Technical Revisions to the Rules and Forms Regulating Money Market Funds
Federal RegisterDec 18, 1996
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 239, 270 and 274
[Release Nos. 33-7371, IC-22383, S7-29-96]
RIN 3235-AE17
Technical Revisions to the Rules and Forms Regulating Money
Market Funds
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: The Commission is publishing for public comment proposed
amendments to rules and forms under the Securities Act of 1933 and the
Investment Company Act of 1940 that govern money market funds. Proposed
technical amendments to rule 2a-7 under the Investment Company Act of
1940, the rule regulating money market funds, would, among other
things, revise terminology used in the rule to reflect common market
usage, and codify a number of interpretive positions taken by the staff
of the Division of Investment Management. Proposed amendments to the
advertising rules applicable to money market funds would clarify the
formula used by money market funds to calculate yield and would prevent
investors from being confused or misled by presentation of a money
market fund's short-term total return in lieu of its yield.
DATES: Comments must be received on or before January 24, 1997.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Stop 6-9, Washington, DC 20549. Comments also may be submitted
electronically at the following E-mail address: [email protected].
All comment letters should refer to File No. S7-29-96; this file number
should be included on the subject line if E-mail is used. Comment
letters will be available for public inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, NW., Washington,
DC 20549. Electronically submitted comment letters will also be posted
on the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Marjorie S. Riegel, Senior Counsel,
Office of Chief Counsel, at (202) 942-0660, Division of Investment
Management, Stop 10-6, 450 Fifth Street, NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') today is proposing for comment technical amendments to
rule 2a-7 [17 CFR 2a-7] (``rule 2a-7'' or the ``rule'') under the
Investment Company Act of 1940 [15 U.S.C. 80a-1, et seq.] (``1940
Act'') and conforming amendments to rules 2a41-1, 12d3-1 and 31a-1
under the 1940 Act [17 CFR 270.2a41-1, 270.12d3-1 and 270.31a-1]. The
Commission also is proposing amendments to rule 482 [17 CFR 230.482]
under the Securities Act of 1933 [15 U.S.C. 77a, et seq.] (``1933
Act''); and Forms N-1A [17 CFR 239.15A and 274.11A], N-3 [17 CFR
239.17a and 274.11b] and N-4 [17 CFR 239.17b and 274.11c].
I. Proposed Technical Amendments to Rule 2a-7
A. Background
On March 21, 1996, the Commission adopted amendments to rule 2a-7
that revised the rule to tighten the risk-limiting conditions imposed
on tax exempt money funds and to address the treatment under the rule
of certain instruments, such as asset backed securities (``March
Amendments'').1 Industry participants 2 have raised a number
of questions concerning the application of the March Amendments in
different contexts subsequent to their adoption. To respond to many of
these questions, the Division of Investment Management published an
interpretive letter (``Q&A Letter'').3 The technical amendments
proposed for public comment today would: (1) codify a number of
interpretive positions taken by the staff in the Q&A Letter; (2) revise
terminology used in the rule to reflect common market usage; (3) modify
certain of the March Amendments so that the treatment accorded certain
instruments (e.g., guarantees) by the rule more closely reflects the
treatment accorded to those instruments by the financial markets; and
(4) make certain other technical corrections.4
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\1\ Revisions to Rules Regulating Money Market Funds, Investment
Company Act Release No. 21837 (March 21, 1996) [61 FR 13956 (March
28, 1996)] (``Release 21837''). Unless otherwise noted, all
references to rule 2a-7, or to any paragraph of the rule, will be to
the applicable paragraph of 17 CFR 270.2a-7, as amended by Release
21837. When a paragraph is renumbered in the rule as it is proposed
to be amended, citations will be given both to rule 2a-7, ``as
proposed to be amended,'' and to the rule as amended by Release
21837.
\2\ In this Release, the term ``industry participants'' refers
to those representatives of money market funds, investment advisers,
law firms, issuers and underwriters of securities, and professional
and trade associations that informally have sought advice from the
staff concerning the application of the March Amendments, raised
interpretive questions, or suggested changes to the rule.
\3\ Investment Company Institute (pub. avail. May 9, 1996).
\4\ The Commission has suspended the compliance date for certain
of the March Amendments. See Revisions to the Rules Regulating Money
Market Funds, Investment Company Act Release No. 22135 (Aug. 13,
1996) [61 FR 42786 (Aug. 19, 1996)] (``Compliance Date Release''),
and Section III of this Release, which requests comment on a new
compliance date.
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B. Discussion
1. Guarantees
a. Definition of ``Guarantee''
Many money market instruments are subject to guarantees and other
forms of unconditional credit support that, among other things, provide
the requisite credit quality to make an instrument eligible for
investment under
[[Page 66622]]
rule 2a-7. Rule 2a-7 characterizes certain of these arrangements as
``puts'' 5 and ``unconditional puts.'' 6 This aspect of the
definition has caused some confusion among industry participants. The
Commission is, therefore, proposing to revise the rule's terminology by
replacing references to ``put'' and ``unconditional put'' with a new
term ``guarantee'' that would include a wide-range of arrangements
designed to unconditionally support the credit of the issuer of a
security.7 In addition, the Commission would amend the credit
quality and diversification provisions of the rule to incorporate the
proposed term, as discussed below. Comment is requested on the proposed
definition of the term ``guarantee.''
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\5\ Paragraph (a)(16) of rule 2a-7 defines the term ``put'' to
mean the right to sell a specified underlying security within a
specified period of time and at a specified exercise price that may
be sold, transferred, or assigned only with the underlying security.
\6\ Paragraph (a)(27) of rule 2a-7 defines the term
``unconditional put'' to mean a put (including any guarantee,
financial guarantee (bond) insurance, letter of credit or similar
unconditional credit enhancement) that by its terms would be readily
exercisable in the event of default in payment of principal or
interest on the underlying security or securities.
\7\ Paragraph (a)(14) of rule 2a-7, as proposed to be amended.
The term ``guarantee'' would be defined to include an unconditional
obligation of a person other than the issuer of the security to
undertake to pay, upon presentment by the holder of the guarantee
(if required), principal plus accrued interest when due upon
default. This definition is for purposes of rule 2a-7 only, and is
not intended to have any effect on the status of these investments
under other provisions of the 1940 Act or under the other federal
securities laws.
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b. Credit Substitution
One type of guarantee to which rule 2a-7 specifically refers is an
``unconditional demand feature.'' 8 Rule 2a-7 permits a fund to
rely on the credit quality of the issuer of an unconditional demand
feature in determining the credit quality of the security.9
Recognizing that a money market fund relies on the credit quality of
the issuer of the unconditional demand feature rather than the issuer
of the security subject to the demand feature in determining whether to
invest in the security, the March Amendments permit a fund to exclude
securities subject to an unconditional demand feature from the rule's
issuer diversification standards if the demand feature is issued by a
``non-controlled person.'' 10 Because of the significance of
demand features to a fund, the March Amendments provide that a demand
feature is not eligible for fund investment unless (i) the demand
feature (or provider of the demand feature) is rated by an NRSRO
(``Rating Requirement''); 11 and (ii) arrangements are in place
for a fund holding a security subject to a demand feature to be given
notice in the event of a change in the identity of the issuer of the
demand feature (``Notification Requirement'').12
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\8\ Paragraph (a)(7) of rule 2a-7 defines the term ``demand
feature'' to mean (i) a put that may be exercisable either: (A) at
any time on no more than 30 calendar days' notice; or (B) at
specified intervals not exceeding 397 calendar days and upon no more
than 30 calendar days' notice; or (ii) a feature permitting the
holder of an asset backed security unconditionally to receive
principal and interest within thirteen months of making demand. An
unconditional demand feature is a demand feature that by its terms
would be readily exercisable in the event of a default in payment of
principal or interest on the underlying security or securities. See
paragraphs (a)(25) and (a)(27) of rule 2a-7 (definitions of
``unconditional demand feature'' and ``unconditional put'').
\9\ Paragraph (c)(3)(ii) of rule 2a-7. This provision was added
to the rule in 1986. See Acquisition and Valuation of Certain
Portfolio Instruments by Registered Investment Companies, Investment
Company Act Release No. 14983 (March 12, 1986) [51 FR 9773 (March
21, 1986)].
\10\ Paragraphs (c)(4)(i), (c)(4)(ii) and (c)(4)(iv) of rule 2a-
7. The term ``unconditional demand feature issued by a non-
controlled person'' is defined in paragraph (a)(26) of rule 2a-7.
\11\ Paragraph (a)(9)(iii)(D)(1) of rule 2a-7.
\12\ Paragraph (a)(9)(iii)(D)(2) of rule 2a-7.
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Money market funds frequently invest in securities subject to
financial guarantee (bond) insurance, letters of credit (``LOCs'') and
other types of unconditional credit enhancements that may not fall
within the definition of ``unconditional demand feature'' under the
rule. As a result, for purposes of the rule, a fund holding securities
subject to these types of unconditional credit enhancements may not be
able to rely exclusively on the credit quality of the credit
enhancement provider in determining the credit quality of the security,
and may not exclude such securities from rule 2a-7's issuer
diversification requirements. Industry participants have noted that the
rule's treatment of securities subject to unconditional credit
enhancements that do not fall within the definition of ``demand
feature'' does not reflect the manner in which the financial markets
treat these securities. Securities of this type typically trade on the
basis of the credit quality of the provider of the credit enhancement.
The Commission is proposing amendments to rule 2a-7 that would
modify the rule's credit quality standards to permit a fund to rely
solely on the credit quality of the issuer of a guarantee in
determining the credit quality of the security.13 Accordingly, (i)
the exclusion from the issuer diversification standards for securities
subject to unconditional demand features from a non-controlled person
would be expanded to include all securities subject to guarantees from
a non-controlled person,14 (ii) the Rating Requirement would be
extended to all guarantees (with certain exceptions),15 and (iii)
the Notification Requirement would be extended to all guarantees for
which substitution is permissible.16
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\13\ Paragraph (c)(3)(iii) of rule 2a-7, as proposed to be
amended. Proposed amendments to the rule's credit quality provisions
would reflect proposed amendments to other provisions of the rule by
permitting a fund that holds a security that is subject to a
guarantee and a conditional demand feature to substitute the rating
of the guarantee for the rating of the underlying security.
Paragraph (c)(3)(iv)(C) of rule 2a-7, as proposed to be amended.
Consistent with the current rule, the fund would continue to be
required to consider the rating of the conditional demand feature in
evaluating the credit quality of the entire instrument. Paragraph
(c)(3)(iv)(A) of rule 2a-7, as proposed to be amended.
\14\ Paragraph (c)(4)(i) of rule 2a-7, as proposed to be
amended. The term ``guarantee issued by a non-controlled person'' is
defined in paragraph (a)(15) of rule 2a-7, as proposed to be
amended.
\15\ Paragraph (a)(10)(iii)(A) of rule 2a-7, as proposed to be
amended. See, infra Section I.B.1.c. of this Release for a
description of other proposed amendments to the Rating Requirement.
\16\ Paragraph (a)(10)(iii)(B) of rule 2a-7, as proposed to be
amended.
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c. Rating Requirement for Guarantees
The March Amendments to rule 2a-7 limit a money market fund to
investing in securities subject to demand features (whether conditional
or unconditional) that have received a short-term rating from an
NRSRO.17 The Commission explained that it believed that such a
requirement would provide a degree of additional protection by ensuring
input into the minimal credit risk determination from an outside
source.18 Because most banks and other institutions issuing demand
features are rated, the Commission concluded that obtaining a rating
was not an unreasonable or a burdensome requirement for an institution
that is in the business of lending its credit and would not
significantly diminish the supply of available, high quality, eligible
securities.
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\17\ See paragraph (a)(9)(iii)(D)(1) of rule 2a-7 (definition of
``eligible security''). Securities subject to demand features issued
on or before June 3, 1996 were ``grandfathered,'' and are not
required to be rated. Release 21837, supra note 1 at Section V.B.
The June 3 ``grandfathering date'' was suspended until the
Commission adopts the technical amendments proposed for comment in
this release. See Compliance Date Release, supra note 4.
\18\ Release 21837, supra note 1, at Section II.C.2.a.
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As noted above, the Commission is proposing to extend the Rating
Requirement to guarantees,19 and to modify this requirement in
three other respects: 20
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\19\ See, supra Section I.B.1.b. of this Release.
\20\ See paragraph (a)(10)(iii)(A) of rule 2a-7, as proposed to
be amended.
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Conditional demand features would be exempted from the
Rating
[[Page 66623]]
Requirement.21 Conditional demand features do not act as a
complete credit substitute for the credit quality of the underlying
security, and a fund should be able, with relative ease, to substitute
a new provider of a conditional guarantee for an existing provider that
is experiencing credit problems.
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\21\ The proposed definition of the term ``guarantee'' does not
include conditional demand features. See paragraph (a)(14) of rule
2a-7, as proposed to be amended.
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Any rating from an NRSRO (rather than only a short-term
rating) would satisfy the Rating Requirement. A long-term rating would
satisfy the primary objective of the Rating Requirement, which is to
ensure input into the minimal credit risk determination by an outside
source.22 In addition, the long-term rating assigned to a
guarantee may be relevant to a fund in evaluating the ability of the
guarantor to perform under the terms of the guarantee.23
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\22\ Release 21837, supra note 1, at Section II.C.2.a.
\23\ For example, a rating representing the long-term
creditworthiness of a guarantor may be significant to a fund holding
a long-term security subject both to a conditional demand feature
that is relied upon to shorten the maturity of the underlying
security and a guarantee. See paragraphs (c)(3)(iv)(A) and
(c)(3)(iv)(C) of rule 2a-7, as proposed to be amended (a long-term
security subject to a conditional demand feature is an eligible
security only if the conditional demand feature is an eligible
security, and the underlying security (or any guarantee of the
underlying security) has received a short-term or long-term rating
from the requisite NRSROs within the two highest short-term or long-
term rating categories).
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A guarantee issued by a person that is controlled by,
controls, or is under common control with the issuer of the security
would be excepted from the Rating Requirement. An entity that
guarantees a security issued by a controlled person may not be in the
business of lending its credit, and such a requirement may by
burdensome and result in a diminished supply of high quality, eligible
securities.24
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\24\ The proposed amendments also would have the effect of
exempting issuer-provided demand features from the Rating
Requirement. This proposed provision is consistent with those
provisions of the March Amendments that permit a fund to disregard
issuer-provided demand features in determining its compliance with
the rule's put diversification requirements. Paragraph
(c)(4)(vi)(B)(1) of rule 2a-7; See Release 21837, supra note 1, at
Section II.C.1.c (securities subject to ``issuer-provided demand
features can be viewed as the functional equivalent of short-term
securities that are `rolled over' periodically.'').
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d. Demand Features and Guarantees Not Relied Upon
The March Amendments permit a fund that is not relying on a
particular put for satisfaction of the rule's credit quality or
maturity standards, or for liquidity, to exclude that put in
determining its compliance with the rule's put diversification
standards.25 The Commission is proposing amendments to the rule
that would provide that a demand feature or guarantee that is not
relied upon to satisfy the rule's credit quality or diversification
standards, or for liquidity, is not subject to any of the rule's
requirements.26
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\25\ Paragraph (c)(4)(vi)(B)(4) of rule 2a-7.
\26\ Paragraph (c)(5) of rule 2a-7, as proposed to be amended.
This proposed amendment would codify a staff interpretive position.
Q&A Letter, supra note 3, at Q&A 2 (a put that is not relied upon
may be disregarded for all purposes under the rule, including the
Rating Requirement, and provisions of the rule that require the
fund's board of directors to reduce investment in securities subject
to downgraded demand features absent a finding). A fund holding
securities subject to demand features or guarantees that the fund's
board of directors has determined are not being relied upon would be
required to establish written procedures requiring periodic re-
evaluations of this determination. Paragraph (c)(8)(ii) of rule 2a-7
(paragraph (c)(9)(ii) of rule 2a-7 as proposed to be amended).
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2. Diversification and Quality Standards Applicable to Issuers
a. Second Tier Securities
The proposed amendments would clarify the scope of the issuer
diversification standards applicable to taxable fund investment in
second tier securities, and tax exempt fund investment in second tier
conduit securities. Under rule 2a-7, a taxable fund may not invest more
than one percent of its total assets in second tier securities issued
by a single issuer, and a tax exempt fund may not invest more than one
percent of its total assets in second tier conduit securities issued by
a single issuer.27 Proposed amendments to the rule's issuer
diversification provisions would clarify that these limits are not
applicable to securities subject to a guarantee issued by a non-
controlled person.28 Accordingly, such securities would only be
subject to the rule's guarantee diversification requirements.29
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\27\ Paragraphs (c)(4)(iv)(A)(1) and (c)(4)(iv)(B)(1) of rule
2a-7.
\28\ Paragraphs (c)(4)(i)(C)(1) and (c)(4)(i)(C)(2) of rule 2a-
7, as proposed to be amended. Rule 2a-7 also limits a taxable fund
and a tax exempt fund to investing no more than five percent of
total assets in second tier securities and second tier conduit
securities respectively. See paragraphs (c)(4)(iv)(A)(2) and
(c)(4)(iv)(B)(2) of rule 2a-7 (``five percent quality test''). The
proposed amendments would not make any substantive changes to the
five percent quality test, and thus a taxable fund, for example,
could not invest more than five percent of its total assets in
second tier securities subject to a second tier demand feature. The
proposed amendments would reorganize the rule text by including the
five percent quality test in the paragraph of the rule that
addresses portfolio quality, rather than portfolio diversification.
See paragraph (c)(3)(ii) of rule 2a-7, as proposed to be amended
(portfolio quality--second tier securities).
\29\ Paragraphs (c)(4)(i) and (c)(4)(iii) of rule 2a-7, as
proposed to be amended.
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b. Repurchase Agreements
Rule 2a-7 allows a fund to ``look through'' a repurchase agreement
(``repo'') to the underlying collateral and thereby ignore the
counterparty in determining compliance with the rule's diversification
limitations when the obligation of the counterparty is ``collateralized
fully.'' 30 A repo is collateralized fully if, among other things,
it is collateralized by Government securities or other securities
listed in the rule that permit the repo to receive favorable treatment
under applicable bankruptcy law. This provision of the rule is intended
to ensure that the securities collateralizing the repo can be
liquidated promptly in the event of the bankruptcy of the counterparty.
Since the publication of the March Amendments, numerous questions have
been raised concerning the eligibility of cash and certain types of
securities that, although not listed in the rule, may (or may not)
constitute appropriate collateral to avoid a stay in the event of a
bankruptcy.31
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\30\ Paragraphs (a)(4) and (c)(4)(vi)(A)(1) of rule 2a-7.
\31\ See, e.g., Q&A Letter, supra note 3, at Q&A 12.
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Although the determination of how a bankruptcy court might treat a
repo is highly relevant for ``look through'' treatment under rule 2a-7,
the Commission believes that specifying the types of collateral that
meet the criteria of relevant provisions of bankruptcy law in rule 2a-7
is unnecessary to fulfill the underlying purposes of the rule.
Therefore, the Commission is proposing to revise the rule to omit
references to specific types of acceptable collateral. Under the
proposed provision, a repo would be ``collateralized fully'' if (i) the
collateral consists entirely of cash, Government securities, or other
securities that are rated in the highest rating category by the
requisite NRSROs, and (ii) upon an event of insolvency with respect to
the seller, the repo would qualify under a provision of applicable
insolvency law providing an exclusion from any general stay of
creditors' rights against the seller.32 Under the proposed
amendments, a fund entering into a repo collateralized by traditional
types of Government securities (as most do) could conclude easily that
the repo qualifies for ``look through'' treatment (assuming other
requirements of the rule are met), while funds wishing to enter into
repos using less traditional forms of collateral may rely on opinions
of bankruptcy counsel.
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\32\ Paragraphs (a)(5)(iv) and (a)(5)(v) of rule 2a-7, as
proposed to be amended. In addition, a money market fund must
evaluate the repo counterparty's creditworthiness in order to
minimize the risk that money market funds do not enter into repos
with parties that present a serious risk of becoming involved in
bankruptcy proceedings. The Commission previously published a
release setting forth the conditions under which the Division of
Investment Management would not recommend enforcement action under
Section 12(d)(3) of the 1940 Act if an investment company entered
into a repo with persons engaged in securities-related businesses.
Securities Trading Practices of Registered Investment Companies,
Investment Company Act Release No. 13005 (Feb. 2, 1983) [48 FR 5824
(Feb. 9, 1983)] (``Repo Release''). One of the conditions stated in
the Repo Release was that the repo be ``fully collateralized,''
although a description of ``fully collateralized'' did not include
all of the conditions in rule 2a-7, as amended by the March
Amendments. A money market fund entering into a repo that is
``collateralized fully'' within t
[[Page 66624]]
he meaning of paragraph (a)(4) of rule 2a-7 (paragraph (a)(5) of
rule 2a-7, as proposed to be amended) would meet the ``fully
collateralized'' requirement of the Repo Release. Investment
companies other than money market funds are not required to comply
with this provision of rule 2a-7 to avoid violating Section
12(d)(3).
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c. Refunded Securities
The March Amendments permit a fund to ``look through'' refunded
securities 33 to the escrowed securities in determining its
compliance with the rule's issuer diversification standards under
certain conditions, one of which is that an independent public
accountant has certified that the escrowed Government securities, or
any subsequent substitution of the escrowed securities, will satisfy
all payments of principal, interest and applicable premiums on the
refunded securities (collectively, the ``accountant's
certifications'').34 NRSROs in rating refunded securities
typically require an independent third party to make the same
determination.35 Therefore, the Commission is proposing to provide
that the accountant's certifications need not be obtained if, in
connection with the placement of Government securities into the escrow
account, the refunded securities have received a rating from an NRSRO
in the highest category for debt obligations.36
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\33\ Paragraph (a)(18) of rule 2a-7 generally defines ``refunded
securities'' as securities whose payment is funded and secured by
Government securities placed in an escrow account.
\34\ Paragraphs (a)(18)(ii), (a)(18)(iii) and (c)(4)(vi)(A)(2)
of rule 2a-7.
\35\ See, e.g., Standard & Poor's Municipal Finance Criteria,
176-177 (1996).
\36\ Paragraph (a)(19)(iii) of rule 2a-7, as proposed to be
amended.
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d. Three-Day Safe Harbor
Rule 2a-7 permits a taxable or national fund to invest up to
twenty-five percent of its total assets in the first tier securities of
a single issuer for up to three business days (``three-day safe
harbor'').37 The proposed amendments restore unintentionally
omitted language stating that a fund may not make more than one
investment at any time during the three day period.38
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\37\ Paragraph (c)(4)(iii) of rule 2a-7 (paragraph (c)(4)(i)(A)
of rule 2a-7, as proposed to be amended). Because single state funds
are required to be diversified only as to seventy-five percent of
their assets, they have available a twenty-five percent basket to
accommodate purchases in excess of five percent. Paragraph
(c)(4)(ii) of rule 2a-7 (paragraph (c)(4)(i)(B) of rule 2a-7, as
proposed to be amended). As a result, the three-day safe harbor of
rule 2a-7 is not available for single state funds.
\38\ Paragraph (c)(4)(i)(A) of rule 2a-7, as proposed to be
amended.
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3. Asset Backed Securities and Synthetic Securities
a. Rating Requirement
The March Amendments provide separate credit quality,
diversification and maturity standards for asset backed securities and
synthetic securities (collectively, ``ABSs''). The amendments provide
that an ABS is not an eligible security unless it has received a rating
from an NRSRO. The ABS covered by the rule include interests in pools
of receivables, such as credit card debt, as well as short-term
synthetic tax exempt securities.39 The Commission adopted the
rating requirement because an NRSRO rating would ensure that an
independent legal, structural and credit analysis of the ABS had taken
place. In addition, the Commission stated that, in light of the role
that the NRSROs have played in the development of structured finance, a
rating requirement should not be burdensome.40
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\39\ Synthetic securities are described in Revisions to Rules
Regulating Money Market Funds, Investment Company Act Release No.
19959 (Dec. 17, 1993) [58 FR 68585 (Dec. 28, 1993)] (``Release
19959'') at Section II.C.4.
\40\ Release 21837, supra note 1 at Section II.E.4.
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The Commission is proposing to modify the rating requirement for
ABS to exempt from the rating requirement any ABS substantially all the
qualifying assets of which consist of the obligations of one or more
municipal issuers.41 In proposing the rating requirement for ABSs,
the Commission noted that when an ABS consists of a large pool of
financial assets, such as credit card receivables or mortgages, the ABS
may not be susceptible to conventional means of credit risk analysis
because credit quality is based not on a single issuer but an actuarial
analysis of a pool of financial assets.42 Industry participants
have suggested that this is usually not the case with respect to
synthetic structures and municipal pools, whose qualifying assets
generally consist of no more than a few municipal issuers (or, in the
case of some pools, several municipalities located in a particular
state). Thus, the credit analysis for these structures is typically no
different than that required for a security directly issued by the
municipality.43
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\41\ Paragraph (a)(10)(ii)(B) of rule 2a-7, as proposed to be
amended.
\42\ Release 19959, supra note 39, at text accompanying n.111.
\43\ Industry representatives have also suggested that because
many synthetics are not rated, the rating requirement may restrict
available supply. ABSs that involve the securitization of financial
assets, on the other hand, are typically rated, and the rating
requirement does not impose any unnecessary burden.
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The Commission is also proposing to revise the rule to clarify
that, consistent with other proposed provisions of the rule, an ABS
subject to a guarantee (which generally would be required to rated
44), would itself not be required to be rated by an NRSRO.45
Under the proposed amendments, a fund holding an ABS fully supported by
a guarantee would be permitted to substitute the credit quality of the
guarantee in determining the credit quality of the ABS,46 and to
exclude the ABS in determining its compliance with the rule's issuer
diversification standards.47
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\44\ Paragraph (a)(10)(iii)(A) of rule 2a-7, as proposed to be
amended.
\45\ Paragraph (a)(10)(ii)(B) of rule 2a-7, as proposed to be
amended.
\46\ Paragraph (c)(3)(iii) of rule 2a-7, as proposed to be
amended.
\47\ Paragraph (c)(4)(i) of rule 2a-7, as proposed to be
amended.
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b. Diversification Standards
The March Amendments treat the special purpose entity as the issuer
of the ABS and therefore require that rule 2a-7's diversification
standards be met with respect to the special purpose entity. The
amendments create an exception to this treatment, however, requiring a
fund to ``look through'' the special purpose entity to any issuer of
qualifying assets whose obligations constitute ten percent or more of
the principal amount of the qualifying assets of the special purpose
entity (``ten percent obligor'').48 For diversification purposes,
a fund is required to treat these ten percent obligors as if they
issued a proportionate amount of the special purpose entity.49
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\48\ Paragraph (c)(4)(vi)(A)(4) of rule 2a-7.
\49\ Id.; Paragraph (c)(4)(ii)(D)(1) of rule 2a-7, as proposed
to be amended.
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Some or all of the qualifying assets of certain ABSs (``primary
ABSs'') also consist of other ABSs (``secondary ABSs''). The proposed
amendments would clarify that a ten percent obligor that is also the
issuer of secondary ABSs would be deemed to have issued a portion of
the assets of the primary ABS that such secondary ABSs represent. For
purposes of identifying ten percent obligors, the proposed amendments
would provide that a fund should
[[Page 66625]]
continue down the chain of ten percent obligors until a special purpose
entity with no ten percent obligors is reached.50 Finally, the
Commission is proposing to clarify that in the case of the obligations
of a ten percent obligor that are treated as being held directly by the
fund, any demand features and guarantees supporting the obligations are
treated as being held by the fund and should be subject to the rule's
demand feature and guarantee diversification tests.51 Comment is
requested on the proposed amendments.
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\50\ Paragraphs (c)(4)(ii)(D)(1) and (c)(4)(D)(ii)(2) of rule
2a-7, as proposed to be amended. The proposed amendments reflect the
approach illustrated in materials prepared by the staff of the
Division of Investment Management. See Materials for 1996 ICI
Conference on Money Market Fund Regulation: Asset Backed Securities
and Synthetic Securities--Application of Paragraph (c)(4)(vi)(A)(4)
of Rule 2a-7 (May 9, 1996) (copies available upon request). Some
industry participants have urged that the rule's diversification
requirements be amended to require money market funds to look
through to the receivables underlying asset backed securities, and
have maintained that a fund holding an asset backed security is
exposed only to the credit quality of the ultimate obligors and not
the special purpose entity. The Commission is not proposing to
follow this approach for several reasons. First, the status of an
ABS as an eligible investment for a money market fund is not based
on the creditworthiness of each obligor, but rather on the
creditworthiness of the entire pool of assets, which typically is
evaluated and rated based on the actuarial experience of similar
pools with similar features (such as an overcollateralization).
Second, applying the rule's diversification tests to the ultimate
obligors of an ABS could permit a fund to invest a significant
percentage of its total assets in a single ABS. Third, the suggested
approach would create significant administrative burdens on funds
that purchase ABSs, because the funds would have to identify and
monitor each obligor (or each guarantor of each obligor), and
determine whether the value of these obligations, together with any
other securities issued by that obligor that the funds hold directly
or propose to acquire, would exceed the applicable diversification
requirements.
\51\ Paragraph (c)(4)(ii)(D)(3) of rule 2a-7, as proposed to be
amended.
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Some industry participants have raised concern about the ABS
diversification test because a fund could invest more than ten percent
of its total assets in ABSs issued by a special purpose entity with one
or more ten percent obligors.52 A fund's investment of a
significant portion of its total assets in a single ABS might expose
the fund and investors to an undue amount of structural risk (e.g., the
risk that the special purpose entity might be affected by the
bankruptcy of the sponsor). Comment is requested whether the rule
should restrict direct and indirect fund investment in the obligations
of a single special purpose entity to a specified percentage of fund
assets (e.g., ten percent of fund assets).
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\52\ For example, a fund could invest fifty percent of its total
assets in ABSs issued by a special purpose entity whose qualifying
assets consist of the obligations of ten individual ten percent
obligors. Under the rule's diversification tests, each ten percent
obligor would be deemed to be the issuer of five percent of the
fund's total assets [(ten percent obligation) x (fifty percent
investment)]. This result would be technically consistent with the
diversification provisions of the rule, even though such an
investment would expose fifty percent of the fund's total assets to
the structural risk inherent in the special purpose entity issuing
the ABSs.
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c. Demand Features and Guarantees
Under rule 2a-7, a fund holding an ABS subject to a demand feature
from a controlled person is subject to the rule's ten percent
diversification limitation applicable to demand features and puts, and
thus may not be able to include this investment in its ``twenty-five
percent basket.'' 53 The sponsor of an ABS may own residual
interests in the special purpose entity, in which case the sponsor may
``control'' the special purpose entity within the meaning of section
2(a)(9) of the 1940 Act.54
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\53\ The diversification standards applicable to puts under rule
2a-7 apply with respect to seventy-five percent of a fund's total
assets--a fund need not comply with the rule's put diversification
standards with respect to the remaining twenty-five percent of its
total assets (``twenty-five percent basket'') as long as: (1) the
fund holds securities in the basket that are subject to, or issued
by, providers of puts that are first tier securities; and (2) the
puts held in the basket are puts issued by non-controlled persons.
See paragraphs (a)(17) (definition of ``put issued by a non-
controlled person'') and (c)(4)(v) of rule 2a-7.
\54\ Section 2(a)(9) of the 1940 Act defines ``control'' to mean
the power to exercise a controlling influence over the management or
policies of a company, unless such power is solely the result of an
official position with such company. Any person who owns
beneficially, either directly or through one or more controlled
companies, more than twenty-five per centum of the voting securities
of a company is presumed to control such company.
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The Commission restricted fund use of the twenty-five percent
basket to non-controlled persons to minimize a fund's concentration of
assets in a single economic enterprise.55 This provision of the
rule, then, was designed to limit a fund's aggregate exposure to the
risks of related, active businesses. Permitting a fund to invest more
than five percent of its total assets in an ABS subject to a demand
feature provided by a sponsor, however, would not have this effect,
because the special purpose entity, unlike an active enterprise, is a
limited purpose vehicle created solely for the purpose of issuing fixed
income securities based on the cash flow of the qualifying assets. The
Commission is therefore proposing amendments to the definitions of
``demand feature issued by a non-controlled person'' and ``guarantee
issued by a non-controlled person'' to include sponsors of special
purpose entities.56 The effect of such an amendment would be to
permit a fund holding an ABS to include any sponsor-provided demand
feature or guarantee in the twenty-five percent basket.57
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\55\ Release 21837, supra note 1, at Section II.C.1.b.
\56\ Paragraphs (a)(9) and (a)(15) of rule 2a-7, as proposed to
be amended.
\57\ Another effect would be that a sponsor-provided guarantee
would be subject to the rating requirement for guarantees. See supra
Section I.B.1.c of this Release (a guarantee issued by a non-
controlled person is subject to the rating requirement described
therein).
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d. Asset Backed Securities: Other Issues
Some types of ABSs may consist of qualifying assets whose cash flow
has been ``swapped'' to a financial institution that ultimately acts as
the primary source of payment to funds holding the ABSs. In these
circumstances, it may be appropriate for the fund to treat the
financial institution as the issuer of the ABSs under the rule's
diversification tests, because the fund is relying on the
creditworthiness of that institution. Comment is requested on whether
and how the rule should be amended to address swaps and similar
arrangements.
4. Other Proposed Amendments
a. Definition of Eligible Security--Certain Unrated Securities
Rule 2a-7 provides that an unrated security that, when issued was a
long-term security but when purchased by the fund had a remaining
maturity of less than 397 calendar days, may be considered to be an
eligible security based on whether the security is comparable in
quality to a rated security, unless the security has received a long-
term rating from any NRSRO that is not within the three highest
categories of long-term ratings.58 Proposed amendments to the rule
permit a fund to treat such a security as an eligible security if that
security had a long-term rating from the requisite NRSROs 59
within the three highest rating categories.60
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\58\ Paragraph (a)(9)(iii)(B) of rule 2a-7.
\59\ The term ``requisite NRSROs'' is defined in paragraph
(a)(19) of rule 2a-7 (paragraph (a)(20) of rule 2a-7, as proposed to
be amended) to mean: (i) any two NRSROs that have issued a rating
with respect to a security or class of debt obligations of an
issuer; or (ii) if only one NRSRO has issued a rating with respect
to such security or class of debt obligations of an issuer at the
time the fund purchases or rolls over the security, that NRSRO.
\60\ Paragraph (a)(10)(ii)(A) of rule 2a-7, as proposed to be
amended. To eliminate duplicative text in the definitions of
``eligible security,'' ``first tier security'' and ``unrated
security,'' the proposed amendments would delete subparagraph (ii)
from each definition. See paragraphs (a)(10), (a)(12) and (a)(27) of
rule 2a-7, as proposed to be amended.
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b. Acquisition of Portfolio Securities
Several provisions of the rule that are applicable to the purchase
of portfolio securities refer to the purchase or
[[Page 66626]]
``rollover'' of the security;61 some refer only to the purchase
62 or acquisition 63 of a security by the fund.64 To
make the rule more uniform, and to clarify that the failure of a fund
to exercise a demand feature does not have similar consequences under
the rule as a decision to rollover commercial paper, the proposed
amendments would add to the rule the defined term ``acquisition,''
which would include a rollover of a security (but not the exercise of a
demand feature.) 65
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\61\ See, e.g., paragraph (a)(19) of rule 2a-7 (definition of
``requisite NRSROs'').
\62\ See, e.g., paragraph (c)(3)(iii) of rule 2a-7 (securities
subject to conditional demand features).
\63\ See, e.g., paragraphs (c)(3)(i) (portfolio quality--
general); (c)(4)(i) (issuer diversification--taxable and national
funds); (c)(4)(ii) (issuer diversification--single state funds);
(c)(4)(v) (put diversification); and (c)(5)(i)(A)(2) (downgrade of
unrated security or second tier security held by the fund) of rule
2a-7.
\64\ See also paragraph (c)(4)(iv) of rule 2a-7 (diversification
tests applicable to second tier securities--references to
``acquisition'' and ``rollover'' but not to ``purchase'').
\65\ Paragraph (a)(1) of rule 2a-7, as proposed to be amended.
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c. Single State Funds
The March Amendments provide that a single state fund is limited to
investing no more than five percent of its assets in the securities of
a single issuer (other than Government securities), but only with
respect to seventy-five percent of its total assets. The remaining
twenty-five percent of a single state fund's assets (``twenty five
percent basket'') may be invested in the securities of one or more
issuers, provided they are first tier securities.66 The March
Amendments define a single state fund as a tax exempt fund that holds
itself out as primarily distributing income exempt from the income
taxes of a specified state or locality.67 Since the adoption of
the March Amendments, the Commission has become aware that a few money
market funds whose investment objectives are to distribute income
exempt from the income taxes of a particular state cannot hold
themselves out as single state funds because they may not primarily
distribute such income. The proposed amendments would modify the
current definition by permitting a fund to qualify as a single state
fund, and make use of the twenty-five percent basket, if it holds
itself out as seeking to maximize the amount of its distributed income
that is exempt from the income taxes or other taxes on investments of a
particular state.68
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\66\ Paragraph (c)(4)(ii) of rule 2a-7.
\67\ Paragraph (a)(21) of rule 2a-7.
\68\ Paragraph (a)(22) of rule 2a-7, as proposed to be amended.
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d. Standby Commitments
Under the rule, a ``standby commitment'' is defined as a put that
entitles the holder to same day settlement,69 and may be purchased
by the fund only if the board (or its delegate) finds that the issuer
presents minimal credit risks.70 The Commission is proposing to
delete the definition of ``standby commitment'' and all references
thereto from the rule. Changes to other definitions make the use of
this term in the rule unnecessary; a standby commitment that falls
within the definition of a demand feature would be treated as a demand
feature under the rule. Standby commitments that do not fall within the
definition of demand feature could not act as a substitute for the
credit quality, and could not be relied upon to shorten the maturity of
the security, would not expose the fund to any significant risks with
respect to the issuer of the standby commitment, and thus would not be
subject to any of the rule's quality or diversification
requirements.71 Comment is requested on the proposed amendment.
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\69\ Paragraph (a)(22) of rule 2a-7.
\70\ Paragraph (a)(9)(iii)(A) of rule 2a-7.
\71\ In the 1985 release proposing amendments to rule 2a-7, the
Commission explained that a fund usually pays nothing or only a
nominal consideration for a standby commitment, and the commitment
may be ``exercised only as a last resort, because the broker,
dealer, or other financial institution [providing the standby
commitment] would suffer a loss on the transaction if the exercise
price is greater than the market value of the underlying securities
at the time of exercise.'' Acquisition and Valuation of Certain
Portfolio Instruments by Registered Investment Companies, Investment
Company Act Release No. 14607 (July 1, 1985) (50 FR 27982 (July 9,
1985)). If there is a practical, contractual or other impediment to
its exercise, a standby commitment would not be a ``demand feature''
under rule 2a-7 because it is not readily exercisable at the time
intervals specified in paragraph (a)(7) of the rule.
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e. Downgrades, Defaults and Other Events
Proposed amendments to rule 2a-7 would clarify that a fund's
investment adviser (or other person) is required to reassess whether an
unrated security or a second tier security continues to present minimal
credit risks to the fund when it becomes aware that the security has
been downgraded by any NRSRO below that NRSRO's two highest short-term
rating categories.72 This amendment would eliminate any confusion
caused by the language of the rule, as amended by the March Amendments,
that some industry participants have suggested could be read to require
such a reassessment upon assignment of any rating below the two highest
rating categories, whether short-term or long-term.
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\72\ Paragraph (c)(6)(i)(A)(2) of rule 2a-7, as proposed to be
amended.
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f. Recordkeeping Requirements
The Commission is proposing amendments to the rule's recordkeeping
and procedural requirements. First, the proposed amendments would
replace certain rule text inadvertently omitted and restore the
requirement that a fund's board of directors (or its delegate) document
the minimal credit risk determination with respect to all securities in
the fund's portfolio.73 Second, the proposed amendments would
clarify that a fund would not be required to establish procedures
concerning demand features and guarantees not relied upon if it does
not hold such instruments.74 Finally, proposed amendments to the
procedures concerning these securities reflect modifications to the
diversification test for asset backed securities.75
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\73\ Paragraph (c)(10)(iii) of rule 2a-7, as proposed to be
amended.
\74\ Paragraph (c)(9)(ii) of rule 2a-7, as proposed to be
amended.
\75\ Paragraphs (c)(9)(iv) and (c)(10)(v) of rule 2a-7, as
proposed to be amended.
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g. Investment Companies Holding Themselves Out as Money Market Funds
Paragraph (b) of rule 2a-7 provides that it is ``an untrue
statement of material fact'' for a registered investment company to use
``money market'' or a similar term as part of its name, or to hold
itself out to investors as a money market fund or its equivalent unless
the fund meets the risk-limiting conditions of rule 2a-7. Proposed
amendments to paragraph (b) of the rule would restate, using additional
rulemaking authority recently provided to the Commission,76 the
rule's prohibition on the use of a name by an investment company that
would suggest the company is a money market fund, unless that company
is a money market fund that operates in compliance with the
rule.77
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\76\ The National Securities Markets Improvement Act of 1996
(Pub. L. No. 104-290) amended Section 35(d) of the 1940 Act to
provide that ``[i]t shall be unlawful for any registered investment
company to adopt as a part of the name or title of such company, or
of any securities of which it is the issuer, any word or words that
the Commission finds are materially deceptive or misleading. The
Commission is authorized, by rule or regulation, or order, to define
such names and titles as are materially deceptive and misleading.''
\77\ Paragraph (b) of rule 2a-7, as proposed to be amended.
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[[Page 66627]]
II. Proposed Amendments to the Advertising Rules
The Commission is also proposing to amend the Commission's
advertising rules to clarify the formula used by money market funds to
calculate yield and to seek to ensure that investors are not confused
by presentation of a money market fund's short-term total return in
lieu of its yield.
A. Calculation of Yield
The Commission adopted a uniform method of calculating money market
fund yield in 1980 that explicitly limited income reflected in yield to
investment income.78 In 1983, the Commission revised the formula
to correct a flaw in the formula at which time the limitation on
investment income was unintentionally omitted.79 Recently,
questions have been raised regarding the inclusion of income other than
investment income in the advertised yield of a money market fund. To
resolve such questions, the Commission is proposing to amend the
formula to clarify that income included in yield is limited to
investment income.80
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\78\ Advertising by Investment Companies, Investment Company Act
Release No. 11379 (Sept. 30, 1980) [45 FR 67079 (Oct. 9, 1980)].
\79\ ``Money Market'' Funds' Inclusion of a Standardized Yield
Computation in Prospectuses, Investment Company Act Release No.
13049 (Feb. 28, 1983) [48 FR 10297 (Mar. 11, 1983)]. In this
release, the Commission stated that ``limiting the yield to net
investment income better indicates the earning potential of a fund's
portfolio and thus both promotes comparability of yield and reduces
the potential for misleading investors.* * * '' (Emphasis added.)
\80\ The proposed amendments would revise Item 22 of Form N-1A
[17 CFR 239.15A and 274.11A], Item 25 of Form N-3 [17 CFR 239.17a
and 274.11b], and Item 21 of Form N-4 [17 CFR 239.17b and 274.11c].
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B. Use of Total Return
Some money market funds, instead of advertising their performance
by quoting a seven-day yield calculated in accordance with Commission
rules, have used quotations of total return covering short periods of
time. Even though sales material may properly identify the performance
figure as ``total return,'' the Commission is concerned that many
investors will not recognize the distinction or, if they do, will not
appreciate the difference between total return and yield. As a result,
investors may assume incorrectly that a fund quoting the higher total
return figure is a better performing fund than the other money market
funds quoting yield.81 In addition, investors may incorrectly
assume that the higher ``total return'' is the yield they can expect to
receive upon an investment in the fund.
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\81\ This practice typically occurs during a period of declining
interest rates when the fund's total return will be higher than its
current yield because it will include periods of time during which
the fund held higher yielding securities. It may also occur in order
to avoid the limitation on income included in yield to investment
income. See discussion supra.
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In seeking to ensure that the distinction between money market fund
yields and short-term total return is clear, the Commission is
proposing to amend rules 482 under the Securities Act of 1933 and 34b-1
under the 1940 Act to require that total return used in advertisements
and sales literature cover a period of at least one year. In addition,
the Commission is proposing to require that quotations of total return
in advertisements and sales literature be accompanied by a quotation of
current yield, computed in accordance with Commission rules, and set
forth with equal prominence.
III. Request for Comment
In connection with its review of the rules and forms regulating
money market funds, the staff has become aware of a fund sponsor that
established a program linking a money market fund with a debit card
available for use by the fund's shareholders. Under the program,
rebates earned by the fund on credit card transactions entered into by
the fund's shareholders are distributed to the shareholders in the form
of income.82 This type of income is not investment income and its
inclusion in the money market fund's standardized yield is not
permitted.83 The Commission solicits comment on an appropriate
method for disclosing, in connection with performance information,
these rebate amounts and other types of arrangements involving non-
investment income. For example, should a fund be able to advertise a
separate rate of return (as a percentage) for the rebate feature
covering the same period of time as the standardized yield?
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\82\ See Robert D. Hershy, Jr., Sophia Collier, Soda
Entrepreneur, Uncorks a Money Market Fund, N.Y. Times, at sec. 3, p.
11.
\83\ Such funds clearly can, however, for example, advertise the
dollar value of the rebate, or specify the dollar amounts received
per certain dollars invested in the fund over some stated period of
time.
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IV. Transition Period
The release adopting the March Amendments provided that money
market funds would be required to comply with certain of the amendments
by October 3, 1996, which was approximately six months from the date of
publication of the March Amendments in The Federal Register.84 On
August 13, 1996, the Commission suspended the compliance date for the
March Amendments until the final version of these proposed amendments
is published in The Federal Register.85 Comment is requested on an
appropriate compliance date for these technical amendments, and whether
the release adopting these technical amendments should provide for a
compliance period of comparable length to that of the March Amendments.
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\84\ Release 21837, supra note 1, at Section V.B.
\85\ Compliance Date Release, supra note 4. The March Amendments
clarified that floating rate and variable rate securities
(``adjustable rate securities'') must reasonably be expected to have
market values that approximate their amortized cost values on each
interest rate adjustment date through their final maturity dates.
See Release 21837, supra note 1, at Section II.F.4 and paragraphs
(a)(12) and (a)(30) of rule 2a-7 (definitions of ``floating rate
security'' and ``variable rate security''). Because these provisions
of the March Amendments merely clarified the application of existing
provisions of the rule, whether a fund or its adviser must
reasonably expect the market value of an adjustable rate security to
approximate its amortized cost value was not affected by the
Compliance Date Release.
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V. Cost/Benefit Analysis
The proposals discussed above constitute refinements to the rules
regulating money market funds, and would not increase costs for money
market funds, their advisers, or other market participants. The
proposed technical amendments would clarify the application of the
quality and diversification tests under rule 2a-7 consistent with
investor protection. The Commission requests specific comment on its
assessment of the costs and benefits associated with the proposal,
including specific estimates of costs and benefits.
VI. Paperwork Reduction Act
Certain provisions of the proposed amendments contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 et seq.), and the Commission has
submitted proposed amendments to the Office of Management and Budget
for review in accordance with 44 U.S.C. 3507(d). The title for the
collection of information is ``Rules Regulating Money Market Funds.''
The Supporting Statement to the Paperwork Reduction Act submission
notes that, because the proposed technical amendments to rule 2a-7
would clarify existing reporting and recordkeeping obligations, it is
estimated that they would have no effect on the annual reporting burden
of money market funds. The Supporting Statement also notes that the
proposed
[[Page 66628]]
amendments to the advertising rules would not impose any new paperwork
burden on money market funds because the majority of money market funds
do not include income other than investment income in calculating their
yield, and do not advertise total return based on short periods of
time.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments concerning: whether the proposed collection of information is
necessary for the proper performance of the function of the Commission,
including whether the information shall have practical utility; on the
accuracy of the Commission's estimate of the burden of the proposed
collection of information; on the quality, utility, and clarity of the
information to be collected; and whether the burden of collection of
information on those who are to respond, including through the use of
automated collection techniques or other forms of information or
technology, may be minimized.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of Management
and Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy of their comments to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549 with reference to File No. S7-29-96. The Office of
Management and Budget is required to make a decision concerning the
collection of information between 30 and 60 days after publication, so
a comment to the Office of Management and Budget is best assured of
having its full effect if the Office of Management and Budget receives
it within 30 days of publication.
VII. Summary of Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis in accordance with 5 U.S.C. 603 regarding proposed technical
amendments to rule 2a-7, and proposed amendments to the advertising
rules applicable to money market funds. The analysis states that the
proposed technical amendments to rule 2a-7 are not intended to effect
major substantive changes to the rule, but are designed to codify
interpretive positions taken by the staff of the Division of Investment
Management; revise terminology in the rule to reflect common usage;
modify certain of the March Amendments so that the treatment accorded
certain instruments by rule 2a-7 more closely reflects the treatment
accorded to those instruments by the financial markets; and make
certain other technical corrections. The analysis also states that, in
light of the nature of the proposed technical amendments to the rule,
it would be inconsistent with the purposes of the Regulatory
Flexibility Act to propose to exempt small entities from the coverage
of these amendments.
The analysis also discusses the proposed amendments to the
advertising rules for money market funds. The analysis explains that
the proposed amendments are designed to clarify the formula used by
money market funds to calculate yield and to prevent investors from
being confused or misled by the presentation of a money market fund's
short-term total return in lieu of its yield. The analysis states that
the concerns that caused the Commission to undertake this proposed
rulemaking are equally applicable to funds of all sizes. A copy of the
Initial Regulatory Flexibility Analysis may be obtained by contacting
Marjorie S. Riegel, Securities and Exchange Commission, 450 Fifth
Street, NW., Mail Stop 10-6, Washington, DC 20549.
VIII. Text of Rule and Form Amendments
List of Subjects in 17 CFR Parts 230, 239, 270 and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
For the reasons set out in the preamble, the Commission is
proposing to amend chapter II, title 17 of the Code of Federal
Regulations as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for part 230 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78d, 78l, 78m, 78n, 78o, 78w, 79ll(d), 79t, 80a-8, 80a-29, 80a-30,
and 80a-37, unless otherwise noted.
* * * * *
2. Section 230.482 is amended by revising paragraph (d) to read as
follows:
Sec. 230.482 Advertising by an investment company as satisfying
requirements of section 10.
* * * * *
(d) In the case of a money market fund:
(1) Any quotation of the money market fund's yield in an
advertisement shall be:
(i) A quotation of current yield based on the method of computation
prescribed in Form N-1A (Secs. 239.15A and 274.11A of this chapter),
Form N-3 (Secs. 239.17a and 274.11b of this chapter), or Form N-4
(Secs. 239.17b and 274.11c of this chapter) and identifying the length
of and the date of the last day in the base period used in computing
that quotation; or
(ii) A quotation of current yield described in paragraph (d)(1)(i)
of this section and a corresponding quotation of effective yield based
on the method of computation prescribed in Form N-1A (Secs. 239.15A and
274.11A of this chapter), Form N-3 (Secs. 239.17a and 274.11b of this
chapter), or Form N-4 (Secs. 239.17b and 274.11c of this chapter);
provided, that when both a quotation of current yield and effective
yield are used in the same advertisement, each quotation shall relate
to an identical base period and shall be given equal prominence; and
(2) Any quotation of total return shall cover a period of no less
than one year and shall be accompanied by a quotation of the fund's
current yield described in paragraph (d)(1)(i) of this section.
* * * * *
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
3. The authority citation for part 270 is amended by revising the
general authority as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(b), 80a-37, 80a-39
unless otherwise noted;
* * * * *
4. Section 270.2a-7 is revised to read as follows:
Sec. 270.2a-7 Money market funds.
(a) Definitions. (1) Acquisition (or Acquire) shall mean any
purchase or subsequent rollover (but does not include the failure to
exercise a Demand Feature).
(2) Amortized Cost Method of valuation shall mean the method of
calculating an investment company's net asset value whereby portfolio
securities are valued at the fund's Acquisition cost as adjusted for
amortization of premium or accretion of discount rather than at their
value based on current market factors.
(3) Asset Backed Security shall mean a fixed income security (other
than a Government security) issued by a Special Purpose Entity (as
defined in this paragraph), substantially all of the assets of which
consist of Qualifying Assets (as defined in this paragraph). Special
Purpose Entity shall mean a trust, corporation, partnership or other
entity organized for the sole purpose of
[[Page 66629]]
issuing securities which entitle their holders to receive payments that
depend primarily on the cash flow from Qualifying Assets, but does not
include a registered investment company. Qualifying Assets shall mean
financial assets, either fixed or revolving, that by their terms
convert into cash within a finite time period, plus any rights or other
assets designed to assure the servicing or timely distribution of
proceeds to security holders.
(4) Business Day shall mean any day, other than Saturday, Sunday,
or any customary business holiday.
(5) Collateralized Fully in the case of a repurchase agreement
shall mean that:
(i) The value of the securities collateralizing the repurchase
agreement (reduced by the transaction costs (including loss of
interest) that the money market fund reasonably could expect to incur
if the seller defaults) is, and during the entire term of the
repurchase agreement remains, at least equal to the Resale Price (as
defined in paragraph (a)(5(v) provided in the agreement;
(ii) The money market fund or its custodian either has actual
physical possession of the collateral or, in the case of a security
registered on a book entry system, the book entry is maintained in the
name of the money market fund or its custodian;
(iii) The collateral consists entirely of cash items, Government
Securities or other securities that at the time the repurchase
agreement is entered into are rated in the highest rating category by
the Requisite NRSROs; and
(iv) Upon an event of insolvency with respect to the seller, the
repurchase agreement would qualify under a provision of applicable
insolvency law providing an exclusion from any general stay of
creditors' rights against the seller.
(v) Resale Price shall mean the Acquisition price paid to the
seller of the securities plus the accrued resale premium on such
Acquisition price. The accrued resale premium shall be the amount
specified in the repurchase agreement or the daily amortization of the
difference between the Acquisition price and the resale price specified
in the repurchase agreement.
(6) Conditional Demand Feature shall mean a Demand Feature that is
not an Unconditional Demand Feature. A Conditional Demand Feature is
not a Guarantee.
(7) Conduit Security shall mean a security issued by a Municipal
Issuer (as defined in this paragraph) involving an arrangement or
agreement entered into, directly or indirectly, with a person other
than a Municipal Issuer, which arrangement or agreement provides for or
secures repayment of the security. Municipal Issuer shall mean a state
or territory of the United States (including the District of Columbia),
or any political subdivision or public instrumentality of a state or
territory of the United States. A Conduit Security does not include a
security that is:
(i) Fully and unconditionally guaranteed by a Municipal Issuer; or
(ii) Payable from the general revenues of the Municipal Issuer or
other Municipal Issuers (other than those revenues derived from an
agreement or arrangement with a person who is not a Municipal Issuer
that provides for or secures repayment of the security issued by the
Municipal Issuer); or
(iii) Related to a project owned and operated by a Municipal
Issuer; or
(iv) Related to a facility leased to and under the control of an
industrial or commercial enterprise that is part of a public project
which, as a whole, is owned and under the control of a Municipal
Issuer.
(8) Demand Feature shall mean:
(i) A feature permitting the holder of a security to sell the
security at an exercise price equal to the approximate amortized cost
of the security plus accrued interest, if any, at the time of exercise.
A Demand Feature must be exercisable either:
(A) At any time on no more than 30 calendar days' notice; or
(B) At specified intervals not exceeding 397 calendar days and upon
no more than 30 calendar days' notice; or
(ii) A feature permitting the holder of an Asset Backed Security
unconditionally to receive principal and interest within 397 calendar
days of making demand.
(9) Demand Feature Issued By A Non-Controlled Person shall mean a
Demand Feature issued by a person that, directly or indirectly, does
not control, and is not controlled by or under common control with the
issuer of the security subject to the Demand Feature; and a sponsor of
an Asset Backed Security with respect to an Asset Backed Security.
Control shall mean ``control'' as defined in section 2(a)(9) of the Act
(15 U.S.C. 80a-2(a)(9)).
(10) Eligible Security shall mean:
(i) A security with a remaining maturity of 397 calendar days or
less that has received a short-term rating (or that has been issued by
an issuer that has received a short-term rating with respect to a class
of debt obligations, or any debt obligation within that class, that is
comparable in priority and security with the security) by the Requisite
NRSROs in one of the two highest short-term rating categories (within
which there may be sub-categories or gradations indicating relative
standing); or
(ii) An Unrated Security that is of comparable quality to a
security meeting the requirements of paragraph (a)(10)(i) of this
section, as determined by the money market fund's board of directors;
Provided, however, that:
(A) A security that at the time of issuance had a remaining
maturity of more than 397 calendar days but that has a remaining
maturity of 397 calendar days or less and that is an Unrated Security
is not an Eligible Security if the security has received a long-term
rating from any NRSRO that is not within the NRSRO's three highest
long-term ratings categories (within which there may be sub-categories
or gradations indicating relative standing) unless the security has
received a long-term rating from the Requisite NRSROs in one of the
three highest rating categories;
(B) An Asset Backed Security (other than an Asset Backed Security
substantially all of whose Qualifying Assets consist of obligations of
one or more Municipal Issuers, as that term is defined in paragraph
(a)(7) of this section) shall not be an Eligible Security unless it has
received a rating from an NRSRO.
(iii) In addition, in the case of a security that is subject to a
Demand Feature or Guarantee:
(A) The Guarantee has received a rating or is issued by an issuer
that has received a rating from an NRSRO (unless the Guarantee is
issued by a person that, directly or indirectly, controls, is
controlled by or is under common control with the issuer of the
security subject to the Guarantee); and
(B) The issuer of the Demand Feature or Guarantee, or another
institution, has undertaken promptly to notify the holder of the
security in the event the Demand Feature or Guarantee is substituted
with another Demand Feature or Guarantee (if such substitution is
permissible under the terms of the Demand Feature or Guarantee).
(11) Event of Insolvency shall mean, with respect to a person:
(i) An admission of insolvency, the application by the person for
the appointment of a trustee, receiver, rehabilitator, or similar
officer for all or substantially all of its assets, a general
assignment for the benefit of creditors, the filing by the person of a
voluntary petition in bankruptcy or application for reorganization or
an arrangement with creditors; or
[[Page 66630]]
(ii) The institution of similar proceedings by another person which
proceedings are not contested by the person; or
(iii) The institution of similar proceedings by a government agency
responsible for regulating the activities of the person, whether or not
contested by the person.
(12) First Tier Security shall mean any Eligible Security that:
(i) Has received a short-term rating (or that has been issued by an
issuer that has received a short-term rating with respect to a class of
debt obligations, or any debt obligation within that class, that is
comparable in priority and security with the security) by the Requisite
NRSROs in the highest short-term rating category for debt obligations
(within which there may be sub-categories or gradations indicating
relative standing); or
(ii) Is an Unrated Security that is of comparable quality to a
security meeting the requirements of paragraph (a)(12)(i) of this
section, as determined by the fund's board of directors; or
(iii) Is a security issued by a registered investment company that
is a money market fund; or
(iv) Is a Government Security.
(13) Floating Rate Security shall mean a security the terms of
which provide for the adjustment of its interest rate whenever a
specified interest rate changes and which, at any time until the final
maturity of the instrument or the period remaining until the principal
amount can be recovered through demand, can reasonably be expected to
have a market value that approximates its amortized cost.
(14) Guarantee shall mean an unconditional obligation of a person
other than the issuer of the security to undertake to pay, upon
presentment by the holder of the Guarantee (if required), at a
specified time a price equal to the principal amount of the underlying
security plus accrued interest when due or upon default, or, in the
case of an Unconditional Demand Feature, an obligation that entitles
the holder to receive upon exercise the approximate amortized cost of
the underlying security or securities, plus accrued interest, if any. A
Guarantee includes a letter of credit, financial guaranty (bond)
insurance, and an Unconditional Demand Feature (other than an
Unconditional Demand Feature provided by the issuer of the security).
(15) Guarantee Issued by a Non-Controlled Person shall mean a
Guarantee issued by a person that, directly or indirectly, does not
control, and is not controlled by or under common control with the
issuer of the security subject to the Guarantee; and a sponsor of a
Special Purpose Entity with respect to an Asset Backed Security.
Control shall mean ``control'' as defined in section 2(a)(9) of the Act
(15 U.S.C. 80a-2(a)(9)).
(16) Government Security shall mean any Government security as
defined in section 2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16)).
(17) NRSRO shall mean any nationally recognized statistical rating
organization, as that term is used in paragraphs (c)(2)(vi) (E), (F)
and (H) of Sec. 240.15c3-1 of this chapter that is not an affiliated
person, as defined in section 2(a)(3)(C) of the Act (15 U.S.C. 80a-
2(a)(3)(C)), of the issuer of, or any insurer, or provider of credit
support for, the security.
(18) Penny-Rounding Method of pricing shall mean the method of
computing an investment company's price per share for purposes of
distribution, redemption and repurchase whereby the current net asset
value per share is rounded to the nearest one percent.
(19) Refunded Security shall mean a debt security the principal and
interest payments of which are to be paid by Government Securities
(``deposited securities'') that have been irrevocably placed in an
escrow account pursuant to agreement between the issuer of the debt
security and an escrow agent that is not an affiliated person, as
defined in section 2(a)(3)(C) of the Act (15 U.S.C. 80a-2(a)(3)(C)), of
the issuer of the debt security, and, in accordance with such escrow
agreement, are pledged only to the payment of the debt security and, to
the extent that excess proceeds are available after all payments of
principal, interest, and applicable premiums on the Refunded
Securities, the expenses of the escrow agent and, thereafter, to the
issuer or another party; provided that:
(i) The deposited securities shall not be redeemable prior to their
final maturity;
(ii) The escrow agreement shall prohibit the substitution of the
deposited securities unless the substituted securities are Government
Securities; and
(iii) At the time the deposited securities are placed in the escrow
account, or at the time a substitution of the deposited securities is
made, an independent certified public accountant shall have certified
to the escrow agent that the deposited securities will satisfy all
scheduled payments of principal, interest and applicable premiums on
the Refunded Securities; Provided, however, an independent public
accountant need not have provided the certification described herein if
the security, as a Refunded Security, has received a rating from an
NRSRO in the highest category for debt obligations (within which there
may be sub-categories or gradations including relative standing).
(20) Requisite NRSROs shall mean:
(i) Any two NRSROs that have issued a rating with respect to a
security or class of debt obligations of an issuer; or
(ii) If only one NRSRO has issued a rating with respect to such
security or class of debt obligations of an issuer at the time the fund
Acquires the security, that NRSRO.
(21) Second Tier Security shall mean any Eligible Security that is
not a First Tier Security. Second Tier Conduit Security shall mean any
Conduit Security that is an Eligible Security that is not a First Tier
Security.
(22) Single State Fund shall mean a Tax Exempt Fund that holds
itself out as seeking to maximize the amount of its distributed income
that is exempt from the income taxes or other taxes on investments of a
particular state and, where applicable, subdivisions thereof.
(23) Tax Exempt Fund shall mean any money market fund that holds
itself out as distributing income exempt from regular federal income
tax.
(24) Total Assets shall mean, with respect to a money market fund
using the Amortized Cost Method, the total amortized cost of its assets
and, with respect to any other money market fund, the total market-
based value of its assets.
(25) Unconditional Demand Feature shall mean a Demand Feature that
by its terms would be readily exercisable in the event of a default in
payment of principal or interest on the underlying security or
securities.
(26) United States Dollar-Denominated shall mean, with reference to
a security, that all principal and interest payments on such security
are payable to security holders in United States dollars under all
circumstances and that the interest rate of, the principal amount to be
repaid, and the timing of payments related to such security do not vary
or float with the value of a foreign currency, the rate of interest
payable on foreign currency borrowings, or with any other interest rate
or index expressed in a currency other than United States dollars.
(27) Unrated Security shall mean:
(i) A security with a remaining maturity of 397 calendar days or
less issued by an issuer that did not, at the time the security was
Acquired by the fund, have a current short-term rating assigned by any
NRSRO:
(A) To the security; or
(B) To the issuer of the security with respect to a class of debt
obligations (or
[[Page 66631]]
any debt obligation within that class) that is comparable in priority
and security with the security, or a Demand Feature with respect to the
security; and
(ii) A security that is a rated security and is the subject of an
external credit support agreement (including an arrangement by which
the security has become a Refunded Security) that was not in effect
when the security (or the issuer) was assigned its rating unless the
security has a rating from an NRSRO reflecting the existence of the
credit support agreement.
(iii) A security is not an Unrated Security if any debt obligation
(reference security) that is issued by the same issuer and is
comparable in priority and security with that security has a short-term
rating by an NRSRO. The status of such security as an Eligible Security
or First Tier Security shall be the same as that of the reference
security.
(28) Variable Rate Security shall mean a security the terms of
which provide for the adjustment of its interest rate on set dates
(such as the last day of a month or calendar quarter) and which, upon
each adjustment until the final maturity of the instrument or the
period remaining until the principal amount can be recovered through
demand, can reasonably be expected to have a market value that
approximates its amortized cost.
(b) Holding Out and Use of Names and Titles. (1) It shall be an
untrue statement of material fact within the meaning of section 34(b)
of the Act (15 U.S.C. 80a-33(b)) for a registered investment company,
in any registration statement, application, report, account, record, or
other document filed or transmitted pursuant to the Act, including any
advertisement, pamphlet, circular, form letter, or other sales
literature addressed to or intended for distribution to prospective
investors that is required to be filed with the Commission by section
24(b) of the Act (15 U.S.C. 80a-24(b)) to hold itself out to investors
as a money market fund or the equivalent of a money market fund, unless
such registered investment company meets the conditions of paragraphs
(c)(2), (c)(3) and (c)(4) of this section.
(2) It shall constitute the use of a materially deceptive or
misleading name or title within the meaning of section 35(d) of the Act
[15 U.S.C. 80a-34(d)] for a registered investment company to adopt the
term ``money market'' as part of its name or title or the name or title
of any redeemable securities of which it is the issuer, or to adopt a
name which suggests that it is, a money market fund or the equivalent
of a money market fund, unless such registered investment company meets
the conditions of paragraphs (c)(2), (c)(3), and (c)(4) of this
section.
(3) For purposes of this paragraph, a name which suggests that a
registered investment company is a money market fund or the equivalent
thereof shall include one which uses such terms as ``cash,''
``liquid,'' ``money,'' ``ready assets'' or similar terms.
(c) Share Price Calculations. The current price per share, for
purposes of distribution, redemption and repurchase, of any redeemable
security issued by any registered investment company (``money market
fund''), notwithstanding the requirements of section 2(a)(41) of the
Act (15 U.S.C. 80a-2(a)(41)) and of Secs. 270.2a-4 and 270.22c-1
thereunder, may be computed by use of the Amortized Cost Method or the
Penny-Rounding Method; Provided, however, That:
(1) Board Findings. The board of directors of the money market fund
shall determine, in good faith, that it is in the best interests of the
fund and its shareholders to maintain a stable net asset value per
share or stable price per share, by virtue of either the Amortized Cost
Method or the Penny-Rounding Method, and that the money market fund
will continue to use such method only so long as the board of directors
believes that it fairly reflects the market-based net asset value per
share.
(2) Portfolio Maturity. The money market fund shall maintain a
dollar-weighted average portfolio maturity appropriate to its objective
of maintaining a stable net asset value per share or price per share;
Provided, however, That the money market fund will not:
(i) Except as provided in paragraph (c)(2)(ii) of this section,
acquire any instrument with a remaining maturity of greater than 397
calendar days; or
(ii) In the case of a money market fund not using the Amortized
Cost Method, acquire a Government Security with a remaining maturity of
greater than 762 calendar days; or
(iii) Maintain a dollar-weighted average portfolio maturity that
exceeds ninety days.
(3) Portfolio Quality--(i) General. The money market fund shall
limit its portfolio investments to those United States Dollar-
Denominated securities that the fund's board of directors determines
present minimal credit risks (which determination must be based on
factors pertaining to credit quality in addition to any rating assigned
to such securities by an NRSRO) and which are at the time of
Acquisition Eligible Securities.
(ii) Second Tier Securities. Immediately after the Acquisition of
any Second Tier Security:
(A) Taxable Funds. A money market fund that is not a Tax Exempt
Fund shall not have invested more than Five Percent of its Total Assets
in securities which are Second Tier Securities; and
(B) Tax Exempt Funds. A money market fund that is a Tax Exempt Fund
shall not have invested more than Five Percent of its Total Assets in
Conduit Securities which are Second Tier Conduit Securities.
(iii) Securities Subject to Guarantees. A security that is subject
to a Guarantee may be determined to be an Eligible Security or a First
Tier Security based solely on whether the Guarantee is an Eligible
Security or First Tier Security, as the case may be.
(iv) Securities Subject to Conditional Demand Features. A security
that is subject to a Conditional Demand Feature (``Underlying
Security'') may be determined to be an Eligible Security or a First
Tier Security only if:
(A) The Conditional Demand Feature is an Eligible Security or First
Tier Security, as the case may be; and
(B) At the time of the Acquisition of the Underlying Security, the
money market fund's board of directors has determined that there is
minimal risk that the circumstances that would result in the
Conditional Demand Feature not being exercisable will occur; and
(1) The conditions limiting exercise either can be monitored
readily by the fund, or relate to the taxability, under federal, state
or local law, of the interest payments on the security; or
(2) The terms of the Conditional Demand Feature require that the
fund will receive notice of the occurrence of the condition and the
opportunity to exercise the Demand Feature in accordance with its
terms; and
(C) The Underlying Security or any Guarantee of such security (or
the debt securities of the issuer of the Underlying Security or
Guarantee that are comparable in priority and security with the
Underlying Security or Guarantee) has received either a short-term
rating or a long-term rating, as the case may be, by the Requisite
NRSROs within the NRSROs' two highest short-term or long-term rating
categories (within which there may be sub-categories or gradations
indicating relative standing) or, if unrated, is determined to be of
comparable quality by the money market fund's board of directors to a
security that has received a rating from the Requisite NRSROs within
the NRSRO's two highest short-term or long-term rating categories, as
the case may be.
[[Page 66632]]
(4) Portfolio Diversification--(i) Issuer Diversification. The
money market fund shall be diversified with respect to issuers of
securities Acquired by the fund as provided in paragraphs (c)(4)(i) and
(c)(4)(ii) of this section, other than with respect to Government
Securities and securities subject to a Guarantee Issued By A Non-
Controlled Person.
(A) Taxable and National Funds. Immediately after the Acquisition
of any security, a money market fund other than a Single State Fund
shall not have invested more than five percent of its Total Assets in
securities issued by the issuer of the security; Provided, however,
that such a fund may invest up to twenty-five percent of its Total
Assets in the First Tier Securities of a single issuer for a period of
up to three Business Days after the Acquisition thereof, Provided,
Further, that the fund may not invest in the securities of more than
one issuer in accordance with the foregoing proviso in this paragraph
at any time.
(B) Single State Funds. With respect to seventy-five percent of its
Total Assets, immediately after the Acquisition of any security, a
Single State Fund shall not have invested more than five percent of its
Total Assets in securities issued by the issuer of the security;
Provided, however, That a Single State Fund shall not invest more than
five percent of its Total Assets in securities issued by the issuer of
the security unless the securities are First Tier Securities.
(C) Second Tier Securities--(1) Taxable Funds. Immediately after
the Acquisition of any Second Tier Security, a money market fund that
is not a Tax Exempt Fund shall not have invested more than the greater
of one percent of its Total Assets or one million dollars in securities
issued by that issuer which are Second Tier Securities.
(2) Tax Exempt Funds. Immediately after the Acquisition of any
Second Tier Conduit Security, a money market fund that is a Tax Exempt
Fund shall not have invested more than the greater of one percent of
its Total Assets or one million dollars in securities issued by that
issuer which are Second Tier Conduit Securities.
(ii) Issuer Diversification Calculations. For purposes of making
calculations under paragraph (c)(4)(i) of this section:
(A) Repurchase Agreements. The Acquisition of a repurchase
agreement may be deemed to be an Acquisition of the underlying
securities, provided the obligation of the seller to repurchase the
securities from the money market fund is Collateralized Fully.
(B) Refunded Securities. The Acquisition of a Refunded Security
shall be deemed to be an Acquisition of a Government Security.
(C) Conduit Securities. A Conduit Security shall be deemed to be
issued by the issuer (other than the Municipal Issuer) ultimately
responsible for payments of interest and principal on the security.
(D) Asset Backed Securities--(1) General. An Asset Backed Security
shall be deemed to be issued by the Special Purpose Entity that issued
the Asset Backed Security, Provided, however, any person whose
obligations constitute ten percent or more of the principal amount of
the Qualifying Assets of that Special Purpose Entity (``Ten Percent
Obligor'') shall be deemed to be an issuer of the portion of the Asset
Backed Security such obligations represent; and
(2) Secondary Asset Backed Securities. If the Ten Percent Obligor
is itself a Special Purpose Entity issuing Asset Backed Securities
(``Secondary ABS''), then that obligor shall be deemed to have issued a
portion of the assets of the primary Asset Backed Security that such
Secondary ABS represents. For purposes of identifying Ten Percent
Obligors, continue down the chain of Ten Percent Obligors until a
Special Purpose Entity with no Ten Percent Obligor is reached.
(3) Demand Features and Guarantees. In the case of a Ten Percent
Obligor deemed to be an issuer, the fund shall satisfy the
diversification requirements of paragraph (c)(4)(iii) of this section
with respect to any Demand Feature or Guarantee to which the Ten
Percent Obligor's obligations are subject.
(E) Shares in Master Funds. A money market fund substantially all
of the assets of which consist of shares of another money market fund
Acquired in reliance on section 12(d)(1)(E) of the Act (15 U.S.C. 80a-
12(d)(1)(E)) shall be deemed to be in compliance with this section if
the board of directors of the money market fund holding the assets of
another money market fund reasonably believes that the fund in which it
has invested is in compliance with this section.
(iii) Diversification Rules for Demand Features and Guarantees. The
money market fund shall be diversified with respect to Demand Features
and Guarantees Acquired by the fund as provided in paragraphs
(c)(4)(iii) and (c)(4)(iv) of this section, other than with respect to
a Demand Feature issued by the same institution that issued the
underlying security.
(A) General. Immediately after the Acquisition of any Demand
Feature or Guarantee or security subject to a Demand Feature or
Guarantee, a money market fund, with respect to seventy-five percent of
its Total Assets, shall not have invested more than ten percent of its
Total Assets in securities issued by or subject to Demand Features or
Guarantees from the institution that issued the Demand Feature or
Guarantee, subject to paragraphs (c)(4)(iii) (B) and (C) of this
section.
(B) Second Tier Demand Features or Guarantees. Immediately after
the Acquisition of any Demand Feature or Guarantee (or a security after
giving effect to the Demand Feature or Guarantee) that is a Second Tier
Security, a money market fund shall not have invested more than five
percent of its Total Assets in securities issued by or subject to
Demand Features or Guarantees from the institution that issued the
Demand Feature or Guarantee.
(C) Demand Features or Guarantees Issued by Non-Controlled Persons.
Immediately after the Acquisition of any security subject to a Demand
Feature or Guarantee, a money market fund shall not have invested more
than ten percent of its Total Assets in securities issued by, or
subject to Demand Features or Guarantees from the institution that
issued the Demand Feature or Guarantee, unless, with respect to any
security subject to Demand Features or Guarantees from that institution
(other than securities issued by such institution), the Demand Feature
or Guarantee is a Demand Feature or Guarantee Issued By A Non-
Controlled Person.
(iv) Demand Feature and Guarantee Diversification Calculations--(A)
Fractional Demand Features or Guarantees. In the case of a security
subject to a Demand Feature or Guarantee from an institution by which
the institution guarantees a specified portion of the value of the
security, the institution shall be deemed to guarantee the specified
portion thereof, Provided, however, if the security is an Asset Backed
Security and the Demand Feature or Guarantee is with respect to all or
a portion of the first losses with respect to the security, the
institution providing the Demand Feature or Guarantee shall be deemed
to have provided the Demand Feature or Guarantee with respect to the
entire principal amount of the security.
(B) Layered Demand Features or Guarantees. In the case of a
security subject to Demand Features or Guarantees from multiple
institutions that have not limited the extent of their obligations as
described in paragraph (c)(4)(iv)(A) of this section, each institution
shall be deemed to have
[[Page 66633]]
provided the Demand Feature or Guarantee with respect to the entire
principal amount of the security.
(v) Diversification Safe Harbor. A money market fund that satisfies
the applicable diversification requirements of paragraph (c)(4) of this
section shall be deemed to have satisfied the diversification
requirements of section 5(b)(1) of the Act (15 U.S.C. 80a-5(b)(1)) and
the rules adopted thereunder.
(5) Demand Features and Guarantees Not Relied Upon. If the fund's
board of directors has determined that the fund is not relying on a
Demand Feature or Guarantee to determine the quality (pursuant to
paragraph (c)(3) of this section), or maturity (pursuant to paragraph
(d) of this section), or liquidity of a portfolio security, and
maintains a record of this determination (pursuant to paragraphs
(c)(9)(ii) and (c)(10)(vi) of this section), then the fund may
disregard such Demand Feature or Guarantee for all purposes of this
section.
(6) Downgrades, Defaults and Other Events--(i) Downgrades--(A)
General. Upon the occurrence of either of the events specified in
paragraphs (c)(6)(i)(A)(1) and (2) of this section with respect to a
portfolio security, the board of directors of the money market fund
shall reassess promptly whether such security continues to present
minimal credit risks and shall cause the fund to take such action as
the board of directors determines is in the best interests of the money
market fund and its shareholders:
(1) A portfolio security of a money market fund ceases to be a
First Tier Security (either because it no longer has the highest rating
from the Requisite NRSROs or, in the case of an Unrated Security, the
board of directors of the money market fund determines that it is no
longer of comparable quality to a First Tier Security); and
(2) The money market fund's investment adviser (or any person to
whom the fund's board of directors has delegated portfolio management
responsibilities) becomes aware that any Unrated Security or Second
Tier Security held by the money market fund has, since the security was
Acquired by the fund, been given a rating by any NRSRO below the
NRSRO's second highest short-term rating category.
(B) Securities To Be Disposed of. The reassessments required by
paragraph (c)(6)(i)(A) of this section shall not be required if, in
accordance with the procedures adopted by the board of directors, the
security is disposed of (or matures) within five Business Days of the
specified event and, in the case of events specified in paragraph
(c)(6)(i)(A)(2) of this section, the board is subsequently notified of
the adviser's actions.
(C) Special Rule for Certain Securities Subject to Demand Features.
In the event that after giving effect to a rating downgrade, more than
five percent of the fund's Total Assets are invested in securities
issued by or subject to Demand Features from a single institution that
are Second Tier Securities, the fund shall reduce its investment in
securities issued by or subject to Demand Features from that
institution to no more than five percent of its Total Assets by
exercising the Demand Features at the next succeeding exercise date(s),
absent a finding by the board of directors that disposal of the
portfolio security would not be in the best interests of the money
market fund.
(ii) Defaults and Other Events. Upon the occurrence of any of the
events specified in paragraphs (c)(6)(ii)(A) through (D) of this
section with respect to a portfolio security, the money market fund
shall dispose of such security as soon as practicable consistent with
achieving an orderly disposition of the security, by sale, exercise of
any Demand Feature or otherwise, absent a finding by the board of
directors that disposal of the portfolio security would not be in the
best interests of the money market fund (which determination may take
into account, among other factors, market conditions that could affect
the orderly disposition of the portfolio security):
(A) The default with respect to a portfolio security (other than an
immaterial default unrelated to the financial condition of the issuer);
(B) A portfolio security ceases to be an Eligible Security;
(C) A portfolio security has been determined to no longer present
minimal credit risks; or
(D) An Event of Insolvency occurs with respect to the issuer of a
portfolio security or the provider of any Demand Feature or Guarantee.
(iii) Notice to the Commission. In the event of a default with
respect to one or more portfolio securities (other than an immaterial
default unrelated to the financial condition of the issuer) or an Event
of Insolvency with respect to the issuer of the security or any Demand
Feature or Guarantee to which it is subject, where immediately before
default the securities (or the securities subject to the Demand Feature
or Guarantee) accounted for \1/2\ of 1 percent or more of a money
market fund's Total Assets, the money market fund shall promptly notify
the Commission of such fact and the actions the money market fund
intends to take in response to such situation. Notification under this
paragraph shall be made telephonically or by means of a facsimile
transmission, followed by letter sent by first class mail, directed to
the attention of the Director of the Division of Investment Management.
(iv) Defaults for Purposes of Paragraphs (c)(6)(ii) and (iii). For
purposes of paragraphs (c)(6) (ii) and (iii) of this section, an
instrument subject to a Demand Feature or Guarantee shall not be deemed
to be in default (and an Event of Insolvency with respect to the
security shall not be deemed to have occurred) if:
(A) In the case of an instrument subject to a Demand Feature, the
Demand Feature has been exercised and the fund has recovered either the
principal amount or the amortized cost of the instrument, plus accrued
interest; or
(B) The provider of the Guarantee is continuing, without protest,
to make payments as due on the instrument.
(7) Required Procedures: Amortized Cost Method. In the case of a
money market fund using the Amortized Cost Method:
(i) General. In supervising the money market fund's operations and
delegating special responsibilities involving portfolio management to
the money market fund's investment adviser, the money market fund's
board of directors, as a particular responsibility within the overall
duty of care owed to its shareholders, shall establish written
procedures reasonably designed, taking into account current market
conditions and the money market fund's investment objectives, to
stabilize the money market fund's net asset value per share, as
computed for the purpose of distribution, redemption and repurchase, at
a single value.
(ii) Specific Procedures. Included within the procedures adopted by
the board of directors shall be the following:
(A) Shadow Pricing. Written procedures shall provide:
(1) That the extent of deviation, if any, of the current net asset
value per share calculated using available market quotations (or an
appropriate substitute which reflects current market conditions) from
the money market fund's amortized cost price per share, shall be
calculated at such intervals as the board of directors determines
appropriate and reasonable in light of current market conditions;
(2) For the periodic review by the board of directors of the amount
of the deviation as well as the methods used to calculate the
deviation; and
[[Page 66634]]
(3) For the maintenance of records of the determination of
deviation and the board's review thereof.
(B) Prompt Consideration of Deviation. In the event such deviation
from the money market fund's amortized cost price per share exceeds \1/
2\ of 1 percent, the board of directors shall promptly consider what
action, if any, should be initiated by the board of directors.
(C) Material Dilution or Unfair Results. Where the board of
directors believes the extent of any deviation from the money market
fund's amortized cost price per share may result in material dilution
or other unfair results to investors or existing shareholders, it shall
cause the fund to take such action as it deems appropriate to eliminate
or reduce to the extent reasonably practicable such dilution or unfair
results.
(8) Required Procedures: Penny-Rounding Method. In the case of a
money market fund using the Penny-Rounding Method, in supervising the
money market fund's operations and delegating special responsibilities
involving portfolio management to the money market fund's investment
adviser, the money market fund's board of directors undertakes, as a
particular responsibility within the overall duty of care owed to its
shareholders, to assure to the extent reasonably practicable, taking
into account current market conditions affecting the money market
fund's investment objectives, that the money market fund's price per
share as computed for the purpose of distribution, redemption and
repurchase, rounded to the nearest one percent, will not deviate from
the single price established by the board of directors.
(9) Specific Procedures: Amortized Cost and Penny-Rounding Methods.
Included within the procedures adopted by the board of directors for
money market funds using either the amortized cost or penny-rounding
methods shall be the following:
(i) Securities for Which Maturity Is Determined by Reference to
Demand Features. In the case of a security for which maturity is
determined by reference to a Demand Feature, written procedures shall
require ongoing review of the security's continued minimal credit
risks, which review must be based on, among other things, financial
data for the most recent fiscal year of the issuer of the Demand
Feature and, in the case of a security subject to a Conditional Demand
Feature, the issuer of the security whose financial condition must be
monitored under paragraph (c)(3)(iv) of this section, whether such data
is publicly available or provided under the terms of the security's
governing documentation.
(ii) Securities Subject to Demand Features or Guarantees. In the
case of a security subject to one or more Demand Features or Guarantees
which the fund's board of directors has determined that the fund is not
relying on to determine the quality (pursuant to paragraph (c)(3) of
this section), maturity (pursuant to paragraph (d) of this section) or
liquidity of the security subject to the Demand Feature or Guarantee,
written procedures shall require periodic evaluation of such
determination.
(iii) Adjustable Rate Securities Without Demand Features. In the
case of a Variable Rate or Floating Rate Security that does not have a
Demand Feature and for which maturity is determined pursuant to
paragraphs (d)(1), (d)(2) or (d)(4) of this section, written procedures
shall require periodic review of whether the interest rate formula,
upon readjustment of its interest rate, can reasonably be expected to
cause the security to have a market value that approximates its
amortized cost value.
(iv) Asset Backed Securities. In the case of an Asset Backed
Security, written procedures shall require the fund to periodically
determine the number of Ten Percent Obligors (as that term is used in
paragraph (c)(4)(ii)(D) of this section) deemed to be the issuers of
all or a portion of the Asset Backed Security for purposes of paragraph
(c)(4)(ii)(D) of this section.
(10) Record Keeping and Reporting--(i) Written Procedures. For a
period of not less than six years following the replacement of such
procedures with new procedures (the first two years in an easily
accessible place), a written copy of the procedures (and any
modifications thereto) described in paragraphs (c)(6) through (c)(9)
and (e) of this section shall be maintained and preserved.
(ii) Board Considerations and Actions. For a period of not less
than six years (the first two years in an easily accessible place) a
written record shall be maintained and preserved of the board of
directors' considerations and actions taken in connection with the
discharge of its responsibilities, as set forth in this section, to be
included in the minutes of the board of directors' meetings.
(iii) Credit Risk Analysis. For a period of not less than three
years from the date that the credit risks of a portfolio security were
most recently reviewed, a written record of the determination that a
portfolio security presents minimal credit risks and the NRSRO ratings
(if any) used to determine the status of the security as an Eligible
Security, First Tier Security or Second Tier Security shall be
maintained and preserved in an easily accessible place.
(iv) Determinations with Respect to Adjustable Rate Securities. For
a period of not less than three years from the date when the
determination was most recently made, a written record shall be
preserved and maintained, in an easily accessible place, of the
determination required by paragraph (c)(9)(iii) of this section (that a
Variable Rate or Floating Rate Security that does not have a Demand
Feature and for which maturity is determined pursuant to paragraphs
(d)(1), (d)(2) or (d)(4) of this section can reasonably be expected,
upon readjustment of its interest rate at all times during the life of
the instrument, to have a market value that approximates its amortized
cost).
(v) Determinations with Respect to Asset Backed Securities. For a
period of not less than three years from the date when the
determination was most recently made, a written record shall be
preserved and maintained, in an easily accessible place, of the
determination required by paragraph (c)(9)(iv) of this section (the
number of Ten Percent Obligors (as that term is used in paragraph
(c)(4)(ii)(D) of this section) deemed to be the issuers of all or a
portion of the Asset Backed Security for purposes of paragraph
(c)(4)(iv)(D) of this section). The written record shall include the
identities of the Ten Percent Obligors (as that term is used in
paragraph (c)(4)(ii)(D) of this section), the percentage of the
Qualifying Assets constituted by the securities of each Ten Percent
Obligor and the percentage of the fund's Total Assets that are invested
in securities of each Ten Percent Obligor.
(vi) Evaluations with Respect to Securities Subject to Demand
Features or Guarantees. For a period of not less than three years from
the date when the evaluation was most recently made, a written record
shall be preserved and maintained, in an easily accessible place, of
the evaluation required by paragraph (c)(9)(ii) (regarding securities
subject to one or more Demand Features or Guarantees) of this section.
(vii) Inspection of Records. The documents preserved pursuant to
this paragraph (c)(10) shall be subject to inspection by the Commission
in accordance with section 31(b) of the Act (15 U.S.C. 80a-30(b)) as if
such documents were records required to be maintained pursuant to rules
adopted under section 31(a) of the Act (15 U.S.C. 80a-30(a)). If any
action was taken under paragraphs (c)(6)(ii) (with respect to defaulted
securities and events of
[[Page 66635]]
insolvency) or (c)(7)(ii) (with respect to a deviation from the fund's
share price of more than \1/2\ of 1 percent) of this section, the money
market fund will file an exhibit to the Form N-SAR (17 CFR 274.101)
filed for the period in which the action was taken describing with
specificity the nature and circumstances of such action. The money
market fund will report in an exhibit to such Form any securities it
holds on the final day of the reporting period that are not Eligible
Securities.
(d) Maturity of Portfolio Securities. For purposes of this section,
the maturity of a portfolio security shall be deemed to be the period
remaining (calculated from the trade date or such other date on which
the fund's interest in the security is subject to market action) until
the date on which, in accordance with the terms of the security, the
principal amount must unconditionally be paid, or in the case of a
security called for redemption, the date on which the redemption
payment must be made, except as provided in paragraphs (d)(1) through
(d)(8) of this section:
(1) Adjustable Rate Government Securities. A Government Security
which is a Variable Rate Security where the variable rate of interest
is readjusted no less frequently than every 762 calendar days shall be
deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate. A Government Security which is a
Floating Rate Security shall be deemed to have a remaining maturity of
one day.
(2) Short-Term Variable Rate Securities. A Variable Rate Security,
the principal amount of which, in accordance with the terms of the
security, must unconditionally be paid in 397 calendar days or less
shall be deemed to have a maturity equal to the earlier of the period
remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through
demand.
(3) Long-Term Variable Rate Securities. A Variable Rate Security,
the principal amount of which is scheduled to be paid in more than 397
calendar days, that is subject to a Demand Feature shall be deemed to
have a maturity equal to the longer of the period remaining until the
next readjustment of the interest rate or the period remaining until
the principal amount can be recovered through demand.
(4) Short-Term Floating Rate Securities. A Floating Rate Security,
the principal amount of which, in accordance with the terms of the
security, must unconditionally be paid in 397 calendar days or less
shall be deemed to have a maturity of one day.
(5) Long-Term Floating Rate Securities. A Floating Rate Security,
the principal amount of which is scheduled to be paid in more than 397
calendar days, that is subject to a Demand Feature, shall be deemed to
have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
(6) Repurchase Agreements. A repurchase agreement shall be deemed
to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to
occur, or, where the agreement is subject to demand, the notice period
applicable to a demand for the repurchase of the securities.
(7) Portfolio Lending Agreements. A portfolio lending agreement
shall be treated as having a maturity equal to the period remaining
until the date on which the loaned securities are scheduled to be
returned, or where the agreement is subject to demand, the notice
period applicable to a demand for the return of the loaned securities.
(8) Money Market Fund Securities. An investment in a money market
fund shall be treated as having a maturity equal to the period of time
within which the Acquired money market fund is required to make payment
upon redemption, unless the Acquired money market fund has agreed in
writing to provide redemption proceeds to the investing money market
fund within a shorter time period, in which case the maturity of such
investment shall be deemed to be the shorter period.
(e) Delegation. The money market fund's board of directors may
delegate to the fund's investment adviser or officers the
responsibility to make any determination required to be made by the
board of directors under this section (other than the determinations
required by paragraphs (c)(1) (board findings); (c)(6)(i)(C) (rule for
certain securities subject to second tier Demand Features); (c)(6)(ii)
(defaults and other events); (c)(7)(i) (general required procedures:
Amortized Cost Method); (c)(7)(ii)(A) (shadow pricing), (B) (prompt
consideration of deviation), and (C) (material dilution or unfair
results); and (c)(8) (required procedures: Penny Rounding Method) of
this section) provided:
(1) Written Guidelines. The Board shall establish and periodically
review written guidelines (including guidelines for determining whether
securities present minimal credit risks as required in paragraph (c)(3)
of this section) and procedures under which the delegate makes such
determinations:
(2) Oversight. The Board shall take any measures reasonably
necessary (through periodic reviews of fund investments and the
delegate's procedures in connection with investment decisions and
prompt review of the adviser's actions in the event of the default of a
security or Event of Insolvency with respect to the issuer of the
security or any Guarantee to which it is subject that requires
notification of the Commission under paragraph (c)(6)(iii) of this
section) to assure that the guidelines and procedures are being
followed.
5. Section 270.2a41-1 is amended by revising the introductory text
of paragraph (a) to read as follows:
Sec. 270.2a41-1 Valuation of standby commitments by registered
investment companies.
(a) A standby commitment means a right to sell a specified
underlying security or securities within a specified period of time and
at an exercise price equal to the amortized cost of the underlying
security or securities plus accrued interest, if any, at the time of
exercise, that may be sold, transferred or assigned only with the
underlying security or securities. A standby commitment entitles the
holder to receive same day settlement, and will be considered to be
from the party to whom the investment company will look for payment of
the exercise price. A standby commitment may be assigned a fair value
of zero, Provided, That:
* * * * *
6. Section 270.12d3-1 is amended by revising paragraph (d)(7)(v) to
read as follows:
Sec. 270.12d3-1 Exemption of acquisitions of securities issued by
persons engaged in securities related businesses.
* * * * *
(d) * * *
(7) * * *
(v) Acquisition of Demand Features or Guarantees, as these terms
are defined in Sec. 270.2a-7(a)(8) and Sec. 270.2a-7(a)(14)
respectively, provided that, immediately after the acquisition of any
Demand Feature or Guarantee, the company will not, with respect to 75
percent of the total value of its assets, have invested more than ten
percent of the total value of its assets in securities underlying
Demand Features or Guarantees from the same institution. For the
purposes of this section, a Demand Feature or Guarantee will be
considered to be from the party to whom the company will look for
payment of the exercise price.
* * * * *
[[Page 66636]]
7. Section 270.17a-9 is revised to read as follows:
Sec. 270.17a-9 Purchase of certain securities from a money market fund
by an affiliate, or an affiliate of an affiliate.
The purchase of a security that is no longer an Eligible Security
(as defined in paragraph (a)(10) of Sec. 270.2a-7) from an open-end
investment company holding itself out as a ``money market'' fund shall
be exempt from section 17(a) of the Act (15 U.S.C. 80a-17(a)), provided
that:
(a) The purchase price is paid in cash; and
(b) The purchase price is equal to the greater of the amortized
cost of the security or its market price (in each case, including
accrued interest).
8. Section 270.31a-1 is amended by revising the last sentence of
paragraph (b)(1) to read as follows:
Sec. 270.31a-1 Records to be maintained by registered investment
companies, certain majority-owned subsidiaries thereof, and other
persons having transactions with registered investment companies.
* * * * *
(b) * * *
(1) * * * In the case of a money market fund, also identify the
provider of any Demand Feature or Guarantee (as defined in Sec. 270.2a-
7(a)(8) or Sec. 270.2a-7(a)(14) respectively) and give a brief
description of the nature of the Demand Feature or Guarantee (e.g.,
unconditional demand feature, conditional demand feature, put, letter
of credit, or bond insurance) and, in a subsidiary portfolio investment
record, provide the complete legal name and accounting and other
information (including sufficient information to calculate coupons,
accruals, maturities, puts, and calls) necessary to identify, value,
and account for each investment.
* * * * *
9. Section 270.34b-1 is amended by revising paragraph (b) (the Note
remains unchanged), to read as follows:
Sec. 270.34b-1 Sales literature deemed to be misleading.
* * * * *
(b)(1) Except as provided in paragraph (b)(2) of this section:
(i) In the case of sales literature regarding a money market fund:
(A) Any quotation of yield or similar quotation purporting to
demonstrate the income earned or distributions made by the money market
fund, shall be accompanied by a quotation of current yield specified by
paragraph (d)(1) of Sec. 230.482 of this chapter;
(B) Any quotation of tax equivalent yield or other similar
quotation purporting to demonstrate the tax equivalent yield earned or
distributions made by the money market fund shall be accompanied by a
quotation of tax equivalent yield as specified in paragraph (d)(1) of
Sec. 230.482 of this chapter; and
(C) Any quotation of total return shall cover a period of no less
than one year and shall be accompanied by a quotation of the fund's
current yield described in paragraph (b)(1)(i) of this section which
shall be given equal prominence.
(ii) In the case of sales literature regarding a company other than
a money market fund:
(A) Any quotation of yield or similar quotation purporting to
demonstrate the income earned or distributions made by the company
shall be accompanied by a quotation of current yield specified by
paragraph (e)(1) of Sec. 230.482 of this chapter; and
(B) Any quotation of tax equivalent yield of other similar
quotation purporting to demonstrate the tax equivalent yield earned or
distributions made by the company shall be accompanied by a quotation
of tax equivalent yield as specified in paragraph (e)(1) of
Sec. 230.482 of this chapter.
(2) The requirements specified in paragraphs (b) (1) and (2) of
this section shall not apply to any quarterly, semi-annual, or annual
report to shareholders under Section 30 of the Act (15 U.S.C. 80a-29),
containing performance data for a period commencing no earlier than the
first day of the period covered by the report; nor shall the
requirements of paragraphs (e)(3)(ii) and (f) of Sec. 230.482 of this
chapter apply to any such periodic report containing any other
performance data.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
10. The authority citation for part 239 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l,
78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,
79n, 79q, 79t, 80a-8, 80a--29, 80a-30 and 80a-37, unless otherwise
noted.
* * * * *
11. The authority citation for Part 274 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.
Form N-1A [Amended]
12. Part B, Item 22(a) of Form N-1A (referenced in Secs. 239.15A
and 274.11A) is amended by:
(a) Adding in paragraphs (i) and (ii) the phrase ``and income other
than investment income'' after the phrase ``exclusive of capital
changes'' in each paragraph.
(b) Adding at the end of Instruction 2 the following: ``Exclude
income other than investment income.''
* * * * *
Note: Form N-1A does not and the amendments will not appear in
the Code of Federal Regulations.
13. Guide 21 (Disclosure of Risk Factors) to Form N-1A (referenced
in 17 CFR 239.15A and 274.11A) is amended by revising the word
``effect'' to read ``affect'' in the sentence of the last paragraph.
* * * * *
Note: Guide 21 to Form N-1A does not and the amendments will not
appear in the Code of Federal Regulations.
14. Guide 35 (Money Market Fund Investments in Other Money Market
Funds) to Form N-1A (referenced in 17 CFR 239.15A and 274.11A] is
amended by revising the last sentence to read as follows:
* * * Paragraph (c)(4)(ii)(E) of rule 2a-7 describes the
obligations of a fund that invests substantially all of its assets in
another money market fund.
Note: Guide 35 to Form N-1A does not and the amendments will not
appear in the Code of Federal Regulations.
Form N-3 [Amended]
15. Item 25(a) of Form N-3 (referenced in Secs. 239.17a and
274.11b) is amended by:
(a) Adding in paragraphs (i) and (ii) the phrase ``and income other
than investment income'' after the phrase ``exclusive of capital
changes'' in each paragraph.
(b) Adding at the end of Instruction 3 the following: ``Exclude
income other than investment income.''
* * * * *
Note: Form N-3 does not and the amendments will not appear in
the Code of Federal Regulations.
16. Guide 38 to Form N-3 (Money Market Fund Investments in Other
Money Market Funds) (referenced in 17 CFR 239.17a and 274.11b) is
amended by revising the last sentence to read as follows:
* * * Paragraph (c)(4)(ii)(E) of rule 2a-7 describes the
obligations of a fund that invests substantially all of its assets in
another money market fund.
[[Page 66637]]
Note: Guide 38 to Form N-3 does not and the amendments will not
appear in the Code of Federal Regulations.
Form N-4 [Amended]
17. Part B, Item 21(a) of Form N-4 (referenced in Secs. 239.17b and
274.11c) is amended by:
(a) Adding in paragraphs (i) and (ii) the phrase ``and income other
than investment income'' after the phrase ``exclusive of capital
changes'' in each paragraph.
(b) Adding at the end of Instruction 3 the following: ``Exclude
income other than investment income.''
* * * * *
Note: Form N-4 does not and the amendments will not appear in
the Code of Federal Regulations.
By the Commission.
Dated: December 10, 1996.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31783 Filed 12-17-96; 8:45 am]
BILLING CODE 8010-01-P
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