THIS SUMMARY IS BASED ON MY NOTES FROM THE MEETING AND, THUS, MAY
DIFFER SLIGHTLY FROM THE ADOPTED CHANGES.
February 13, 1991
TO: MONEY MARKET FUNDS AD HOC COMMITTEE NO. 3-91
RE: SEC ADOPTION OF AMENDMENTS TO MONEY MARKET FUND RULES
__________________________________________________________
At an open meeting today, the SEC adopted amendments to
Rule 2a-7 and other rules applying to money market funds.
Chairman Breeden stated in his introductory remarks that the
Commission’s proposal was important to protect the more than 20
million money market fund shareholders, especially at a time when
investor confidence has seriously eroded as a result of the S&L
crisis and bank failures.
Set forth below is a brief summary of the significant
changes that were adopted today. I will prepare a more detailed
summary of the new requirements as soon as the release is
available from the SEC.
Quality
Ratings - A fund may purchase a security that has
received the highest rating by any two rating agencies. If
onlyone rating agency has rated the security, that rating is
determinative.
Second Tier Paper - A fund may invest up to 5% of its
assets in securities in second tier paper. In response to
commercial paper issuers who were concerned by this limit, the
SEC stated there is nothing to prevent other mutual funds from
purchasing this paper (except that they can not call themselves
money market funds). In addition, the SEC noted that money
market funds today only have 1/2 of 1% of their assets invested
in second tier paper. This translates into about $2 billion of
this paper; however, under the 5% limit they could hold up to
$20-25 billion. Thus, the impact in the marketplace should be
negligible.
In addition to the overall 5% limit of second tier paper,
a fund is limited to the greater of 1% or $1 million per issuer.
This modification is intended to respond to concerns that funds
may not be able to buy small amounts of this paper and that the
1% limit may have prohibited some funds from purchasing second
tier paper.
Unrated Securities - Funds may buy unrated securities
provided that the issuer does not have a similar security rated
below eligible quality and does not have outstanding long-term
debt rated below the top two ratings.
Split-Rated Securities - Split-rated securities that
have received the highest rating by two agencies may be purchased
by a fund. A security that has received the highest rating by
only one agency may be purchased by a fund, but must be included
in the 5% basket of second tier paper. It is interesting that
under the SEC’s proposal a fund could only hold up to 5% of its
assets in split-rated paper and that under the adopted standard a
fund could be 100% invested in split-rated securities, provided
at least two agencies rate it the highest.
Maturity
Dollar-Weighted Average - The dollar-weighted average
portfolio maturity was reduced from 120 days to 90 days.
Single Instruments - The maturity of a single portfolio
instrument can not exceed 13 months, except that a fund that uses
mark-to-market valuation may purchase government securities with
a maturity of up to 25 months.
Diversification
A fund may not invest more than 5% of its assets in any
one issuer, except that a fund may exceed this limit with respect
to an issuer of top rated paper for up to 3 business days. This
allows funds to deal with unexpected cash flows. A fund may
continue to invest up to 10% of its assets in securities subject
to an unconditional put issued by any one institution.
Downgrades and Defaults
If a portfolio security is downgraded below eligible
quality or is in default, the fund must dispose of the security
as soon as practicable unless the board determines that it is in
the best interests of the fund and its shareholders not to do so.
The rule will explicitly state that market conditions may be a
factor that the board considers in making this determination.
If a security is downgraded but is still of eligible
quality, the board must make a prompt assessment of whether to
continue to hold the security or sell it.
If an adviser becomes aware that a rating agency has
rated a security below the second highest rating, the board must
make a prompt assessment of whether to continue to hold or sell
the security.
Notification - If a fund is holding a security that is
in default that accounts for 1/2 of 1% or more of the fund’s
assets, the fund must notify the SEC. The notification is only
required where the default relates to the financial condition of
the issuer.
Disclosure and Holding Out Requirements - The SEC adopted
the cover page disclosure and holding out requirements as
proposed.
Board Delegation of Duties - The rule will explicitly state
that the board may delegate its duties to another party and will
identify some of the specific duties that may be delegated (e,g,
comparability determination of unrated securities, reassessment
of a downgraded security).
Transition Period - There will be a 90 day transition
period from the date of publication in the Federal Register,
which they expect will be within a week or two.
Tax-Exempt Funds - The new diversification and quality
requirements will not apply to tax-exempt money market funds.
Marianne Smythe stated that the staff will be taking a look at
tax-exempt money market funds and, in fact, was urged by
Commissioner Roberts to do so.