October 30, 1990
TO: MONEY MARKET FUNDS AD HOC COMMITTEE NO. 1-90
RE: NOVEMBER 12 MEETING TO DISCUSS TAX-EXEMPT MONEY MARKET FUNDS
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The Institute has scheduled a meeting for Monday, November
12 to discuss recommendations to the SEC for the regulation of
tax-exempt money market funds. Set forth below is an outline of
a proposal, which was developed by the Institute and several
members of the Committee. The proposal is intended to be simpler
and more straightforward than the one developed at the previous
meeting of the Committee. It should be noted that not all of the
members of the Committee that developed this proposal endorse all
of its aspects.
Summary of Proposal
A. National Tax-Exempt Funds
1. Diversity - Require that a fund invest no more than 5%
of its assets in securities of any one issuer and no more than
10% of its assets in securities subject to a guarantee issued by
any one institution. (This would be the same standard as that
under our proposal to the SEC for taxable funds.)
2. Quality
a. Unrated Securities - Allow a fund to start with a 5%
basket of unrated securities (using the same definition of
"unrated securities" that was used in connection with taxable
funds) and require that it phase out its holdings in unrated
securities over a one year period. (After the phase out, the
standard would be identical to our taxable fund proposal.)
b. Securities Not Receiving the Highest Rating -
Restrict fund investment in securities not receiving the highest
rating to 10% of the fund's assets and up to 3% per issuer.
(These limits are the same as those applicable to split-rated
securities under our taxable fund proposal.)
c. Split-Rated Securities - No limit should be imposed
on the amount of split-rated securities that a fund may purchase
provided that at least one of the ratings is the highest.
B. Single State Funds
1. Use of Words "Single State" - Require a state specific
fund to disclose on the cover page of its prospectus and in
advertisements and sales literature that it is a "single state"
fund and that there may be certain risks as a result of
concentrating in securities issued by issuers domiciled in only
one state. In addition, disclosure would be required in the
prospectus concerning diversification depending on whether the
fund was 5% diversified with respect to 100% of its assets, 5%
diversified with respect to 75% of its assets or non-diversified
(as defined under Section 5 of the 1940 Act).
2. Quality
a. Two alternatives were proposed:
i. Under the first proposal, unrated securities
would initially be subject to a 10% basket, which
would be phased out over two years. Securities not
having the highest rating would be subject to the
10%/3% limit proposed for national funds. (Thus,
after the phase out, single state funds would be
subject to the same quality standards as national
tax exempt funds.)
ii. Under the second alternative, there would be a
permanent 25% basket made up of both unrated
securities and securities not having received the
highest rating.
C. Opinions Concerning Tax-Exempt Status
In addition to submitting proposals for tax-exempt funds,
consider submitting a letter to the SEC recommending that it
issue a release requiring that funds only buy tax-exempt
securities that have received an unqualified opinion of counsel
as to their tax-exempt status.
* * * *
The meeting will be held at the Institute and will begin at
1:00 p.m. (Lunch will be served at 12:00 noon prior to the
meeting.) If you plan to attend, please call Michele Dugue at
202/955-3515.
Craig S. Tyle
Associate General Counsel