SEI Daily Income Trust Money Market Fund (the "Fund") and SEI Investments Company ("SEI") received no-action relief from the SEC to enter into arrangement addressing certain non- or underperforming portfolio assets consisting of interests in pools containing sub-prime mortgages.
The Fund is an SEC-registered money market fund that seeks to maintain a stable net asset value per share of $1.00 and uses the amortized cost method of valuation in valuing its portfolio securities as permitted by Rule 2a-7 under the 1940 Act. It holds notes (the "Notes") issued by several issuers identified in a schedule to the Capital Support Agreement (the "Agreement"). One of the issuers of the Notes, Cheyne Finance LLC, has defaulted under the terms of its Notes due to its failure to comply with certain financial requirements. The Fund seeks to sell the Notes issued by Cheyne Finance LLC.
The Fund and SEI received no-action relief to enter into the Agreement to prevent any losses realized upon the ultimate disposition of the Notes from causing the Fund's market based net asset value ("NAV") per share to fall below a minimum permissible NAV specified in the Agreement. SEI represented to the SEC that:
- the Agreement would be entered into at no cost to the Fund;
- generally upon the sale or other disposition of a Note, the Agreement would obligate SEI to make a cash contribution to the Fund (up to a maximum amount specified in the Agreement) sufficient to restore the Fund's NAV to the minimum permissible NAV; and
- SEI would not obtain any shares or other consideration from the Fund for its contribution.
SEI's obligations under the Agreement would be guaranteed in the form of a letter of credit ("Letter of Credit") for the benefit of the Fund issued at the expense of SEI by a bank with the highest short-term credit rating. The Fund would draw on the Letter of Credit in the event that SEI failed to make a cash contribution when due under the Agreement. The SEC staff stated that if the Agreement is deemed to be a security within the meaning of Section 2(a)(36) of the 1940 Act, it would be an Eligible Security as defined in Rule 2a-7 because the Letter of Credit is the equivalent of a Guarantee that is a First Tier Security, as those terms are defined in Rule 2a-7, with respect to the Agreement. The incoming letter noted that the Agreement would terminate following a change in the Letter of Credit issuer's short-term credit ratings as specified in the Agreement, unless SEI puts in place a substitute arrangement that is a First Tier Security within 15 calendar days after such occurrence, and the Letter of Credit issuer's ratings qualify as Second Tier Securities, as defined in Rule 2a-7, during the 15 calendar day period.
Please click http://www.sec.gov/divisions/investment/noaction/2007/seiditmmf110907.pdf for a copy of the no-action letter. A sister money market fund received substantially similar relief in Prime Obligation Fund (pub. avail. Nov. 8, 2007). See http://www.sec.gov/divisions/investment/noaction/2007/seiditpof110807.pdf for a copy of the no-action letter.