The staff of the Securities and Exchange Commission (Commission) has issued a no-action letter to the Investment Company Institute stating that it would not recommend that the Commission institute an enforcement action under section 2(a)(41) of the Investment Company Act of 1940 (1940 Act) if a money market fund board did not designate nationally recognized statistical rating organizations (NRSROs) or make related disclosures in its statement of additional information (SAI) before the Commission has completed its review of rule 2a-7 required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Rule 2a-7 under the 1940 Act was amended in early 2010 to, among other changes, require that money market fund boards: 1) designate at least four NRSROs, the ratings of which the fund will use to determine portfolio security eligibility under rule 2a-7, and 2) disclose those designated NRSROs in its SAI prior to December 31, 2010. Section 939A of the recently enacted Dodd-Frank Act, however, requires the Commission to review its regulations that reference credit ratings and modify those regulations to remove any reference to, or requirement of reliance on, credit ratings and substitute a standard of creditworthiness that the Commission deems appropriate. The no-action letter explains that the Commission required boards to designate NRSROs “in order to shift to the board the responsibility for deciding which NRSROs the board would use in determining whether a security is an eligible security for purposes of rule 2a-7,” but recognizes that “[i]n light of the requirements in section 939A of the [Dodd-Frank] Act, . . . such a shift would not be a useful exercise pending the Commission review.”

The no-action letter further provides that money market funds relying on the letter must continue to comply with the obligations for determining and monitoring eligible securities set forth in rule 2a-7 as in effect before May 5, 2010 (other than the limitation on holding unrated asset backed securities rescinded by the 2010 rulemaking).

For a full copy of the no-action letter, see 2010/ici-nrsro081910.htm.