August 10, 2010 SEC No-Action Letter
On August 10, 2010, the staff of the Securities and Exchange Commission’s (SEC) Division of Investment Management (Staff) issued a no-action letter, permitting money market funds to treat a short-term floating rate security that is subject to a demand feature (conditional or unconditional) as having a maturity equal to the period remaining until the principal can be recovered through demand for purposes of calculating the fund’s weighted average portfolio maturity under Rule 2a-7(c)(2)(iii) under the Investment Company Act of 1940 (1940 Act).
SEC Staff Q &A on Rule 30b1-7 under the 1940 Act and Form N-MFP
The Staff also recently posted on the SEC’s website questions and answers (Q&A) regarding Rule 30b1-7 under the 1940 Act and Form N-MFP. In the Q&A, among other things, the Staff discussed:
- Scope of Rule 30b1-7. Pursuant to Rule 30b1-7, all funds subject to Rule 2a-7 under the 1940 Act are required to file Form N-MFP with the SEC, even if they do not use the Amortized Cost Method or Penny Rounding Method.
- Shadow Prices (Items 18, 25, 45 and 46). Items 18 and 25 of Form N-MFP require each money market fund to disclose the market-based net asset value (shadow price) of the series and each class, including the date on which it was calculated. Items 45 and 46 require disclosure of the market price of each security. The Q&A clarifies that the market price of each security should be as of the last business day of the month, rather than the date the shadow price was calculated. The Q&A also clarifies that, if a money market fund’s dividend and accounting policies assure that there will be no deviation between the marketbased net asset values of the classes offered by the fund, the fund may use the same market-based net asset value for each class without a separate calculation. This could be the case, for example, where a fund has a policy of paying daily dividends equal to the full amount of accrued income of each class.
- Master-Feeder Funds. A feeder fund that is a money market fund should disclose the securities it holds (i.e., the investment in the master fund) rather than the holdings of the master fund. The feeder fund should calculate its weighted average maturity and weighted average life in accordance with Rule 2a-7(d)(8) under the 1940 Act. The Q&A also discussed how feeder funds should respond to certain specific items of Form N-MFP.
- Capital Support Agreements. The Q&A clarifies that the value of a capital support agreement that does not relate to a particular security should not be reflected in the value of any particular security. The capital support agreement should be treated as a separate security for purposes of Form N-MFP.
- Funds Only Registered Under 1940 Act. The Q&A clarified that a fund that is only registered under the 1940 Act will not be deemed to violate the prohibition on general solicitation and advertising in Rule 502(c) of Regulation D under the Securities Act of 1933 (Securities Act), so long as it limits the information on Form N-MFP to the required information and does not otherwise use the Form NMFP filing to offer its securities publicly or to condition the market for the offering of its securities. A fund following this guidance should be deemed to comply with the exemption contained in Section 4(2) of the Securities Act if it otherwise complies with Rule 506 of Regulation D.
- 7-Day Gross Yield (Item 17). A tax-exempt fund that holds taxable paper should not adjust the gross yield to reflect federal income taxes that would be imposed on the taxable paper. Similarly, a state tax-exempt fund that holds paper from out of state should not adjust the gross yield to reflect state-level taxes that would be imposed on the out-of-state paper.
- Investment Categories (Item 31). Item 31 requires a fund to indicate the specific category most closely identified with each portfolio security. The Q&A clarifies that a fund must use the categories that are specified in Form N-MFP.
- Repurchase Agreements (Item 32). A fund should still respond to Items 32a through 32f even if it is not treating the acquisition of the repurchase agreement as the acquisition of the underlying securities for purposes of diversification.
- Demand Features and Guarantees (Items 37 and 38). If a fund is not relying on a demand feature or guarantee to determine the quality, maturity or liquidity of a security, information regarding the demand feature or guarantee does not need to be provided in response to these items.
- Percentage of Net Assets Invested in Security (Item 42). The percentage of a fund’s net assets invested in the security should be based on amortized cost if the fund is using the Amortized Cost Method of valuation.
August 19, 2010 No-Action Letter
On August 19, 2010, the Staff issued a no-action letter to the Investment Company Institute (ICI) stating that it would not recommend that the SEC institute an enforcement action under Section 2(a)(41) of the 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 SEC completed its review of Rule 2a-7 as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Because that letter did not discuss or reference Items 34, 37, 38 and 39 of Form N-MFP, which require money market funds to report information regarding their designated NRSROs and the credit ratings given by those NRSROs, it is currently unclear whether money market funds are similarly relieved of their obligation to designate NRSROs for purposes of Form N-MFP filings.
Copies of the no-action letters can be found at: http://www.sec.gov/divisions/investment/noaction/2010/ici081010.htm and http://www.sec.gov/divisions/investment/noaction/2010/ici-nrsro081910.htm, respectively.