November 10, 1989
TO: BOARD OF GOVERNORS NO. 70-89
SEC RULES COMMITTEE NO. 70-89
MONEY MARKET FUND CHIEF EXECUTIVE OFFICERS NO. 9-89
RE: INSTITUTE LETTER TO SEC STAFF CONCERNING REGULATION
OF MONEY MARKET FUNDS
__________________________________________________________
Attached is a copy of the letter the Institute submitted to
the SEC staff concerning the quality standards applicable to
instruments held by money market funds.
As you know, this past summer an issuer defaulted on its
short-term commercial paper which was held by a number of money
market funds. Shortly thereafter, the staff of the SEC requested
that the industry review the current regulation of money market
funds. Specifically, the staff sought input on whether steps
should be taken to tighten up Rule 2a-7, the rule governing the
use of amortized cost valuation by money market funds.
The Institute formed an ad hoc committee to review this
matter. As stated in the letter, the committee concluded that it
was not desirable to amend the provisions of Rule 2a-7. Instead,
the committee suggested that the Commission issue an interpretive
release reiterating the obligation of the fund to analyze and
monitor credit risk, as currently required by the rule. In
connection with considering credit risk, the letter notes that it
would be useful if the release included factors that might be
considered in assessing credit risk. As one of the factors, we
recommended that with respect to money market instruments which
have not received a rating higher than the second highest rating
(e.g., A-2 or P-2), the quality of the issuer's senior,
unsecured, long-term debt securities also be examined. If any of
those long-term debt securities have received a rating below
"investment grade," we stated that the release might suggest that
the board consider limiting the fund's investments in that
issuer's short-term debt to one percent of the fund's assets.
In addition, the letter recommends that the Guidelines to
Form N-1A be amended to require (1) certain disclosures
concerning the credit analysis undertaken by the fund and (2)
that funds which purchase certain instruments be required to
disclose this fact in their prospectuses along with any
associated risks.
We will keep you informed of developments.
Amy B. Rosenblum
Assistant General Counsel
Attachment