December 13, 1989
TO: BOARD OF GOVERNORS NO. 75-89
MONEY MARKET FUND CHIEF EXECUTIVE OFFICERS NO. 11-89
SEC RULES COMMITTEE NO. 76-89
RE: SEC STAFF RESPONSE TO INSTITUTE LETTER ON MONEY MARKET FUNDS
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Attached is a copy of the response of the SEC staff to the
Institute's letter concerning the quality standards applicable to
money market instruments. (See Memorandum to Board of Governors
No. 70-89, SEC Rules Committee No. 70-89 and Money Market Fund
Chief Executive Officers No. 9-89, dated November 10, 1989.)
In her response, Kathryn McGrath reiterated that Rule 2a-7
requires the board to undergo a two-part analysis of the money
market instruments which may be purchased by the fund.
Specifically, Mrs. McGrath noted that the instrument must be one
which (1) the board has determined presents a minimal credit risk
to the fund and (2) is rated "high quality" by a major rating
service or, if the security is unrated, is determined by the
board to be of comparable quality.
While Mrs. McGrath agreed with the Institute's position
that Rule 2a-7 did not need to be amended, she did not believe
that it was necessary for the Commission to issue an interpretive
release on the fund's obligation to determine and monitor credit
risk, as suggested by the Institute. The letter states that such
a release is not necessary since the rule is clear about the
fund's obligations and, thus, there is nothing to interpret.
Finally, the letter states that the Office of Disclosure
and Adviser Regulation will be evaluating the Institute's
recommendation to amend the Guidelines to Form N-1A to require
(1) certain disclosures concerning the credit analysis undertaken
by or on behalf of the fund and (2) that funds which purchase
certain instruments be required to include language in their
prospectuses disclosing this fact and any associated risks.
We will keep you informed of further developments.
Amy B. Rosenblum
Assistant General Counsel
Attachment