Treasury clarifies that guaranty is limited to balances as of September 19, 2008 in registered money market mutual funds that comply with Rule 2a-7.

With developments occurring moment to moment, we are sending this Update to let you know the details of the Treasury Department’s extension of a federal government guaranty to certain money market mutual funds. Details of how this guaranty will operate have not been released. The actions to restore liquidity to the commercial paper market is only one facet of the many monumental actions being taken.

On September 19, 2008, the U.S. Treasury Department and the Board of Governors of the Federal Reserve System took the following actions intended to restore investor confidence in money market mutual funds and restore liquidity to the commercial paper market: 

  • The Treasury announced that it would insure the holdings “of any publicly offered eligible money market mutual fund” that pays a fee to participate in the program. This guaranty program would last for one year. See http://www.ustreas.gov/press/releases/hp1147.htm for the full text of this announcement. 

The Treasury’s guaranty will be effected through the Exchange Stabilization Fund established by the Gold Reserve Act of 1934. According to the Treasury, this fund has a mandate to promote international financial stability. The fund is reported to have assets of approximately $50 billion. 

The Treasury’s initial release did not define which funds would constitute “publicly offered eligible money market mutual funds.” On September 21, 2008, the Treasury clarified the scope of this guaranty as follows:

  • All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program. 
  • Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS intend to issue guidance that will confirm that participation in the temporary guaranty program will not be treated as a federal guaranty that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds. 
  • The temporary guaranty program was designed to provide coverage to shareholders for amounts held by them in such funds as of the close of business on September 19, 2008.

See http://www.treasury.gov/press/releases/hp1151.htm for the Treasury’s most recent clarification. Exempt money market funds and other unregistered pools of money market instruments do not appear to be covered by the federal guaranty.