May 6, 1994
TO: BOARD OF GOVERNORS NO. 38-94
MONEY MARKET FUNDS AD HOC COMMITTEE NO. 12-94
MONEY MARKET MEMBERS - ONE PER COMPLEX NO. 3-94
SEC RULES COMMITTEE NO. 52-94
RE: INSTITUTE LETTER ON PROPOSED AMENDMENTS TO MONEY MARKET
FUND REGULATION
__________________________________________________________
As we previously informed you, the Securities and Exchange
Commission has proposed amendments to Rule 2a-7 under the
Investment Company Act, and other rules and forms under the
Investment Company Act and the Securities Act of 1933 relating to
the regulation of money market funds. (See Memorandum to Board of
Governors No. 115-93, Money Market Members - One Per Complex No.
11-93, dated December 27, 1993, and Memorandum to SEC Rules
Committee No. 113-94 and Money Market Funds Ad Hoc Committee No.
10-93, dated December 23, 1993.) The Institute submitted the
attached comment letter on the proposed amendments.
The significant aspects of the Institute's letter are
summarized below.
A. Tax-Exempt Money Market Funds
1. Diversification - The Institute's letter expressed support
for the proposed diversification requirements for tax-exempt money
market funds. These would require national funds to meet the five
percent diversification requirement currently applicable to taxable
funds and would exempt single state funds from this requirement.
2. Credit Quality - The Institute opposed the proposal to
limit eligible securities for single state funds to first tier
securities. We recommended that national and single state funds be
subject to the same credit limitations. Specifically, we
recommended that all tax-exempt funds be subject to a five percent
limit on fund investments in second tier securities that are not
traditional municipal obligations (i.e., "conduit securities",
which is defined in the proposed amendments), and that single state
funds be subject to a five percent issuer diversification
requirement with respect to their investments in second tier
traditional municipal obligations (i.e., non-conduit securities).
As a fallback to our recommendation, we suggested that
national and single state funds be subject to a twenty-five percent
limit on investments in second tier municipal securities, of which
no more than five percent could be invested in second tier conduit
securities.
B. Puts and Demand Features
The Commission proposed amendments to and solicited comment on
a number of issues relating to the treatment of puts and guarantees
under Rule 2a-7. The Institute supported the proposed ten percent
aggregate limit on a fund's investments in securities subject to
puts from a single provider. We opposed, however, eliminating
entirely the twenty-five percent undiversified put basket, which is
currently available for tax-exempt funds. Instead, we recommended
that the basket be retained for securities subject to puts issued
by institutions determined to be of first tier quality under the
Rule. We also opposed any limitation on a fund's ability to rely
on non-bank put providers. Finally, we supported the Commission's
objective in proposing to restrict the types of conditions to which
a put may be subject when used to shorten maturity, but suggested
that more general language be adopted with respect to the types of
conditions that would be permissible.
C. Asset-Backed Securities
The Institute generally opposed all of the amendments relating
to asset-backed securities. We expressed the view that these
instruments should be treated the same as all other instruments
under Rule 2a-7.
D. Disclosure Requirements
The Institute supported, subject to slight modification,
requiring that single state funds disclose in their prospectuses
the risks related to the geographic concentration and, if
applicable, the lack of diversification of their ivestments.
E. Proposed Rule 17a-9
The Institute opposed proposed Rule 17a-9 under the Investment
Company Act, which would permit a person affiliated with a money
market fund to purchase a portfolio security from the fund in
certain instances (such as when a security is in default) without
having to obtain exemptive relief under Section 17(a) of the Act.
We expressed the view that such an exemption from Section 17(a)
could mislead investors by suggesting that the fund's adviser or
other affiliate will "backstop" the fund, and therefore, that the
fund's net asset value will always remain stable.
Amy B.R. Lancellotta
Associate Counsel
Attachment