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Final Rule: Money Market Fund Reform - SEC.gov

SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 270 and 274 [Release No. IC-29132; File Nos. S7-11-09, S7-20-09] RIN 3235-AK33 Money Market fund Reform AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission ( Commission or SEC ) is adopting amendments to certain rules that govern Money Market funds under the Investment Company Act of 1940. The amendments will tighten the risk-limiting conditions of rule 2a-7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the maximum weighted average maturity of portfolio holdings, and improving the quality of portfolio securities; require Money Market funds to report their portfolio holdings monthly to the Commission; and permit a Money Market fund that has broken the buck ( , re-priced its securities below $ per share), or is at imminent risk of breaking the buck, to suspend redemptions to allow for the orderly liquidation of fund assets.

2 551-6792, Division of Investment Management, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-8549. SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to rules 2a-7 [17 CFR 270.2a-7], 17a-9 [17 CFR …

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Transcription of Final Rule: Money Market Fund Reform - SEC.gov

1 SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 270 and 274 [Release No. IC-29132; File Nos. S7-11-09, S7-20-09] RIN 3235-AK33 Money Market fund Reform AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission ( Commission or SEC ) is adopting amendments to certain rules that govern Money Market funds under the Investment Company Act of 1940. The amendments will tighten the risk-limiting conditions of rule 2a-7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the maximum weighted average maturity of portfolio holdings, and improving the quality of portfolio securities; require Money Market funds to report their portfolio holdings monthly to the Commission; and permit a Money Market fund that has broken the buck ( , re-priced its securities below $ per share), or is at imminent risk of breaking the buck, to suspend redemptions to allow for the orderly liquidation of fund assets.

2 The amendments are designed to make Money Market funds more resilient to certain short-term Market risks, and to provide greater protections for investors in a Money Market fund that is unable to maintain a stable net asset value per share. DATES: The rules, rule amendments, and form are effective May 5, 2010. The expiration date for 17 CFR is extended from September 17, 2010 to December 1, 2010. Compliance dates are discussed in Section III of the Supplementary Information. FOR FURTHER INFORMATION CONTACT: Office of Regulatory Policy, at (202) 2 551-6792, Division of Investment Management, Securities and Exchange Commission, 100 F Street, NE, washington , DC 20549-8549.

3 SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to rules 2a-7 [17 CFR ], 17a-9 [17 CFR ] and 30b1-6T [17 CFR ], new rules 22e-3 [17 CFR ] and 30b1-7 [17 CFR ], and new Form N-MFP [17 CFR ] under the Investment Company Act of 1940 ( Investment Company Act or Act ).1 TABLE OF CONTENTS I. 3 II. DISCUSSION .. 10 A. Portfolio Quality ..11 1. Second Tier Securities .. 11 2. Eligible Securities .. 22 3. Asset Backed 35 B. Portfolio Maturity ..37 1. Weighted Average Maturity .. 38 2. Weighted Average 42 3. Maturity Limit for Government Securities.

4 49 C. Portfolio Liquidity ..49 1. General Liquidity Requirement .. 51 2. Limitation on Acquisition of Illiquid Securities .. 54 3. Minimum Daily and Weekly Liquidity Requirements .. 54 4. Stress 67 D. Repurchase E. Disclosure of Portfolio 1. Public Website Posting .. 72 2. Reporting to the Commission .. 77 3. Phase-out of Weekly Reporting by Certain Funds .. 89 F. Processing of Transactions ..90 G. Exemption for Affiliate 1. Expanded Exemptive Relief .. 94 2. New Reporting Requirement .. 96 H. fund 15 80a. Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all references to rules under the Investment Company Act, including rule 2a-7, are to Title 17, Part 270 of the Code of Federal Regulations [17 CFR 270].

5 References to current rules relate to rules in their current form [17 CFR Part 270 (2009 version)], and references to amended rules relate to rules as they will be amended by this Release. 1 3 III. COMPLIANCE 101 IV. PAPERWORK REDUCTION ACT ANALYSIS .. 103 V. COST BENEFIT ANALYSIS .. 120 VI. COMPETITION, EFFICIENCY, AND CAPITAL FORMATION .. 160 VII. REGULATORY FLEXIBILITY ACT CERTIFICATION .. 173 VIII. STATUTORY AUTHORITY .. 174 TEXT OF RULES, RULE AMENDMENTS, AND FORM .. 174 I. BACKGROUND On June 30, 2009, the Commission issued a release proposing new rules and rule amendments governing the operation of Money Market Money Market funds are open-end management investment companies that are registered under the Investment Company Act.

6 They invest in high-quality, short-term debt instruments such as commercial paper, Treasury bills and repurchase agreements. Money Market funds pay dividends that reflect prevailing short-term interest rates and, unlike other investment companies, maintain a stable net asset value per share (or NAV ), typically $ per share. Money Market funds have over $ trillion dollars in assets under management, and comprise over 30 percent of the assets of registered investment All Money Market funds are subject to rule 2a-7 under the Investment Company Act. Rule 2a-7, among other things, facilitates Money Market funds ability to maintain a stable net asset value per share by permitting them to use the amortized cost method of valuation and the penny-rounding method of But for rule 2a-7, the Investment Company Act and our 2 Money Market fund Reform , Investment Company Act Release No.

7 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)] ( Proposing Release ). All references to proposed rules relate to rules as proposed in the Proposing Release. 3 See Investment Company Institute, Trends in Mutual fund Investing, Nov. 2009, available at 4 Current rule 2a-7(a)(2) defines the amortized cost method as the method of calculating an investment company s net asset value per share (or NAV ) whereby portfolio securities are valued at the fund s acquisition cost as adjusted for amortization of premium or accretion of 4 rules would require a Money Market fund to calculate its current net asset value per share by valuing portfolio securities at their current value ( mark-to- Market ).

8 5 Under the amortized cost method, portfolio securities generally are valued at cost plus any amortization of premium or accumulation of discount. The basic premise underlying Money Market funds use of the amortized cost method of valuation is that high-quality, short-term debt securities held until maturity will eventually return to their amortized cost value, regardless of any current disparity between the amortized cost value and Market value, and would not ordinarily be expected to fluctuate significantly in Therefore, the rule permits Money Market funds to value portfolio securities at their amortized cost so long as the deviation between the portfolio s amortized cost and current Market value remains minimal and results in the computation of a share price that represents fairly the current net asset value per share of the To reduce the likelihood of a material deviation occurring between the amortized cost value of a portfolio and its Market -based value, the rule contains several conditions (which we discount rather than at their value based on current Market factors.)

9 The penny-rounding method of pricing means the method of computing a fund 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. See current rule 2a-7(a)(18). 5 See section 2(a)(41) of the Act (defining value of fund assets); rule 2a-4 (defining current net asset value for use in computing the current price of a redeemable security); and rule 22c-1 (generally requiring open-end funds to sell and redeem their shares at a price based on the funds current net asset value as next computed after receipt of a redemption, purchase, or sale order). 6 See Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies ( Money Market Funds), Investment Company Act Release No.

10 13380 (July 11, 1983) [48 FR 32555 (July 18, 1983)] ( 1983 Adopting Release ) at and accompanying text; Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies ( Money Market Funds), Investment Company Act Release No. 12206 (Feb. 1, 1982) [47 FR 5428 (Feb. 5, 1982)] at and accompanying text. 7 See amended rule 2a-7(c)(1), (c)(8)(ii)(B) - (C) (requiring, among other things, that the fund s board of directors promptly consider what action, if any, should be taken if the deviation between the Money Market fund s current Market value and the fund s amortized cost price per share exceeds of 1%). 5 refer to as risk-limiting conditions ) that limit the fund s exposure to certain risks, such as credit, currency, and interest rate In addition, the rule includes certain procedural requirements overseen by the fund s board of directors.