(c)(7)(iii). 

276See NRSRO References Proposal, supra note 

105, at n.35 and accompanying text. 

277Proposed rule 2a–7(c)(7)(iii)(B). 

278See NRSRO References Proposal, supra note 

105, at Section III.A.4. 

279See, e.g., Comment Letters of the Investment 

Company Institute (Sept. 5, 2008); Commenter 

Letter of the Mutual Fund Directors Forum (Sept. 

5, 2008); Comment Letter of OppenheimerFunds, 

Inc. (Sept. 4, 2008); Comment Letter of Charles 

Schwab Co., Inc. (Sept. 5, 2008). Comment letters 

may be accessed on the Commission’s Web site at 

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

s71908.shtml. 

280The Treasury’s Guarantee Program guarantees 

that shareholders of a participating money market 

fund will receive the fund’s stable share price for 

each share owned as of September 19, 2008, if the 

fund liquidates under the terms of the Program. See 

supra note 55 and accompanying text. 

281See Investment Trusts and Investment 

Companies: Hearings on S. 3580 Before a 

Subcomm. of the Senate Comm. on Banking and 

Currency, 76th Cong., 3d Sess. 291 (1940) 

(statement of David Schenker, Chief Counsel, 

Investment Trust Study, SEC). 

282See Rule 22e–3T Adopting Release, supra note 

31. 

283 Id. 

284One commenter on rule 22e–3T recommended 

that we make the rule a permanent rule for any fund 

preparing to liquidate, independent of the 

Guarantee Program. See Comment Letter of the 

Investment Company Institute (Dec. 24, 2008). Two 

other comment letters related to matters unique to 

the Guarantee Program. See Comment Letter of the 

Coalition of Mutual Fund Investors (Dec. 14, 2008) 

(recommending that any fund that liquidates and 

relies on the Guarantee Program be required to 

provide information obtained pursuant to rule 22c– 

2 under the Investment Company Act); Comment 

Letter of Michael F. Johnson (Nov. 20, 2008) 

(requesting information concerning the 

applicability of the Guarantee Program to a 

particular fund). The only other comment letter that 

the Commission received concerning interim final 

rule 22e–3T was a letter from the Committee of 

Annuity Insurers, discussed below. See infra note 

288 and accompanying text. Comments on interim 

final rule 22e–3T, File No. S7–32–08, are available 

at http://www.sec.gov/comments/s7-32-08/ 

s73208.shtml. Once rule 22e–3T expires, the 

Commission would stand ready to consider 

applications for exemptive relief under section 

22(e). 

the transaction via electronic mail.275

We proposed a similar amendment last 

summer in connection with the NRSRO 

References Proposal.276 That proposal is 

superseded by the requirement we 

propose here, which contains one 

change.277 Due to the nature of the 

proposed amendments to rule 17a–9, 

which do not restrict the purchase of a 

portfolio security from a fund to 

particular categories, we propose to 

require not only notice of the fact of the 

purchase, but also the reasons for the 

purchase. 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 heightened 

redemption requests and wished to 

avoid a ‘‘fire sale’’ of assets to satisfy 

such requests. 

We continue to believe that the 

current notice requirement in rule 2a–7, 

which is triggered when a security over 

a threshold amount of the fund’s assets 

defaults, provides us with incomplete 

information about money market fund 

holdings of distressed securities, 

particularly those that have engaged in 

affiliated transactions.278 We also 

continue to believe that this proposed 

notice requirement, which is a concept 

supported by some commenters last 

summer,279 would impose little burden 

on money market funds or their 

managers, and would enhance our 

oversight of money market funds 

especially during times of economic 

stress. We request comment on this 

proposed notice requirement. Is the 

proposed requirement that the notice 

include the reasons for the purchase by 

the affiliate sufficiently clear? Should 

we require that any additional 

information be included in the notice 

and should the notice take a particular 

form? 

I. Fund Liquidation 

1. Proposed Rule 22e–3 

The Commission is proposing a new 

rule 22e–3, which would exempt money 

market funds from section 22(e) to 

permit them to suspend redemptions in 

order to facilitate an orderly liquidation 

of the fund. The new rule would replace 

rule 22e–3T, a temporary rule that 

provides a similar exemption for money 

market funds participating in the 

Treasury Department’s Guarantee 

Program.280

Section 22(e) of the Act generally 

prohibits funds, including money 

market funds, from suspending the right 

of redemption, and from postponing the 

payment or satisfaction upon 

redemption of any redeemable security 

for more than seven days. The provision 

was designed to prevent funds and their 

investment advisers from interfering 

with the redemption rights of 

shareholders for improper purposes, 

such as the preservation of management 

fees.281 Although section 22(e) permits 

funds to postpone the date of payment 

or satisfaction upon redemption for up 

to seven days, it does not permit funds 

to suspend the right of redemption, 

absent certain specified circumstances 

or a Commission order. 

As discussed above, on September 22, 

2008, we issued an order under section 

22(e) to permit two series of The 

Reserve Fund to suspend redemptions 

and postpone payments in the midst of 

a run on the fund. In November 2008, 

we adopted rule 22e–3T to permit 

money market funds participating in the 

Treasury’s Guarantee Program to 

suspend redemptions and postpone the 

payment of redemption proceeds if a 

fund breaks the buck and begins 

liquidation proceedings under the 

Guarantee Program.282

The temporary rule was intended to 

facilitate the orderly disposal of assets 

in a manner that would protect the 

interests of all shareholders. Absent the 

exemption provided by rule 22e–3T, a 

fund participating in the Guarantee 

Program that faces a run would be 

compelled by section 22(e) to continue 

to redeem shares. In order to raise the 

money to pay redemption proceeds to 

shareholders, a fund may have to sell 

portfolio securities. Massive redemption 

requests could thus force a fund to 

liquidate positions in a fire sale, further 

depressing the fund’s market value 

share price. Earlier redeeming 

shareholders would receive higher share 

prices (at or near the amortized cost) 

but, as a result of the fund’s diminishing 

asset base, later redeeming shareholders 

may receive lower prices.283 Moreover, 

as demonstrated by the events of last 

fall, a run on a single fund can quickly 

spread to other funds and, as multiple 

funds attempt to meet redemption 

requests, seriously deplete the value of 

portfolio holdings and drain the 

availability of cash and more liquid 

securities. 

We believe that rule 22e–3T, which 

will expire on October 18, 2009 in 

conjunction with the Guarantee 

Program, should be replaced with a rule 

that would provide for a similar 

exemption independent of the 

Guarantee Program.284 Proposed rule 

22e–3 would permit all money market 

funds to suspend redemptions upon 

breaking a buck, if the board, including 

a majority of independent directors, 

approves liquidation of the fund, in 

order to liquidate in an orderly manner. 

The proposed rule is intended to reduce 

the vulnerability of investors to the 

harmful effects of a run on a fund, and 

minimize the potential for disruption to 

the securities markets. 

Proposed rule 22e–3(a) would permit 

a money market fund to suspend 

redemptions if: (i) The fund’s current 

price per share, calculated pursuant to 

rule 2a–7(c), is less than the fund’s 

stable net asset value per share; (ii) its 

board of directors, including a majority 

of directors who are not interested 

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285Proposed rule 22e–3(a). 

286We also note that the potential for abuse may 

be mitigated because the impending liquidation of 

the fund would ultimately eliminate a source of 

advisory fees for the adviser. See Rule 22e–3T 

Adopting Release, supra note 31, at text 

accompanying nn.19–20. 

287Proposed rule 22e–3(c). We adopted a similar 

provision in rule 22e–3T. Rule 22e–3T(b); see also 

Rule 22e–3T Adopting Release, supra note 31. 

288Proposed rule 22e–3(b). This provision is 

based on a suggestion we received in a comment 

letter submitted in connection with rule 22e–3T. 

See Comment Letter of the Committee of Annuity 

Insurers (Dec. 23, 2008) (requesting that the 

Commission extend the application of rule 22e–3T 

to insurance company separate accounts). Proposed 

rule 22e–3(b) also would require a fund to promptly 

notify the Commission that it has suspended 

redemptions in reliance on the rule. 289For a discussion of master-feeder 

arrangements, see supra note 194. 290 ICI Report, supra note 6, at 85–89. 

291Similarly, the Treasury’s Guarantee Program 

and rule 22e–3T effectively provide funds with the 

ability to temporarily suspend redemptions. The 

Guarantee Program requires funds that break the 

buck to commence liquidation proceedings within 

five days, unless the fund restores its net asset value 

to a level equal to or above $0.995 within that 

period. Meanwhile, rule 22e–3T permits funds to 

suspend redemptions if a fund breaks the buck and 

has not yet ‘‘cured’’ the event. 

292 In other situations, temporary restrictions on 

redemptions may have exacerbated the situation 

and increased the rate of redemptions. See Svea 

Herbst-Bayliss, ‘‘Gates’’ May Have Hurt More Than 

Helped Hedge Funds, Reuters, Mar. 26, 2009, 

available at http://www.reuters.com/article/ 

PrivateEquityandHedgeFunds09/ 

idUSTRE52P4JJ20090326. 

persons, approves the liquidation of the 

fund; and (iii) 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 our 

Director of the Division of Investment 

Management or the Director’s 

designee.285 These proposed conditions 

are intended to ensure that any 

suspension of redemptions will be 

consistent with the underlying policies 

of section 22(e). We understand that 

suspending redemptions may impose 

hardships on investors who rely on their 

ability to redeem shares. Accordingly, 

our proposal is limited to permitting 

suspension of this statutory protection 

only in extraordinary circumstances. 

Thus, the proposed conditions, which 

are similar to those of the temporary 

rule, are designed to limit the 

availability of the rule to circumstances 

that present a significant risk of a run on 

the fund. Moreover, the exemption 

would require action of the fund board 

(including the independent directors), 

which would be acting in its capacity as 

a fiduciary.286

The proposed rule contains an 

additional provision that would permit 

us to take steps to protect investors. 

Specifically, the proposed rule would 

permit us 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.287 Under this provision, 

the Commission may modify the relief 

‘‘after appropriate notice and 

opportunity for hearing,’’ in accordance 

with section 40 of the Act. 

Paragraph (b) of the proposed rule 

would provide a limited exemption 

from section 22(e) for certain conduit 

funds that invest, pursuant to section 

12(d)(1)(E) of the Act, all of their assets 

in a money market fund that suspends 

redemption in reliance on paragraph (a) 

of the proposed rule.288 Without this 

exemption, these conduit funds may be 

placed in the position of having to 

honor redemption requests while being 

unable to liquidate shares of money 

market funds held as portfolio 

securities. We anticipate that this 

provision would be used principally by 

insurance company separate accounts 

issuing variable insurance contracts and 

by funds participating in master-feeder 

arrangements.289

We request comment generally on all 

aspects of proposed rule 22e–3. Is it 

appropriate to permit money market 

funds that break the buck to suspend 

redemptions during liquidation? Should 

the exemption be available to other 

types of open-end investment 

companies? Should there be additional 

or alternative conditions with regard to 

the exemption (e.g., should the fund be 

required to disclose its liquidation plan 

to shareholders)? Should there be a limit 

on the suspension period so that 

shareholder assets are not ‘‘locked up’’ 

for an unduly lengthy period? If so, 

what should be the maximum length of 

the suspension period (e.g., 60 or 90 

days)? 

2. Request for Comment on Other 

Regulatory Changes 

We also request comment on certain 

additional changes that we are 

considering but are not currently 

proposing, relating to the suspension of 

redemptions that may provide 

additional protections to money market 

fund investors. 

a. Temporary Suspensions for Exigent 

Circumstances 

Should we include a provision in rule 

22e–3 that would permit fund directors 

to temporarily suspend redemptions 

during certain exigent circumstances 

other than liquidation of the fund? The 

ICI Report recommends that we permit 

a fund’s directors to suspend 

temporarily the right of redemption if 

the board, including a majority of its 

independent directors, determines that 

the fund’s net asset value is ‘‘materially 

impaired.’’ 290 Under this approach, the 

fund could suspend redemptions for up 

to five days, during which time the fund 

could attempt to restore its net asset 

value (e.g., by securing credit support 

agreements). In the event that the fund 

could not restore its net asset value 

within that period, the fund would be 

required to begin the liquidation 

process. A fund would be permitted to 

exercise this option only once every five 

years. This ‘‘time out’’ could give money 

market funds some time during 

turbulent periods to assess the viability 

of the fund.291

We request comment generally on 

whether we should provide this 

additional relief. Would it make money 

market funds less appealing to 

investors? Would it provide time for 

directors to find a solution? Or might it 

accelerate redemptions from 

shareholders once the suspension 

period ends, regardless of any action 

taken by the board of directors? 292

Could the accumulating redemptions 

‘‘hanging over the fund’’ place pressure 

on the prices of fund portfolio 

securities? How could we ensure that 

directors would use this authority only 

in exigent circumstances? When is a 

money market fund’s net asset value 

‘‘materially impaired’’? Would this term 

include circumstances in which the 

fund has overvalued securities, which, 

if sold to satisfy redemptions, would 

have to be marked down? 

We also request comment on how a 

temporary suspension should operate. 

What disclosures should a money 

market fund be required to make, and 

when and where should the fund make 

them? Should a fund be required to 

calculate its net asset value during the 

suspension period, and, if so, should the 

net asset value be publicly disclosed? 

Should the suspension period be longer 

or shorter than five days? What factors 

should the board of directors take into 

consideration when deciding whether to 

suspend redemptions temporarily? How 

would directors weigh the various and 

possibly competing interests of 

shareholders? 

b. Options for Shareholders in 

Liquidating Funds 

If a fund suspends redemptions in 

order to liquidate, the directors would 

likely distribute money to investors as it 

becomes available from the sale of 

portfolio securities, while maintaining a 

reserve to cover expenses and potential 

liabilities. As we have seen, this process 

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32716 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

293 The Investment Company Act does not 

contain any provisions governing the liquidation of 

an investment company, including a money market 

fund; rather, liquidations are primarily effected in 

accordance with applicable state law. The Act does 

include, however, a provision authorizing Federal 

district courts to enjoin a plan of reorganization 

upon a proceeding initiated by the Commission on 

behalf of security holders, if the court determines 

that the plan of reorganization is not ‘‘fair and 

equitable to all security holders.’’ Section 25(c) of 

the Act. A plan of ‘‘reorganization’’ includes a 

voluntary dissolution or liquidation of a fund. 

Section 2(a)(33) of the Act. 

294 In addition, we note that the U.S. Department 

of the Treasury’s white paper on Financial 

Regulatory Reform calls for the President’s Working 

Group on Financial Markets to prepare a report by 

September 15, 2009 assessing whether more 

fundamental changes are necessary to further 

reduce the money market fund industry’s 

susceptibility to runs, such as eliminating the 

ability of a money market fund to use a stable net 

asset value or requiring money market funds to 

obtain access to reliable emergency liquidity 

facilities from private sources. See Department of 

the Treasury, Financial Regulatory Reform, A New 

Foundation: Rebuilding Financial Supervision and 

Regulation, at 38–39 (June 2009). 

295See 1983 Adopting Release, supra note 3. 

296Rule 2a–7 is not the only exception permitting 

open-end investment companies to value short-term 

debt securities in their portfolios on an amortized 

cost basis. Subject to certain conditions, the 

amortized cost method of valuation may be used by 

open-end investment companies to value 

investments with a remaining maturity of 60 days 

or less in accordance with the Commission’s 

interpretation set forth in Valuation of Debt 

Instruments by Money Market Funds and Certain 

Other Open-End Investment Companies, Investment 

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

FR 28999 (June 7, 1977)]. 

297See 1982 Proposing Release, supra note 25, at 

text preceding, accompanying, and following nn.2– 

4. 

298See rule 2a–7(c)(1). 

299A $1.00 stable net asset value per share 

relieves shareholders of the administrative task of 

tracking the timing and price of purchase and sale 

transactions for capital gain and wash sale purposes 

under tax laws. 

300Some institutional investors are prohibited by 

board-approved guidelines or firm policies from 

investing certain assets in money market funds 

unless they have a stable net asset value per share. 

See ICI Report, supra note 6, at 109. One survey 

also reported that 55% of institutional cash 

managers would substantially decrease their 

investments in money market funds if the funds 

had a floating value. See id. at 110 (citing a January 

2009 survey by Treasury Strategies, Inc.). 

can be lengthy. Should we include 

conditions in any rule regarding the 

treatment of shareholders in a 

liquidation? 293 For example, should we 

require that fund assets be distributed 

on a pro rata basis? Should there be a 

limit on allowable reserves? 

Alternatively, should we permit or 

require a fund board to recognize that 

investors will have different preferences 

for liquidity and capital preservation? 

For example, a fund that decides to 

liquidate and suspend redemptions 

could be allowed to offer shareholders 

the choice of redeeming their shares 

immediately at a reduced net asset value 

per share that reflects the fair market 

value of fund assets, i.e., at a price 

below the fund’s stable net asset value. 

Remaining shareholders would receive 

their redemption proceeds at the end of 

the liquidation process and may receive 

the economic benefit of an orderly 

disposal of assets. Would such an 

approach be fair to all fund 

shareholders? What conditions would 

be necessary and appropriate to ensure 

that shareholders are treated fairly? 

Specifically, how would such a 

mechanism operate? Should funds be 

able to deduct an additional discount or 

‘‘haircut’’ from earlier redeeming 

shareholders to provide additional 

protection for later redeeming 

shareholders? Should we permit boards 

to decide the amount of the haircut? If 

so, what factors should boards use to 

decide such haircuts? What disclosures 

and information would be necessary to 

permit shareholders to make an 

informed decision between the options? 

Should investors be required to 

choose their preferences at the time they 

purchase fund shares? Should investors 

be able to change their preferences? If 

so, how and when? Should they be able 

to choose their preferences when a fund 

announces its intention to liquidate and 

suspend redemptions under the rule? If 

so, should we (or the fund board) 

establish a default assumption for 

investors that fail to respond to the 

inquiry? 

III. Request for Comment 

The Commission requests comment 

on the rules and amendments proposed 

in this release. Commenters are 

requested to provide empirical data to 

support their views. The Commission 

also requests suggestions for additional 

changes to existing rules or forms, and 

comments on other matters that might 

have an effect on the proposals 

contained in this release. 

We recognize that the events of the 

last two years raise the question of 

whether further and perhaps more 

fundamental changes to the regulatory 

structure governing money market funds 

may be warranted. Therefore we are 

exploring other ways in which we could 

improve the ability of money market 

funds to weather liquidity crises and 

other shocks to the short-term financial 

markets. We invite interested persons to 

submit comments on the advisability of 

pursuing any or all of the following 

possible reforms, as well as to provide 

other approaches that we might 

consider to achieve our goals. We expect 

to benefit from the comments we receive 

before deciding whether to propose 

these changes.294

A. Floating Net Asset Value 

When the Commission adopted rule 

2a–7 in 1983,295 it facilitated money 

market funds’ maintenance of a stable 

net asset value by permitting them to 

use the amortized cost method of 

valuing their portfolio securities. As 

discussed above, section 2(a)(41) of the 

Act, in conjunction with rules 2a–4 and 

22c–1, normally require a registered 

investment company to calculate its 

current net asset value per share by 

valuing its portfolio securities for which 

market quotations are readily available 

at current market value and its other 

securities at their fair value as 

determined, in good faith, by the board 

of directors. Therefore, using the 

amortized cost method of valuation is 

an exception to the general requirement 

under the Act that investors in 

investment companies should pay and 

receive market value or fair value for 

their shares.296 The Commission did not 

take lightly its decision to permit money 

market funds to use the amortized cost 

method of valuation. Rule 2a–7 

essentially codified several of the 

Commission’s exemptive orders relating 

to money market funds, and these 

orders were issued only after an 

administrative hearing in the late 1970s 

at which the use of the amortized cost 

method of valuation was a matter of 

considerable debate.297

The balance the Commission struck 

was that, in exchange for permitting this 

valuation method, it would impose 

certain conditions on money-market 

funds designed to ensure that these 

funds invested only in instruments that 

would tend to promote a stable net asset 

value per share and would impose on 

the funds’ boards of directors an 

ongoing obligation to determine that it 

remains in the best interest of the funds 

and their shareholders to maintain a 

stable net asset value. Further, money 

market funds are permitted to use the 

amortized cost method of valuation only 

so long as their boards believe that it 

fairly reflects the funds’ market-based 

net asset value per share.298

The $1.00 stable net asset value per 

share has been one of the trademark 

features of money market funds. It 

facilitates the funds’ role as a cash 

management vehicle, provides tax and 

administrative convenience to both 

money market funds and their 

shareholders,299 and promotes money 

market funds’ role as a low-risk 

investment option. Many investors may 

hold shares in money market funds in 

large part because of these features.300

We are mindful that if we were to 

require a floating net asset value, a 

substantial number of investors might 

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301See ICI Report, supra note 6, at 1. 

302See ICI Mutual Fund Historical Data, supra 

note 47 (data for week ended June 10, 2009). 

303We have considered the impact of dilution in 

money market funds using the amortized cost 

method of valuation in the past. See, e.g., 1982 

Proposing Release, supra note 25, at n.6 and 

accompanying text. 

304This benefit would otherwise be paid out to 

money market fund shareholders in the form of 

greater dividend payments from the increased yield. 

305See S&P 2007 Ratings Criteria, supra note 139, 

at 27. Standard and Poor’s gives the example of an 

investor holding $1 million in 90-day U.S. Treasury 

bills yielding 5%. If interest rates increased 150 

basis points, the value of the investment would 

drop by approximately $3700 and the investor’s 

yield would remain at 5%. Compare this to an 

investor holding one million shares of a money 

market fund holding exclusively Treasury bills 

yielding 5% (setting aside fund expenses). If 

interest rates rose 150 basis points, the investor 

could sell the fund investment for $1.00 per share 

and not experience any loss. The investor could 

then purchase 90-day Treasury bills yielding 6.5%, 

instantaneously increasing its return by 1.5%. If the 

fund is forced to sell these securities to meet 

redemption requests, the $3700 unrealized loss 

would be borne by the fund and its remaining 

shareholders. 

move their investments from money 

market funds to other investment 

vehicles. 

However, a stable $1.00 net asset 

value per share also creates certain risks 

for a money market fund and its 

investors. These risks are a consequence 

of the amortized cost method of 

valuation and the resulting insensitivity 

of the $1.00 net asset value per share to 

market valuation changes. It may create 

an incentive for investors to redeem 

their shares when a fund’s market-based 

net asset value per share falls between 

$0.995 and $1.00 because they will 

obtain $1.00 in exchange for their right 

to fund assets worth less than $1.00 per 

share. Regardless of the motivation 

underlying the redemptions, the 

unrealized losses attributable to 

redeeming shareholders are now borne 

by the remaining money market fund 

shareholders. 

Further, particularly in times of 

market turbulence and illiquidity, 

regardless of the motivation behind the 

redemptions, redemptions at $1.00 in a 

money market fund whose market-based 

net asset value is below $1.00 can 

further depress the fund’s market-based 

net asset value, exacerbating the impact 

on remaining shareholders. It can create 

a level of unfairness in permitting the 

remaining fund shareholders to pay for 

the liquidity needs and unrealized 

losses of redeeming fund shareholders. 

Because there is a limited window 

where only so many shareholders can 

redeem at $1.00 in a fund with a 

portfolio under threat (because of 

holding distressed securities or facing 

significant shareholder redemptions) 

before the board of the fund must 

consider whether to re-price the fund’s 

shares or take other action, there can be 

an incentive to be the first shareholder 

to place a redemption request upon any 

hint of stress at a money market fund. 

Generalized market dislocations or 

illiquidity can create this stress on a 

number of money market funds 

simultaneously, leading to runs on 

money market funds similar to those we 

witnessed in September 2008. Even 

further, a run may result in fire sales of 

securities, placing pressure on market 

prices and transmitting problems that 

may be originally associated with a 

single money market fund to other 

money market funds. Finally, larger, 

institutional money market fund 

investors, especially those with 

fiduciary responsibilities for managing 

their clients’ assets, are more likely to 

recognize negative events potentially 

affecting the money market fund and to 

be in a position to quickly redeem 

shares of the money market fund and 

thus protect their money market 

investments and those of their clients, 

leaving other smaller, more passive 

money market investors to bear their 

losses. 

When we determined to permit 

money market funds to use amortized 

cost valuation in 1983, money market 

funds held only about $180 billion in 

assets 301 and played a minor role in the 

short-term credit markets. Their 

principal benefit was to provide retail 

investors with a cash investment 

alternative to bank deposits, which at 

the time paid fixed rates substantially 

below short-term money market rates. 

Since that time, money market funds 

have grown tremendously and have 

developed into an industry driven in 

large part by institutional investors, who 

hold approximately 67 percent of the 

over $3.7 trillion in money market fund 

assets.302 As noted earlier, with the 

ability of institutional investors today to 

make hourly redemption requests to 

money market funds, these investors 

have the ability to move substantial 

amounts of money in and out of money 

market funds (or between money market 

funds), with potentially detrimental 

effects on the funds, their remaining 

shareholders, and the marketplace. 

The influx of institutional 

investments in money market funds, the 

increased transparency of fund 

holdings, and the speed with which 

large shareholders can buy and redeem 

shares may have increased the 

possibility that the value of some fund 

investors’ shares will be diluted as a 

result of the fund’s use of the amortized 

cost valuation method.303 When shortterm interest rates decrease, the fund’s 

portfolio holdings (with their now 

above-market yields) become more 

valuable. Institutional investors may 

pay $1.00 per share to purchase fund 

shares whose market value is, for 

example, $1.002 per share. Such 

institutional inflows would be invested 

by the fund in securities offering the 

new, reduced market yields, diluting the 

yield advantage that existing fund 

shareholders would otherwise enjoy. 

These institutional investors, in effect, 

are able to earn a yield through a money 

market fund above the market rate they 

could earn on a direct investment. They 

achieve this yield advantage by 

capturing a portion of the benefit from 

declining interest rates that otherwise 

would benefit existing money market 

fund investors.304 Similarly, when 

interest rates increase, institutional 

investors could sell shares of money 

market funds, obtaining $1.00 per share 

for a fund that all things being equal 

likely will be worth less, e.g., $0.997 per 

share.305 If instead the institutional 

investor sells commercial paper in the 

market under the same conditions, it 

could only sell such securities at a 

discount. 

In stable markets and with small 

shareholdings, amortized cost pricing at 

most results in shareholders who 

purchase or redeem shares receiving 

slightly more or less (in shares or in 

redemption proceeds) than they 

otherwise would if the fund’s net asset 

value were to fluctuate according to 

market-based pricing. Net redemptions 

generally are funded by cash on hand. 

Any deviation between the marketbased net asset value per share of the 

fund and its amortized cost value is 

small enough to have an immaterial 

effect on the fund, and no effect on 

investors. It could be compared to a 

rounding convention in a billing system. 

In a market under significant stress 

and with institutions holding billions of 

dollars of money market fund shares, 

however, a real arbitrage opportunity 

can arise, and a race or threat of a 

potential race for redemptions may 

become a real possibility. For example, 

during last fall’s market turbulence, as 

credit spreads on many money market 

fund portfolio securities widened and 

the market value of these securities fell, 

we understand that the market-based 

net asset value of some money market 

funds dropped low enough that 

redemptions by a few large shareholders 

in the fund at $1.00 per share alone 

could have caused the fund to break the 

buck. 

We recognize that a floating net asset 

value would not necessarily eliminate 

the incentive to redeem shares during a 

liquidity crisis—shareholders still 

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32718 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

306This situation to some extent could be 

analogized to the situation that can be created by 

market timing in which selling shareholders receive 

benefits to the detriment of remaining mutual fund 

shareholders. 

307An in-kind redemption occurs when a 

shareholder’s redemption request to a fund is 

satisfied by distributing to that shareholder 

portfolio assets of that fund instead of cash. 

308See section 2(a)(32) of the Act (defining a 

redeemable security as a security where the holder 

‘‘is entitled * * * to receive approximately his 

proportionate share of the issuer’s current net 

assets, or the cash equivalent thereof’’ (italics 

added)). See also rule 18f–1, which provides an 

exemption from certain prohibitions of section 

18(f)(1) of the Act with regard to redemptions in 

kind and in cash. 

309On September 19, 2008, the American Beacon 

Money Market Portfolio announced it would honor 

redemption requests exceeding $250,000 in a 90- 

day period through pro rata payments of cash and 

‘‘in-kind’’ distributions of securities held by the 

fund, to prevent redemptions from ‘‘forcing’’ the 

sale of fund assets. See American Beacon Funds, 

Prospectus Supplement for BBH ComSet Class, 

Institutional Class, Cash Management Class, and 

PlanAhead Class (Sept. 30, 2008), available at 

http://www.sec.gov/Archives/edgar/data/809593/ 

000080959308000045/sep3008_prosuppbeacon.txt. 

310Large investors that did not wish to receive inkind redemptions could avoid this risk by 

spreading their investments among several money 

market funds such that no single money market 

fund investment was large enough to possibly 

trigger the in-kind redemption requirement. 

would have an incentive to redeem 

before the portfolio quality deteriorated 

further from the fund selling securities 

into an illiquid market to meet 

redemption demands. But a floating net 

asset value may lessen the impact of any 

portfolio deterioration by eliminating 

the ability of shareholders to redeem 

their shares for more than the current 

market value per share of the fund’s 

portfolio. It also might better align 

investors’ expectations of risk with the 

actual risks posed by money market 

fund investments. We expect that, at 

least under stable market conditions, the 

other risk-limiting conditions of rule 

2a–7 would tend to promote a relatively 

stable net asset value per share even if 

we eliminated the ability of money 

market funds to rely on the amortized 

cost method of valuation. 

We request comment on the 

possibility of eliminating the ability of 

money market funds to use the 

amortized cost method of valuation. 

Would such a change render money 

market funds a more stable investment 

vehicle? Would it lessen systemic risk 

by making money market funds less 

susceptible to runs? Would it make the 

risks inherent in money market funds 

more transparent? Many money market 

funds’ stable net asset value was 

supported voluntarily by fund affiliates 

over the last two years, and 

shareholders may not have understood 

that this support was provided on a 

voluntary basis and may not be 

provided in the future. 

On the other hand, would such a 

change make money market funds more 

susceptible to runs because investors 

might respond quickly to small changes 

in net asset value? As discussed above, 

a stable net asset value per share creates 

certain administrative, tax, and cash 

management conveniences for fund 

investors. Accordingly, would 

prohibiting the use of the amortized cost 

method of valuation in money market 

funds encourage investors to shift assets 

from money market funds to 

unregulated offshore funds, bank 

accounts, or other investments? Would 

it result in some institutional money 

market funds deregistering with the 

Commission (in reliance on section 

3(c)(7) of the Act) in order to continue 

to maintain a stable net asset value? Is 

this a result with which the Commission 

should be concerned? 

What impact would this have on 

investors’ cash management activities? 

What impact might such a change have 

on the short-term credit markets and 

issuers of short-term debt securities? 

How would money market funds whose 

share prices were based on marketbased net asset values differ from 

current short-term bond funds? Should 

any rule amendment eliminating the 

ability of money market funds to rely on 

the amortized cost method of valuation 

to create a stable net asset value be 

limited to institutional money market 

funds? As discussed above, institutional 

money market funds are at greater risk 

of instability, runs and the dilutive 

effect of large redemptions. 

B. In-Kind Redemptions 

As noted above, one of our concerns 

relates to the ability of large 

institutional shareholders to rapidly 

redeem substantial amounts of fund 

assets, which can pose a threat to the 

stable net asset value of the fund and 

can advantage one group of 

shareholders over another by requiring 

remaining shareholders to pay for the 

liquidity needs of large redeeming 

shareholders.306 While the liquidity 

requirements we are proposing today 

may ameliorate pressures created by 

redeeming shareholders, during severe 

market dislocations even more steps 

may be necessary to help ensure the 

stability of a stable net asset value 

money market fund. Accordingly, if we 

retain a stable net asset value for money 

market funds, we are interested in 

exploring other methods of reducing the 

risks and unfairness posed by 

significant sudden redemptions. 

One possible way of addressing these 

issues would be to require that funds 

satisfy redemption requests in excess of 

a certain size through in-kind 

redemptions.307 Money market funds 

currently are permitted to and many 

money market funds disclose in their 

prospectuses that they may satisfy 

redemption requests through in-kind 

redemptions.308 In the wake of last fall’s 

redemption pressures on money market 

funds, however, only one announced 

that it would do so.309 In-kind 

redemptions would lessen the impact of 

large redemptions on remaining money 

market fund shareholders and would 

require the redeeming investor to bear 

part of the cost of its liquidity needs. If 

shareholders did not immediately sell 

these securities, requiring in-kind 

redemptions in such circumstances may 

mitigate the impact of large redemptions 

on short-term credit markets by 

reducing the likelihood of large fire 

sales of short-term securities into the 

market. Finally, it also may encourage 

large investors to diversify their money 

market fund holdings among a variety of 

funds, perhaps lessening the risk that 

any individual fund would be 

threatened by a few redemptions.310 If 

proposed, we would expect to set a 

threshold for requiring in-kind 

redemptions sufficiently high that we 

could reasonably assume that such an 

investor would be in the position to 

assume ownership of such securities. 

We request comment on requiring 

money market funds to satisfy 

redemption requests in excess of a 

certain size through in-kind 

redemptions. What would be the 

advantages and disadvantages of this 

approach? What type of threshold 

redemption request should trigger this 

requirement? Should there be a different 

threshold for third-party shareholders 

versus affiliated shareholders of a 

money market fund? Should there be 

other restrictions on affiliate 

redemptions (e.g., prioritizing nonaffiliate redemptions over affiliate 

redemption requests that are submitted 

on the same day)? How should the fund 

determine the value of the securities to 

be distributed as a result of such a 

redemption request? The securities’ 

amortized cost value? The securities’ 

fair value, as determined based on 

current market quotations or, if no such 

quotations are readily available, as 

determined in good faith by the fund’s 

board of directors? Would these 

shareholders be able to assume 

ownership of such securities? 

We note that a board of directors 

alternatively could cause a money 

market fund to impose a redemption fee 

under rule 22c–2 to impose some of the 

fund’s costs from shareholders’ liquidity 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32719 

311The redemption fee cannot exceed two percent 

of the value of the shares redeemed. 

312 44 U.S.C. 3501–3521. 

313See supra Section II.A–G. 

314Proposed rule 2a–7(c)(8)(ii)(D). These events 

would include, but would not be 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. 

315Proposed rule 2a–7(c)(8)(ii)(D)(2), (3). The 

report to the board would 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 

percent. 

316The estimates of hour burdens and costs 

provided in the PRA and cost benefit analyses are 

based on staff discussions with representatives of 

money market funds and on the experience of 

Commission staff. 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. 

needs on the redeeming shareholders.311

What would be the advantages and 

disadvantages of this alternative 

approach to addressing our concerns 

regarding significant shareholder 

redemptions? 

IV. Paperwork Reduction Act Analysis 

Certain provisions of the proposed 

amendments to rules 2a–7 and 30b1–5 

and proposed new rules 22e–3 and 

30b1–6 and Form N–MFP under the 

Investment Company Act contain 

‘‘collections of information’’ within the 

meaning of the Paperwork Reduction 

Act of 1995 (‘‘PRA’’).312 The titles for 

the existing collections of information 

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

Company Act of 1940, Money market 

funds’’ (OMB Control No. 3235–0268); 

(2) ‘‘Rule 30b1–5 under the Investment 

Company Act of 1940, Quarterly filing 

of schedule of portfolio holdings of 

registered management investment 

companies’’ (OMB Control No. 3235– 

0577); and (3) ‘‘Form N–Q under the 

Investment Company Act of 1940, 

Quarterly Schedule of Portfolio 

Holdings of Registered Management 

Investment Company’’ (OMB Control 

No. 3235–0578). The titles for the new 

collections of information are: (1) ‘‘Rule 

22e–3 under the Investment Company 

Act of 1940, Exemption for liquidation 

of money market funds;’’ (2) ‘‘Rule 

30b1–6 under the Investment Company 

Act of 1940, Monthly report for money 

market funds;’’ and (3) ‘‘Form N–MFP 

under the Investment Company Act of 

1940, Portfolio Holdings of Money 

Market Funds.’’ The Commission is 

submitting these collections of 

information to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. Our 

proposed 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 per 

share. 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. 

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 

proposing to amend rule 2a–7 in several 

respects. Our proposal would amend the 

rule by: Revising portfolio quality and 

maturity requirements; introducing 

liquidity requirements; requiring money 

market fund boards to adopt procedures 

providing for periodic stress testing of 

the fund’s portfolio; requiring funds to 

disclose monthly on their websites 

information on portfolio securities; and 

finally, requiring money market fund 

boards to determine, at least once each 

calendar year, that the fund has the 

capability to redeem and issue its 

securities at prices other than the fund’s 

stable net asset value per share.313 Three 

of the proposed amendments would 

create new collection of information 

requirements. The respondents to these 

collections of information would be 

money market funds or their advisers, as 

noted below. 

1. Stress Testing 

The proposed amendments would 

require money market fund boards to 

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.314 These 

procedures also would have to provide 

for a report of the testing results to be 

submitted to the board of directors at its 

next regularly scheduled meeting, and 

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.315

Compliance with this proposed 

disclosure requirement would be 

mandatory for any fund that holds itself 

out as a money market fund in reliance 

on rule 2a–7. The information when 

provided to the Commission in 

connection with staff examinations or 

investigations would be kept 

confidential to the extent permitted by 

law. 

We anticipate that stress testing 

would 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 that risk, and actions 

the adviser may need to take to mitigate 

the possibility of the fund breaking the 

buck. 

Commission staff believes that in light 

of the events of last fall 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.316 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 may not. Some funds that 

currently conduct testing may be 

required to include additional 

hypothetical events under our proposed 

amendments. These funds likely 

provide regular reports of the test results 

to senior management. We expect, 

however, that 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 the 

stress testing procedures are or would 

be developed for all the money market 

funds in a fund complex by the fund 

adviser, and would address appropriate 

variations for individual money market 

funds within the complex. Staff 

estimates that it would take a fund 

adviser an average of 21 hours for a 

portfolio risk analyst initially to draft 

procedures documenting the complex’s 

stress testing, and 3 hours for the board 

of directors to consider and adopt the 

written procedures. We estimate that 

171 fund complexes with money market 

funds are subject to rule 2a–7. We 

therefore estimate that the total burden 

to draft these procedures initially would 

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32720 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

317This estimate is based on the following 

calculation: (21 hours + 3 hours) × 171 fund 

complexes = 4104 hours. 

318These estimates are based on the following 

calculations: (21 + 3) ÷ 3 = 8 hours; 8 × 171 fund 

complexes = 1368 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. 

319This estimate is based on the following 

calculation: (6 hours (analyst) + 1 hour (board)) × 

171 fund complexes = 1197 hours. 

320These estimates are based on the following 

calculations: (10 hours + 2 hours + 15 hours) × 6 

meetings = 162 hours; 162 hours × 171 fund 

complexes = 27,702 hours. 

321Proposed rule 2a–7(c)(11)(vii). 

322This estimate is based on the following 

calculation: 0.1667 hours × 6 meetings × 171 fund 

complexes = 171 hours. 323These estimates are based on the following 

calculations: 8 hours (draft procedures) + 7 hours 

(revise procedures) + 72 hours (6 reports) + 90 

hours (assessments) + 1 hour (record retention) = 

178 hours; 1368 hours (draft procedures) + 1197 

hours (revise procedures) + 12,312 hours (6 reports) 

+ 15,390 (6 assessments) + 171 hours (record 

retention) = 30,438 hours. 

324Proposed rule 2a–7(c)(12). 

325Certain 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. 

326The estimate is based on the following 

calculations. The staff estimates that 150 funds 

would require a total of 3600 hours initially to 

develop a webpage (150 funds × 24 hours per fund 

= 3600 hours). In addition, each of the 750 funds 

would require 48 hours per year to update and 

maintain the webpage, for a total of 36,000 hours 

per year (4 hours per month × 12 months = 48 hours 

per year; 48 hours per year × 750 funds = 36,000). 

The average annual hour burden for each of the first 

three years would thus equal 37,200 hours ([3600 

+ (36,000 × 3)] ÷ 3). 

327See proposed rule 2a–7(c)(7)(iii). 

328Commission rules provide, however, for a 

procedure under which persons submitting notices 

under the proposed amendment would be able to 

request that the information not be disclosed under 

a Freedom of Information Act request. See 17 CFR 

200.83. 

be 4104 hours.317 Amortized over a 

three-year period, this would result in 

an average annual burden of 8 hours for 

an individual fund complex and a total 

of 1368 hours for all fund complexes.318

Staff estimates that a risk analyst also 

may 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 would spend 1 hour 

to consider and adopt the revisions, for 

a total annual burden of 1197 hours.319

Commission staff estimates further that 

it would take an average of 10 hours of 

portfolio management time to draft each 

report to the board of directors, 2 hours 

of an administrative assistant’s time to 

compile and copy the report and 15 

hours of the fund adviser’s time to 

provide an assessment of the funds’ 

ability to withstand reasonably likely 

hypothetical events in the coming year. 

The report must be provided at the next 

scheduled board meeting, and we 

estimate that the report would cover all 

money market funds in a complex. We 

also believe that the fund adviser would 

provide an assessment each time it 

provided a report. Finally, we assume 

that funds would conduct stress tests no 

less than monthly. With an average of 6 

board meetings each year, we estimate 

that the annual burden would be 162 

hours for an individual fund complex 

with a total annual burden for all fund 

complexes of 27,702 hours.320

The proposed amendment would 

require the fund to retain records of the 

reports on stress tests and the 

assessments for at least 6 years (the first 

two in an easily accessible place).321

The retention of these records would be 

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 would be 10 minutes 

per fund complex per meeting to retain 

these records for a total annual burden 

of 171 hours for all fund complexes.322

Thus, we estimate that for the three 

years following adoption, the average 

annual burden resulting from the stress 

testing requirements would be 178 

hours for each fund complex with a 

total of 30,438 hours for all fund 

complexes.323

We request comment on these 

estimates of hourly burdens. Would 

funds develop stress tests on a complexwide basis for money market funds? 

Would the adviser prepare one report 

regarding stress tests for all the money 

market funds in a complex, or prepare 

a separate report for each money market 

fund? 

2. Public Web site Posting 

The proposed amendments would 

require money market funds to post 

monthly portfolio information on their 

Web sites.324 We believe that greater 

transparency of fund portfolios may 

allow investors to exert influence on 

risk-taking 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 

would be mandatory for any fund that 

holds itself out as a money market fund 

in reliance on rule 2a–7. We estimate 

that there are approximately 750 money 

market funds that would be affected by 

this proposal. We understand, based on 

interviews with industry 

representatives, that most money market 

funds already post portfolio information 

on their webpages at least quarterly.325

To be conservative, the staff estimates 

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 proposed 

rule. We estimate that a money market 

fund would spend approximately 24 

hours of internal money market fund 

staff time initially to develop the 

webpage. We further estimate 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. Based 

on an estimate of 750 money market 

funds posting their portfolio holdings 

on their webpages, including 150 funds 

incurring start-up costs to develop a 

webpage, we estimate that, in the 

aggregate, the proposed amendment 

would result in a total of 37,200 average 

burden hours for all money market 

funds for each of the first three years.326

3. Reporting of Rule 17a–9 Transactions 

We are proposing to amend 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 an affiliated person in reliance on the 

rule and to explain the reasons for such 

purchase.327 The proposed 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 would 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 would not be 

kept confidential.328

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 171 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 would be 

required to provide notice to the 

Commission of a rule 17a–9 transaction, 

with the total annual response per fund 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32721 

329The estimate is based on the following 

calculation: (25 fund complexes × 1 hour) = 25 

hours. 

330This estimate is based on the following 

calculation: 310,983 (estimated in 2a–7 renewal 

submission) + 30,438 (stress testing) + 37,200 

(website posting) + 25 hours (reporting 17a–9 

transactions) = 378,646 hours. 

331See proposed rule 22e–3(c). 

332As discussed above, since the adoption of rule 

2a–7 in 1983, only two money market funds have 

broken the buck. 

333These estimates are based on the following 

calculations: (1 hour ÷ 6 years) = 10 minutes per 

year. 

334We 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. 

335The staff estimates that a fund would make 36 

filings in three years. The first filing would require 

40 hours and subsequent filings would require 8 

hours each, for an average annual burden of 107 

hours (1 filing × 40 hours = 40 hours; 35 filings × 

8 hours = 280 hours; 40 hours + 280 hours = 320 

hours; 320 hours ÷ 3 years = 107 hours). Thereafter, 

filers generally would not incur the start-up 

burdens applicable to the first filing. 

336Funds are required to file a quarterly report on 

Form N–Q after the close of the first and third 

quarters of each fiscal year. 

337The estimate is based on the following 

calculation: 750 money market funds × 8 hours per 

money market fund = 6000 hours. 

complex, on average, requiring 1 hour of 

an in-house attorney’s time. Given these 

estimates, the total annual burden of 

this proposed amendment to rule 2a–7 

for all money market funds would be 

approximately 25 hours.329

4. Total Burden 

The currently approved burden for 

rule 2a–7 is 1,348,000 hours. In a recent 

renewal submission to OMB, we 

estimated the collection of information 

burden for the rule is 310,983 hours. 

The additional burden hours associated 

with the proposed amendments to rule 

2a–7 would increase the renewal 

estimate to 378,646 hours annually.330

B. Rule 22e–3 

Proposed rule 22e–3 would permit a 

money market fund to suspend 

redemptions and postpone the payment 

of proceeds pending board-approved 

liquidation proceedings, provided that 

the fund notifies the Commission by 

electronic mail of its decision to do 

so.331 The proposed rule is intended to 

reduce the vulnerability of investors to 

the harmful effects of a run on a fund, 

and minimize the potential for 

disruption to the securities markets. The 

proposed 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 

redemptions, which would otherwise be 

prohibited. Only money market funds 

that break the buck and begin boardapproved liquidation proceedings 

would be able to rely on the rule. The 

respondents to this information 

collection therefore would be money 

market funds that break the buck and 

elect to rely on the exemption afforded 

by the rule. Compliance with the 

notification requirements of rule 22e–3 

would be necessary for money market 

funds that seek to rely on rule 22e–3 to 

suspend redemptions and postpone 

payment of proceeds pending a 

liquidation, and would not be kept 

confidential. 

We estimate that, on average, one 

money market fund would break the 

buck and liquidate every six years.332

Staff estimates that a fund providing the 

required electronic mail notice under 

proposed rule 22e–3 would spend 

approximately 1 hour of an in-house 

attorney’s time to prepare and submit 

the notice. Given these estimates, the 

total annual burden of proposed rule 

22e–3 for all money market funds would 

be approximately 10 minutes.333

C. Monthly Reporting of Portfolio 

Holdings 

1. Rule 30b1–6 and Form N–MFP 

Proposed rule 30b1–6 would require 

money market funds to file an electronic 

monthly report on proposed Form N– 

MFP within two business days after the 

end of each month. The proposed 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 proposed 

form would be data-tagged in XML 

format and filed through EDGAR. The 

respondents to rule 30b1–6 would be 

investment companies that are regulated 

as money market funds under rule 2a– 

7. Compliance with proposed rule 

30b1–6 would be mandatory for any 

fund that holds itself out as a money 

market fund in reliance on rule 2a–7. 

Responses to the disclosure 

requirements would not be kept 

confidential. 

We estimate that 750 money market 

funds would be required by rule 30b1– 

6 to file, on a monthly basis, a complete 

Form N–MFP disclosing certain 

information regarding the fund and its 

portfolio holdings. For purposes of this 

PRA analysis, the burden associated 

with the requirements of proposed rule 

30b1–6 has been included in the 

collection of information requirements 

of proposed Form N–MFP. 

Based on our experience with other 

interactive data filings, we estimate that 

money market funds would require an 

average of approximately 40 burden 

hours to compile, tag and electronically 

file the required portfolio holdings 

information for the first time and an 

average of approximately 8 burden 

hours in subsequent filings.334 Based on 

these estimates, we estimate the average 

annual burden over a three-year period 

would be 107 hours per money market 

fund.335 Based on an estimate of 750 

money market funds submitting Form 

N–MFP in interactive data format, each 

incurring 107 hours per year on average, 

we estimate that, in the aggregate, Form 

N–MFP would result in 80,250 burden 

hours, on average, for all money market 

funds for each of the first three years. 

2. Rule 30b1–5 and Form N–Q 

Our proposed amendments to rule 

30b1–5 would exempt money market 

funds from the requirement to file a 

schedule of investments pursuant to 

Item 1 of Form N–Q. The proposed 

amendment is intended to eliminate 

unnecessarily duplicative disclosure 

requirements. The proposed amendment 

would only affect investment companies 

that are regulated as money market 

funds under rule 2a–7. 

We estimate that 750 money market 

funds would be affected by the 

proposed amendment to rule 30b1–5. 

For the purposes of this PRA analysis, 

the decrease in burden hours resulting 

from the proposed amendment is 

reflected in the collection of information 

requirements for Form N–Q. 

We estimate that money market funds 

would require an average of 

approximately 4 hours to prepare the 

schedule of investments required 

pursuant to Item 1 of Form N–Q. Based 

on these estimates, we estimate that the 

average annual burden avoided would 

be 8 hours per fund.336 Based on an 

estimate of 750 money market funds 

filing Form N–Q, each incurring 8 

burden hours per year on average, we 

estimate that, in the aggregate, our 

proposed exemption would result in a 

decrease of 6000 burden hours 

associated with Form N–Q.337

D. Request for Comments 

We request comment on whether 

these estimates are reasonable. Pursuant 

to 44 U.S.C. 3506(c)(2)(B), the 

Commission solicits comments in order 

to: (i) Evaluate whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed 

collections of information; (iii) 

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32722 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

338See proposed rule 2a–7(a)(11)(iii); proposed 

rule 2a–7(a)(11)(iv); proposed rule 2a–7(c)(3). 

339See proposed rule 2a–7(a)(11)(iv)(A). 

340See proposed rule 2a–7(c)(2)(ii). 

341See proposed rule 2a–7(c)(2)(iii). 

342See proposed rule 2a–7(c)(2)(i); rule 

2a–7(d)(1)–(5). 

343See proposed rule 2a–7(c)(5)(i). 

344See proposed rule 2a–7(c)(5)(iii). This 

restriction would not apply to tax exempt money 

market funds. 

345See proposed rule 2a–7(c)(5)(iv). 

346See proposed rule 2a–7(c)(5)(ii). 

347See proposed rule 2a–7(a)(18) (defining 

‘‘Institutional Fund’’). 

determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(iv) determine whether there are ways to 

minimize the burden of the collections 

of information on those who are to 

respond, including through the use of 

automated collection techniques or 

other forms of information technology. 

Persons wishing to submit comments 

on the collection of information 

requirements of the proposed 

amendments should direct them to the 

Office of Management and Budget, 

Attention Desk Officer for the Securities 

and Exchange Commission, Office of 

Information and Regulatory Affairs, 

Room 10102, New Executive Office 

Building, Washington, DC 20503, and 

should send a copy to Elizabeth 

Murphy, Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–1090, with 

reference to File No. S7–11–09. OMB is 

required to make a decision concerning 

the collections of information between 

30 and 60 days after publication of this 

Release; therefore a comment to OMB is 

best assured of having its full effect if 

OMB receives it within 30 days after 

publication of this Release. Requests for 

materials submitted to OMB by the 

Commission with regard to these 

collections of information should be in 

writing, refer to File No. S7–11–09, and 

be submitted to the Securities and 

Exchange Commission, Office of 

Investor Education and Advocacy, 100 F 

Street, NE., Washington, DC 20549– 

0213. 

V. Cost Benefit Analysis 

The Commission is sensitive to the 

costs and benefits imposed by its rules. 

We have identified certain costs and 

benefits of the proposed amendments 

and new rules, and we request comment 

on all aspects of this cost benefit 

analysis, including identification and 

assessment of any costs and benefits not 

discussed in this analysis. We seek 

comment and data on the value of the 

benefits identified. We also welcome 

comments on the accuracy of the cost 

estimates in each section of this 

analysis, and request that commenters 

provide data that may be relevant to 

these cost estimates. In addition, we 

seek estimates and views regarding 

these costs and benefits for particular 

covered institutions, including small 

institutions, as well as any other costs 

or benefits that may result from the 

adoption of these proposed amendments 

and new rules. 

A. Rule 2a–7 

1. Second Tier Securities, Portfolio 

Maturity and Liquidity Requirements 

We are proposing several changes to 

the risk-limiting conditions of rule 2a– 

7. While we believe that these changes 

would impart substantial benefits to 

money market funds, we recognize that 

they also may impose certain costs. 

First, we would limit money market 

fund investments to first tier securities, 

i.e., securities receiving the highest 

short-term debt ratings from the 

requisite NRSROs or securities that the 

fund’s board of directors or its delegate 

determines are of comparable quality.338

We also are proposing to limit money 

market funds to acquiring long-term 

securities that have received long-term 

ratings in the highest two ratings 

categories.339

Second, we are proposing certain 

changes to rule 2a–7’s portfolio maturity 

limits. We are proposing to reduce the 

maximum weighted average maturity of 

a money market fund permitted by rule 

2a–7 from 90 days to 60 days.340 We 

also are proposing a new maturity 

limitation based on the ‘‘weighted 

average life’’ of fund securities that 

would limit the portion of a fund’s 

portfolio that could be held in longer 

term floating- or variable-rate securities. 

This restriction would require a fund to 

calculate the weighted average maturity 

of its portfolio without regard to interest 

rate reset dates. The weighted average 

life of a fund’s portfolio would be 

limited to 120 days.341 Finally, we are 

proposing to delete a provision in rule 

2a–7 that permits 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. 

Under the amended rule, money market 

funds could not 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.342

Third, we are proposing new liquidity 

requirements on money market funds. 

Under the proposed amendments, 

money market funds would be 

prohibited from acquiring securities 

unless, at the time acquired, they are 

liquid, i.e., securities that can 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.343 We also 

propose to limit taxable retail money 

market funds and taxable institutional 

money market funds to acquiring Daily 

Liquid Assets unless five percent of a 

retail fund’s and 10 percent of an 

institutional fund’s assets are Daily 

Liquid Assets.344

In addition, our proposed 

amendments to rule 2a–7 would impose 

weekly liquidity requirements on 

money market funds. Specifically, retail 

and institutional money market funds 

would not be permitted to acquire any 

securities other than weekly liquid 

assets if, after the acquisition, (i) the 

retail fund would hold less than 15 

percent of its total assets in weekly 

liquid assets and (ii) the institutional 

fund would hold less than 30 percent of 

its total assets in weekly liquid 

assets.345 Finally, we are proposing to 

require that a money market fund at all 

times hold daily and weekly liquid 

assets sufficient to meet reasonably 

foreseeable redemptions in light of its 

obligations under section 22(e) of the 

Act and any commitments the fund has 

made to shareholders.346

Our proposed amendments would 

rely on a money market fund’s board of 

directors to determine, no less 

frequently than once each calendar year, 

whether the money market fund is 

intended to be offered to institutional 

investors or has the characteristics of a 

fund that is intended to be offered to 

institutional investors, based on the: (i) 

Nature of the record owners of fund 

shares; (ii) minimum amount required 

to be invested to establish an account; 

and (iii) historical cash flows resulting, 

or expected cash flows that would 

result, from purchases and 

redemptions.347

a. Benefits 

We believe that the proposed 

amendments to rule 2a–7’s risk-limiting 

conditions would be likely to produce 

broad benefits for money market fund 

investors. First, they should reduce 

money market funds’ exposure to 

certain credit, interest rate, and spread 

risks. For example, precluding money 

market funds from investing in second 

tier securities would decrease money 

market funds’ exposure to credit risk. 

Reducing the maximum weighted 

average maturity of money market 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32723 

348 During the recent financial crisis, investors 

redeemed substantial amounts of assets from ultrashort bond funds and certain offshore money 

market funds. See ICI Report, supra note 6, at 106– 

07. 

349See supra note 101 and accompanying and 

following text, and Section II.C.1. 

funds’ portfolios would further decrease 

their interest rate sensitivity, as well as 

reduce their exposure to credit risk. 

Introducing the weighted average life 

limitation on money market funds’ 

portfolios would limit credit spread risk 

and interest rate spread risk to funds 

from longer term floating- or variablerate securities. 

We expect that the proposed 

amendments also would bolster the 

ability of money market funds to 

maintain a stable net asset value during 

times when the level of shareholder 

redemption demand is high. Fund 

portfolios with a lower weighted 

average maturity that include a limited 

amount of longer term floating- or 

variable-rate securities would turn over 

more quickly and the fund would be 

better able to increase its holdings of 

highly liquid securities in the face of 

illiquid markets than funds that satisfy 

current maturity requirements. The 

proposed liquidity requirements are 

designed to increase a money market 

fund’s ability to withstand illiquid 

markets by ensuring that the fund 

acquires only liquid securities and that 

a certain percent of its assets are held in 

daily and weekly liquid assets. These 

requirements also should decrease the 

likelihood that a fund would have to 

realize losses from selling portfolio 

securities into an illiquid market to 

satisfy redemption requests. Because the 

proposed amendments would require a 

fund to have a contractual right to 

receive cash for the daily and weekly 

liquid assets, rather than the current 

standard, which assumes that a fund 

would be able to find a buyer for its 

securities within seven days, we believe 

that the proposed required liquidity 

requirements would allow money 

market fund advisers to more easily 

adjust the funds’ portfolios to increase 

liquidity when needed. 

We believe that a reduction of these 

credit, interest rate, spread, and 

liquidity risks would better enable 

money market funds to weather market 

turbulence and maintain a stable net 

asset value per share. The proposed 

amendments are designed to reduce the 

risk that a money market fund will 

break the buck and therefore prevent 

losses to fund investors. To the extent 

that money market funds are more 

stable, they also would reduce systemic 

risk to the capital markets and provide 

a more stable source of financing for 

issuers of short-term credit instruments, 

thus promoting capital formation. If 

money market funds become more 

stable investments as a result of the 

proposed rule amendments, they may 

attract further investment, increasing 

their role as a source of capital 

formation. 

b. Costs 

We recognize that there are potential 

costs that would result if we adopted 

our proposed changes regarding second 

tier securities, portfolio maturity, and 

liquidity. Second tier securities, less 

liquid securities, and longer term credit 

instruments typically pay a higher 

interest rate and, therefore, the proposed 

amendments may decrease money 

market funds’ yields. 

Precluding ownership of second tier 

securities also may deprive money 

market funds of some benefits of 

reduced risk through diversification. We 

invite comment on whether the benefits 

of reducing credit risk through 

precluding purchases of second tier 

securities justifies the costs of the lost 

diversification benefits that second tier 

securities may provide. 

If, as a result of the proposed 

amendments, there is a smaller set of 

Eligible Securities for a money market 

fund to choose from, that may increase 

the cost of those securities if their 

supply is limited. In particular, to the 

extent that the proposed liquidity 

requirements increase demand for 

highly liquid securities that is not 

countered by increased supply, the cost 

of those securities may rise as well. 

Increased costs of portfolio securities 

will have a negative impact on money 

market fund yield. Finally, to the extent 

that actual investor redemptions are 

significantly lower than our proposed 

liquidity requirements, money market 

funds may achieve lower yields as a 

result of complying with these liquidity 

requirements. 

Although the impact on individual 

funds would vary significantly, we 

estimate that the proposed changes to 

rule 2a–7’s requirements regarding 

portfolio quality, portfolio maturity, and 

liquidity would decrease the yield that 

a money market fund is able to achieve 

in the range of 2 to 4 basis points. We 

understand that the majority of money 

market funds are already in compliance 

with these proposed requirements due 

either to their own risk-limiting actions 

or to their voluntary compliance with 

the recommendations contained in the 

ICI Report. Accordingly, we expect that 

the decrease in yield from these changes 

to rule 2a–7’s risk-limiting conditions 

would have a relatively minor impact 

on current money market fund yields. 

However, this decreased yield may 

limit the range of choices that 

individual money market fund investors 

currently have to select their desired 

level of investment risk. This might 

cause some investors to shift their assets 

to, among other places, offshore or other 

enhanced cash funds unregulated by 

rule 2a–7 that are able to offer a higher 

yield. Alternatively, some investors may 

choose to shift their assets to bank 

deposits. 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 risk 348 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 proposed 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 securities or a larger percentage 

of longer term securities. 

Our proposed 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 of their second 

tier securities, less liquid securities, 

longer term securities, or floating- and 

variable-rate securities at previous 

market rates. As noted earlier in the 

release, we do not believe that money 

market funds currently hold a 

significant amount of second tier 

securities, or securities that are illiquid 

at acquisition.349 Thus, we expect that 

the proposed amendment’s impact on 

issuers of these securities would be 

minimal. If the proposed amendments 

result 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 short-term 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. The markets for 

longer term or floating- and variable-rate 

securities may become less liquid if the 

proposed rule amendments cause 

issuance of these instruments to decline. 

We generally expect that issuers of 

floating- or variable-rate securities 

would respond to the proposed 

amendments by issuing a greater 

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32724 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

350See supra text accompanying note 101, note 

145 and accompanying text, and note 147. 

351See NRSRO References Proposal, supra note 

105. 

352See id. 

353See ICI Report, supra note 6, at 82. 

354See supra note 116 and accompanying text. 

355See rule 2a–7(c)(6)(i)(A)(2). 

proportion of their securities with 

shorter final maturities. 

Our proposed requirement that fund 

boards distinguish between retail and 

institutional money market funds would 

require boards to make a determination 

based on an understanding of the 

investors in the fund and their behavior. 

Our proposed liquidity requirements 

also would require money market funds 

to ‘‘know their customers,’’ including 

their expected redemption behavior. We 

expect that most money market funds 

already have methods to understand 

their customers and their redemption 

needs because ‘‘knowing your 

customer’’ is already a best practice. As 

a result, we also do not expect that these 

requirements would impose any 

material costs on funds. 

We do not believe that eliminating the 

provision in rule 2a–7 that allowed 

money market funds relying solely on 

the penny-rounding method of pricing 

to hold Government securities with 

remaining maturities of up to 762 days 

would 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 request comment on these costs 

and benefits. Would money market fund 

investors benefit from the proposed 

portfolio quality, maturity and liquidity 

requirements? Would money market 

funds experience a significant yield and 

diversification impact from the 

proposed changes to rule 2a–7’s second 

tier security, portfolio maturity, and 

liquidity requirements? We note that the 

highest rated money market funds 

currently must have a weighted average 

maturity of 60 days or less, the average 

weighted average maturity for taxable 

money market funds as of June 16, 2009 

was 53 days, and very few money 

market funds hold second tier 

securities.350 What other impacts would 

these changes have on money market 

funds? What effect would such changes 

have on the short-term credit market 

and issuers of longer term or debt 

instruments held to satisfy the daily or 

weekly liquidity requirements? How 

would the proposed amendments 

impact issuers of, and the market for, 

longer term variable- or floating-rate 

debt securities? We encourage 

commenters to provide empirical data to 

support their analysis. 

2. Use of NRSROs 

As discussed above, we are 

considering an approach that would 

require a money market fund’s board of 

directors to designate NRSROs whose 

credit ratings the fund would use in 

determining the eligibility of portfolio 

securities under rule 2a–7 and that the 

board would annually determine issue 

credit ratings that are sufficiently 

reliable for that use. As we also noted 

above, we proposed eliminating 

references to NRSROs in rule 2a–7 last 

year.351 For a discussion of the costs 

and benefits of that proposal, please see 

Section VI of the NRSRO References 

Release.352 Are there additional factors 

we should consider since that release 

was published? 

We request comment on the approach 

we are considering. We specifically 

request comment regarding the standard 

we are considering for the board’s 

annual determination, i.e., that the 

designated NRSROs issue ratings that 

are sufficiently reliable for use in 

determining the eligibility of portfolio 

securities. Is this standard appropriate, 

and if not, what would be a more 

appropriate standard? We expect that in 

making their initial designation and 

their annual determination, fund boards 

would review a presentation by the 

fund’s adviser regarding the relative 

strength of relevant NRSROs’ ratings 

and ratings criteria. What kind of 

guidance, if any, should the 

Commission provide with respect to 

such a standard? 

According to the ICI Report, a 

requirement that funds designate three 

or more NRSROs to use in determining 

the eligibility of portfolio securities 

could encourage competition among 

NRSROs to achieve designation by 

money market funds.353 We anticipate 

that the approach we are considering, 

which would require fund boards 

annually to determine that the 

designated NRSROs issue credit ratings 

sufficiently reliable to use in 

determining the eligibility of portfolio 

securities, may promote competition 

among NRSROs to produce the most 

reliable ratings in order to obtain 

designation by money market funds. In 

addition to the potential for competition 

among existing NRSROs, the proposed 

amendment might encourage new 

NRSROs that issue ratings specifically 

for money market fund instruments to 

enter the market. As we noted above, 

however, the staff believes it is 

reasonable to assume that the three 

NRSROs that issued almost 99 percent 

of all outstanding ratings across all 

categories that were issued by the 10 

registered NRSROs as of June 2008, also 

issued well over 90 percent of all 

outstanding ratings of short term 

debt.354 If fund boards were required to 

designate a minimum of three NRSROs 

and all money market fund boards chose 

to designate these three NRSROs, the 

requirement could result in decreased 

competition among NRSROs. We 

request comment on the impact that the 

approach we are considering, 

particularly the minimum number of 

NRSROs, might have on competition 

among NRSROs. We also request 

comment on the impact, if any, of this 

approach with respect to the efficiency 

of fund managers. Finally, we request 

comment on any potential benefits this 

approach might have with respect to 

money market funds or NRSROs. 

We recognize that there could be costs 

associated with the approach we are 

considering. Staff estimates that the 

costs of this approach would include: 

Initial costs for the board to designate 

NRSROs, as well as an annual cost to 

determine that designated NRSROs 

continue to issue ratings that are 

sufficiently reliable for use in 

determining the eligibility of portfolio 

securities. We expect that fund advisers 

currently evaluate the strength of 

NRSRO ratings and ratings criteria as 

part of the analysis they perform (under 

delegated authority from the board) in 

determining the eligibility of portfolio 

securities, and that this evaluation 

includes consideration of whether an 

NRSRO’s rating is sufficient for that use. 

Accordingly, we anticipate that fund 

advisers would not incur additional 

time to perform an evaluation that 

would be the basis for their 

recommendations to the board when it 

makes its initial designation and annual 

determination, but the adviser would 

incur costs to draft those 

recommendations in a presentation or 

report for board review. 

Under the current rule, if a money 

market fund invests in unrated or 

second tier securities, the adviser must 

monitor all NRSROs in case an unrated 

or second tier security has received a 

rating from any NRSRO below the 

second highest short-term rating 

category.355 Because fund advisers 

currently monitor NRSROs, we do not 

expect that limiting the number of 

NRSROs that a fund would have to 

monitor to a number designated by the 

fund board would result in increased 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32725 

356Proposed rule 2a–7(c)(8)(ii)(D). 

357The proposed provision includes as 

hypothetical events 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 proposed rule 2a– 

7(c)(8)(ii)(D)(1). 

358Proposed rule 2a–7(c)(8)(ii)(D)(2), (3). 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%. 

359As noted above, the ratings agencies stress test 

the portfolios of money market funds they rate. In 

addition, the Irish Financial Services Authority 

requires stress testing of money market funds 

domiciled in Ireland, and the Institutional Money 

Market Funds Association provides guidance for its 

members in stress testing money market fund 

portfolios. See supra notes 214–215 and 

accompanying text. 

360These complexes do not, however, meet the 

definition of ‘‘small entities’’ under the Investment 

Company Act for purposes of the Regulatory 

Flexibility Act of 1980. 5 U.S.C. 603(a). See infra 

note 417. 

361This estimate is based on the following 

calculations: $275/hour × 280 hours (2 senior risk 

management specialists) + ($244/hour × 320 hours 

(2 senior systems analysts) = $155,080; $275/hour 

(1 senior risk management specialist) × 21 hours = 

$5775; $4000/hour × 3 hours = $12,000; $155,080 

+ $5775 + $12,000 = $172,855. 

362This estimate is based on the following 

calculation: (155,080 × 0.5) (revise procedures) + 

$5775 (draft procedures) + $12,000 (board approval) 

= $93,315. 

363This estimate is based on the following 

calculation: $275/hour (senior risk management 

specialist) × 8 hours = $2200; $2200 + $5775 + 

$12,000 = $19,975. 

costs to fund advisers to monitor 

NRSROs. 

We request comment on our analysis 

of the potential costs and benefits of a 

requirement to designate NRSROs. Do 

funds currently evaluate NRSRO ratings 

for reliability? Would there be benefits 

to funds and their advisers if the board 

designates three or more NRSROs? 

Would fund advisers benefit from 

having fewer NRSROs to monitor? 

Would fund advisers incur significant 

costs to make presentations to the board 

recommending which NRSROs to 

designate? What would be involved, 

including specific costs, for fund 

management to evaluate whether an 

NRSRO ‘‘issues credit ratings that are 

sufficiently reliable’’ for the fund’s 

determination of whether a security is 

an eligible security? Would funds incur 

costs if we required them to disclose 

designated NRSROs in the statement of 

additional information? 

We do not anticipate that the 

designation of NRSROs would have an 

adverse impact on capital formation. We 

request comment on whether requiring 

fund boards to designate NRSROs 

would have an impact on capital 

formation. 

3. Stress Testing 

We are proposing to require that 

money market fund boards of directors 

adopt written procedures that provide 

for the periodic stress testing of each 

money market fund’s portfolio.356 The 

procedures would require testing of the 

fund’s ability to maintain a stable net 

asset value per share based upon certain 

hypothetical events.357 The procedures 

also would have to 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 and 

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.358

We anticipate that stress testing 

would 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 that it would 

break the buck, and actions the adviser 

may need to take to mitigate the 

possibility of the fund breaking the 

buck. We believe that many funds 

currently conduct stress testing as a 

matter of routine fund management and 

business practice. We anticipate, 

however, that funds that do not 

currently perform stress testing and 

funds that may revise their procedures 

in light of the proposed rule 

amendments would 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 and 

assessments would 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.359 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 

management.360 Accordingly, staff 

estimates that as a result of the proposed 

amendments to adopt stress testing 

procedures, (i) funds that currently 

conduct rigorous stress testing, 

including tests for hypothetical events 

listed in the proposed amendment (and 

concurrent occurrences of those events) 

would incur some cost to evaluate 

whether their current test procedures 

would comply with the proposed rule 

amendment, but would 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 proposed rule 

amendment, would incur somewhat 

greater expenses to revise those 

procedures in light of the proposed 

amendments and maintain the revised 

testing, and (iii) funds that do not 

conduct stress testing would 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 or would 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 would require 

approximately 1 month for 2 risk 

management analysts and 2 systems 

analysts to develop stress test 

procedures at a cost of approximately 

$155,000, 21 hours for a risk 

management analyst to draft the 

procedures, and 3 hours of board of 

directors’ time to adopt the procedures 

for a total of approximately $173,000.361

Costs for fund complexes that would 

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 would 

incur half the costs of development, for 

a total of approximately $95,000.362

Funds that would not have to change 

their test procedures would incur 

approximately $20,000 to determine 

compliance with the proposed 

amendment, and to draft and adopt the 

procedures.363 We also would anticipate 

that if there is a demand to develop 

stress testing procedures, third parties 

may develop programs that funds could 

purchase for less than our estimated 

cost to develop the programs 

themselves. 

As with the development of stress test 

procedures, the costs funds would 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 would 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 

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364This 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. 

365This estimate is based on the following 

calculations: Tests: $275/hour × 15 hours (senior 

risk management specialist) + $244/hour × 20 hours 

(senior systems analyst) = $9,005; $9,005 × 12 

(monthly testing) = $108,060; Update procedures: 

$275/hour × 5 hours (senior risk management 

specialist) + $4000/hour × 1 hour = $5375; $108,060 

+ $5375 = $113,435. 

366This estimate is based on the following 

calculation: (43 × $173,000) + (85 × $95,000) + (43 

× $20,000) + (171 × $5775) + (171 × $12,000) = 

$19,413,525. 

367This estimate is based on the following 

calculation: (43 × $113,000) + (85 × $113,000 × 0.5) 

+ (171 × $42,054 (reports and assessments)) = 

$16,852,734. 

368See rule 2a–7(c)(4)(ii)(A). The rule 5b–3(c)(1) 

definition of collateralized fully, which is crossreferenced by rule 2a–7(a)(5), sets forth the related 

conditions. Under the current definition, a money 

market fund may look through repurchase 

agreements collateralized with cash items, 

Government securities, securities with the highest 

rating or unrated securities of comparable credit 

quality. 

369Proposed rule 2a–7(a)(5). 

370Proposed rule 2a–7(c)(4)(ii)(A). 

371See rule 2a–7(c)(3)(i). 

372Proposed rule 2a–7(c)(12). 

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 all fund complexes would 

incur costs of $3000 to provide a written 

report on the test results to the board, 

$4000 to provide an assessment to the 

board and $10 to retain records of the 

reports and assessments for a total 

annual cost to a fund complex of 

approximately $42,000.364 We estimate 

that a portion of funds would incur 

additional costs each year to perform 

stress tests and update their procedures 

each year, up to a maximum of 

approximately $113,000.365

For purposes of this cost benefit 

analysis, Commission staff has 

estimated that 25 percent of fund 

complexes (or 43 complexes) would 

have to develop stress test procedures, 

50 percent (or 85) would have stress test 

procedures, but have to revise those 

procedures, and 25 percent of 

complexes (or 43 complexes) would 

review the procedures without having to 

change them. Based on these estimates, 

staff further estimates that the total one 

time costs for fund complexes to 

develop or refine existing stress test 

procedures would be approximately $19 

million.366 In addition, staff estimates 

that the annual costs to all funds to 

conduct stress tests, update test 

procedures, provide reports and 

assessments to fund boards and retain 

records of the reports and assessments 

would be approximately $17 million.367

We request comment on our 

estimates. We are particularly interested 

in comments regarding how many funds 

currently conduct stress testing, the 

extent and nature of that testing, 

including whether the procedures can 

be adopted on a complex wide basis, 

and the costs to develop rigorous stress 

testing procedures. For those money 

market funds that have stress test 

procedures, how significantly would 

they have to change those procedures in 

light of the proposed rule amendment? 

What costs would they incur, including 

specific costs for personnel that would 

be involved in changes? 

4. Repurchase Agreements 

We are proposing to modify the 

conditions under which a money market 

fund may treat the acquisition of a 

repurchase agreement collateralized 

fully to be an acquisition of the 

repurchase agreement’s collateral for 

purposes of rule 2a–7’s diversification 

requirement.368 Money market funds 

would be able to adopt this ‘‘lookthrough’’ treatment only with respect to 

repurchase agreements collateralized by 

cash items or Government securities 369

and as to which the board of directors 

or its delegate has evaluated the 

creditworthiness of the counterparty.370

We believe that the proposed changes 

would limit money market funds’ 

exposure to credit risk. Collateral other 

than cash items and Government 

securities might not adequately protect 

money market funds because the funds 

may be unable to liquidate the collateral 

without incurring a loss if the 

counterparty defaults. The 

creditworthiness evaluation, moreover, 

would make it less likely that a money 

market fund enters into repurchase 

agreements with counterparties that will 

default and be exposed to risks related 

to the collateral. As discussed above, we 

believe that the reduction of credit risk 

would better enable money market 

funds to weather market turbulence and 

maintain a stable net asset value per 

share. 

We recognize that these proposed 

changes could result in costs to money 

market funds. The limitation on money 

market funds’ ability to invest in 

repurchase agreements collateralized 

with securities other than cash items 

and Government securities may result in 

lower yields for money market funds to 

the extent that other investment 

opportunities do not provide the same 

returns as those agreements. The 

limitation also could lead to an increase 

in the counterparties’ short-term 

financing costs. Counterparties may 

have to substitute such repurchase 

agreements with other sources of 

financing linked to the same type of 

collateral. If counterparties limited their 

own investments in securities that are 

no longer permissible collateral, the 

issuers of such securities could also be 

indirectly affected by our proposed 

change. The restrictions on repurchase 

agreements held by money market funds 

might potentially affect the functioning 

of these important markets. We invite 

comment on what effects, if any, these 

restrictions might have on the markets 

for repurchase agreements. 

The creditworthiness evaluation 

would also impose additional costs. A 

credit risk evaluation, however, is 

required with respect to other portfolio 

securities and to repurchase agreements 

for which money market funds do not 

adopt a look-through treatment.371 We 

understand, moreover, that many money 

market fund complexes already perform 

a creditworthiness evaluation for all 

repurchase agreement counterparties. 

Accordingly, we believe that the 

additional cost imposed on money 

market funds, if any, would be minimal. 

We request comment on any potential 

costs and benefits. Would the proposed 

amendments significantly reduce the 

risk that money market funds incur 

losses upon the default of their 

repurchase agreement counterparties? 

What effect would the limitation on 

permissible collateral have on 

counterparties’ ability to obtain shortterm financing? How would the 

proposed change impact issuers of 

securities that would no longer be 

permissible collateral? Would the 

required creditworthiness evaluation 

impose any material cost on money 

market funds? We encourage 

commenters to provide empirical data to 

support their analysis. 

5. Public Web site Posting 

The proposed amendments to rule 2a– 

7 would require money market funds to 

post monthly portfolio information on 

their Web sites.372 The rule is intended 

to provide shareholders with timely 

information about the securities held by 

the money market fund. 

We anticipate that the proposal to 

require funds to post monthly portfolio 

information on their Web sites would 

benefit investors by providing them a 

better understanding of their own risk 

exposure and thus enabling them to 

make better informed investment 

decisions. The proposed rule may thus 

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373This estimate is based on our experience with 

other filings and an estimated hourly wage rate of 

$78.48 (6000 hours × $78.48 = $470,880). 

374The staff estimates 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). 

375The staff estimates 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). 

376See supra note 325 and accompanying text. 

377This calculation is based on the following 

estimate: ($4944 × 150 portfolios) = $741,600. 

378This calculation is based on the following 

estimate: ($9888 × 750 portfolios) = $7,416,000. 

379See ICI Report, supra note 6, at 93. 

380Proposed rule 2a–7(c)(1). 

381See supra note 262 and accompanying text. 

382This estimate is based on the following 

calculation: $244/hour × 160 hours (senior systems 

analyst) = $39,040. 

383This is based on the following calculation: 

(171 (fund complexes) ÷ 3) × $39,040 = $2,225,280. 

384This is based on the following calculation: 

$4000/hour (board time) × 0.25 hours = $1000. 

385This is based on the following calculation: 

$1000 × 171 (fund complexes) = $171,000. 

386See proposed rule 17a–9(a). 

instill more discipline into portfolio 

management and reduce the likelihood 

of a money market fund breaking the 

buck. Finally, any increased costs to 

money market funds from monthly 

reporting may be offset to a degree by 

the proposal to exclude them from 

current requirements to file quarterly 

portfolio holdings information on Form 

N–Q. For the purposes of the PRA 

analysis, we estimate that money market 

funds would realize, in the aggregate, a 

decrease of 6,000 burden hours, or 

$470,880, from this exclusion.373

The proposed website posting 

requirement would also impose certain 

costs on funds. We estimate that, for the 

purposes of the PRA, 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.374 We also 

estimate 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.375

We believe, however, that our estimates 

may overstate the actual costs that 

would be incurred to comply with the 

website posting requirement because 

many funds currently post their 

portfolio holdings on a monthly, or 

more frequent, basis.376 For purposes of 

this cost benefit analysis, Commission 

staff estimates that 20 percent of money 

market portfolios (150 portfolios) do not 

currently post portfolio holdings 

information on their websites. Based on 

these estimates, we estimate that the 

total initial costs for the proposed 

website disclosure would be 

$741,600.377 In addition, we estimate 

that the annual costs for all money 

market funds to maintain and update 

their webpages would be $7.4 

million.378

In addition, monthly website 

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 

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.379 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 this 

proposal would be minimal. We request 

comment on the analysis above, and on 

any other potential costs and benefits of 

the proposed website disclosure 

requirement. 

6. Processing of Transactions 

Our proposal would require that a 

money market fund’s board determine 

in good faith, on an annual basis, that 

the fund (or its transfer agent) has the 

capacity to redeem and sell securities at 

prices that do not correspond to the 

fund’s stable net asset value per 

share.380 As discussed above, the 

aftermath of 2008 market events 

revealed that some funds had not 

implemented systems to calculate 

redemptions at prices other than the 

funds’ stable net asset value per 

share.381 Because of this failure, 

transactions were processed manually, 

which extended the time that investors 

had to wait for the proceeds from their 

redeemed shares. 

As noted in Section II.G above, money 

market funds may be required to process 

transactions at a price other than the 

fund’s stable share price and pay the 

proceeds of redemptions within seven 

days (or a shorter time that the fund has 

represented). We believe that funds that 

do not have the operational capacity to 

price shares at other than the stable 

share price risk being unable to meet 

their obligations under the Act. We 

expect that the proposed amendments 

would help eliminate the risk that 

money market funds would not be able 

to meet these obligations in the event 

the fund breaks a buck. Shareholders 

would benefit from the proposed 

amendments because they would be 

more likely to receive the proceeds from 

their investments in the event of a 

liquidation. 

Because funds are obligated to redeem 

at other than stable net asset value per 

share, there should be no new cost 

associated with the requirement for the 

funds (or their transfer agents) to have 

the systems that can meet these 

requirements. To the extent that funds 

and transfer agents have to change their 

systems, however, these changes will 

likely entail costs. If a fund complex 

were to require one month of a senior 

systems analyst’s time in assuring that 

the required systems are in place, the 

total cost for the fund complex would be 

$39,040.382 Based on this estimate we 

estimate that, if one-third of the fund 

complexes are not currently able to 

redeem at prices other than stable net 

asset value, the total cost to all money 

market funds would be $2,225,280.383

We also anticipate that the board’s 

determination would result in costs. We 

anticipate that the board’s 

determination would be based on a 

review at a regularly scheduled board 

meeting of the fund adviser’s or the 

transfer agent’s certification that the 

operational systems have the requisite 

capacity. Commission staff estimates 

that this review would take about 15 

minutes of board time at a cost of 

$1000.384 Based on this estimate we 

estimate that the total cost to all money 

market funds of board determinations 

would be $171,000.385 We request 

comment on the analysis above, and on 

any other potential costs and benefits of 

this proposed rule amendment. 

B. Rule 17a–9 

The Commission is proposing to 

amend rule 17a–9 to expand the 

circumstances under which affiliated 

persons can purchase money market 

fund portfolio securities. Under the 

proposed amendment, a money market 

fund could sell a portfolio security that 

has defaulted (other than an immaterial 

default unrelated to the financial 

condition of the issuer) to an affiliated 

person for the greater of the security’s 

amortized cost value or market value 

(plus accrued and unpaid interest), even 

though the security continued to be an 

eligible security.386

The proposed amendment essentially 

would codify past Commission staff nomstockstill on DSKH9S0YB1PROD with PROPOSALS2

32728 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

387See supra Section II.H.1. 

388Commission staff estimates that the costs to 

obtain staff no-action assurances range from 

$50,000 to $100,000. 

389See proposed rule 17a–9(b)(2). 

390Many of the no-action letters can be found on 

our website. See http://www.sec.gov/divisions/ 

investment/im-noaction.shtml#money. 

391 Id. 

392This estimate is based on the following 

calculation: $292/hour × 5 hours × 171 fund 

complexes = $249,660. 

393This estimate is based on the following 

calculations: 25 (notices) + $305/hour (attorney) × 

1 hour = $7625. See supra note 329 and 

accompanying text. 

394See Exchange Traded Funds, Investment 

Company Act Release No. 28913 (Mar. 11, 2008) [73 

FR 14618 (Mar. 18, 2008)] at n.301 (estimating a 

cost range between $75,000 and $350,000 to submit 

an application for relief to operate an ETF). We 

assume that the costs associated with an application 

for exemptive relief from section 22(e) would be on 

the low end of this range because section 22(e) 

exemptive applications are often less involved than 

ETF exemptive applications. 

395This estimate is based on the following 

calculation: $305/hour × 1 ÷ 6 hour = $51. 

action letters 387 and should benefit 

investors by enabling money market 

funds to dispose of troubled 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 would benefit 

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.388 We do not believe 

that there are any costs associated with 

this amendment, but we request 

comment on this analysis. 

In addition, we are proposing to 

permit affiliated persons to purchase 

other portfolio securities from an 

affiliated money market fund, for any 

reason, provided that such person 

would be required to promptly remit to 

the fund any profit it realizes from the 

later sale of the security.389 Our staff 

provided temporary no-action 

assurances last fall 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).390 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 last fall 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.391 Money market funds and 

their shareholders would benefit if 

affiliated persons were 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. 

Affiliated persons purchasing such 

securities would 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 171 fund 

complexes with money market funds 

and a total cost of $249,660.392 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 would 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 

request comment on this analysis. Are 

our cost estimates accurate? Are there 

other costs in allowing an affiliated 

person of a money market fund to 

purchase portfolio securities from the 

fund? Are there incentives that might 

encourage an affiliated person to 

purchase securities that are not 

distressed in any way? If so, would such 

purchases result in any cost to the fund 

and its investors? 

The Commission also is proposing a 

related amendment to rule 2a–7, which 

would require that funds report all 

transactions under rule 17a–9 to the 

Commission. We believe that this 

reporting requirement would benefit 

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 would allow 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 would 

better enable the Commission to 

monitor emerging risks at money market 

funds. For purposes of the Paperwork 

Reduction Act analysis, we estimate this 

amendment would impose relatively 

small reporting costs on money market 

funds of $7625 per year.393 We request 

comment on whether these cost 

estimates are reasonable. We also 

request comment on our analysis of the 

costs and benefits of this proposed rule 

amendment. 

C. Rule 22e–3 

Proposed rule 22e–3 would permit 

money market funds that break the buck 

to suspend redemptions and postpone 

payment of proceeds pending boardapproved liquidations. The rule would 

thus facilitate orderly liquidations, 

which would protect value for fund 

shareholders and minimize disruption 

to financial markets. The rule would 

also enable funds to avoid the expense 

and delay of obtaining an exemptive 

order from the Commission, which we 

estimate would otherwise cost about 

$75,000,394 and would provide legal 

certainty to funds that wish to suspend 

redemptions during a liquidation in the 

interest of fairness to all shareholders. 

Proposed rule 22e–3 would 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. We 

estimate that, for the purposes of the 

PRA, the annual burden of the 

notification requirement would be 10 

minutes for a cost of $51.395 The 

proposed rule may also impose costs on 

shareholders who seek to redeem their 

shares, but are unable to do so. In those 

circumstances, shareholders might have 

to borrow funds from another source, 

and thereby incur interest charges and 

other transactional fees. We believe the 

potential costs associated with proposed 

rule 22e–3 would be minimal, however, 

because the proposed rule would 

provide a limited exemption that is only 

triggered in the event of a fund breaking 

the buck and liquidating. We request 

comment on this analysis, and on any 

other potential costs and benefits of 

proposed rule 22e–3. 

D. Rule 30b1–6 and Form N–MFP: 

Monthly Reporting of Portfolio Holdings 

Proposed rule 30b1–6 and Form N– 

MFP would require money market funds 

to file with the Commission interactive 

data-formatted portfolio holdings 

information on a monthly basis. We 

expect that the proposed rule would 

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396This estimate is based on the following 

calculation: $281/hour × 128 hours (senior database 

administrator) = $35,968. 

397This estimate is based on the following 

calculation: $281/hour × 96 hours (senior database 

administrator) = $26,976. 

398We 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. 

399Pub. L. 104–121, Title II, 110 Stat. 857 (1996). 

400 15 U.S.C. 80a–2(c). 

401See proposed rule 2a–7(a)(11)(iii); proposed 

rule 2a–7(a)(11)(iv). 

402See proposed rule 2a–7(a)(11)(iv)(A). 

403See proposed rule 2a–7(c)(2)(ii). 

404See proposed rule 2a–7(c)(2)(iii). 

405See proposed rule 2a–7(c)(5)(i). 

406See proposed rule 2a–7(c)(5). 

407See proposed rule 2a–7(c)(5)(ii). 

improve the efficiency and effectiveness 

of the Commission’s oversight of money 

market funds by enabling Commission 

staff to manage and analyze money 

market fund portfolio information more 

quickly and at a lower cost than is 

currently possible. The interactive data 

would also facilitate the flow of 

information between money market 

funds and other users of this 

information, such as information 

services, academics, and investors. As 

the development of software products to 

analyze the data continues to grow, we 

expect these benefits would increase. 

Money market funds may also realize 

cost savings from the proposed rule. 

Currently, money market funds provide 

portfolio holdings information in a 

variety of formats to different thirdparties, such as information services 

and NRSROs. The proposed 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. In addition, money 

market funds may also benefit from cost 

savings to the extent that we exempt 

them from filing certain information 

required to be disclosed in existing 

quarterly portfolio holdings reports. 

The proposed reporting requirement 

would also impose certain costs. We 

estimate 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 

$35,968 396 per money market fund for 

the first year, and 96 burden hours at a 

cost of $26,976 397 per money market 

fund in subsequent years.398

For the reasons outlined in the 

discussion on the monthly website 

posting requirement, we estimate that 

there would be minimal additional costs 

incurred in connection with the 

proposed reporting requirement. We 

request comment on our estimates, 

including whether our assumptions 

about the costs and benefits are correct. 

We also request comment on other 

potential costs and benefits of the 

proposed reporting requirement. 

E. Request for Comments 

The Commission requests comment 

on the potential costs and benefits of the 

proposed rules and rule amendments. 

We also request comment on the 

potential costs and benefits of any 

alternatives suggested by commenters. 

We encourage commenters to identify, 

discuss, analyze, and supply relevant 

data regarding any additional costs and 

benefits. For purposes of the Small 

Business Regulatory Enforcement Act of 

1996,399 the Commission also requests 

information regarding the potential 

annual effect of the proposals on the 

U.S. economy. Commenters are 

requested to provide empirical data to 

support their views. 

VI. 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.400

A. Rule 2a–7 

1. Second Tier Securities, Portfolio 

Maturity, and Liquidity Limits 

We are proposing several 

amendments to rule 2a–7 to tighten the 

risk-limiting conditions of the rule. We 

are proposing to limit money market 

fund investments to only first tier 

securities, i.e., securities receiving the 

highest short-term ratings from the 

requisite NRSROs or unrated securities 

that the fund’s board of directors or its 

delegate determines are of comparable 

quality.401 We also are proposing to 

limit money market funds to acquiring 

long-term securities that have received 

long-term ratings in the highest two 

ratings categories.402

The proposed amendments would 

reduce the maximum weighted average 

maturity of a money market fund 

permitted by rule 2a–7 from 90 days to 

60 days.403 They also would impose a 

new maturity limitation based on the 

weighted average ‘‘life’’ of fund 

securities that would limit the portion 

of a fund’s portfolio that could be held 

in longer term floating- or variable-rate 

securities.404 We are proposing to delete 

a provision in rule 2a–7 that permits 

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 proposing new 

liquidity requirements on money market 

funds. Under the proposed 

amendments, money market funds 

would be prohibited from acquiring 

illiquid securities405 and money market 

funds would be required to comply with 

certain minimum daily and weekly 

liquidity requirements.406 The amended 

rule also would require that a money 

market fund at all times hold highly 

liquid securities sufficient to meet 

reasonably foreseeable redemptions in 

light of its obligations under section 

22(e) of the Act and any commitments 

the fund has made to shareholders.407

We believe that these changes would 

reduce money market funds’ sensitivity 

to interest rate, credit, and liquidity 

risks. These changes also would limit 

the credit spread risk and interest rate 

spread risk produced by longer term 

securities. A reduction of these risks 

would better enable money market 

funds to weather market turbulence and 

maintain a stable net asset value per 

share. We believe that the changes 

would reduce the risk that a money 

market fund will break the buck and 

therefore prevent losses to fund 

investors. To the extent that money 

market funds are more stable, the 

changes also would 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 would 

encourage capital formation by 

encouraging investment in money 

market funds, thereby allowing them to 

expand as a source of short-term 

financing in the capital markets. 

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. To the 

extent that some issuers are unwilling or 

unable to issue securities that match 

money market fund demand given these 

proposed restrictions, the amendments 

could have a negative impact on capital 

formation. 

If the proposed amendments reduce 

yields that money market funds are able 

to offer, some investors may move their 

money to, among other places, offshore 

unregulated money market funds that 

do not follow rule 2a–7’s strictures and 

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408Proposed rule 2a–7(c)(8)(ii)(D). 

409Proposed rule 2a–7(a)(5). 

410Proposed rule 2a–7(c)(4)(ii)(A). 

411See supra Section II.F.1. 412Proposed rule 2a–7(c)(1). 

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. 

Precluding ownership of 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. The 

proposed elimination of the ability of 

money market funds to invest in second 

tier securities may affect the capital 

raising ability and strategies of the 

issuers of second tier securities or 

otherwise affect their financing 

arrangements, and may affect the 

flexibility of investing options for funds. 

As noted above, however, second tier 

securities represent only a very small 

percentage of money market fund 

portfolios today, which suggests that our 

proposed amendments would not have 

a material effect on capital formation. 

We solicit specific comment on whether 

the proposed amendments regarding 

second tier securities would promote 

efficiency, competition and capital 

formation. 

2. Stress Testing 

We are proposing to amend 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.408 We believe 

that stress testing could 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 may 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 would have an 

adverse impact on competition or 

capital formation. What effect would the 

proposed requirement have on 

competition, efficiency and capital 

formation? 

3. Repurchase Agreements 

We are proposing to allow money 

market funds to treat the acquisition of 

a repurchase agreement to be an 

acquisition of the collateral for purposes 

of rule 2a–7’s diversification 

requirement only if the repurchase 

agreement is collateralized by cash 

items or Government securities 409 and 

after the board of directors or its 

delegate has evaluated the 

creditworthiness of the counterparty.410

We believe that these changes would 

limit money market funds’ exposure to 

credit risk. The reduction of credit risk 

would increase money market funds’ 

ability to maintain a stable net asset 

value per share, thereby preventing 

losses to fund investors, reducing 

systemic risk to the capital markets and 

ensuring a stable source of financing for 

issuers of short-term credit instruments. 

More stable money market funds may 

attract greater investments, thus 

promoting capital formation and 

providing a greater source of short-term 

financing in the capital markets. 

The limitation on money market 

funds’ ability to invest in repurchase 

agreements collateralized with 

securities other than cash items and 

Government securities may result in an 

increase in the short-term financing 

costs of the counterparties in such 

agreements, thereby reducing their 

willingness to invest in those securities. 

As a result, issuers of such securities 

could also be indirectly affected by our 

proposed change, which therefore could 

have a negative impact on capital 

formation. We request comment on 

what effect the proposed amendments 

would have on competition, efficiency, 

and capital formation. 

4. Public Web Site Disclosure 

We are proposing to require money 

market funds to disclose certain 

portfolio holdings information on their 

Web sites on a monthly basis.411 The 

proposed rule amendment would 

provide greater transparency of the 

fund’s investments for current and 

prospective shareholders, and may thus 

promote more efficient allocation of 

investments by investors. We believe 

the proposed 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 

proposed rule 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 alternative product. 

Alternatively, the proposed rule could 

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 may 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 request comment on 

what effect this proposed rule would 

have on competition, efficiency, and 

capital formation. 

5. Processing of Transactions 

We are proposing to require that each 

money market fund’s board determine, 

at least once each calendar year, that the 

fund has the capability to redeem and 

sell its securities at prices other than the 

fund’s stable net asset value per 

share.412 This amendment would 

require money funds to have the 

operational capacity if they break the 

buck to continue to process investor 

transactions in an orderly manner. This 

amendment would increase 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 redemption 

would be unduly delayed if a money 

market fund were to break the buck. We 

do not believe that this amendment 

would have a material impact on 

competition or capital formation. We 

request comment on what effect this 

proposed amendment would have on 

competition, efficiency, and capital 

formation. 

B. Rule 17a–9 

The Commission is proposing to 

amend rule 17a–9 to expand the 

circumstances under which affiliated 

persons can purchase money market 

fund securities. Under the proposed 

amendments, a money market fund 

could sell a portfolio security that has 

defaulted (other than an immaterial 

default unrelated to the financial 

condition of the issuer) to an affiliated 

person for the greater of the security’s 

amortized cost value or market value 

(plus accrued and unpaid interest), even 

though the security continued to be an 

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413See proposed rule 17a–9(a). 

414See proposed rule 17a–9(b). 

415 5 U.S.C. 603(a). 

416 5 U.S.C. 605(b). 

eligible security.413 In addition, the 

proposed amendment would permit 

affiliated persons, for any reason, to 

purchase other portfolio securities from 

an affiliated money market fund on the 

same terms provided that such person is 

required to promptly remit to the fund 

any profit it realizes from the later sale 

of the security.414 These amendments 

would 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. We 

do not believe that the proposed 

amendments will have any material 

impact on competition or capital 

formation. We request comment on our 

analysis. What effect would the 

proposed amendment to rule 17a–9 

have on efficiency, competition and 

capital formation? 

C. Rule 22e–3 

Proposed rule 22e–3 would permit 

money market funds that break the buck 

to suspend redemptions and postpone 

the payment of proceeds pending boardapproved liquidation proceedings. We 

anticipate that the rule would promote 

efficiency in the financial markets by 

facilitating orderly disposal of assets 

during liquidation. To the extent that 

investors choose money market funds 

over alternative investments because the 

proposed rule would provide 

reassurance as to the protection of their 

assets in the event the fund breaks the 

buck and minimize disruption in the 

financial markets, the rule also may 

promote capital formation. If, however, 

the possibility that redemptions can be 

suspended during a liquidation makes 

money market funds less appealing to 

investors, the rule may have a negative 

effect on capital formation. The 

proposed rule also could help make 

investors more confident that they 

would be able to receive the proceeds 

from their investment in the event of a 

liquidation of the fund. We do not 

believe that the proposed rule would 

have an adverse effect on competition. 

We request comment on what effect the 

proposed rule would have on 

competition, efficiency, and capital 

formation. 

D. Rule 30b1–6 and Form N–MFP: 

Monthly Reporting of Portfolio Holdings 

Proposed new rule 30b1–6 and Form 

N–MFP would 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 would improve the 

efficiency and effectiveness of the 

Commission’s oversight of money 

market funds. The availability, and 

usability, of this data would also 

promote efficiency for other thirdparties 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 proposal 

may encourage a standardized format 

for disclosure or transmission of 

portfolio holdings information, the 

proposal may promote efficiency for 

money market funds. We do not believe 

that the proposed rule would have an 

adverse effect on competition or capital 

formation. We request comment on 

what effect the proposed rule would 

have on competition, efficiency, and 

capital formation. 

VII. Regulatory Flexibility Act 

Certification 

Section 3(a) of the Regulatory 

Flexibility Act of 1980 415 (‘‘RFA’’) 

requires the Commission to undertake 

an initial regulatory flexibility analysis 

(‘‘IRFA’’) of the proposed rule 

amendments on small entities unless 

the Commission certifies that the rule, if 

adopted, would not have a significant 

economic impact on a substantial 

number of small entities.416 Pursuant to 

5 U.S.C. section 605(b), the Commission 

hereby certifies 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, if adopted, have a 

significant economic impact on a 

substantial number of small entities. 

The proposal would amend rule 2a– 

7 under the Investment Company Act to: 

(i) Limit money market fund 

investments to first tier securities (i.e., 

securities that received the highest 

short-term ratings categories from the 

requisite NRSROs or unrated securities 

that the board of directors (or its 

delegate) determines are of comparable 

quality); 

(ii) Limit money market funds to 

acquiring long-term securities that have 

received long-term ratings in the highest 

two ratings categories from the requisite 

NRSROs; 

(iii) Reduce the maximum weighted 

average maturity of money market 

funds’ portfolio securities from 90 to 60 

days; 

(iv) Require money market funds to 

maintain a maximum weighted average 

life to maturity of portfolio securities of 

no more than 120 days; 

(v) Eliminate a provision of the rule 

that permits a fund that relies 

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; 

(vi) Prohibit money market funds 

from acquiring securities unless, at the 

time acquired, they are liquid, i.e., can 

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; 

(vii) Require that immediately after 

the acquisition of a security, a taxable 

‘‘retail fund’’ hold no less than 5 percent 

of its total assets in cash, U.S. Treasury 

securities, or other securities (including 

repurchase agreements) that mature, or 

are subject to a demand feature 

exercisable in one business day, and (ii) 

an ‘‘institutional fund’’ hold no less 

than 10 percent of those instruments; 

(viii) Require that immediately after 

the acquisition of a security (i) a ‘‘retail 

fund’’ holds no less than 15 percent of 

its total assets in cash, U.S. Treasury 

securities, or other securities (including 

repurchase agreements) that are 

convertible to cash within five business 

days, and (ii) an ‘‘institutional fund’’ 

holds no less than 30 percent of those 

instruments; 

(ix) Require that a money market fund 

at all times hold cash, U.S. Treasury 

securities, or securities readily 

convertible to cash on a daily or weekly 

basis sufficient to meet reasonably 

foreseeable redemptions in light of its 

obligations under section 22(e) of the 

Act and any commitments the fund has 

made to shareholders; 

(x) Require the board of directors of 

each money market fund to adopt 

procedures providing for periodic stress 

testing of the money market fund’s 

ability to maintain a stable net asset 

value per share based on certain 

hypothetical events, a report of the 

testing results to the board, and an 

assessment by the fund’s adviser of the 

fund’s ability to withstand the events 

that are reasonably likely to occur 

within the following year; 

(xi) Limit money market funds to 

investing in repurchase agreements 

collateralized by cash items or 

Government securities in order to obtain 

special treatment under the 

diversification provisions of rule 2a–7; 

(xii) Require that the money market 

fund’s board of directors or its delegate 

evaluate the creditworthiness of the 

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32732 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

417Under 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. 

counterparty, regardless of whether the 

repurchase agreement is collateralized 

fully; 

(xiii) Require money market funds to 

post monthly portfolio information on 

their Web sites; and 

(xiv) Require that a money market 

fund’s board determine, on an annual 

basis, that the fund (or its transfer agent) 

has the capacity to redeem and sell 

securities at prices that do not 

correspond to the fund’s stable net asset 

value. 

We also are proposing to amend rule 

17a–9 to permit a money market fund to 

sell a portfolio security that has 

defaulted (other than an immaterial 

default unrelated to the financial 

condition of the issuer) to an affiliated 

person for the greater of the security’s 

amortized cost value or market value 

(plus accrued and unpaid interest), even 

though the security continues to be an 

eligible security. In addition, we are 

proposing to permit an affiliated person, 

for any reason, to purchase any other 

portfolio security (e.g., an eligible 

security that has not defaulted) from an 

affiliated money market fund for cash at 

the greater of the security’s amortized 

cost value or market value, provided 

that such person promptly remits to the 

fund any profit it realizes from the later 

sale of the security. Under the proposal, 

a money market fund whose portfolio 

securities are purchased in reliance on 

rule 17a–9 would be required to provide 

notice of the transaction to the 

Commission by e-mail. 

We are also proposing to amend rule 

30b1–5 to exempt money market funds 

from the requirement to file their 

schedules of investments pursuant to 

Item 1 of Form N–Q, a quarterly 

schedule of portfolio holdings of 

management investment companies. 

The proposed amendment is intended to 

avoid unnecessarily duplicative 

disclosure obligations. 

Finally, we are proposing two new 

rules. Proposed rule 22e–3 would 

exempt money market funds from 

section 22(e) to permit them to suspend 

redemptions in order to facilitate an 

orderly liquidation of fund assets. Rule 

30b1–6 would mandate the monthly 

electronic filing in XML-tagged format 

of valuation and other information 

about the risk characteristics of the 

money market fund and each security in 

its portfolio. 

Based on information in filings 

submitted to the Commission, we 

believe that there are no money market 

funds that are small entities.417 For this 

reason, the Commission believes the 

proposed amendments to rules 2a–7, 

17a–9, and 30b1–5, and proposed rules 

22e–3 and 30b1–6 under the Investment 

Company Act would not, if adopted, 

have a significant economic impact on 

a substantial number of small entities. 

We encourage written comments 

regarding this certification. The 

Commission solicits comment as to 

whether the proposed amendments to 

rules 2a–7, 17a–9, and 30b1–5, and 

proposed rules 22e–3 and 30b1–6 could 

have an effect on small entities that has 

not been considered. We request that 

commenters describe the nature of any 

impact on small entities and provide 

empirical data to support the extent of 

such impact. 

VIII. Statutory Authority 

The Commission is proposing 

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 of 

1940 [15 U.S.C. 80a–6(c), 80a–8(b), 80a– 

22(c), 80a–37(a)]. The Commission is 

proposing 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 proposing 

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 proposing amendments 

to rule 30b1–5 and new rule 30b1–6 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 Proposed Rules and Form 

For reasons set out in the preamble, 

Title 17, Chapter II of the Code of 

Federal Regulations is proposed to be 

amended as follows: 

PART 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). 

(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 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; 

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(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; 

(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) Eligible Security means: 

(i) A security issued by a registered 

investment company that is a money 

market fund; 

(ii) A Government Security; 

(iii) A Rated Security with a 

remaining maturity of 397 calendar days 

or less that has received a rating from 

the Requisite NRSROs in the highest 

short-term rating category (within which 

there may be sub-categories or 

gradations indicating relative standing); 

or 

(iv) An Unrated Security that is of 

comparable quality to a security meeting 

the requirements for a Rated Security in 

paragraph (a)(11)(iii) of this section, as 

determined by the money market fund’s 

board of directors; provided, however, 

that: 

(A) 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 NRSRO that 

is not within the NRSRO’s two highest 

long-term 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 two highest rating 

categories; 

(B) An Asset Backed Security (other 

than an Asset Backed Security 

substantially all of whose Qualifying 

Assets consist of obligations of one or 

more Municipal Issuers, as that term is 

defined in paragraph (a)(7) of this 

section) shall not be an Eligible Security 

unless it has received a rating from an 

NRSRO. 

(v) 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 an NRSRO or the Guarantee 

is issued by a guarantor that has 

received a rating from an 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 

substituted with another Demand 

Feature or Guarantee (if such 

substitution is permissible under the 

terms of the Demand Feature or 

Guarantee). 

(12) Event of Insolvency means ‘‘Event 

of Insolvency’’ as defined in § 270.5b– 

3(c)(2). 

(13) 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. 

(14) Government Security means any 

‘‘Government security’’ as defined in 

section 2(a)(16) of the Act (15 U.S.C. 

80a–2(a)(16)). 

(15) 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). 

(16) 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. 

(17) Institutional Fund means a 

money market fund whose board of 

directors determines, no less frequently 

than once each calendar year, is 

intended to be offered primarily to 

institutional investors or has the 

characteristics of such a fund, based on 

the: 

(i) Nature of the record owners of the 

fund’s shares; 

(ii) Minimum initial investment 

requirements; and 

(iii) Historical cash flows that have 

resulted or expected cash flows that 

would result from purchases and 

redemptions. 

(18) Liquid Security means a security 

that can be sold or disposed of in the 

ordinary course of business within 

seven calendar days at approximately its 

amortized cost. 

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(19) NRSRO means any nationally 

recognized statistical rating 

organization, 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 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. 

(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 an NRSRO, or has been 

issued by an issuer that has received a 

short-term rating from an 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 an NRSRO, or a Guarantee 

issued by a guarantor that has received 

a short-term rating from an 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 NRSROs that have issued 

a rating with respect to a security or 

class of debt obligations of an issuer; or 

(ii) If only one NRSRO has issued a 

rating with respect to such security or 

class of debt obligations of an issuer at 

the time the fund acquires the security, 

that NRSRO. 

(24) Retail Fund means any money 

market fund that the board of directors 

has not determined within the calendar 

year is an Institutional Fund under 

paragraph (c)(5)(v) of this section. 

(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; or 

(iii) 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. The 

board shall annually determine in good 

faith that the fund (or its transfer agent) 

has the capacity to redeem and sell 

securities issued by the fund at a price 

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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. 

(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 an NRSRO) and that are at 

the time of Acquisition Eligible 

Securities. 

(ii) Securities Subject to Guarantees. 

A security that is subject to a Guarantee 

may be determined to be an Eligible 

Security based solely on whether the 

Guarantee is an Eligible Security. 

(iii) 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 

only if: 

(A) The Conditional Demand Feature 

is an Eligible Security; 

(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’ highest short-term or longterm 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’ highest short-term or longterm 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 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 

State Fund shall not have invested more 

than five percent of its Total Assets in 

securities issued by the issuer of the 

security. 

(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 

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32736 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

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 paragraph 

(c)(4)(iii)(B) of this section. 

(B) 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. (i) Liquid 

Securities. The money market fund shall 

limit its portfolio investments to cash 

and securities that at the time of 

Acquisition are Liquid Securities. 

(ii) General Liquidity Requirement. 

The money market fund shall hold Daily 

Liquid Assets and Weekly Liquid Assets 

sufficient 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. 

(iii) Minimum Daily Liquidity 

Requirement. A money market fund 

shall not Acquire any security other 

than a Daily Liquid Asset if, 

immediately after the Acquisition, a 

Retail Fund would have invested less 

than five percent of its Total Assets, and 

an Institutional 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. 

(iv) Minimum Weekly Liquidity 

Requirement. A money market fund 

shall not Acquire any security if, 

immediately after the Acquisition, a 

Retail Fund would have invested less 

than fifteen percent of its Total Assets, 

and an Institutional Fund would have 

invested less than thirty percent of its 

Total Assets, in Weekly Liquid Assets. 

(v) Annual Board Determination. The 

board of directors of each money market 

fund shall determine no less than once 

each calendar year whether the fund is 

an Institutional Fund for purposes of 

meeting the minimum liquidity 

requirements set forth in paragraphs 

(c)(5)(iii) and (iv) of this section. 

(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. In 

the event that 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 held by the money 

market fund has, since the security was 

Acquired by the fund, been given a 

rating by any NRSRO below the 

NRSRO’s highest short-term rating 

category, 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. 

(B) The reassessment 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. 

(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 with respect to one or 

more portfolio securities (other than an 

immaterial default unrelated to the 

financial condition of the issuer) or an 

Event of Insolvency with respect to the 

issuer of the security or any Demand 

Feature or Guarantee to which it is 

subject, where immediately before 

default the securities (or the securities 

subject to the Demand Feature or 

Guarantee) accounted for 1⁄2 of 1 percent 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32737 

or more of a money market fund’s Total 

Assets, the money market fund shall 

promptly notify the Commission of such 

fact and the actions the money market 

fund intends to take in response to such 

situation; or 

(B) Purchase of a security from the 

fund by an affiliated person in reliance 

on § 270.17a–9 of this section, 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 

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. 

(D) Stress Testing. Written procedures 

shall provide for: 

(1) 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; 

(2) A report on the results of such 

testing to be provided to the board of 

directors at its next regularly scheduled 

meeting, which report shall include 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 

(3) 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. 

(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 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 

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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. 

(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 NRSRO ratings (if 

any) used to determine the status of the 

security as an Eligible 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 

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 and Assessments 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)(8)(ii)(D)(2) of this 

section and a written record of the 

assessment required under paragraph 

(c)(8)(ii)(D)(3) 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) Public Disclosure of Valuations. 

The money market fund shall post on its 

Web site, for a period of not less than 

twelve months, beginning no later than 

the second business day of the month, 

the fund’s schedule of investments, as 

prescribed by rules 12–12 through 12– 

14 of Regulation S–X [17 CFR 210.12.– 

12 through 210.12–14], as of the last 

business day of the prior month. 

(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 

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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 

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 (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), and (C) 

(material dilution or unfair results); and 

(c)(9) (required procedures: PennyRounding Method) of this section) 

provided: 

(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)(11), 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 paragraphs (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) 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 current price per share 

calculated pursuant to § 270.2a–7(c) is 

less than the fund’s stable net asset 

value or price per share; 

(2) The fund’s board of directors, 

including a majority of directors who 

are not interested persons of the fund, 

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 

his designee. 

(b) Any fund 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. A fund 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 his 

designee. 

(c) For the protection of fund 

shareholders, the Commission may 

issue an order to rescind or modify the 

exemption provided by this section as to 

that fund, after appropriate notice and 

opportunity for hearing in accordance 

with section 40 of the Act (15 U.S.C. 

80a–39). 

5. Section 270.30b1–5 is revised to 

read as follows: 

§ 270.30b1–5 Quarterly report. 

Every registered management 

investment company, other than a small 

business investment company registered 

on Form N–5 (§§ 239.24 and 274.5 of 

this chapter), shall file a quarterly report 

on Form N–Q (§§ 249.332 and 274.130 

of this chapter) not more than 60 days 

after the close of the first and third 

quarters of each fiscal year. A registered 

management investment company that 

has filed a registration statement with 

the Commission registering its securities 

for the first time under the Securities 

Act of 1933 is relieved of this reporting 

obligation with respect to any reporting 

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32740 Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 

period or portion thereof prior to the 

date on which that registration 

statement becomes effective or is 

withdrawn. A registered management 

investment company regulated as a 

money market fund under § 270.2a–7 is 

relieved of the reporting obligation 

required pursuant to Item 1 of Form 

N–Q. 

6. Section 270.30b1–6 is added to 

read as follows: 

§ 270.30b1–6 Monthly report for money 

market funds. 

Every registered open-end 

management investment company, or 

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 no later than the second 

business day of each month. 

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 

are added to read as follows: 

§ 274.201 Form N–MFP, Portfolio Holdings 

of Money Market Funds. 

This form shall be used by registered 

management investment companies that 

are regulated as money market funds 

under § 270.2a–7 of this chapter to file 

reports pursuant to § 270.30b1–6 of this 

chapter not later than two business days 

after the end 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 openend management investment 

companies, or series thereof, that are 

regulated as money market funds under 

§ 270.2a–7 (‘‘money market funds’’), to 

file reports with the Commission, not 

later than the second business day of 

each month, pursuant to rule 30b1–6 

under the Investment Company Act of 

1940 (17 CFR 270.30b1–6). 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 under 

section 30(b) of the Investment 

Company Act of 1940 (the ‘‘Act’’) and 

rule 30b1–6 of the Act (17 CFR 

270.30b1–6). Form N–MFP must be filed 

no later than the second business day of 

each month, and will contain certain 

information about the money market 

fund and its portfolio holdings as of the 

last business day of the preceding 

month. 

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 no later than the second 

business day of each month, 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. 

UNITED STATES SECURITIES AND 

EXCHANGE COMMISSION 

WASHINGTON, DC 20549 

FORM N–MFP—MONTHLY 

SCHEDULE OF PORTFOLIO 

HOLDINGS OF MONEY MARKET 

FUNDS 

Date of Filing: 

Report for [Month, Day, Year] 

Name and Address of Fund or Portfolio 

Filing This Report: 

CIK Number: 

SEC File Number: 

EDGAR Series Identifier: 

Number of share classes offered: 

Check here if Amendment [ ] 

Amendment Number: 

Is this an Initial Filing? [Y/N] 

Is this a Final Filing? [Y/N] 

Is the fund liquidating? [Y/N] 

Is the fund merging with another fund? 

[Y/N] 

If so, please identify the other fund by 

name, SEC File Number, and 

EDGAR Series Identifier. 

Is the fund being acquired by another 

fund? [Y/N] 

If so, please identify the acquiring fund 

by name, SEC File Number, and 

EDGAR Series Identifier. 

Part I: Information about the Fund 

Item 1. Name of Investment Adviser. 

a. SEC file number of Investment 

Adviser. 

Item 2. Name of Sub-Adviser. If a fund 

has multiple sub-advisers, disclose 

the name of all sub-advisers to the 

fund. 

a. SEC file number of Sub-Adviser. 

Disclose the SEC file number of 

each sub-adviser to the fund. 

Item 3. Independent Auditor. 

Item 4. Administrator. 

Item 5. Transfer Agent. 

a. SEC file number of Transfer Agent. 

Item 6. Minimum initial investment. 

Item 7. Is this a feeder fund? [Y/N] 

a. If this is a feeder fund, identify the 

master fund. 

b. SEC File Number of the master 

fund. 

Item 8. Is this a master fund? [Y/N] 

a. If this is a master fund, identify all 

feeder funds. 

b. SEC File Number of each feeder 

fund. 

Item 9. Is this portfolio primarily used 

to invest cash collateral? [Y/N] 

Item 10. Is this portfolio primarily used 

to fund variable accounts? [Y/N] 

Item 11. Category. Indicate whether the 

money market fund is a Treasury, 

Government/Agency, Prime, TaxFree National, or Tax-Free State 

Fund. 

Item 12. Total value of the portfolio at 

cost, to the nearest hundredth of a 

cent. 

Item 13. Net value of other assets and 

liabilities, to the nearest hundredth 

of a cent. 

Item 14. Net asset value per share for 

purposes of distributions, 

redemptions, and repurchase, to the 

nearest hundredth of a cent. 

Item 15. Net shareholder flow activity 

for the month ended (subscriptions 

less redemptions). 

Item 16. Dollar weighted average 

maturity. Calculate the dollar 

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Federal Register / Vol. 74, No. 129 / Wednesday, July 8, 2009 / Proposed Rules 32741 

weighted average maturity of 

portfolio securities, based on the 

time remaining until the next 

interest rate re-set. 

Item 17. Dollar weighted average life 

maturity. Calculate the dollar 

weighted average maturity of 

portfolio securities based on final 

legal maturity or demand feature. 

Item 18. 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. 

Part 2: Schedule of Portfolio Securities. 

For each security held by the money 

market fund, please disclose the 

following: 

Item 19. The name of the issuer. 

Item 20. CIK number of the issuer. 

Item 21. The title of the issue. 

Item 22. The CUSIP. 

Item 23. Other unique identifier (if the 

instrument does not have a CUSIP). 

Item 24. The category of investment. 

Please indicate the category that 

most closely identifies the 

instrument from among the 

following: Treasury Debt; 

Government Agency Debt; Variable 

Rate Demand Notes; Other 

Municipal Debt; Financial 

Company Commercial Paper; Asset 

Backed Commercial Paper; 

Certificate of Deposit; Structured 

Investment Vehicle Notes; Other 

Notes; Treasury Repurchase 

Agreements; Government Agency 

Repurchase Agreements; Other 

Repurchase Agreements; Insurance 

Company Funding Agreements; 

Investment Company; Other 

Instrument. 

Item 25. Rating. Please indicate whether 

the security is a 1st tier security, 

unrated, or no longer eligible. 

Item 26. Requisite NRSROs. 

a. Identify each Requisite NRSRO. 

b. For each Requisite NRSRO, disclose 

the credit rating given by the 

Requisite NRSRO. 

Item 27. The maturity date as 

determined under rule 2a–7. 

Disclose the maturity date, taking 

into account the maturity 

shortening provisions of rule 2a–7. 

Item 28. The final legal maturity date. 

Item 29. Is the maturity date extendable? 

[Y/N] 

Item 30. Does the security have a credit 

enhancement? [Y/N] 

Item 31. For each credit enhancement, 

disclose: 

a. The type of credit enhancement. 

b. The identity of the credit 

enhancement provider. 

c. The credit rating of the credit 

enhancement provider. 

Item 32. Does the security have an 

insurance guarantee? [Y/N] 

Item 33. For each insurance guarantee 

provider, disclose: 

a. The identity of the insurance 

guarantee provider. 

b. The credit rating of the insurance 

guarantee provider. 

Item 34. Does the security have a 

liquidity provider? [Y/N] 

Item 35. For each liquidity provider, 

disclose: 

a. The identity of the liquidity 

provider. 

b. The credit rating of the liquidity 

provider. 

Item 36. The principal amount of the 

security. 

Item 37. The current amortized cost, to 

the nearest hundredth of a cent. 

Item 38. Is this a Level 1, Level 2, or 

Level 3 security, or Other? Please 

explain how the security was 

valued. Level 1 securities are 

valued based on quoted prices in 

active markets for identical 

securities. Level 2 securities are 

valued based on other significant 

observable inputs (including quoted 

prices for similar securities, interest 

rates, prepayment speeds, credit 

risks, etc.). Level 3 securities are 

valued based on significant 

unobservable inputs (including the 

fund’s own assumptions in 

determining the fair value of 

investments). See Statement of 

Financial Accounting Standards 

Board No. 157, ‘‘Fair Value 

Measurement.’’ 

Item 39. The percentage of the money 

market fund’s gross assets invested 

in the security, to the nearest 

hundredth of one percent. 

Item 40. Explanatory notes. Please 

disclose any other information that 

may be material to other disclosure 

in the Form. 

Dated: June 30, 2009. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–15906 Filed 7–7–09; 8:45 am] 

BILLING CODE 8010–01–P 

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