On January 27, 2010, the SEC adopted amendments to certain rules under the 1940 Act that govern money market funds. The amendments seek to: (1) increase the resilience of money market funds to short-term market risks, (2) reduce the likelihood of money market funds “breaking the buck,” and (3) improve the ability of the SEC to oversee money market funds. The rule amendments:

  • prohibit money market funds from buying “second tier securities” with a maturity in excess of 45 days (rather than 397 days),
  • restrict investments in “second tier securities” to 3% of assets (rather than 5%),
  • limit investments in “second tier securities” issued by a single issuer to ½ of 1% of a fund’s assets,
  • impose a 60-day weighted average maturity limit,
  • impose a new maturity test that would limit “weighted average life maturity” (the measurement of a money market fund’s portfolio maturity without regard to any interest reset dates) to 120 days,
  • redefine “illiquid security” and limit holdings in illiquid securities to 5% of assets (rather than 10%),
  • require money market funds to hold at all times highly liquid securities sufficient to meet reasonably foreseeable redemptions,
  • require taxable money market funds to hold at least 10% of assets in cash, U.S. Treasury securities and securities that convert to cash within one business day,
  • require all money market funds (including tax-exempt funds) to maintain weekly liquidity requirements of 30% of assets in cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less or securities that convert to cash within one week,
  • require money market fund managers to stress test periodically a fund’s portfolio, including testing of a fund’s ability to maintain a stable net asset value per share based on certain “shocks,”
  • limit money market funds to investing in repurchase agreements collateralized by cash or U.S. government securities in order to obtain special treatment under the diversification provisions of Rule 2a-7,
  • require money market funds to evaluate the creditworthiness of a counterparty to a repurchase agreement, whether or not the repurchase agreement is collateralized fully,
  • require money market funds to post their portfolio holdings as of each month end to their website and to maintain such information on the website for at least six months,
  • require money market funds to file a monthly portfolio holdings report, including “shadow” NAVs, with the SEC on new Form N-MFP (this information would be available to the public 60 days later),
  • require money market funds and their administrators to be able to process purchases and redemptions electronically at a price other than $1.00,
  • require money market funds to annually designate at least four nationally recognized statistical rating organizations (“NRSROs”) whose ratings the fund board considers reliable,
  • eliminate the requirement that money market funds invest only in those asset-backed securities that have been rated by an NRSRO,
  • expand Rule 17a-9 to allow an affiliate to purchase a portfolio security from a money market fund (1) if the security has defaulted (other than an immaterial default unrelated to the financial condition of the issuer) even though the security remained an eligible security or (2) for any reason if the security is purchased with cash at the greater of amortized cost value or market value and the affiliate promptly remits to the fund any profit it realizes from a later sale of the security,
  • require a money market fund whose securities have been purchased by an affiliate in reliance on Rule 17a-9 to provide the SEC via e-mail with prompt notice of the purchase and the reasons for the purchase, and
  • create new Rule 22c-3, which would permit money market funds to suspend redemptions if a fund is about to break the buck if the fund’s board, including a majority of independent directors, approves the liquidation of the fund in order to facilitate an orderly liquidation of the fund.

The amendments will be effective 60 days after their publication in the Federal Register, with mandatory compliance for some rules phased in throughout 2010.