On Monday, Sept. 29, 2008, the Department of Treasury made available its Temporary Guarantee Program for Money Market Funds. This Program is open to money market funds that are registered under the Investment Company Act of 1940 and that offer securities registered under the Securities Act of 1933. To qualify for the Program, a fund must also have a policy of maintaining a stable net asset value or share price of $1.00, and its market-based net asset value per share (NAV) on Sept. 19, 2008, must have been at least $0.995.
Under the Program, the Treasury will guarantee that shareholders of a participating fund as of the close of business on Sept. 19, 2008 will receive $1.00 per “covered” share if the fund’s NAV falls below $0.995 (i.e., the fund “breaks the buck”), to the extent that there are sufficient assets in the Exchange Stabilization Fund. “Covered” shares are the number of shares that were held by the shareholder as of the close of business on Sept. 19, 2008, or on the date that the fund breaks the buck, whichever is less. The Treasury will initially provide this guarantee until Dec. 18, 2008. After this three month term, the Secretary of the Treasury may extend the Program for additional periods until Sept. 18, 2009.
Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS issued guidance that confirmed that participation in the Program will not be treated as a federal guarantee that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.
To participate, eligible funds must complete a Guarantee Agreement and other required documents and pay a participation fee, all of which must be received by the Treasury Department before midnight, Washington, DC time, on Wednesday, Oct. 8, 2008.
The participation fee for the initial three-month period payable by a fund is calculated by multiplying $1.00 by the number of the fund’s shares outstanding as of the close of business on Sept. 19, 2008, and then multiplying by the following: 0.00010 (or one basis point) for funds with a market-based NAV of at least $0.9975 as of the close of business on Sept. 19, 2008; or 0.00015 (1.5 basis points) for funds with a market-based NAV between $0.995 and $0.9975. The entire amount of the participation fee is due on the date of execution of the Guarantee Agreement.
The Guarantee Agreement contains a number of representations including, for example, that the participating fund’s board of directors, including a majority of the independent board members, must have determined that entering into the Guarantee Agreement and the fund’s fulfillment of its obligations thereunder are in the best interests of the fund and its shareholders. Therefore, funds that wish to participate in the Program should make arrangements to obtain board approval through a meeting or unanimous consent by next Wednesday’s deadline.
Importantly, if the Treasury Secretary continues the Program beyond Dec. 18, 2008, only funds that participated initially and whose NAV is at least $0.995 on the date the Program is extended are eligible to continue to participate. However, the funds must meet other conditions and pay Program extension fees.
The Guarantee Agreement, other required forms and instructions are contained on the Treasury’s website at: http://www.treas.gov/offices/domestic-finance/key-initiatives/ money-market-fund.shtml.
In addition, the Investment Company Institute (ICI) and Independent Directors Council are conducting a free webinar open to the public regarding the Treasury’s Guarantee Program on Wednesday, Oct. 1, beginning at 2 p.m. EDT. Registration questions can be directed to the ICI’s Conference Division at (202) 326-5968.