Recent Changes to Rule 2a-7 for Money Market Funds

Posted by Investment Management Group on Jul 21, 2011 8:17:57 PM

Last year, the Securities and Exchange Commission ( "SEC") implemented amendments to Rule 2a-7 compliance procedures for money market funds. The amendments are meant to provide better protection for money market fund investors.

Some of the areas with the most significant changes are:

  • portfolio maturity and liquidity
  • disclosure of portfolio holdings and shadow pricing
  • procedures surrounding a money market fund breaking a dollar or about to break a dollar.

The SEC now requires a money market fund's investments to maintain a dollar-weighted average maturity of 60 days or less and a weighted average life maturity of 120 days or less without consideration of interest rate resets or floating rate securities. Previous rules required a fund to maintain a dollar-weighted average maturity of 90 days or less. There are also new liquidity requirements including requiring a fund to hold securities sufficiently liquid to meet reasonably foreseeable redemptions, a 10% daily liquid asset requirement and a 30% weekly asset requirement. Daily liquid assets include cash, Treasury securities and securities that mature within one business day. Weekly liquid assets include cash, Treasury securities, discount notes issued by federal agencies with maturities of 60 days or less and securities that mature within five business days.

The amendments also require money market funds to post their monthly portfolio holdings on their websites and maintain the posting for at least six months. Funds must also provide detail of shadow prices and other information on a monthly filing of Form N-MFP.

I think the most important change enacted is the empowerment of a money market fund's Board and affiliates to take steps to prevent the fund from imminently breaking a buck. The Board is now permitted to suspend redemptions when a fund breaks a dollar or is about to break a dollar if the Board then liquidates the fund. An affiliate may also purchase an underlying security in a fund to protect the fund from loss or to provide liquidity. However, the securities must be purchased for the greater of amortized cost or market value.

Hopefully these SEC amendments will help maintain investor confidence and ensure their money market investments remain steady at $1.00 per share.

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