November 25, 1991
TO: MONEY MARKET FUNDS AD HOC COMMITTEE NO. 29-91
RE: INSTITUTE MEETING WITH SEC STAFF CONCERNING INVERSE FLOATERS
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At the November 6 meeting of the ad hoc committee, it was
decided that the Institute should discuss with the SEC staff the
concerns that were expressed by members of the committee about
the appropriateness of inverse floaters for funds that seek to
maintain a stable net asset value. On Monday, November 18,
several representatives of the Institute met with members of the
staff of the Division of Investment Management to discuss, among
other things, inverse floaters. At that meeting, the SEC staff
also expressed concerns about money market funds purchasing
inverse floaters. The staff focused on the fact that the
duration of these instruments typically exceeds their stated
maturity, as well as the maturity limitations under Rule 2a-7,
thereby increasing their market risk. The staff stated that Rule
2a-7 was not intended to permit the purchase of these
instruments, since one of the primary objectives of the Rule was
to reduce interest rate risk.
While the SEC staff members did not explicitly state that
they were planning to take any action to prohibit inverse
floaters under Rule 2a-7, it did appear that they were
considering doing so in the near future.
We will keep you informed of developments.
Amy B.R. Lancellotta
Associate General Counsel