July 20, 1990
TO: BOARD OF GOVERNORS NO. 50-90
MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 9-90
SEC RULES MEMBERS NO. 51-90
PUBLIC INFORMATION COMMITTEE NO. 22-90
RE: SEC PROPOSES CHANGES TO MONEY MARKET FUND REGULATION
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The SEC has proposed for public comment a number of changes
to Rule 2a-7, the rule permitting money market funds to use
amortized cost valuation and penny-rounding price methods, to
reduce the likelihood that a money market fund would not be able
to maintain a stable net asset value. In addition, the SEC has
proposed to require all funds that hold themselves out as "money
market funds" to comply with certain requirements contained in
Rule 2a-7 and to revise the definition of a "money market fund"
under the advertising rules. Attached is a copy of the SEC's
release proposing these changes.
Proposed Changes to Rule 2a-7
The significant changes to Rule 2a-7 proposed by the SEC
are as follows:
a. Diversification
i. Funds could not invest more than 5% of fund
assets in any one issuer (except U.S. government securities or
repurchase agreements backed by the U.S. government).
ii. Funds could not invest more than 1% of fund
assets in securities that have not received the highest rating
(e.g., those rated below A-1 or P-1) of any one issuer.
b. Quality
i. A security would have to be rated high quality
by all agencies assigning a rating to the security or issuer. A
split rated security would be considered to have the lower
rating.
ii. Funds could not invest more than 5% of total
fund assets in securities not having the highest rating.
c. Maturity
i. Funds would have to maintain a dollar-weighted
average maturity that does not exceed 90 days.
ii. Funds could not purchase an instrument with a
remaining maturity of greater than 2 years.
d. Holding Out
Any fund that holds itself out as a "money market
fund" would need to meet the conditions of Rule 2a-7 relating to
portfolio diversification, quality and maturity.
e. Tax-Exempt Funds
Tax-exempt funds would be exempt from the 5%
diversification requirement and the percentage limitations on
investing in securities that do not have the highest rating. The
release solicits comments on what conditions, if any, should be
imposed on tax-exempt funds as a substitute for the
diversification requirements and the five percent quality test,
or whether it is possible to apply the same conditions applicable
to taxable funds.
Prospectus Disclosure
The SEC proposes to require money market funds to
prominently disclose on the cover page of the prospectus that the
shares of a money market fund are neither insured nor guaranteed
by the U.S. government and that there is no assurance that the
fund will be able to maintain a stable net asset value of $1.00
per share.
Advertising
The definition of "money market funds" under Rule 482 of
the Securities Act would be amended to include only those funds
that meet the quality, diversification and maturity requirements
of Rule 2a-7.
May 8th Credit Analysis Letter
Page 29 of the attached release includes a brief discussion
of the staff's May 8th letter on credit analysis. The release,
by noting that the staff's letter includes elements that a fund
should consider in an analysis of whether a security presents a
minimal credit risk and that those factors do not constitute an
exhaustive list, implies that a fund must consider those factors.
Footnote 48 of the release reiterates the SEC's position that the
board may delegate the day-to-day function of determining credit
quality to the fund's investment adviser, provided that the board
retains sufficient oversight.
Comment Period
The comment period for the proposed changes to rule 2a-7
expires 60 days after publication of the release in the Federal
Register, which we anticipate will be in a couple of days. I
would appreciate receiving, in writing, any suggestions you may
have for possible inclusion in the Institute's comment letter no
later than August 30, 1990.
Amy B. Rosenblum
Assistant General Counsel
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