Revised: August 7, 2012
Staff Responses to Questions About Money Market Fund Reform
The staff of the Division of Investment Management has prepared the following responses to questions related to rule 2a-7, the “money market fund rule” under the Investment Company Act of 1940 (“Investment Company Act”), and other rules applicable to money market funds in light of the amendments recently approved by the Securities and Exchange Commission (the “Amendments”) and expects to update this document from time to time to include responses to additional questions. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved this information. The adopting release for the money market fund reforms (dated February 23, 2010, the “Adopting Release”) can be found at: http://www.sec.gov/rules/final/2010/ic-29132.pdf.1 Responses to questions on rule 30b1-7 and Form N-MFP will be included in a separate document that will be accessible through a hyperlink when available.
I. Compliance Dates and Implementation
A. Disposal of Holdings to Meet the WAM/WAL Limits
Q: Section III of the Adopting Release states that “[e]xcept as indicated below, the compliance date for amendments to rule 2a-7 related to portfolio quality, maturity, liquidity, and repurchase agreements, is May 28, 2010. Funds are not required to dispose of portfolio securities owned, or terminate repurchase agreements entered into, as of the time of adoption of the amendments to comply with the requirements of the rule as amended. Fund portfolios must meet the new maximum [weighted average maturity (“WAM”) and weighted average life (“WAL”)] limits by June 30, 2010.” Is a money market fund required to dispose of securities owned or terminate repurchase agreements entered into as of the time of adoption of the Amendments (February 23, 2010) in order to meet the new maximum WAM and WAL limits by June 30, 2010?
A: A money market fund must be in compliance with the WAM limit of 60 days and the WAL limit of 120 days by June 30, 2010. Funds may use alternative portfolio strategies in order to comply with these requirements, including the acquisition of securities with shorter maturities to offset securities with longer maturities held at the time the rule was adopted or, if necessary, disposal of those portfolio securities.
B. Amendments to Registration Statements
Q: The Adopting Release states that the Commission would not object if a fund were to amend its registration statement to reflect the fund’s compliance with the amended rule pursuant to rule 485(b) under the Securities Act of 1933, if other changes in the fund’s post-effective amendment meet the conditions for immediate effectiveness under that rule. May a fund initially reflect revisions, including disclosure of Designated NRSROs, in a supplement to its registration statement, pursuant to rule 497 under the Securities Act, rather than in a post-effective amendment?
A: The statement in the Adopting Release that disclosure changes may be made in a registration statement filed under rule 485(b) was intended to inform registrants that a filing under rule 485(a), providing for automatic effectiveness typically after 60 days, is not required. We believe, however, that a registrant could also conclude that investors would be informed adequately of the Designated NRSROs and investment policy changes made in response to the Amendments through a supplement pursuant to rule 497, which would be incorporated into the prospectus and statement of additional information when the fund files its next post-effective amendment.
Q: Paragraph (d) of rule 2a-7 permits the maturity shortening provisions of paragraphs (d)(1) through (d)(8) to apply for purposes of determining the maturity of a portfolio security under the rule. The rule’s new definitions of Daily Liquid Assets and Weekly Liquid Assets include “[s]ecurities that will mature” within one or five Business Days, respectively. May a fund rely on the maturity shortening provisions of paragraphs (d)(1) through (d)(8) for purposes of these definitions?
A: No. Section II.C.3 of the Adopting Release explains that Daily Liquid Assets and Weekly Liquid Assets include “only cash and securities that can readily be converted to cash.” The maturity shortening provisions of paragraphs (d)(1) through (d)(8) are not always consistent with this requirement and therefore should not be relied upon in interpreting those definitions. The term “mature” in these definitions should be understood to mean only the date on which 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.
Q: Agency notes can qualify as Weekly Liquid Assets only if they “are issued at a discount to the principal amount to be repaid at maturity.” During periods of market stress, investors may bid to purchase non-interest bearing agency notes for their face value or for prices above their face value. Assuming the notes have remaining maturities of 60 days or less, can a fund still treat such Government Securities as Weekly Liquid Assets?
A: Yes. Whether an agency note may qualify as a Weekly Liquid Asset depends on whether the note is issued without an obligation to pay additional interest on the principal amount, so that income earned, if any, is solely the difference between the amount paid at issuance and the principal amount payable upon maturity.
Q: Many money market funds do not update their accounting records until the close of business. May a fund use its Total Assets determined at the close of the previous Business Day (which also is the Total Assets at the beginning of the current Business Day) to determine compliance with the Daily and Weekly Liquid Asset requirements at the time a security is acquired?
A: A money market fund may choose any reasonable time for determining its Total Assets, Daily Liquid Assets, and Weekly Liquid Assets for purposes of compliance with rule 2a-7, provided that: (a) the determinations are made at least once every Business Day; and (b) the fund consistently makes the determinations at the same time or times. The fund should use the Total Assets, Daily Liquid Assets and Weekly Liquid Assets most recently computed. Nevertheless, a fund should take into account its use of Daily or Weekly Liquid Assets to acquire assets when determining whether a subsequent acquisition complies with the Daily or Weekly Liquid Asset requirement. For example, if a fund acquires longer term securities with a value of $10 million using available cash balances, the $10 million should be subtracted from the fund’s Daily Liquid Assets when evaluating whether a subsequent acquisition on the same day would be in compliance with the Daily or Weekly Liquid Asset requirement. A fund, however, must at all times be in compliance with the general liquidity requirement in paragraph (c)(5) of rule 2a-7, which requires the fund to hold securities sufficiently liquid to meet reasonably foreseeable shareholder redemptions.
Q: If a taxable fund’s portfolio manager learns that the fund is expected to experience net redemptions of one percent, which will be funded from Daily Liquid Assets, and (i) the fund’s portfolio manager sells securities with remaining maturities in excess of seven days for settlement on the next Business Day and (ii) the fund records the sale in its books as a receivable due on the next Business Day, can the fund treat the receivable as a Daily Liquid Asset?
A: Yes. As previously noted, Daily and Weekly Liquid Assets are intended to include securities that can readily be converted to cash within one or five Business Days. This requirement would be satisfied if a security is sold to a creditworthy buyer, and the proceeds from the sale are due unconditionally within one (in the case of a Daily Liquid Asset) or five (in the case of a Weekly Liquid Asset) Business Days.
Q: In a master-feeder structure, can a taxable money market fund that is a feeder fund, investing solely in securities issued by a master fund in reliance on section 12(d)(1)(E) of the Investment Company Act, look through to the portfolio of the master fund for purposes of compliance with the Daily Liquid Asset requirement?
A: No. Such a feeder fund can comply with the requirement by investing in a master fund that guarantees redemptions in one day or by holding 10 percent of its Total Assets in cash or in other Daily Liquid Assets that are not deemed to be investment securities for purposes of section 12(d)(1)(E), e.g., U.S. Treasury securities. See Equity Securities Trust, Series 4, SEC No-action Letter (Jan. 19, 1994); The Thai Fund, Inc., SEC No-Action Letter (Nov. 30, 1987).
III. Stress Testing
A. Procedures for Stress Testing
Q: Rule 2a-7(c)(10)(v)(A) requires funds to adopt stress testing procedures that provide for certain hypothetical events. 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), however, are not likely to experience downgrades of or defaults on those securities.2 May U.S. Treasury money market funds determine not to stress test for a downgrade or default?
A: We would not object if an investment adviser of a U.S. Treasury money market fund refrained from stress testing for downgrades or defaults if the board makes a determination that these types of stress events are not relevant for the particular fund. Pursuant to rule 2a-7(c)(11)(ii), the money market fund must retain a record of the board’s determination and the basis for the determination for a period of at least six years, the first two in an easily accessible place.
Q: A money market fund can “break the buck” if the market-based net asset value of its securities exceeded $1.005, but such a fund easily could take action to avoid re-pricing its shares by making a distribution of capital gains or return of capital to its shareholders. Therefore, must a money market fund stress test its portfolio for the risk of breaking the buck on the upside?
Q: Rule 2a-7(c)(10)(v) requires a money market fund to adopt written procedures to provide for the “periodic testing … 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 downgrade of or default on portfolio securities ....” Although the diversification requirements of rule 2a-7 generally restrict a fund’s exposure to any one portfolio security, a default of any First or Second Tier Security issued by a single issuer could cause a money market fund to “break a buck.” How should funds stress test defaults?
A: Although changes in short-term interest rates and redemptions will likely affect the entire portfolio, downgrades and defaults are likely to be limited to an individual security or to a few specific securities. This test should therefore be designed to assist the board of directors in assessing the effect of isolated stresses on a fund’s shadow net asset value (“NAV”). If a downgrade or default of a portfolio holding is likely to have a significant effect on the fund’s shadow NAV, so that the shadow NAV would deviate by more than one-half cent per share, the test should indicate the full extent of the loss a fund might be expected to incur as a result.
Q: If under normal market conditions stress testing procedures require monthly testing and the board meets on a quarterly basis, does the board need to receive the results of all the testing done between its regular meetings, or just the most recent testing results?
A: Rule 2a-7(c)(10)(v) requires the board of directors to adopt procedures that provide for “periodic testing, at such intervals as the board of directors determines appropriate and reasonable in light of current market conditions,” and “[a] report on the results of such testing to be provided to the board of directors at its next regularly scheduled meeting.” Thus, the rule requires the board of directors to receive a report on all periodic testing performed. The Division believes that a single report presenting data from each of the monthly stress tests conducted between meetings would satisfy the rule. We encourage reports to present results (including results previously reported to the directors) in a manner that would facilitate directors’ observation of trends in stress testing results.
B. “Know Your Customer” Requirements and Stress Testing
Q: The Adopting Release states that a money market fund should incorporate “know your customer” evaluations in its stress testing procedures.3 How could money market funds incorporate these evaluations in their stress tests?
A: A money market fund should incorporate an evaluation of the liquidity needs of its shareholder base into its stress testing procedures. For example, testing of the fund’s ability to maintain a stable net asset value per share based upon specified hypothetical events should account for the fund’s anticipated redemption activity for the relevant period. In addition, the investment adviser’s assessment 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 should be based, in part, on the redemption activity that the investment adviser believes is reasonably likely to occur in the following year.
A. Designated NRSROs
Q: The definition of First Tier Security includes any Eligible Security that is a Government Security. Given that a money market fund that invests only in Government Securities or repurchase agreements collateralized by Government Securities does not need to rely on NRSRO ratings to determine whether its portfolio securities are First or Second Tier, does the fund still need to designate NRSROs?
Q: Some NRSROs do not rate municipal securities. Can a board include one of these NRSROs in the four Designated NRSROs for a Tax Exempt Fund? Could the NRSRO rate companies that may act as the provider of a Guarantee or Demand Feature for tax exempt securities?
A: The board of directors of a money market fund does not have to designate four NRSROs for every type of security held by the fund (or one NRSRO for every type of security held by the fund, given that a fund may hold Unrated Securities). As long as a Designated NRSRO rates at least one type or class of securities in which the fund invests, the Designated NRSRO will count toward the required four. A Tax Exempt Fund, therefore, can include among its four Designated NRSROs an NRSRO that rates only the providers of Guarantees or Demand Features for tax exempt securities in which the fund invests.
Q: When must a fund incorporate the use of Designated NRSROs in determining whether a security is an Eligible Security?
A: When a fund discloses its Designated NRSROs as required under rule 2a-7(a)(11) (but no later than December 31, 2010), the fund must incorporate their use in determining whether a security is an Eligible Security. Until it does, the fund may comply with the obligations for determining and monitoring Eligible Securities set forth in rule 2a-7 as in effect before May 5, 2010.
Q: When a board approves its Designated NRSROs, must a fund review whether the designation affects the eligibility or results in a downgrade of portfolio securities held prior to the designation as a result of the Designated NRSROs’ ratings?
A: Yes. The designation of the NRSROs might affect a portfolio security’s status as an Eligible Security or as a First or Second Tier Security. That could be the case, for example, if a fund does not designate an NRSRO that the fund relied on previously as a Requisite NRSRO. If the designation results in a downgrade of the security, the fund would be required to reassess whether the security continues to present minimal credit risks. See footnote 116 of the Adopting Release (providing an example of the potential effect of a new NRSRO designation, which is now treated under the rules as the equivalent of a credit event).
Q: If a board has approved four Designated NRSROs, and a Designated NRSRO withdraws its registration as an NRSRO or ceases to provide credit ratings, or if two Designated NRSROs merge in a business combination, how long does the board have to designate an additional NRSRO?
A: A money market fund’s board of directors does not have to call a special meeting to replace a Designated NRSRO in these circumstances, but may designate a new NRSRO at a regularly scheduled board meeting that occurs before the event takes place. If an event is announced shortly before it occurs, however, the board may postpone the designation until after the event occurs as reasonably necessary to give the adviser time to prepare a recommendation for the board.
B. Asset Backed Securities (“ABS”)
Q: In performing the minimal credit risk evaluation for ABS, does a board have to analyze all of the elements discussed in the Adopting Release? Can a board analyze elements that are not specifically discussed, but that are relevant to the risk associated with the investment?
A: As discussed in Section II.A.3 of the Adopting Release, the board should “perform the legal, structural, and credit analyses required to determine that the particular ABS involves appropriate risk for the money market fund.” This standard requires the board to consider all elements relevant to the analyses required to evaluate the ABS’ risk. The board need not consider other elements discussed in the Adopting Release that the board determines are not relevant for the particular investment.
V. Website Posting
A. Compliance Date
Q: The Adopting Release indicates that the compliance date for the public website disclosure is October 7, 2010. Rule 2a-7(c)(12) requires that a money market fund post a schedule of investments on its website for a period of not less than six months. On October 7, 2010, may a fund post only a schedule of investments for the month ended September 2010, or will the fund be required to post a schedule of investments for each of the six months ending prior to the compliance date (i.e., April 2010 through September 2010)?
A: Money market funds are not required to post the schedule of investments for periods prior to the month ending September 30, 2010.
B. Money Market Funds Offering Shares Only to Affiliated Funds
Q: Must an open-end management investment company registered under the Investment Company Act and regulated as a money market fund under rule 2a-7 that offers and sells its shares only to registered investment companies that are part of the same “group of investment companies”, as that term is defined in section 12(d)(1)(G)(ii) of the Investment Company Act, comply with the website disclosure requirement described in rule 2a-7(c)(12)?
C. Link to Form N-MFP
Q: Rule 2a-7(c)(12)(iii) requires that a money market fund provide on its website a link to the SEC’s website where a user can obtain the fund’s most recent 12 months of publicly available filings of Form N-MFP. Can the money market fund satisfy this requirement by creating a link to (i) the website http://sec.gov/ or (ii) the web page on the SEC website where a user can "Search for company filings" (http://sec.gov/edgar/searchedgar/webusers.htm)?
Q: Can the money market fund satisfy the requirement in rule 2a-7(c)(12)(iii) by creating a link to a fund specific web page on the SEC website that contains links to (at least) each of the fund’s most recent 12 monthly Form N-MFP filings?
A: Yes. A fund can do a one-time search in the EDGAR section of the SEC website limited to Form N-MFP filings. The fund should not include a specific date range in its search or limit the number of possible results. The resulting URL containing the links to the fund’s Form N-MFP filings would be updated automatically (without the fund having to update the search) to include any Form N-MFP filed after the URL was created. The fund can create a link on its website to the URL resulting from such a search to satisfy the requirement to post a link to the fund’s most recent 12 months of filings on Form N-MFP. An example of such a URL search is:
http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=[insert the fund’s CIK]&type=N-MFP&dateb=&count=20&scd=filings.
Q: Form N-MFP filings must first be made no later than December 7, 2010 for the period ending November 30, 2010, and will first be made publicly available on the SEC website on January 31, 2011. How should funds comply with the requirement to provide the required link during the initial start-up period?
A: Funds should provide the link beginning with the monthly website posting for the month ending November 30, 2010, which will be available on the SEC website on January 31, 2011.
D. Master-Feeder Funds
Q: Should a money market fund that is a feeder fund in a master-feeder structure disclose the master fund’s portfolio holdings in its monthly website posting?
A: Under rule 2a-7(c)(12), the feeder fund must disclose the master fund’s portfolio holdings (which reflect the actual exposure of the feeder fund). However, Commission staff will not object if the feeder fund provides a link to the master fund’s website disclosure of portfolio holdings in lieu of listing the master fund’s portfolio holdings.
E. WAM and WAL Disclosure
Q: Should a fund’s WAM and WAL be provided on the same page with the required listing of the securities held by the fund or can it be provided on a separate web page that provides data about the fund (e.g., an overview page that provides SEC yield, top ten holdings, etc.).
A: WAM and WAL should be provided on the same web page with the required listing of the securities held by the fund as of the last Business Day of the month.
F. Unregistered Funds and Rule 12d1-1
Question: A “private” money market fund undertakes to comply with rule 2a-7 under the Investment Company Act in order to permit registered investment companies to invest in the fund under rule 12d1-1 under the Investment Company Act in excess of the limits set forth in section 12(d) of the Investment Company Act. Pursuant to rule 2a-7(c)(12), a “private” money market fund is required to post monthly on its publicly available web site specific information about securities in its portfolio as well as the weighted average maturity and weighted average life maturity of its portfolio. Would compliance with the conditions of this web posting requirement cause the fund to violate the prohibition on general solicitation and advertising in rule 502(c) under the Securities Act? The fund relies on the exception provided in section 3(c)(1) or section 3(c)(7) of the Investment Company Act to the definition of “investment company” in section 3(a) of that Act. Sections 3(c)(1) and 3(c)(7) both require that a fund not make or propose to make a public offering of its securities.
Answer: The view of the Division of Corporation Finance, as stated in the Division of Corporation Finance’s Securities Act Rules CDI Question 256.21, is that the fund will not be deemed to violate the prohibition on general solicitation and advertising by posting information on its web site in compliance with rule 2a-7 for purposes of permitting registered investment companies to invest in the fund under rule 12d1-1 in excess of the limits set forth in section 12(d) of the Investment Company Act, so long as the fund posts only the information required by the rule and does not use its web site to offer or sell securities or in a manner that is deemed to be general solicitation or advertising for offers or sales of its securities. [Aug. 11, 2010]
G. Money Market Funds Registered Only Under the Investment Company Act
Q: A money market fund that is registered under the Investment Company Act must comply with rule 2a-7(c)(12). Rule 2a-7(c)(12) requires a money market fund to post monthly on its website specific information about securities in its portfolio as well as the weighted average maturity and weighted average life maturity of its portfolio. If the fund offers and sells its securities without registration under the Securities Act in reliance on rule 506 of Regulation D under the Securities Act and/or section 4(2) of that Act, would compliance with the requirements of this website posting cause the fund to violate the prohibition on general solicitation and advertising in rule 502(c) of Regulation D that applies to rule 506 offerings? Would the fund be able to rely on the section 4(2) non-public offering exemption?
A: Consistent with the Division of Corporation Finance’s Securities Act Rules CDI Question 256.21, the fund will not be deemed to violate the prohibition on general solicitation and advertising in rule 502(c) of Regulation D, so long as it limits the information posted on its website to the information required by rule 2a-7(c)(12) and does not otherwise use its website to sell securities or in a manner that conditions the market for sales of its securities. Because rule 506 is a safe harbor that provides objective standards that an issuer can rely on to meet the requirements of the section 4(2) exemption, a fund following this guidance regarding the use of the information posted on its website should be deemed to comply with the section 4(2) exemption, if it otherwise complies with rule 506.
H. Final Legal Maturity Date
Q: Rule 2a-7(c)(12)(ii)(F) requires that a fund include for each security the final legal maturity date taking into account any maturity date extensions that may be effected at the option of the issuer. Should the security’s final legal maturity date be the same as the date used to calculate the fund’s WAL?
A: Yes. See also footnote 154 of the Adopting Release.
I. Liquidated Money Market Funds
Q: Is a liquidated money market fund required to post its portfolio holdings on its website?
A: Rule 2a-7(c)(12) of the Investment Company Act requires a money market fund to post on its website, for a period of not less than six months, beginning no later than the fifth Business Day of the month, a schedule of its investments, as of the last Business Day of the prior month, that includes the information specified in the rule ("Website Portfolio Holdings Disclosure"). In response to recent inquiries, the staff confirms that liquidated money market funds are not required to maintain their Website Portfolio Holdings Disclosure. [July 31, 2012]
1 Unless otherwise defined in this document, capitalized terms have the meanings provided in rule 2a-7.
2 See Money Market Fund Reform, Investment Company Act Release No. 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)], at Section II.C.3.
3 See Adopting Release at n.261 (“As discussed above, amended rule 2a-7’s new liquidity requirements require money market funds to evaluate their liquidity needs based on their shareholder base. . . . Money market funds should also incorporate this element in their stress testing procedures as appropriate.”).