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U.S. Securities and Exchange Commission

Making Money Market Funds Less Risky

U.S. Securities And Exchange Commission

Open Meeting Fact Sheet

June 24, 2009

The Securities and Exchange Commission today will consider proposing rule amendments designed to significantly strengthen the regulatory requirements governing money market funds. The proposal would increase the resilience of these funds to economic stresses and reduce the risks of runs on the funds. The proposal would:

Further Restrict Risks by Money Market Funds

Improved Liquidity: The proposal would prohibit money market funds from purchasing illiquid securities. It also would require that funds have a minimum percentage of their assets in highly liquid securities so that those assets could be readily converted to cash:

  • For retail money market funds at least 5% of assets must be in cash, U.S. Treasury securities, or readily convertible into cash (collectively, “liquid”) within one day, and at least 15% must be liquid within one week.
  • For institutional money market funds, which have experienced greater liquidity challenges than retail funds, at least 10% of assets must be liquid within one day, and at least 30% must be liquid within one week.

Currently, rule 2a-7, the rule governing money market funds, contains no liquidity requirements. [Note: The one-day liquidity limits for retail and institutional funds would not apply to tax exempt (i.e., municipal) money market funds.]

Shortened Maturity Limits: The proposal would shorten the average maturity limits for money market funds, which would help to limit the exposure of the funds to certain risks, such as interest rate risks. It would do this by:

  • Restricting the maximum “weighted average life” maturity of a fund’s portfolio to 120 days (currently there is no such limit). The effect of the restriction would be to limit the ability of the fund to invest in long-term floating rate securities.
  • Restricting the maximum weighted average maturity of a fund’s portfolio to 60 days (currently the limit is 90 days).

Higher Credit Quality: The proposal would limit money market funds to investing only in the highest quality securities — that is, not “Second Tier” securities. Currently, most funds are permitted to invest up to 5% of their assets in “Second Tier” securities.

Periodic Stress Tests: The proposal would require fund managers to examine the fund’s ability to maintain a stable net asset value per share in the event of shocks – such as interest rate changes, higher redemptions, and changes in credit quality of the portfolio.

Know Your Investor” Procedures: The proposal would require funds to hold sufficiently liquid securities to meet foreseeable redemptions. In order to meet this requirement, it is expected that funds would develop procedures to identify investors whose redemption requests may pose risks for funds. As part of these procedures, funds would anticipate the likelihood of large redemptions.

Enhance Disclosure of Portfolio Securities

Monthly Web Site Posting: The proposal would require money market funds each month to post on their Web sites their portfolio holdings.

Monthly Reporting: The proposal would also require money market funds each month to report to the Commission detailed portfolio schedules in a format that could be used to create an interactive database through which the Commission could better oversee the activities of money market funds. This would replace the current quarterly reporting requirement.

Improve Money Market Fund Operations

Electronic Processing: The proposal would require that all money market funds and their administrators be able to process purchases and redemptions electronically at a price other than $1 per share. The requirement would facilitate share redemptions if a fund were to “break the buck.” A money market fund “breaks the buck” when its net asset value falls below $1 per share, meaning investors in that fund will lose money.

Suspension of Redemptions: The proposal would permit a money market fund’s board of directors to suspend redemptions if the fund were to break a buck and decide to liquidate. In the event of a threatened run on the fund, this would allow for an orderly liquidation of the portfolio. The fund would be required to notify the Commission when it relies on this rule.

Purchases by Affiliates: The proposal would expand the ability of affiliates of money market funds to purchase distressed assets from funds in order to protect a fund from losses. Currently, an affiliate cannot purchase securities from the fund before a ratings downgrade or a default of the securities – unless it receives individual approval. The change would permit such purchases without the need for approval under conditions that would protect the fund from transactions that disadvantage the fund. The fund would have to notify the Commission when it relies on this rule.

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In addition to the proposed rules, the Commission will consider seeking public comment on such issues as:

  • Floating Share Price — Should money market funds be required to sell and redeem shares at a floating share price rather than a stable share price (typically $1 per share)?
  • Credit Rating Agencies — What role should credit rating agencies’ ratings have in money market fund regulation? Should fund boards designate certain rating agencies that they will use to evaluate securities for purchase, and to monitor securities after purchase?
  • Asset-Backed Securities — Should the Commission amend the money market fund rule with respect to investment in asset-backed securities and the attendant risks?

The proposed rule amendments and requests for comment would be subject to a 60 day public comment period following publication in the Federal Register.



Modified: 06/30/2009