September 24, 1990
TO: BOARD OF GOVERNORS NO. 69-90
MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 13-90
SEC RULES MEMBERS NO. 67-90
PUBLIC INFORMATION COMMITTEE NO. 34-90
MONEY MARKET FUND AD HOC COMMITTEE
RE: INSTITUTE COMMENTS ON SEC PROPOSED REVISIONS TO
MONEY MARKET FUNDS
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As we previously informed you, the SEC has proposed changes
to Rule 2a-7, the rule permitting money market funds to use
amortized cost valuation and penny rounding pricing methods, and
to other rules affecting money market funds. (See Memorandum to
Board of Governors No. 50-90, Money Market Members - One Per
Complex No. 9-90, SEC Rules Members No. 51-90 and Public
Information Committee No. 22-90, dated July 20, 1990.)
Attached is a copy of the Institute's comment letter on the
SEC's proposed revisions to the rules regulating money market
funds. Our comments, which were developed with the assistance of
the Institute's Money Market Fund Ad Hoc Committee, focus only on
taxable money market funds. We are still considering proposals
for tax-exempt funds. In the meantime, we supported the SEC's
proposal to apply the same maturity requirements to tax-exempt
funds as taxable funds, but to exempt tax-exempt funds from any
modified diversification and quality requirements.
Set forth below is a summary of the Institute's comments.
Proposed Changes to Rule 2a-7
a. Diversification - The Institute supported the SEC's
proposal to require that a fund invest no more than 5% of fund
assets in any one issuer (except U.S. government securities or
repurchase agreements backed by U.S. government securities).
b. Quality - The Institute opposed the proposed change to
require that a security be rated eligible quality by all NRSROs
that have rated the security. Instead, we recommended that if a
security has been rated by only one rating agency that it be
rated eligible quality by that agency and, if rated by more than
one agency, it receive an eligible quality rating from at least
two agencies.
We opposed the proposal to allow funds to invest up to five
percent of their assets in securities that have not received the
highest rating (e.g., securities rated below A-1, P-1). We
believe that such securities may present risks that are
inappropriate for a fund seeking to maintain a stable net asset
value. We noted in our letter that our opposition to this
proposal was not intended to suggest that such investments were
inappropriate for other types of mutual funds and financial
intermediaries that do not seek to maintain a stable net asset
value.
Instead of allowing funds to invest in securities that have
not received the highest rating as proposed by the SEC, we
recommended that funds be permitted to invest up to ten percent
of their assets (subject to a three percent per issuer
limitation) in securities that have received a split-rating where
at least one of the ratings is the highest (e.g., A-1/P-2).
c. Maturity - The Institute supported the proposed
amendment to reduce the dollar-weighted average portfolio
maturity from 120 to 90 days. However, we opposed the proposal
to extend the maturity limit of a single instrument from one to
two years. Instead, we recommended that the maturity limit be
thirteen months.
d. Unrated Securities - The Institute recommended a more
restrictive standard with respect to unrated securities than
proposed by the SEC. We recommended that funds be permitted to
invest in unrated securities only if they are of comparable
quality to other outstanding short-term debt of the issuer that
has received the highest rating or, if the issuer does not have
other rated outstanding short-term debt, the long-term debt of
the issuer that has received one of the three highest ratings.
e. Holding Out - The Institute endorsed the proposal to
require any fund that holds itself out as a "money market fund"
to meet the quality, diversification and maturity requirements
under Rule 2a-7.
Prospectus Disclosure
The Institute supported the SEC's proposal to require
disclosure 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.
May 8th Credit Letter
The Institute requested clarification that the elements
listed in the letter from the Division of Investment Management
to money market funds on credit analysis are factors that could
be considered, but are not required to be considered, by the
board of directors.
* * *
The Institute would appreciate receiving copies of any
comment letters filed by members. Please send any copies to
Michele Dugue at the Institute.
We will keep you informed of developments.
Amy B. Rosenblum
Assistant General Counsel
Attachment