Technical Revisions to the Rules and Forms Regulating Money Market Funds

SUMMARY: The Commission is adopting amendments to rules and forms under

the Securities Act of 1933 and the Investment Company Act of 1940 that

govern money market funds. Technical amendments to rule 2a-7 under the

Investment Company Act of 1940, the rule regulating money market funds,

among other things, revise terminology used in the rule to reflect

common market usage and resolve certain interpretive issues under the

rule. Amendments to the advertising rules applicable to money market

funds, among other things, clarify the formula used by money market

funds to calculate yield.

DATES: Effective Date: The rule and form amendments adopted in this

Release will become effective February 10, 1998. Compliance Date: See

Section III of this Release.

FOR FURTHER INFORMATION CONTACT: David P. Mathews, Senior Counsel,

Office of Regulatory Policy, (202) 942-0690, Division of Investment

Management, Securities and Exchange Commission, 450 Fifth Street, N.W.,

Mail Stop 10-2, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission

(``Commission'') is adopting technical amendments to rule 2a-7 [17 CFR

270.2a-7] (``rule 2a-7'' or the ``rule'') under the Investment Company

Act of 1940 [15 USC 80a-1, et seq.] (``1940 Act''), the rule governing

the operations of money market funds (``funds'').1 The

Commission is adopting conforming amendments to rules 2a41-1, 12d3-1,

17a-9 and 31a-1 under the 1940 Act [17 CFR 270.2a41-1, 270.12d3-1,

270.17a-9 and 270.31a-1] to reflect the amendments to rule 2a-7. The

Commission also is adopting amendments to rule 482 [17 CFR 230.482]

under the Securities Act of 1933 [15 USC 77a, et seq.] (``1933 Act'')

and rule 34b-1 under the 1940 Act [17 CFR 270.34b-1]; and to 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].

---------------------------------------------------------------------------

\1\ Unless otherwise noted, all references to ``rule 2a-7, as

amended,'' or any paragraph of the rule, will be to 17 CFR 270.2a-7

as amended by this Release.

---------------------------------------------------------------------------

I. Technical Amendments to Rule 2a-7

A. Background

On March 21, 1996, the Commission adopted amendments to rule 2a-7

under the 1940 Act (``1996 Amendments'') to tighten the rule's risk-

limiting conditions imposed on tax exempt money market funds and to

address the treatment under the rule of certain instruments, such as

asset backed securities.2 These risk-limiting conditions

include requirements that a fund limit itself to investing in high

quality securities 3 and that the fund's portfolio be

diversified.4 After the adoption of the 1996 Amendments,

industry participants raised numerous questions concerning the

application of the amendments in different contexts. The Commission

thereafter suspended the compliance date of certain of the 1996

Amendments pending the proposal and adoption of technical amendments to

address these concerns.5

---------------------------------------------------------------------------

\2\ Revisions to Rules Regulating Money Market Funds, Investment

Company Act Release No. 21837 (Mar. 21, 1996) [61 FR 13956 (Mar. 28,

1996)] (``Release 21837''). Unless otherwise noted, all references

to the ``1996 Amendments'' in this Release are to rule 2a-7 as

adopted in Release 21837. The compliance date for the 1996

Amendments to rule 2a-7 was suspended pending the adoption of

technical amendments. See infra note 5 and accompanying text.

\3\ The portfolio or credit quality provisions of the rule

generally limit funds to investments in U.S. dollar-denominated

securities that present minimal credit risks and that are, at the

time of acquisition, ``eligible securities'' as defined by the rule.

See paragraph (c)(3) of rule 2a-7, as amended (``portfolio quality

standards'' or ``credit quality standards''). ``Eligible security''

is defined in paragraph (a)(10) of rule 2a-7, as amended.

\4\ The diversification provisions of the rule generally limit

the amount of assets that a fund may invest in a single issuer of

securities, and the amount of assets that may be subject to credit

enhancements, such as letters of credit or puts, provided by the

same credit enhancement provider. See paragraph (c)(4) of rule 2a-7,

as amended (``diversification standards'').

\5\ Revisions to Rules Regulating Money Market Funds, Investment

Company Act Release No. 22135 (Aug. 13, 1996) [61 FR 42786 (Aug. 19,

1996)]. The Commission suspended the 1996 Amendments' compliance

date for rules 2a-7, 2a41-1, 12d3-1 and 31a-1 under the 1940 Act.

[17 CFR 270.2a-7, 2a41-1, 12d3-1 and 31a-1]. The compliance date was

not suspended with respect to the adoption of rule 17a-9 under the

1940 Act [17 CFR 270.17a-9] and the 1996 Amendments' revisions of

the rules and forms relating to money market fund disclosure,

advertising and reporting.

---------------------------------------------------------------------------

On December 10, 1996, the Commission issued a release proposing

technical amendments to rule 2a-7 (``Proposing Release'').6

The proposed amendments would: (1) codify certain interpretive views

expressed by the Division of Investment Management;7 (2)

revise terminology used in the rule to reflect common market usage; (3)

modify certain of the 1996 Amendments so that the rule's treatment of

certain instruments (e.g., guarantees) more closely reflects the

treatment of those instruments by the financial markets; and (4) make

certain other technical corrections. The Commission also proposed

amendments to clarify the Commission's advertising rules regarding how

money market funds calculate current yield and represent short-term

total return in conjunction with current yield quotations.

---------------------------------------------------------------------------

\6\ Technical Revisions to the Rules and Forms Regulating Money

Market Funds, Investment Company Act Release No. 22383 (Dec. 10,

1996) [61 FR 66621 (Dec. 18, 1996)] (``Proposing Release'').

\7\ See Investment Company Institute (pub. avail. May 9, 1996).

---------------------------------------------------------------------------

The Commission received comments on the proposed amendments from

seventeen commenters, including nine mutual fund complexes.8

Commenters supported the proposed technical amendments to rule 2a-7,

and suggested further amendments to certain provisions of the rule

primarily relating to the treatment of asset backed securities. Most

commenters that addressed the proposed amendments to the Commission's

advertising rules relating to money market fund yield and total return

generally supported them. The Commission is adopting the technical

amendments substantially as proposed, with certain modifications that

reflect, in part, many of the commenters' suggestions. The Commission

also is establishing a new compliance date for the 1996 Amendments, as

further amended by the technical amendments adopted in this

Release.9

---------------------------------------------------------------------------

\8\ The comment letters and a summary of the comments prepared

by the Commission staff are available to the public and are included

in File No. S7-29-96.

\9\ The new compliance date is discussed infra in Section III.B.

of this Release.

---------------------------------------------------------------------------

B. Discussion

1. Guarantees

a. Definition of ``Guarantee''. Rule 2a-7 currently characterizes

certain features that enhance the credit or liquidity of portfolio

securities as ``puts'' and ``unconditional puts.''10 To

clarify

[[Page 64969]]

terminology used in rule 2a-7, the Commission proposed to replace these

terms 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.11 Commenters generally supported the

proposed amendments, which the Commission is adopting substantially as

proposed.12

---------------------------------------------------------------------------

\10\ The 1996 Amendments defined a ``put'' as the right to sell

a specified underlying security within a specified period of time at

a specified exercise price that may be sold, transferred or assigned

only with the underlying security. An ``unconditional put'' was

defined as 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. See paragraphs (a)(16) and (a)(27) of rule 2a-

7, as adopted by the 1996 Amendments.

\11\ See Proposing Release, supra note , at n.7 and accompanying

text.

\12\ Under the new definition, a guarantee is any 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. Paragraph (a)(15) of rule 2a-7, as amended. In order to

permit guarantees that are payable at any time, the Commission has

eliminated a requirement in the proposed definition that the issuer

of the guarantee be obligated to pay upon default ``at a specified

time.'' The Commission also is adopting amendments to the credit

quality and diversification provisions of the rule to incorporate

the new term ``guarantee,'' as discussed infra in Sections I.B.1.b.

and c. of this Release. The definition of ``guarantee'' 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 other federal securities laws.

---------------------------------------------------------------------------

b. Credit Substitution. Since 1986, rule 2a-7 has permitted a fund

to rely exclusively on the credit quality of the issuer of an

``unconditional demand feature'' in determining whether a security

meets the rule's credit quality standards.13 The 1996

Amendments also permitted a fund to exclude from the rule's issuer

diversification standards a security subject to an unconditional demand

feature provided by a person that does not control, or is not

controlled by or under common control with, the issuer of the security

(``non-controlled person'').14 Reflected in this approach is

the recognition that the holder of a security typically relies

exclusively on the credit quality of the issuer of the unconditional

demand feature in deciding to invest in the security.

---------------------------------------------------------------------------

\13\ See Acquisition and Valuation of Certain Portfolio

Instruments by Registered Investment Companies, Investment Company

Act Release No. 14983 (Mar. 12, 1986) [51 FR 9773 (Mar. 21, 1986)].

A ``demand feature'' means (i) a feature 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. 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)(8) and (a)(26) of rule 2a-7, as

amended.

\14\ Under the 1996 Amendments, a security subject to an

unconditional demand feature from a person in a control relationship

with the issuer of the security (i.e., one that controls, is

controlled by or under common control with the issuer) remains

subject to the issuer diversification standards in order to reduce a

fund's exposure to credit risks presented by a single economic

enterprise. See Release 21837, supra note 2, at nn.42-47 and

accompanying text.

---------------------------------------------------------------------------

In addition to enhancing credit quality, money market funds also

rely on demand features to shorten the maturities of adjustable rate

securities or provide a source of liquidity.15 Because of

the significance of demand features to a money market fund's ability to

maintain a stable net asset value, the 1996 Amendments further provided

that a demand feature is not eligible for fund investment unless (i)

The demand feature (or the issuer of the demand feature) is rated by an

NRSRO (``Rating Requirement'');16 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'').

---------------------------------------------------------------------------

\15\ Tax exempt funds, for example, typically invest in long-

term adjustable rate securities subject to demand features. The

interest rates on these securities periodically adjust to reflect

short-term rates. The demand features permit funds to demand payment

of the security at relatively short intervals, and if unconditional,

also serve to enhance credit quality--thus providing the basis for

making the securities eligible for money market fund investment.

\16\ ``NRSRO'' is the acronym used in rule 2a-7 to stand for a

``nationally recognized statistical rating organization.'' See

paragraph (a)(17) of rule 2a-7, as amended. NRSROs are designated as

such by the Commission's Division of Market Regulation through the

no-action letter process for purposes of the Commission's net

capital rule [17 CFR 240.15c3-1].

---------------------------------------------------------------------------

The Commission proposed to extend these provisions to other types

of guarantees commonly held by funds, such as bond insurance, letters

of credit and similar unconditional guarantees.17 Like

securities subject to unconditional demand features, securities subject

to guarantees typically trade on the basis of the credit of the

guarantor, rather than the issuer. Commenters strongly supported the

proposed amendments, which the Commission is adopting as

proposed.18

---------------------------------------------------------------------------

\17\ Proposing Release, supra note 6, at nn. 8-16 and

accompanying text.

\18\ See paragraphs (c)(3)(iii) (determination of whether a

security meets the rule's credit quality standards may be based

exclusively on the credit quality of the security's guarantee);

(c)(4)(i) (excluding securities subject to guarantees from non-

controlled persons from the rule's issuer diversification

standards); (a)(10)(iii)(A) (extending the Rating Requirement to

guarantees); (a)(10)(iii)(B) (extending the Notification Requirement

to guarantees); and (a)(16) (definition of ``guarantee issued by a

non-controlled person'') of rule 2a-7, as amended. The amended rule

also permits a fund that holds a security 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 amended. Consistent with the amended

rule, however, a fund must also 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 amended.

---------------------------------------------------------------------------

Under the rule as amended, a fund holding a security subject to a

guarantee (as defined in the rule) may rely exclusively on the credit

quality of the issuer of the guarantee in determining whether the

security meets the rule's credit quality standards.19 In

addition, securities subject to guarantees issued by non-controlled

persons are not subject to the rule's issuer diversification

standards.20

---------------------------------------------------------------------------

\19\ Paragraph (c)(3)(iii) of rule 2a-7, as amended.

\20\ Paragraph (c)(4)(i) of rule 2a-7, as amended. Guarantees,

however, are subject to the guarantee and demand feature

diversification standards of paragraphs (c)(4)(iii), (c)(4)(iv) and

(c)(5) of rule 2a-7, as amended. A security subject to a guarantee

that is provided by a person in a control relationship with the

issuer of the security remains subject to the rule's issuer

diversification standards. See paragraphs (a)(16) (definition of

``guarantee issued by a non-controlled person'') and (c)(4)(i) of

rule 2a-7, as amended.

---------------------------------------------------------------------------

c. Rating Requirement for Guarantees. The 1996 Amendments precluded

funds from investing in securities subject to demand features (whether

unconditional or conditional) that have not received a short-term

rating from an NRSRO. The Commission proposed, in light of its proposal

to extend the rule's treatment of unconditional demand features to all

guarantees, to extend the Rating Requirement to guarantees, subject to

certain exceptions.21 Commenters generally supported the

proposal, which the Commission is adopting substantially as proposed.

---------------------------------------------------------------------------

\21\ Proposing Release, supra note 6, at nn. 17-24 and

accompanying text.

---------------------------------------------------------------------------

Under rule 2a-7, as amended, all guarantees must be rated by an

NRSRO,22 except (i) a guarantee 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,23 (ii) a guarantee with respect to a repurchase

agreement (``repo'') that is collateralized fully,24 (iii) a

guarantee issued by the

[[Page 64970]]

U.S. Government,25 or (iv) a guarantee not relied upon for

quality, maturity or liquidity purposes.26 Conditional

demand features, which are not within the definition of a ``guarantee''

under the amended rule, are not subject to the Rating

Requirement.27

---------------------------------------------------------------------------

\22\ Paragraph (a)(10)(iii)(A) of rule 2a-7, as amended. Unlike

the 1996 Amendments, which required a short-term rating, the amended

rule allows any rating from an NRSRO to satisfy the Rating

Requirement.

\23\ Paragraph (a)(10)(iii)(A)(1) of rule 2a-7, as amended. The

Commission proposed to exclude this type of guarantee from the

Rating Requirement because a guarantor that guarantees securities

issued by a person in a control relationship with the guarantor may

not be in the business of lending its credit, and such a requirement

may be burdensome and result in a diminished supply of high quality,

eligible securities available for money market fund investment.

\24\ Paragraph (a)(10)(iii)(A)(2) of rule 2a-7, as amended. The

Commission has relaxed the Rating Requirement with respect to

guarantees of repos that are ``collateralized fully.'' One commenter

noted that funds often rely on unconditional puts (i.e.,

``guarantees'' under the amended rule's terminology) with respect to

``term repos''--which are repos for periods longer than one day. The

puts could be exercised if a repo counterparty's credit quality

deteriorated or to cover short-term cash outflows. The issuers of

unconditional puts with respect to term repos are typically

government securities dealers that are not rated by NRSROs. Since a

repo that is ``collateralized fully'' already has significant

protection from the risk of a counterparty's default or insolvency,

requiring puts (or guarantees) of such repos to be rated would add

little additional protection, and could cause funds to forgo a

beneficial method of liquidity enhancement. See infra Section

I.B.2.b. of this Release (treatment of repos that are

``collateralized fully'').

\25\ Paragraph (a)(10)(iii)(A)(3) of rule 2a-7, as amended; see

infra Section I.B.2.e. of this Release (discussing guarantees issued

by the U.S. Government).

\26\ Paragraph (c)(5) of rule 2a-7, as amended; see also infra

Section I.B.1.d. of this Release (demand features and guarantees not

relied upon).

\27\ A conditional demand feature is any demand feature that is

not an unconditional demand feature. Paragraph (a)(6) of rule 2a-7,

as amended.

---------------------------------------------------------------------------

d. Demand Features and Guarantees Not Relied Upon. The 1996

Amendments permitted a fund that is not relying on a particular put to

disregard that put for purposes of meeting rule 2a-7's put and demand

feature diversification standards. The Commission is revising the rule

to extend this provision to guarantees, and to expand the provision to

permit funds to disregard a demand feature or a guarantee that is not

relied upon to satisfy the rule's credit quality or maturity standards,

or for liquidity, for all purposes under the rule.28

---------------------------------------------------------------------------

\28\ Paragraph (c)(5) of rule 2a-7, as amended. A fund holding

securities subject to demand features or guarantees that are not

being relied upon for credit quality, maturity or liquidity must

establish written procedures requiring periodic re-evaluations of

this determination. Paragraph (c)(9)(ii) of rule 2a-7, as amended.

Funds are not required to establish procedures concerning demand

features and guarantees not relied upon if they do not hold such

instruments. Id.

---------------------------------------------------------------------------

2. Diversification and Credit Quality Standards Applicable to Issuers

a. Second Tier Securities. Rule 2a-7 provides that a taxable fund

may not invest more than one percent of its total assets in second tier

securities issued by a single issuer.29 In the case of tax

exempt funds, this one percent limitation on investments in second tier

securities applies only to second tier ``conduit securities'' that are

issued by municipalities, but whose ultimate obligors are not

government or municipal entities.30 The Commission is

adopting the proposed amendments to the rule that clarify that these

limitations are not applicable to a security that is guaranteed by a

non-controlled person.31 Securities subject to guarantees

from non-controlled persons are subject only to the rule's guarantee

and demand feature diversification standards.32

---------------------------------------------------------------------------

\29\ A ``second tier security'' is an eligible security that is

not a first tier security. Paragraph (a)(22) of rule 2a-7, as

amended. ``First tier securities'' are (i) securities that have

received short-term debt ratings in the highest category from the

requisite NRSROs; (ii) comparable unrated securities; (iii)

securities issued by money market funds; and (iv) Government

securities. Paragraph (a)(12) of rule 2a-7, as amended. ``Requisite

NRSROs'' means (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 a

security or class of debt obligations of an issuer, that NRSRO.

Paragraph (a)(21) of rule 2a-7, as amended.

\30\ ``Conduit securities'' are issued to finance non-government

projects, such as private hospitals, housing projects, or industrial

development projects. See paragraph (a)(7) of rule 2a-7, as amended

(definition of ``conduit security'').

\31\ Paragraphs (c)(4)(i)(C) (1) and (2) of rule 2a-7, as

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

(``five percent quality test''). Paragraph (c)(3)(ii) of rule 2a-7,

as amended (portfolio quality standards--second tier securities).

The amendments do not make substantive changes to the five percent

quality test. 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 amendments, however,

reorganize the rule text to include the five percent quality test in

paragraph (c)(3) of the rule, which addresses portfolio quality

standards, rather than paragraph (c)(4), which addresses

diversification standards.

\32\ Paragraphs (c)(4)(iii) and (c)(4)(iv) of rule 2a-7, as

amended.

---------------------------------------------------------------------------

b. Repurchase Agreements. Rule 2a-7 permits a fund to ``look-

through'' a repo to the underlying collateral and disregard the

counterparty in determining compliance with the rule's diversification

standards if the obligation of the counterparty is ``collateralized

fully.'' The 1996 Amendments sought to define ``collateralized fully''

to limit the collateral to that which could be liquidated promptly even

in the event of bankruptcy of the counterparty.

Because of questions concerning the treatment of cash and other

types of collateral not specifically addressed in the 1996 Amendments,

the Commission proposed to revise the ``look-through'' provisions of

the rule to focus on the treatment of the repo under applicable

insolvency law rather than exclusively on the type of collateral. Under

the proposed amendments, 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 qualifies under a provision of applicable

insolvency law providing an exclusion from any ``general stay'' of

creditors rights against the seller.33

---------------------------------------------------------------------------

\33\ Proposing Release, supra note 6, at nn. 30-36 and

accompanying text.

---------------------------------------------------------------------------

Commenters supported the proposed revisions, but three commenters

urged that the rule's language be modified to refer to an ``automatic

stay'' rather than a ``general stay.'' These commenters pointed out

that even repos protected from automatic stays under federal insolvency

law may be subject to a court-ordered general stay obtained by the

Securities Investor Protection Corporation (``SIPC'') or the Federal

Deposit Insurance Corporation (``FDIC''). Because no provision of

insolvency law protects a purchaser of a repo from such orders, the

proposed amendments might have precluded money market funds from

relying on the rule's ``look-through'' provision for most repos, even

though it is the policy of both SIPC (as to broker-dealer

counterparties) and FDIC (as to bank counterparties) generally to allow

the prompt liquidation of repos in insolvency proceedings.34

---------------------------------------------------------------------------

\34\ The United States Bankruptcy Code [11 U.S.C. 559] protects

certain repos from the automatic stay provision, but provides that

SIPC may obtain a court order barring the closeout of repo

transactions with member broker-dealer firms. As a matter of policy,

however, SIPC honors repos and allows their liquidation under most

circumstances. See Letter dated February 4, 1986, from Michael E.

Don, Deputy General Counsel of SIPC, to Robert A. Portnoy, Deputy

Executive Director and General Counsel of the Public Securities

Association. FDIC, as conservator or receiver for insolvent

depository institutions, similarly has the ability to avoid

contracts entered into by such institutions, but may not avoid

transfers of property in connection with repos under most

circumstances. See 12 U.S.C. 1821(e)(8)(A), (C) and (D); FDIC

Statement of Policy on Qualified Financial Contracts (Dec. 12,

1989).

---------------------------------------------------------------------------

The Commission is adopting the proposed amendments, revised in part

to reflect the commenters' suggestions.35 The Commission

notes that, under the revised rule, a fund entering into a repo

collateralized by Government securities (which most are) should be able

to conclude that the repo qualifies for ``look-through'' treatment

(assuming the

[[Page 64971]]

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.36

---------------------------------------------------------------------------

\35\ Paragraph (a)(5)(iv) of rule 2a-7, as amended. Commenters

also suggested that the text of this provision refer only to

applicable ``federal'' insolvency law. Although repos entered into

by funds typically involve domestic counterparties subject to

federal insolvency law, funds may enter into repos with non-U.S.

counterparties that are not subject to federal insolvency laws.

Therefore, the amended rule continues to apply to any applicable

insolvency law.

\36\ In addition, a money market fund must evaluate the repo

counterparty's creditworthiness in order to minimize the risk that

money market funds will 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 [15 U.S.C. 80a-12(d)(3)] (limiting fund investments in certain

securities-related businesses) 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''). Among other things, the Repo

Release requires that the repo be ``fully collateralized.'' The

definition of ``fully collateralized'' in the Repo Release does not

include all of the conditions in rule 2a-7. A money market fund

entering into a repo that is ``collateralized fully'' within the

meaning of paragraph (a)(5) of rule 2a-7, as amended, will be deemed

to 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 be deemed to

hold repos that are ``fully collateralized'' for purposes of the

Repo Release.

---------------------------------------------------------------------------

c. Refunded Securities. Money market funds often invest in

``refunded securities,'' which are securities the payment for which is

funded and secured by Government securities placed in an escrow

account. Rule 2a-7 permits a fund to ``look-through'' refunded

securities to the escrowed Government securities in determining its

compliance with the rule's issuer diversification standards under

certain conditions.37 One condition contained in the 1996

Amendments required certification by an independent public accountant

that the escrowed Government securities, or any subsequent substitution

of the escrowed securities, would satisfy all payments of principal,

interest and applicable premiums on the refunded securities

(collectively, the ``accountant's certification''). The Proposing

Release noted that NRSROs, in rating refunded securities, typically

require an independent third party to make the same

determination.38 Therefore, the Commission proposed, and is

now adopting, an amendment to the rule eliminating the accountant's

certification requirement if a refunded security has received a rating

from an NRSRO in the highest category for debt

obligations.39

---------------------------------------------------------------------------

\37\ Paragraph (c)(4)(ii)(B) of rule 2a-7, as amended. This

``look-through'' treatment would not be available to refunded

securities subject to a swap agreement (i.e., the payments from the

escrowed Government securities are exchanged for payments made by a

swap counterparty) because the swap counterparty, rather than the

escrowed Government securities, acts as the ultimate source of

payment for the refunded securities. See J.P. Morgan Structured

Obligations Corp. (pub. avail. July 27, 1994); see generally infra

Section I.B.3.d. of this Release (swap arrangements).

\38\ See, e.g., Standard & Poor's Municipal Finance Criteria,

176-77 (1996).

\39\ Paragraph (a)(20)(iii) of rule 2a-7, as amended (definition

of ``refunded security'').

---------------------------------------------------------------------------

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''). The Commission proposed, and is adopting,

amendments that restore unintentionally omitted language from the rule

text stating that a fund relying on the three-day safe harbor may not

make more than one investment in reliance on the safe harbor at any

time during the three day period.40

---------------------------------------------------------------------------

\40\ Paragraph (c)(4)(i)(A) of rule 2a-7, as amended. The three-

day safe harbor is not available for single state funds. Single

state funds, however, are required to be diversified only as to

seventy-five percent of their assets, and so have available a

twenty-five percent basket to accommodate purchases in excess of

five percent of fund assets. Paragraph (c)(4)(i)(B) of rule 2a-7, as

amended.

---------------------------------------------------------------------------

e. Government Guarantees. Two commenters suggested that the

Commission exclude guarantees issued by the U.S. Government from the

rule's guarantee and demand feature diversification standards as

finally amended, and thus treat government guarantees in the same

manner as securities issued directly by the U.S.

Government.41 The Commission is amending the demand feature

and guarantee diversification standards accordingly.42

---------------------------------------------------------------------------

\41\ A security guaranteed as to principal and interest by a

U.S. Government agency is a ``Government security'' as defined in

section 2(a)(16) of the 1940 Act [15 U.S.C. 80a-2(a)(16)] and

paragraph (a)(14) of rule 2a-7, as amended. Investments in

Government securities are excluded from the rule's issuer

diversification standards because they are presumed to present

little, if any, credit risks. The same rationale applies to a

security guaranteed by a U.S. Government agency, which by definition

also is a ``Government security.''

\42\ Paragraph (c)(4)(iii) of rule 2a-7, as amended. Guarantees

issued by the U.S. Government are deemed to be first tier

securities. Paragraph (a)(12)(iv) of rule 2a-7, as amended

(definition of ``first tier security'').

---------------------------------------------------------------------------

f. Definition of ``Rated Security''. Two commenters recommended

that the Commission adopt a new defined term, ``rated security,'' which

would permit rule 2a-7's definitions of ``unrated security,''

``eligible security'' and ``first tier security'' to be shortened and

clarified. The Commission is adopting the new term ``rated security''

and amending other provisions in the rule to incorporate the new

term.43

---------------------------------------------------------------------------

\43\ A ``rated security'' is defined generally as (i) a security

(or the issuer with respect to a comparable security) that has

received a short-term rating from an NRSRO; or (ii) a security

subject to a guarantee if the guarantee (or the guarantor with

respect to a comparable guarantee) has received a short-term rating

from an NRSRO. A security is not a rated security, however, if it is

subject to an external credit support agreement that was not in

effect when the security was assigned its rating, unless the

security has received a short-term rating reflecting the existence

of the credit support agreement, or the credit support agreement has

received a short-term rating. Paragraph (a)(19) of rule 2a-7, as

amended. The Commission is making conforming amendments to

paragraphs (a)(10) (definition of ``eligible security'') and (a)(12)

(definition of ``first tier security'') of rule 2a-7, as amended,

and amending the definition of ``unrated security.'' Under the

amended definition, an ``unrated security'' is a security that is

not a ``rated security.'' Paragraph (a)(28) of rule 2a-7, as

amended.

---------------------------------------------------------------------------

3. Asset Backed Securities and Synthetic Securities

The 1996 Amendments revised rule 2a-7 to accommodate asset backed

securities and synthetic securities (collectively ``ABS''). Rule 2a-7

defines an ABS as a fixed income security 44 issued by a

``special purpose entity'' substantially all of the assets of which

consist of ``qualifying assets.'' 45 Rule 2a-7 provides

separate credit quality,46 diversification 47 and

maturity 48 standards for ABSs. The ABSs covered by the rule

include interests in pools of receivables, such as credit card debt, as

well as short-term synthetic tax exempt securities.49

---------------------------------------------------------------------------

\44\ For purposes of rule 2a-7's definition of ``asset backed

security,'' the term ``fixed income security'' has the same meaning

as that term is defined in rule 3a-7(b)(2) under the 1940 Act [17

CFR 270.3a-7(b)(2)]. Rule 3a-7 excludes structured financings, such

as ABSs, from the definition of ``investment company.''

\45\ Paragraph (a)(3) of rule 2a-7, as amended. Paragraph (a)(3)

defines ``special purpose entity'' as a trust, corporation,

partnership or other entity organized for the sole purpose of

issuing securities that entitle holders to receive payments from the

cash flows of the ``qualifying assets.'' Paragraph (a)(3) defines

``qualifying assets'' as either fixed or revolving financial assets

that by their terms convert into cash within a finite time period.

\46\ Paragraph (a)(10)(ii)(B) of rule 2a-7, as amended.

\47\ Paragraph (c)(4)(ii)(D) of rule 2a-7, as amended.

\48\ Paragraph (d) of rule 2a-7, as amended.

\49\ A synthetic security is created typically by placing a

long-term fixed rate municipal bond into a trust that issues short-

term variable or floating rate securities subject to a conditional

demand feature. This process effectively converts long-term fixed

rate bonds into short-term variable or floating rate demand

instruments that meet the rule's maturity requirements. Synthetic

securities were developed to address a shortage in the supply of

short-term tax exempt securities eligible for money market fund

investment. See Revisions to Rules Regulating Money Market Funds,

Investment Company Act Release No. 19959 (Dec. 17, 1993) [58 FR

68585 (Dec. 28, 1993)] at nn.100-05 and accompanying text (``Release

19959'') (discussing the development and characteristics of

synthetic securities).

---------------------------------------------------------------------------

a. Rating Requirement. In recognition of the independent legal,

structural and credit analysis conducted by NRSROs before assigning a

rating to an ABS, the

[[Page 64972]]

1996 Amendments required that all ABSs purchased by money market funds

receive a rating from an NRSRO.\50\ In light of the role that NRSROs

have played in the development of structured finance, the Commission

believed that this ABS rating requirement was appropriate and would not

be burdensome.

---------------------------------------------------------------------------

\50\ The 1996 Amendments excluded unrated ABSs from the

definition of an ``eligible security.''

---------------------------------------------------------------------------

The Commission proposed to further amend the rule to exclude from

this rating requirement ABSs substantially all of the qualifying assets

of which consist of municipal securities.51 The Commission

was persuaded by the assertions of industry participants that, as

applied to these ABSs, the rating requirement was burdensome and

unnecessary.52 Commenters generally supported the amendment,

which the Commission is adopting as proposed.53

---------------------------------------------------------------------------

\51\ Proposing Release, supra note, at nn.41-43 and accompanying

text.

\52\ Industry participants noted that when ABSs consist of a

large pool of financial assets, such as credit card receivables,

they may not be susceptible to conventional means of credit risk

analysis because credit quality is based on an actuarial analysis of

a pool of financial assets, rather than a single issuer. The credit

analysis for synthetic structures and municipal pools whose

qualifying assets consist of one or a few municipal issuers,

however, is typically no different than that required for a security

directly issued by a municipality. Since many synthetic securities

are not rated, applying the ABS rating requirement to them would

have restricted the available supply of ABSs suitable for money

market fund investment. ABSs involving large pools of financial

assets, on the other hand, are typically rated.

\53\ Paragraph (a)(10)(ii)(B) of rule 2a-7, as amended. An ABS

subject to a guarantee is not itself required to be rated. Under

rule 2a-7, as amended, an ABS subject to a guarantee that has

received a short-term rating is considered a ``rated security.''

Paragraph (a)(19) of rule 2a-7, as amended. Moreover, an ABS subject

to a guarantee may be determined to be an eligible security based

solely on whether the guarantee is an eligible security. Paragraph

(c)(3)(iii) of rule 2a-7, as amended.

---------------------------------------------------------------------------

b. Diversification Standards. i. Look-Through to Secondary ABSs.

Rule 2a-7 treats the special purpose entity as the issuer of the ABS

and requires the rule's issuer diversification standards to be met with

respect to the special purpose entity. The rule contains an exception

to this treatment, which requires 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''). For diversification purposes, a fund must treat these ten

percent obligors as if they issued a proportionate amount of the

special purpose entity.54 The ``look-through'' to ten

percent obligors is designed to ensure that a fund does not invest

indirectly more than five percent of its assets in a particular issuer.

---------------------------------------------------------------------------

\54\ Paragraph (c)(4)(ii)(D)(1)(i) of rule 2a-7, as amended.

---------------------------------------------------------------------------

Some or all of the qualifying assets of certain ABSs (``primary

ABSs'') also consist of other ABSs (``secondary ABSs''). The Commission

proposed amendments to clarify that a ten percent obligor of a primary

ABS 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 provided that a fund should ``continue down the

chain'' of ten percent obligors until a special purpose entity with no

ten percent obligors is reached.55 Commenters supported this

general approach, which the Commission is adopting, but raised several

concerns that have led the Commission to further revise and clarify the

rule.

---------------------------------------------------------------------------

\55\ Proposing Release, supra note, at nn. 48-50 and

accompanying text. The approach set forth in the Proposing Release

was illustrated in materials prepared by the staff of the Division

of Investment Management and made available at the 1996 ICI

Conference on Money Market Fund Regulation. 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).

---------------------------------------------------------------------------

One commenter observed that the benefits and materiality of the

required ``look-through'' to secondary ABSs diminish rapidly. This

commenter asserted that the risks posed by remote special purpose

entities are likely to be outweighed by the costs incurred by funds to

create compliance systems that identify, and treat as proportionate

issuers, ten percent obligors beyond those comprising the qualifying

assets of secondary ABSs. The Commission agrees and has amended the ABS

``look-through'' provision so that, instead of ``continuing down the

chain'' indefinitely, funds are required to identify and treat as

proportionate issuers of a primary ABS only ten percent obligors of the

primary ABS and ten percent obligors of any secondary

ABSs.56

---------------------------------------------------------------------------

\56\ Paragraphs (c)(4)(ii)(D)(1)(i) and (ii) of rule 2a-7, as

amended. Under this provision, funds must ``look through'' to any

ten percent obligor of a primary ABS, and to any ten percent obligor

of a secondary ABS, and treat each such obligor as an issuer of a

portion of the primary ABS. Funds need not, however, ``look-

through'' to the qualifying assets of any ten percent obligor of a

``tertiary ABS'' (i.e., a ten percent obligor of a secondary ABS

that is itself a special purpose entity issuing ABSs) for purposes

of compliance with the rule's diversification standards. Although

the rule does not specifically prohibit a multi-layered ABS designed

to avoid the ``look-through'' to secondary ABSs, the Commission

would collapse the multiple layers of such an ABS and view remote

ten percent obligors as proportionate issuers for purposes of

determining compliance with the rule's issuer diversification

standards. The Appendix to this Release illustrates the operation of

the ``look-through'' to secondary ABSs under the amended rule.

---------------------------------------------------------------------------

Another commenter urged that a particular type of ABS issuer, a

``restricted special purpose entity,'' be excluded from treatment as a

ten percent obligor under the rule, and thus not be counted for

diversification purposes. A ``restricted special purpose entity'' is

one that does not issue its ABSs to anyone other than another specific

ABS issuer. For example, a company that provides financing for

automobile purchasers may establish a restricted special purpose entity

to securitize its automobile loans. The restricted special purpose

entity will only sell ABSs to another special purpose entity that

issues ABSs to money market funds or other investors. No

diversification risk would appear to be posed to funds in this instance

because funds cannot directly or indirectly invest in the restricted

special purpose entity (i.e., a secondary ABS) other than through the

purchase of ABSs from a particular primary ABS issuer.57 The

Commission has decided to further amend the rule to exclude restricted

special purpose entities from treatment as ten percent

obligors.58

---------------------------------------------------------------------------

\57\ This commenter further noted that compliance costs of

tracking ten percent obligors may cause funds to avoid any ABS whose

issuer discloses the existence of ten percent obligors. Since a

large number of ABSs may be structured such that all or a

significant portion of ten percent obligors are restricted special

purpose entities, allowing funds to disregard these ten percent

obligors would further increase the supply of desirable ABSs for

money market fund investment, avert the imposition of unnecessary

constraints on the asset backed commercial paper market, and expose

funds to little, if any, additional risks.

\58\ Paragraph (c)(4)(ii)(D)(2) of rule 2a-7, as amended. The

amended rule provides that a restricted special purpose entity may

issue its securities to other persons that control, are controlled

by or are under common control with, the restricted special purpose

entity if such persons are not ABS issuers.

---------------------------------------------------------------------------

ii. Demand Features and Guarantees Securing Obligations of Ten

Percent Obligors. The Commission is adopting a proposed amendment to

clarify that in the case of any ten percent obligors deemed to be

issuers for purposes of the rule's diversification standards, any

demand features or guarantees supporting the obligations of the ten

percent obligors are treated as being held by the fund and are subject

to the rule's demand feature and guarantee diversification

standards.59

---------------------------------------------------------------------------

\59\ Paragraph (c)(4)(ii)(D)(3) of rule 2a-7, as amended. If the

fund is not relying on a demand feature or guarantee of a ten

percent obligor for purposes of credit quality or maturity, or for

liquidity, the fund may disregard the demand feature or guarantee

for all purposes. See paragraph (c)(5) of rule 2a-7, as amended.

---------------------------------------------------------------------------

[[Page 64973]]

iii. Special Purpose Entity Cap. In the Proposing Release, the

Commission explained that it was possible under the rule for a large

portion of a fund to be exposed to a single ABS, as a result of a fund

investing in a special purpose entity with one or more ten percent

obligors.60 The Commission noted that this could expose the

fund to an undue amount of structural risk (e.g., the risk that the

special purpose entity might be affected by the bankruptcy of its

sponsor), and requested comment whether the rule should restrict fund

investment in the obligations of a single special purpose entity.

---------------------------------------------------------------------------

\60\ Proposing Release, supra note 6, at n.52 and accompanying

text.

---------------------------------------------------------------------------

Although the three industry participants that responded to the

request for comment urged adoption of such a cap, the Commission has

decided not to amend the rule in this manner. The Commission is

concerned that such a cap would add complexity to the rule without

meaningfully limiting structural risks. While a cap would limit a

fund's investment in a particular special purpose entity, it would not

prevent a fund from investing large amounts of its assets in multiple

identically-structured special purpose entities established by the same

sponsor. A structural flaw in an ABS that exposes investors in one

special purpose entity to the bankruptcy of the sponsor would likely

affect all of the special purpose entities similarly structured.

Therefore, the Commission is not persuaded that a cap would effectively

contain a fund's exposure to structural risk, and in any event, rule

2a-7 looks to the ratings of the NRSROs to provide an independent

review of ABS structures.61 Fund advisers, however, should

consider the fund's exposure to structural risk when evaluating whether

an investment in a particular ABS is consistent with the fund's

objective of maintaining a stable net asset value.

---------------------------------------------------------------------------

\61\ NRSROs, prior to assigning a rating, not only analyze the

quality of the assets underlying an ABS, but also conduct an

independent analysis of the structural integrity of the ABS. See

Release 19959, supra note 49, at nn.108-12 and accompanying text.

---------------------------------------------------------------------------

iv. Sponsor-Provided Demand Features and Guarantees. Rule 2a-7

provides that a fund may not invest, with respect to seventy-five

percent of its total assets, more than ten percent of its total assets

in securities issued by or subject to puts from the same institution

(or under the amended rule's terminology, ``guarantee'' or ``demand

feature'').62 A fund is not subject to the ten percent

limitation with respect to the remaining twenty-five percent of its

total assets (``twenty-five percent basket'') if the securities held in

the basket are first tier securities and the puts are issued by non-

controlled persons.63 As a result, a fund holding an ABS

subject to a put from its sponsor is not able to include this

investment in its twenty-five percent basket if the sponsor is in a

control relationship with the special purpose entity.64

---------------------------------------------------------------------------

\62\ Paragraph (c)(4)(iii) of rule 2a-7, as amended.

\63\ Id. The amended rule refers to such instruments as

guarantees or demand features from ``non-controlled persons.'' See

paragraphs (a)(9) and (a)(16) of rule 2a-7, as amended. The Appendix

to this Release illustrates the operation of the twenty-five percent

basket under the amended rule when securities are subject to

guarantees or demand features from multiple providers.

\64\ This may occur, for example, if an ABS sponsor owns a

residual equity interest in the special purpose entity. In this

case, the ABS sponsor might ``control'' the special purpose entity

within the meaning of section 2(a)(9) of the 1940 Act [15 U.S.C.

80a-2(a)(9)]. See Proposing Release, supra note 6, at n.54 and

accompanying text. An ABS sponsor may not, however, be deemed to

``control'' the special purpose entity under other federal

securities laws or for other purposes.

---------------------------------------------------------------------------

The twenty-five percent basket is restricted to securities subject

to puts from non-controlled persons in order to minimize a fund's

exposure to the credit risk of a single economic enterprise and limit

the aggregate exposure to the risks of related, active

businesses.65 Permitting a fund to invest more than ten

percent of its total assets in an ABS subject to a demand feature or

guarantee issued 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.

Therefore, the Commission proposed to amend rule 2a-7 to allow funds to

treat a demand feature or guarantee from an ABS sponsor as a demand

feature or guarantee from a non-controlled person. Commenters supported

the proposed amendment, which the Commission is adopting as

proposed.66

---------------------------------------------------------------------------

\65\ Release 21837, supra note 2, at n.73 and accompanying text.

\66\ Paragraphs (a)(9) (``demand feature issued by a non-

controlled person'') and (a)(16) (``guarantee issued by a non-

controlled person'') of rule 2a-7, as amended. Although a guarantee

provided by a person in a control relationship with the issuer of

the underlying security is excluded from the Rating Requirement for

guarantees, the exclusion does not apply to a sponsor-provided

guarantee of an ABS under the amended rule. Thus, sponsor-provided

guarantees of ABSs must be rated. Paragraph (a)(10)(iii)(A) of rule

2a-7, as amended; see also supra Section I.B.1.c. of this Release.

---------------------------------------------------------------------------

v. First Loss Guarantees. Some ABSs are supported by a guarantee

that covers all losses up to an amount of expected losses likely to be

experienced by the ABS. Because a fund's exposure to such a ``first

loss guarantee'' is similar to its exposure to a guarantee of the

entire security,67 the 1996 Amendments required a fund to

treat a first loss guarantor as a guarantor of the entire ABS.

Commenters urged that first loss guarantees be treated similar to other

fractional guarantees under the rule and raised numerous questions

about the application of the provision to certain ABS structures.

---------------------------------------------------------------------------

\67\ The failure of a first loss guarantor covering the first

ten percent of all losses likely to be incurred by an ABS is likely

to have a more significant effect on the value of the ABS than the

failure of a fractional guarantor supporting only a portion of any

losses incurred.

---------------------------------------------------------------------------

The Commission continues to believe that investment in an ABS

subject to a first loss guarantee can potentially result in a fund

being overexposed to the credit risk of the first loss guarantor. The

number and nature of questions raised by the 1996 Amendments, however,

have convinced the Commission that these risks are better managed by

the fund's investment adviser. The Commission, therefore, is revising

the rule to permit funds to treat a first loss guarantee as any other

fractional guarantee when calculating compliance with the rule's

guarantee and demand feature diversification standards.68

Advisers should, however, carefully consider potential exposure to the

credit risks of a first loss guarantor when evaluating whether

investment in an ABS is consistent with the fund's objective of

maintaining a stable net asset value.

---------------------------------------------------------------------------

\68\ Paragraph (c)(4)(iv)(A) of rule 2a-7, as amended. ABSs also

may be subject to ``second loss guarantees'' that guarantee a

specific amount of losses in excess of losses covered by a first

loss guarantee. Funds should treat second loss guarantees of ABSs in

the same manner as any other fractional guarantees or demand

features under the amended rule. Sponsors of ABSs may provide

additional credit risk protection by structuring an offering such

that the value of qualifying assets in the pool exceeds the amount

of the ABS offering. For example, a $1 billion ABSs offering might

be collateralized by an asset pool of $1.1 billion. The $100 million

of ``overcollateralization'' may be applied to cover any first

losses incurred before drawing upon third party guarantees or other

credit enhancements. Although overcollateralization would be

relevant in determining whether the ABS presents minimal credit

risks, this type of seller-provided credit enhancement does not fall

within the rule's definition of a guarantee or demand feature and

may be disregarded for purposes of the rule's diversification

standards. See paragraphs (a)(8) (definition of ``demand feature'')

and (a)(15) (definition of ``guarantee'') of rule 2a-7, as amended.

---------------------------------------------------------------------------

c. Periodic Determinations Regarding Ten Percent Obligors. The 1996

Amendments required a fund to adopt written procedures requiring

periodic determinations of the number of ten percent obligors deemed to

be issuers of all or a portion of an ABS. The Commission is amending

this requirement so that periodic determinations are not required with

[[Page 64974]]

respect to any ABS that a fund's board of directors initially has

determined will never have, or is unlikely to have, any ten percent

obligors.69 This determination may be based upon a

structural analysis of the ABS or upon representations in the offering

materials or governing documents of an ABS that it will never have ten

percent obligors. Funds also must maintain a record of this

determination.70

---------------------------------------------------------------------------

\69\ Paragraph (c)(9)(iv) of rule 2a-7, as amended. The board of

directors may delegate this determination, and most other

determinations required by the rule, to the fund's adviser or to the

officers of the fund. The board, however, may not delegate certain

specific determinations required under rule 2a-7. See paragraph (e)

of rule 2a-7, as amended.

\70\ Paragraph (c)(10)(v) of rule 2a-7, as amended.

---------------------------------------------------------------------------

d. Swap Arrangements. The Proposing Release noted that certain ABSs

may consist of qualifying assets whose cash flow has been ``swapped''

to a financial institution (the ``swap counterparty'') that ultimately

acts as the primary source of payment to funds holding the ABSs (i.e.,

a ``total return swap''). The Commission requested comment whether the

swap counterparty in this instance should be treated as the issuer of

the ABSs for diversification purposes and on the appropriate treatment

of swaps and similar arrangements under the rule.

Commenters suggested various approaches to the treatment of swaps

under the rule.71 All acknowledged, however, the difficulty

of addressing swaps and similar arrangements by rule due to the

constantly evolving nature of swap transactions and the wide variations

in the types of swaps used to structure ABSs offerings. The Commission

has determined not to amend the rule at this time to specifically

address the treatment of swaps or similar arrangements. Swaps and

similar arrangements that fall within the rule's definition of a

guarantee or demand feature, however, should be treated as such for

purposes of guarantee and demand feature diversification.72

A fund's adviser, however, should seek to ensure that investments by

the fund in securities subject to swap arrangements are consistent with

rule 2a-7's overriding policy of limiting funds to investments that are

consistent with maintaining a stable net asset value and do not expose

the fund excessively to credit risks posed by swap counterparties.

---------------------------------------------------------------------------

\71\ Six commenters addressed this issue and generally suggested

that a swap counterparty acting as the primary source of payment to

a fund be treated as an issuer and subject to the issuer

diversification standards. Most of these commenters suggested that

counterparties in swaps that support or guarantee the obligations of

an ABS issuer or other party to pay (but are not the sole source of

payment on the ABS) be treated as guarantees subject to the

guarantee and demand feature diversification standards.

\72\ See paragraphs (a)(8), (a)(15), (c)(4)(iii) and (c)(4)(iv)

of rule 2a-7, as amended.

---------------------------------------------------------------------------

4. Other Amendments to Rule 2a-7

a. Investments in Other Money Market Funds. The 1996 Amendments

permitted a fund (``acquiring fund'') to treat an investment in another

money market fund (``acquired fund'') as a first tier security, but

limited investment in any single money market fund to no more than five

percent of fund assets. The 1996 Amendments created an exception,

however, for a fund investing substantially all of its assets in shares

of another money market fund in reliance on section 12(d)(1)(E) of the

1940 Act (e.g., a master-feeder arrangement).73 The 1996

Amendments deemed this type of a fund to be in compliance with rule 2a-

7's diversification standards if the acquiring fund's board of

directors reasonably believed that the acquired fund is in compliance

with rule 2a-7.

---------------------------------------------------------------------------

\73\ 15 USC 80a-12(d)(1)(E).

---------------------------------------------------------------------------

Several commenters pointed out that, as a result of Commission

exemptive orders 74 and amendments to the 1940 Act's

limitations on ``funds of funds'' arrangements,75 some money

market funds may now invest more than five percent but less than

substantially all of their assets in shares of another money market

fund. The Commission is amending the rule to expand the exception to

cover all investments by a fund in the shares of another money market

fund in excess of the otherwise applicable issuer diversification

standards.76

---------------------------------------------------------------------------

\74\ See, e.g., Daily Money Fund, et al., Investment Company Act

Release Nos. 22285 (Oct. 16, 1996) (Order) and 22236 (Sept. 20,

1996) (Notice).

\75\ In 1996, the 1940 Act's restrictions on fund investments in

other funds were relaxed by, among other things, adding new section

12(d)(1)(G) [15 USC 80a-12(d)(1)(G)] that excepts ``affiliated''

funds of funds from the restrictions of section 12(d)(1)(A) under

certain conditions. See The National Securities Markets Improvement

Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416 (1996).

\76\ Paragraph (c)(4)(ii)(E) of rule 2a-7, as amended.

---------------------------------------------------------------------------

Under the amended rule, shares of money market funds are considered

to be first tier securities,77 and are thus subject to the

rule's issuer diversification standards with respect to first tier

securities.78 A fund may, however, within the limitations of

section 12(d)(1) of the 1940 Act, invest in shares of another money

market fund in excess of the rule's issuer diversification standards,

but only if the acquiring fund's board of directors reasonably believes

that the acquired fund is in compliance with rule 2a-7.79

---------------------------------------------------------------------------

\77\ Paragraph (a)(12) of rule 2a-7, as amended.

\78\ See paragraph (c)(4)(i) of rule 2a-7, as amended.

\79\ Paragraph (c)(4)(ii)(E) of rule 2a-7, as amended. A taxable

or national fund could take advantage of the three day safe harbor

of paragraph (c)(4)(i)(A) and a single state fund could use its

``twenty-five percent basket'' under paragraph (c)(4)(i)(B) to

invest up to twenty-five percent of fund assets in the securities of

a single money market fund without the board making a ``reasonable

belief'' finding, even though, in both cases, the investment would

be in excess of five percent of fund assets. Under the rule, an

acquiring fund that holds securities of a particular issuer

(``Issuer A''), and invests in shares of an acquired fund that also

holds securities of Issuer A, would not aggregate those positions to

determine its compliance with the rule's diversification standards

with respect to Issuer A.

---------------------------------------------------------------------------

b. Definition of Eligible Security--Certain Unrated Securities.

Under the 1996 Amendments, an unrated security that was a long-term

security when issued, but had a remaining maturity of less than 397

calendar days when purchased by the fund, was an eligible security

based on whether the security is comparable in quality to a rated

security (i.e., one with a short-term rating), unless the unrated

security had received a long-term rating from any NRSRO that was not

within the three highest categories of long-term ratings. The

Commission is adopting a proposed amendment to the rule permitting a

fund to treat such a security as an eligible security if that security

has a long-term rating from the ``requisite NRSROs'' 80

within the three highest rating categories.81

---------------------------------------------------------------------------

\80\ Paragraph (a)(21) of rule 2a-7, as amended (definition of

``requisite NRSROs'').

\81\ Paragraph (a)(10)(ii)(A) of rule 2a-7, as amended. For

example, an unrated ``stub'' security may have long-term ratings

from three NRSROs. One of these NRSROs may give the security a long-

term rating in the NRSRO's fourth highest category, which would have

precluded the fund from purchasing the security before the adoption

of these amendments. Under the revised rule, however, the fund may

look to the other ratings and treat the security as an eligible

security if the two other NRSROs have given the security long-term

ratings within one of their three highest long-term rating

categories. If any NRSRO has given the security (or the issuer of

the security with respect to a class of debt obligations that is

comparable in priority and security) a short-term rating, however,

the short-term rating would override the long-term ratings and

reference to long-term ratings would be unnecessary to determine

whether the security was an eligible security. Long-term ratings may

be relevant, however, to an evaluation of whether the issuer

presents minimal credit risks under paragraph (c)(3)(i) of rule 2a-

7, as amended.

---------------------------------------------------------------------------

c. Additional Amendments. The Commission proposed additional

amendments designed to further clarify and make technical corrections

to the rule. Commenters supported the amendments, and the Commission is

adopting them as follows:

(i) Acquisition of Portfolio Securities. The Commission is adding

the new defined term ``acquisition'' to make the rule more uniform in

its application to

[[Page 64975]]

fund investments 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.82

---------------------------------------------------------------------------

\82\ Paragraph (a)(1) of rule 2a-7, as amended.

---------------------------------------------------------------------------

(ii) Single State Funds. The Commission is amending the definition

of a ``single state fund'' to include a fund seeking to ``maximize''

the amount of income exempt from income taxes of a particular

state.83

---------------------------------------------------------------------------

\83\ Paragraph (a)(23) of rule 2a-7, as amended. The effect of

the amendment would be to permit this type of a fund to take

advantage of the twenty-five percent basket in determining

compliance with the rule's diversification standards, even if it did

not primarily distribute income exempt from state income taxes. See

paragraph (c)(4)(i)(B) of rule 2a-7, as amended; see also Proposing

Release, supra note 6, at nn.66-68 and accompanying text.

---------------------------------------------------------------------------

(iii) Standby Commitments. As proposed, the Commission has deleted

the term ``standby commitment'' and all references to that term from

the rule.84

---------------------------------------------------------------------------

\84\ See Proposing Release, supra note 6, at nn.69-71 and

accompanying text. Under the amended rule, a standby commitment that

meets the definition of a demand feature must be treated as such.

See paragraph (a)(8) of rule 2a-7, as amended (definition of

``demand feature''). A standby commitment that is not a demand

feature is not subject to the rule's credit quality or

diversification standards.

---------------------------------------------------------------------------

(iv) Downgrades, Defaults, and Other Events. The Commission is

amending the rule to require a fund's board of directors to reassess

whether an unrated or second tier security continues to present minimal

credit risks only when the fund's adviser (or other person delegated

portfolio management responsibilities) becomes aware that the security

has been downgraded by any NRSRO below that NRSRO's two highest short-

term rating categories.85

---------------------------------------------------------------------------

\85\ Paragraph (c)(6)(i)(A)(2) of rule 2a-7, as amended; see

Proposing Release, supra note 6, at n.72 and accompanying text.

---------------------------------------------------------------------------

(v) Recordkeeping Requirements. The Commission is adding rule text

inadvertently omitted from the 1996 Amendments that requires the board

of directors to document minimal credit risk determinations of

portfolio securities.86

---------------------------------------------------------------------------

\86\ Paragraph (c)(10)(iii) of rule 2a-7, as amended; see

Proposing Release, supra note 6, at nn.74-75 and accompanying text.

---------------------------------------------------------------------------

(vi) Holding Out. Using new rulemaking authority, the Commission is

restating the rule's prohibition on a fund's use of names suggesting

that it is a money market fund, unless it complies with rule 2a-

7.87

---------------------------------------------------------------------------

\87\ Paragraph (b) of rule 2a-7, as amended. The National

Securities Markets Improvement Act of 1996 [Pub. L. 104-290, 110

Stat. 3416 (1996)] amended Section 35(d) of the 1940 Act [15 USC

80a-34(d)] to make it unlawful to adopt as a fund name or title, or

as a title of fund securities, words that the Commission finds are

materially deceptive or misleading, and to authorize the Commission

to define names and titles deemed to be ``materially deceptive and

misleading.''

---------------------------------------------------------------------------

II. Amendments to the Advertising Rules Applicable to Money Market

Funds

The Commission is adopting amendments to the Commission's money

market fund advertising rules and forms to clarify the formula used by

money market funds to calculate yield and to reduce the potential for

investors being misled or confused by the presentation of a money

market fund's short-term total return.

A. Calculation of Yield

The Commission proposed to amend its money market fund yield

formula to clarify that only investment income may be included in the

yield of a money market fund. Three commenters supported the amendment;

one opposed it and urged the Commission to specifically permit

inclusion of non-investment income. The Commission is concerned that

inclusion of non-investment income will distort yield and diminish the

utility of money market fund yield to investors. The Commission,

therefore, has decided to adopt the proposed amendment to the money

market fund yield formula.88

---------------------------------------------------------------------------

\88\ See 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], as amended.

---------------------------------------------------------------------------

B. Use of Total Return

The Proposing Release noted that some money market fund

advertisements have used short-term total return instead of yield and

expressed concern that many investors may not understand the

difference.89 The Commission proposed to amend its rules to

require that total return quotations in advertisements and sales

literature cover a period of at least one year, and that such

quotations be accompanied by a quotation of current yield, computed in

accordance with Commission rules and set forth with equal prominence.

---------------------------------------------------------------------------

\89\ Proposing Release, supra note 6, at n.81 and accompanying

text. As a result, investors may assume incorrectly that a fund

quoting the higher total return figure is a better performing fund

than other money market funds quoting yield. For example, during a

period of declining interest rates, 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. 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.

---------------------------------------------------------------------------

All commenters that addressed this proposal objected to the

proposed requirement that total return quotations cover at least one

year. They argued that the proposal would preclude total return

quotations during a fund's first year and in other circumstances in

which the purpose of the advertisement was other than to circumvent the

Commission's yield formula. The Commission has decided not to require

all money market fund total return quotations to cover a period of one

year. Instead, the Commission is revising its rules to require that (i)

quotations of total return be accompanied by quotations of current

yield and that both quotations be placed next to each other and shown

in the same size print, 90 and (ii) if there is a material

difference between the quoted total return and the quoted yield, a

statement that the yield quotation more closely reflects the current

earnings of the fund than the total return quotation.91

---------------------------------------------------------------------------

\90\ Quotations of total return and current yield in an

advertisement delivered electronically must be presented together

and in a manner that presents each quotation with identical

prominence in light of the particular electronic medium used to

transmit the advertisement.

\91\ See paragraph (d)(2) of rule 482 under the 1933 Act, as

amended [17 CFR 230.482(d)(2)]; paragraph (b)(1)(ii)(C) of rule 34b-

1 under the 1940 Act, as amended [17 CFR 270.34b-1(b)(1)(ii)(C)].

---------------------------------------------------------------------------

III. Effective Date/Compliance Date

A. Effective Date

The rule amendments adopted in this Release will become effective

February 10, 1998. The Office of Management and Budget has determined

that the technical amendments to rule 2a-7 are ``major rules'' and the

amendments to the Commission's money market fund advertising rules and

forms are ``minor rules'' under Chapter 8 of the Administrative

Procedure Act, 92 which was added by the Small Business

Regulatory Enforcement Fairness Act of 1996 (``SBREFA'').93

SBREFA requires all final agency rules to be submitted to Congress for

review and requires generally that the effective date of a major rule

be delayed for sixty days pending Congressional review. A major rule

may become effective at the end of the sixty-day review period, unless

Congress passes a joint resolution disapproving the rule.94

---------------------------------------------------------------------------

\92\ 5 USC 801.

\93\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996). Under

SBREFA, a rule is ``major'' if it is likely to result in (i) an

annual effect on the economy of $100 million or more, (ii) a major

increase in costs or prices for consumers or individual industries,

or (iii) significant adverse effects on competition, investment, or

innovation. 5 USC 804(2).

\94\ 5 USC 801(a)(3).

---------------------------------------------------------------------------

B. Compliance Dates

The Proposing Release requested comment whether the Commission

should provide for a six-month

[[Page 64976]]

transition period for compliance.95 Commenters supported a

six-month period to give fund boards of directors sufficient time to

review and approve fund procedures. Several commenters also suggested

that the ``grandfathering'' of certain securities provided for by the

release adopting the 1996 Amendments be extended, 96 whereas

one commenter opposed such extension. The Commission has decided to

delay the date for compliance with the amended rule for six months and

to extend the ``grandfathering'' of fund investments in certain

securities, as described below.

---------------------------------------------------------------------------

\95\ See Proposing Release, supra note 6, at nn.84-85 and

accompanying text.

\96\ The 1996 Amendments ``grandfathered'' fund investments in

certain securities issued on or before June 3, 1996.

---------------------------------------------------------------------------

1. General Compliance Date

All money market funds must be in compliance with rule 2a-7, as

amended, (and with conforming amendments reflecting the revisions to

rule 2a-7) by July 1, 1998, except with respect to ``grandfathered

securities'' as provided below.97 Funds must comply with the

amendments to the advertising rules and forms applicable to money

market funds by February 10, 1998.

---------------------------------------------------------------------------

\97\ Rule 2a-7 requires a fund to meet the rule's

diversification standards with respect to a particular issuer on the

date the fund acquires a security of that issuer. Paragraphs

(c)(4)(i) and (ii) (with respect to issuer diversification) and

(c)(4)(iii) and (iv) (with respect to diversification of demand

features and guarantees) of rule 2a-7, as amended. A tax exempt fund

holding a greater percentage of its total assets in the securities

of an issuer than the applicable diversification standard permits as

of July 1, 1998 may not purchase additional securities or ``roll

over'' current holdings until the purchase or roll over of such

securities will not cause the fund to exceed the applicable

diversification standards immediately after the purchase or roll

over. Funds are not required to exercise puts or otherwise dispose

of portfolio holdings to meet the new diversification standards.

---------------------------------------------------------------------------

2. ``Grandfathered'' Securities

To minimize disruption to funds and markets as a result of the

adoption of these amendments, the Commission is ``grandfathering''

certain securities first issued on or before February 10, 1998 that do

not meet the following requirements of the amended rule:

(i) The Rating Requirement for guarantees; 98

---------------------------------------------------------------------------

\98\ Paragraph (a)(10)(iii)(A) of rule 2a-7, as amended.

---------------------------------------------------------------------------

(ii) The Notification Requirement, which provides that, in order

for a security subject to a guarantee or demand feature to be an

eligible security, the fund must receive notice from the demand feature

or guarantee provider (or another institution) if there is a

substitution of the provider of the demand feature or guarantee;

99

---------------------------------------------------------------------------

\99\ Paragraph (a)(10)(iii)(B) of rule 2a-7, as amended.

---------------------------------------------------------------------------

(iii) The requirements for ABSs regarding maturity determinations

and ratings; 100

---------------------------------------------------------------------------

\100\ Paragraphs (a)(8)(ii) (definition of demand feature for

ABSs) and (a)(10)(ii)(B) (rating requirement for ABSs) of rule 2a-7,

as amended. Funds are required, however, to apply the issuer

diversification standards for ABSs in accordance with Section

I.B.3.b. of this Release, supra. See paragraph (c)(4)(ii)(D) of rule

2a-7, as amended.

---------------------------------------------------------------------------

(iv) The requirement that a demand feature and a guarantee include

the ability to recover principal and any accrued interest;

101 and

---------------------------------------------------------------------------

\101\ Paragraphs (a)(8) and (a)(15) of rule 2a-7, as amended.

---------------------------------------------------------------------------

(v) The requirement that a security subject to a conditional demand

feature is an eligible security only if the fund's board of directors

makes certain determinations regarding the conditional demand feature's

exercisability.102

---------------------------------------------------------------------------

\102\ Paragraph (c)(3)(iv)(B) of rule 2a-7, as amended.

---------------------------------------------------------------------------

A fund may continue to hold these ``grandfathered'' securities or

acquire these securities provided that they satisfy the other

provisions of the rule, as amended, and are issued on or before

February 10, 1998.

IV. Cost/Benefit Analysis and Effects on Competition, Efficiency

and Capital Formation

A. Technical Amendments to Rule 2a-7

The technical amendments to rule 2a-7 make refinements and

corrections to the 1996 Amendments. They are intended to permit money

market funds the maximum amount of flexibility in selecting their

investments consistent with the objective of maintaining a stable net

asset value. This additional flexibility will promote market efficiency

by allowing funds to invest in a wider variety of instruments that

present risks consistent with that objective. For example, the

technical amendments expand the investment opportunities of funds,

without increasing risks, by allowing funds to substitute the credit

quality of guarantee providers for the issuers of securities subject to

guarantees (instead of only those subject to unconditional demand

features) for purposes of compliance with the rule's credit quality

standards. By resolving interpretive issues, the technical amendments

also address competitive inequities that might arise among funds if,

for example, funds draw different conclusions as to the permissibility

of a particular investment that may increase fund yield.

As discussed above,103 the 1996 Amendments tighten the

risk-limiting conditions of rule 2a-7 applicable to tax exempt money

market funds and clarify the rule's treatment of certain instruments,

such as ABSs. The technical amendments potentially will benefit

investors to the extent that rule 2a-7, as finally amended, operates to

decrease the likelihood that a fund will not maintain a stable net

asset value and provides investors greater opportunities to obtain

higher yields without exposure to risks inconsistent with their

investment expectations.

---------------------------------------------------------------------------

\103\ See supra Section I.A. of this Release.

---------------------------------------------------------------------------

The costs of the technical amendments to funds and fund advisers

(and ultimately fund shareholders) are likely to be minimal, since the

amendments do not impose additional procedural requirements or

reporting burdens on funds. The Commission believes that the direct or

indirect benefits derived from the technical amendments cannot be

quantified because it is impossible to predict with certainty how funds

will structure their portfolio holdings in response to these

amendments.104 In addition, any costs or benefits are likely

to affect not only funds, but also a wide variety of market

participants.105

---------------------------------------------------------------------------

\104\ For example, many money market funds currently do not

invest in ABSs, or invest only in those ABSs that do not raise the

diversification issues addressed in this Release. The Commission

expects that more funds will invest in ABSs, although there is no

empirical basis for predicting the size of that expected effect.

\105\ Many of the complex money market fund instruments affected

by the technical amendments are specifically designed to comply with

rule 2a-7. The primary effect of the amendments will be to change

how those instruments are structured, rather than to prohibit funds

from investing in currently-available money market instruments.

Thus, to the extent the amendments impose costs or provide benefits,

these costs and benefits may be shared by funds, investors, issuers,

and the investment banks or other entities that structure money

market instruments.

---------------------------------------------------------------------------

In the Proposing Release, the Commission requested specific comment

on the costs and benefits associated with the proposals. No commenters

provided specific estimates of any costs or benefits. One noted

generally the increase in time and costs incurred to document

compliance with rule 2a-7 since 1991, and suggested that procedural

requirements focus less on periodic reviews of existing information and

more on actions required by a board or fund managers in response to new

information.106 In response to these

[[Page 64977]]

concerns, the technical amendments create exceptions to the rule's

periodic review requirements when those requirements are not necessary

to prevent the fund from inadvertently holding ineligible

securities.107

---------------------------------------------------------------------------

\106\ The technical amendments do not require additional

periodic reviews. The rule's procedural requirements, including

periodic reviews of certain determinations, were adopted before the

proposal of the technical amendments. The costs and benefits of

these procedures were analyzed previously in connection with the

adoption of rule 2a-7 in 1983, and in connection with amendments to

rule 2a-7 in 1986, 1991 and 1996.

\107\ For example, the amended rule does not require periodic

determinations of the number of ten percent obligors of an ABS that

the board determines will never have, or is unlikely to have, ten

percent obligors. See paragraphs (c)(9)(iv) and (c)(10)(v) of rule

2a-7, as amended.

---------------------------------------------------------------------------

Section 2(c) of the 1940 Act provides that whenever the Commission

is engaged in rulemaking and is required to consider whether an action

is necessary or appropriate in the public interest, the Commission also

must consider, in addition to the protection of investors, whether the

action will promote efficiency, competition, and capital

formation.108 For the reasons stated in the cost/benefit

analysis above, the Commission has concluded that the technical

amendments will promote efficiency, competition and capital formation.

---------------------------------------------------------------------------

\108\ 15 USC 80a-2(c).

---------------------------------------------------------------------------

B. Amendments to Advertising Rules Applicable to Money Market Funds

The amendments to the Commission's advertising rules and forms

applicable to money market funds are designed to clarify the formula

used by money market funds to calculate yield and reduce the potential

for investors being misled or confused by the presentation of a money

market fund's short-term total return. They benefit funds and fund

investors by clarifying the yield formula and codifying accepted

practices under the current rules. The amendments are intended to

preserve the consistency of advertised yield and to maintain the

ability of investors to compare yields quoted by various funds.

The Commission anticipates that the costs of these amendments to

funds and investors are likely to be minimal. No commenters responded

to the Commission's request for specific estimates of costs or benefits

associated with the proposed rule amendments. One commenter stated that

the proposal to clarify that only investment income may be included in

a fund's yield would benefit neither funds nor investors, because it

would discourage funds from identifying sources of safe, non-investment

income, encourage funds to increase yield through riskier investments,

and deprive investors of information regarding consistent sources of

non-investment income.109 The Commission believes, however,

that the rule will benefit investors by ensuring that a money market

fund's yield is consistently advertised and represents only income that

reflects the performance of the fund's investment

portfolio.110

---------------------------------------------------------------------------

\109\ According to this commenter, the inability to advertise

non-investment income also would have an adverse effect on

competition in the industry.

\110\ The Commission believes that it is not relevant to

consider the costs to funds identified by the commenter in

connection with these amendments. The amendments are intended to

clarify the existing money market fund yield formula, and as noted

in the Proposing Release, the existing yield formula does not permit

the inclusion of non-investment income in yield. See Proposing

Release, supra note 6, at n.83 and accompanying text. In addition,

the Commission believes that any such costs are in fact quite

limited, since it is aware of only one fund that has sought to

include non-investment income in its calculation of yield.

---------------------------------------------------------------------------

V. Paperwork Reduction Act

As set forth in the Proposing Release, certain provisions of the

amendments adopted in this Release contain ``collection of

information'' requirements within the meaning of the Paperwork

Reduction Act of 1995 (``PRA'').111 The collection of

information requirements contained in these amendments were submitted

to the Office of Management and Budget (``OMB'') for review in

accordance with section 3507(d) of the PRA. The title for the

collection of information is ``Rules Regulating Money Market Funds.''

The collection of information requirements are in accordance with

section 3507 of the PRA. An agency may not conduct or sponsor, and a

person is not required to respond to, a collection of information

unless the agency displays a valid OMB control number. OMB approved the

PRA submission with respect to these amendments and assigned OMB

control numbers with respect to the rules amended by this

Release.112

---------------------------------------------------------------------------

\111\ 44 U.S.C 3501--3520.

\112\ OMB control numbers are as follows: rule 2a-7 (3235-0268,

expires Mar. 31, 2000); rule 34b-1 (3235-0346, expires Mar. 31,

2000); rule 482 (3235-0074, expires Mar, 31, 2000); Form N-1A (3235-

0307, expires May 31, 2000); Form N-3 (3235-0316, expires Mar. 31,

2000); and Form N-4 (3235-0318, expires Apr. 30, 2000).

---------------------------------------------------------------------------

Responses to the collection of information requirements for the

rules and forms amended by this Release are mandatory. The collection

of information requirements under rule 2a-7 are designed to enable the

Commission staff to ascertain a money market funds' compliance with the

rule and ensure that funds have in place procedures for collecting

information necessary to make the required determinations regarding

portfolio securities. Most responses required by rule 2a-7 and

requested by or submitted to the Commission will be kept confidential

to the extent permitted by relevant statutory and regulatory

provisions.113 The collection of information required by

rule 34b-1, rule 482, Form N-1A, Form N-3 and Form N-4, and which is

disclosed in fund prospectuses, registration statements and

advertisements, is public and is not kept confidential by the

Commission.

---------------------------------------------------------------------------

\113\ If the board of directors takes action with respect to

defaulted securities, events of insolvency or deviations in share

price, however, funds must file an exhibit to Form N-SAR describing

the action. This collection of information under rule 2a-7 is public

and is not kept confidential by the Commission. See paragraph

(c)(10)(vii) of rule 2a-7, as amended.

---------------------------------------------------------------------------

The Supporting Statement to this Paperwork Reduction Act submission

notes that, because the technical amendments to rule 2a-7 clarify

existing reporting and recordkeeping obligations, it is estimated that

they will have no effect on the annual reporting burden of money market

funds. The amendments to the advertising rules and forms applicable to

money market funds are estimated to impose no substantive additional

paperwork burdens on funds. The Commission is aware of only one money

market fund that has sought to include income other than investment

income in its yield calculation, and very few money market funds that

quote any type of total return in their advertisements. If total return

is quoted, however, an insignificant additional burden is required only

if the quoted yield differs materially from quoted total return, which

the Commission believes occurs infrequently.

VI. Summary of Regulatory Flexibility Analysis

A summary of the Initial Regulatory Flexibility Analysis (``IRFA'')

regarding the proposed amendments, which was prepared in accordance

with 5 U.S.C 603, was published in the Proposing Release. No comments

were received on the IRFA. The Commission has prepared a Final

Regulatory Flexibility Analysis (``FRFA'') in accordance with 5 U.S.C

604 regarding the adoption of technical amendments to rule 2a-7 and the

adoption of amendments to the Commission's advertising rules applicable

to money market funds.

The FRFA discusses the need for, and objectives of, the rule

amendments. The FRFA explains that the technical amendments to rule 2a-

7 address many of the questions and issues raised by industry

participants after the adoption of the 1996 Amendments. The objective

of the technical amendments is to refine

[[Page 64978]]

and correct the 1996 Amendments, and thereby permit money market funds

the maximum amount of flexibility in selecting their investments

consistent with the objective of maintaining a stable net asset value.

The FRFA explains that the amendments to the advertising rules

applicable to money market funds clarify that only investment income

may be included in the yield of a money market fund and reduce the

potential for investors being misled or confused by the presentation of

a money market fund's short-term total return.

The FRFA estimates that out of the approximately 650 investment

companies registered with the Commission that have one or more

portfolios that are money market funds, a total of 130 would be

considered small entities. The FRFA indicates that the technical

amendments to rule 2a-7 and the amendments to the advertising rules and

forms applicable to money market funds would effect small entities in

the same manner as other funds subject to these rules.

The FRFA explains that neither the technical amendments to rule 2a-

7 nor the amendments to the advertising rules applicable to money

market funds impose any substantive additional reporting, recordkeeping

or other compliance burdens. Finally, the FRFA states that in adopting

the amendments the Commission considered (a) the establishment of

differing compliance requirements that take into account the resources

available to small entities; (b) simplification of the requirements for

small entities; (c) the use of performance rather than design

standards; and (d) an exemption from the rules for small entities. The

FRFA states that the Commission concluded that different requirements

for small entities with respect to either the technical amendments to

rule 2a-7 or the amendments to the advertising rules applicable to

money market funds are unnecessary and would be inconsistent with

investor protection, and that the adopted amendments are not design

standards.

Cost/benefit information reflected in the ``Cost/Benefit Analysis''

section of this Release also is reflected in the FRFA. A copy of the

FRFA may be obtained by contacting David P. Mathews, Senior Counsel,

Mail Stop 10-2, Securities and Exchange Commission, 450 Fifth Street,

N.W., Washington, D.C. 20549.

VII. Statutory Authority

The Commission is amending rule 2a-7 and the advertising rules and

forms applicable to money market funds under the exemptive and

rulemaking authority set forth in sections 6(c) [15 USC 80a-6(c)], 8(b)

[15 USC 80a-8(b)], 22(c) [15 USC 80a-22(c)], 34(b) [15 USC 80a-33(b)],

35(d) [15 USC 80a-34(d)] and 38(a) [15 USC 80a-37(a)] of the Investment

Company Act of 1940. The authority citations for the amendments to the

rules and forms precede the text of the amendments.

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 amending

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 based on the methods 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 may include:

(i) A quotation of current yield that identifies the length of and

the date of the last day in the base period used in computing that

quotation; or

(ii) A quotation of effective yield if it appears in the same

advertisement as a quotation of current yield and each quotation

relates to an identical base period and is presented with equal

prominence.

(2) Accompany any quotation of the money market fund's total return

in an advertisement with a quotation of the money market fund's current

yield under paragraph (d)(1)(i) of this section. Place the quotations

of total return and current yield next to each other, in the same size

print, and if there is a material difference between the quoted total

return and the quoted current yield, include a statement that the yield

quotation more closely reflects the current earnings of the money

market fund than the total return quotation.

* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

3. The general authority citation for Part 270 is revised to read

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) means any purchase or subsequent

rollover (but does not include the failure to exercise a Demand

Feature).

(2) Amortized Cost Method of valuation means 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 means 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 which consist of

Qualifying Assets (as defined in this paragraph). Special Purpose

Entity means a trust, corporation, partnership or other entity

organized for the sole purpose of issuing securities that 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 means 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 means any day, other than Saturday, Sunday, or any

customary business holiday.

(5) Collateralized Fully in the case of a repurchase agreement

means 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

[[Page 64979]]

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) of this section) 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 automatic stay of

creditors' rights against the seller.

(v) Resale Price means 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 means a Demand Feature that is not

an Unconditional Demand Feature. A Conditional Demand Feature is not a

Guarantee.

(7) Conduit Security means 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 means 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 means:

(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 means a Demand

Feature issued by:

(i) 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 (control means ``control'' as

defined in section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)); or

(ii) A sponsor of a Special Purpose Entity with respect to an Asset

Backed Security.

(10) Eligible Security means:

(i) A Rated Security with a remaining maturity of 397 calendar days

or less that has received a rating from 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 for a Rated Security in 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 from an NRSRO or the

Guarantee is issued by a guarantor that has received a rating from an

NRSRO with respect to a class of debt obligations (or any debt

obligation within that class) that is comparable in priority and

security to the Guarantee, unless:

(1) 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 (other than a

sponsor of a Special Purpose Entity with respect to an Asset Backed

Security);

(2) The security subject to the Guarantee is a repurchase agreement

that is Collateralized Fully; or

(3) The Guarantee is itself a Government Security; 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 means, 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

(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 means any Eligible Security that:

[[Page 64980]]

(i) Is a Rated Security that has received a short-term rating from

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 for a Rated Security in 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 means a security the terms of which

provide for the adjustment of its interest rate whenever a specified

interest rate changes and that, 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) Government Security means any ``Government security'' as

defined in section 2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16)).

(15) Guarantee means 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), 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).

(16) Guarantee Issued By A Non-Controlled Person means a Guarantee

issued by:

(i) 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 (control means ``control'' as defined

in section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)); or

(ii) A sponsor of a Special Purpose Entity with respect to an Asset

Backed Security.

(17) NRSRO means 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 means 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) Rated Security means a security that meets the requirements of

paragraphs (a)(19)(i) or (ii) of this section, in each case subject to

paragraph (a)(19)(iii) of this section:

(i) The security has received a short-term rating from an NRSRO, or

has been issued by an issuer that has received a short-term rating from

an NRSRO 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; or

(ii) The security is subject to a Guarantee that has received a

short-term rating from an NRSRO, or a Guarantee issued by a guarantor

that has received a short-term rating from an NRSRO with respect to a

class of debt obligations (or any debt obligation within that class)

that is comparable in priority and security with the Guarantee; but

(iii) A security is not a Rated Security if it is subject to 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 was assigned its rating, unless the security has

received a short-term rating reflecting the existence of the credit

support agreement as provided in paragraph (a)(19)(i) of this section,

or the credit support agreement with respect to the security has

received a short-term rating as provided in paragraph (a)(19)(ii) of

this section.

(20) Refunded Security means 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 in this

paragraph (a)(20)(iii) 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).

(21) Requisite NRSROs means:

(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.

(22) Second Tier Security means any Eligible Security that is not a

First Tier Security. Second Tier Conduit Security means any Conduit

Security that is an Eligible Security that is not a First Tier

Security.

(23) Single State Fund means 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.

(24) Tax Exempt Fund means any money market fund that holds itself

out as distributing income exempt from regular federal income tax.

(25) Total Assets means, 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.

(26) Unconditional Demand Feature means 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.

[[Page 64981]]

(27) United States Dollar-Denominated means, 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.

(28) Unrated Security means a security that is not a Rated

Security.

(29) Variable Rate Security means 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 that, 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 that 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 that suggests that a

registered investment company is a money market fund or the equivalent

thereof shall include one that 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'' or ``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 that 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 that 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 that 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;

(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, from 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 NRSROs' two highest short-term or long-term rating categories, as

the case may be.

(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

[[Page 64982]]

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 that 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 that 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 the escrowed Government

Securities.

(C) Conduit Securities. A Conduit Security shall be deemed to be

issued by the person (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

Acquired by a fund (``Primary ABS'') shall be deemed to be issued by

the Special Purpose Entity that issued the Asset Backed Security,

Provided, however:

(i) Holdings of Primary ABS. Any person whose obligations

constitute ten percent or more of the principal amount of the

Qualifying Assets of the Primary ABS (``Ten Percent Obligor'') shall be

deemed to be an issuer of the portion of the Primary ABS such

obligations represent; and

(ii) Holdings of Secondary ABS. If a Ten Percent Obligor of a

Primary ABS is itself a Special Purpose Entity issuing Asset Backed

Securities (``Secondary ABS''), any Ten Percent Obligor of such

Secondary ABS also shall be deemed to be an issuer of the portion of

the Primary ABS that such Ten Percent Obligor represents.

(2) Restricted Special Purpose Entities. A Ten Percent Obligor with

respect to a Primary or Secondary ABS shall not be deemed to have

issued any portion of the assets of a Primary ABS as provided in

paragraph (c)(4)(ii)(D)(1) of this section if that Ten Percent Obligor

is itself a Special Purpose Entity issuing Asset Backed Securities

(``Restricted Special Purpose Entity''), and the securities that it

issues (other than securities issued to a company that controls, or is

controlled by or under common control with, the Restricted Special

Purpose Entity and which is not itself a Special Purpose Entity issuing

Asset Backed Securities) are held by only one other Special Purpose

Entity.

(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 of Other Money Market Funds. A money market fund that

Acquires shares issued by another money market fund in an amount that

would otherwise be prohibited by paragraph (c)(4)(i) of this section

shall nonetheless be deemed in compliance with this section if the

board of directors of the Acquiring 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, or with respect to a Guarantee or Demand Feature

that is itself a Government 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.

(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

[[Page 64983]]

institution shall be deemed to have 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 paragraphs (c)(4) and

(c)(5) 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 or electronic mail, 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 that 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 64984]]

(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, and that 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

that 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 is not subject

to 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; Provided, however, written procedures

need not require periodic determinations with respect to any Asset

Backed Security that a fund's board of directors has determined, at the

time of Acquisition, will not have, or is unlikely to have, Ten Percent

Obligors that are deemed to be issuers of all or a portion of that

Asset Backed Security for purposes of paragraph (c)(4)(ii)(D) of this

section, and maintains a record of this determination.

(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 is not subject to 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

determinations 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)(ii)(D) of this section). The written record shall include:

(A) 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; and

(B) Any determination that an Asset Backed Security will not have,

or is unlikely to have, Ten Percent Obligors deemed to be issuers of

all or a portion of that Asset Backed Security for purposes of

paragraph (c)(4)(ii)(D) of this section.

(vi) Evaluations with Respect to Securities Subject to Demand

Features or Guarantees. For a period of not less

[[Page 64985]]

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 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

that 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 that 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) * * *

[[Page 64986]]

(7) * * *

(v) Acquisition of Demand Features or Guarantees, as these terms

are defined in Secs. 270.2a-7(a)(8) and 270.2a-7(a)(15) 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.

* * * * *

7. Section 270.17a-9 is amended by revising the cite to ``paragraph

(a)(9)'' in the introductory paragraph to read ``paragraph (a)(10)''.

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)(15) respectively) and give a brief

description of the nature of the Demand Feature or Guarantee (e.g.,

unconditional demand feature, conditional demand feature, 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)(3) of this section:

(i) In any sales literature that contains performance data for an

investment company, include the disclosure required by paragraph (a)(6)

of Sec. 230.482 of this chapter.

(ii) In any sales literature for a money market fund:

(A) Accompany any quotation of yield or similar quotation

purporting to demonstrate the income earned or distributions made by

the money market fund with a quotation of current yield specified by

paragraph (d)(1)(i) of Sec. 230.482 of this chapter;

(B) Accompany 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 with a quotation

of current yield specified in paragraph (d)(1)(i) of Sec. 230.482 of

this chapter; and

(C) Accompany any quotation of the money market fund's total return

with a quotation of the money market fund's current yield specified in

paragraph (d)(1)(i) of Sec. 230.482 of this chapter. Place the

quotations of total return and current yield next to each other, in the

same size print, and if there is a material difference between the

quoted total return and the quoted current yield, include a statement

that the yield quotation more closely reflects the current earnings of

the money market fund than the total return quotation.

(iii) In any sales literature for an investment company other than

a money market fund that contains performance data:

(A) Include the total return information required by paragraph

(e)(3) of Sec. 230.482 of this chapter;

(B) Accompany any quotation of yield or similar quotation

purporting

This text is long and has been trimmed here. Open the source document for the complete record.