June 17, 1993
TO: MONEY MARKET FUNDS AD HOC COMMITTEE NO. 5-93
SEC RULES MEMBERS NO. 52-93
RE: CLARIFICATION OF SEC STAFF'S POSITION ON CAPPED FLOATERS
UNDER RULE 2a-7
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The SEC Division of Investment Management issued the attached letter
clarifying its position on the ability of money market funds to acquire certain
capped floating and variable rate government securities under Rule 2a-7 of the
Investment Company Act of 1940.
Paragraph (c)(2)(i) of Rule 2a-7, with limited exceptions, prohibits money
market funds from holding portfolio instruments having maturities greater than
397 days. Paragraph (d)(1) of the Rule permits funds to measure the maturity of
a variable rate instrument issued or guaranteed by the United States government
(or agency thereof) by reference to the period remaining until the next interest
rate adjustment. In the letter, the staff reiterated its position that although
paragraph (d)(1) does not explicitly provide that the instruments covered by that
paragraph must have a market value that approximates their par value upon their
interest rate readjustment, such a requirement is implicit in the Rule.
With respect to the eligibility of capped floating or variable rate
instruments under Rule 2a-7, the staff has taken the position that generally such
instruments are inconsistent with the requirement that they can reasonably be
expected to return to par upon readjustment. However, the staff would not object
if, in the current interest rate environment, money market funds purchase
variable or floating rate instruments issued by the United States government or
an agency thereof the interest rates of which are capped at a rate in excess of
20% to comply with certain state usury laws in reliance on paragraph (d)(1) of
the Rule. The letter states that this exception would not relieve money market
funds from the overall duty of care to manage the fund in such a manner as to
stabilize the fund's net asset value.
The staff's position expressed in the letter does not limit the ability of
money market funds to invest in capped instruments with final maturities of less
than 397 days. The maturity of these instruments generally must be determined
by reference to their final maturity rather than their interest rate readjustment
date. However, consistent with the staff's position above, the maturity of
floating or variable rate instruments issued by the United States government or
an agency thereof with an interest rate cap in excess of 20% to comply with
certain state usury laws which have less than 397 days remaining until final
maturity may be determined based on their interest rate readjustment date.
The staff's position also does not affect the ability of money market funds
to invest in capped floating or variable rate demand notes or other instruments
the maturity of which is determined by reference to a demand feature under
paragraph (d)(3) or (4) of Rule 2a-7, because a fund may exercise the demand
feature and receive the amortized value of the instrument in the event that
interest rates rise so that the market value is below the par value of the
instrument as a result of the cap.
Amy B.R. Lancellotta
Associate Counsel
Attachment