In a recent no-action letter addressed to the Investment Company Institute, the staff of the Securities and Exchange Commission provided no-action assurance to any money market fund that “shadow prices” certain portfolio securities by reference to their amortized cost value rather than available market quotations. The relief is available only to money market funds that comply with Rule 2a-7, and the relief expires on Jan. 12, 2009. Further, the relief applies to only a small universe of securities – primarily fixed rate commercial paper.
The SEC staff is permitting money market funds to use amortized cost values, rather than market prices, for the shadow pricing of certain portfolio securities because under current market conditions, the shadow pricing provisions are not working as intended. Shadow pricing is the periodic calculation of the deviation, if any, between a money market fund’s current net asset value per share, calculated using available market quotations, and the fund’s amortized cost price per share. In the no-action letter, the SEC staff explained that the market for short-term securities, including commercial paper, may not necessarily result in prices that reflect the fair value of securities that the issuers are reasonably likely to pay upon maturity. In addition, pricing vendors typically used by money market funds are, at times, unable to provide meaningful prices because the underlying data used to derive those prices have become less reliable indicators.
This relief is limited to debt securities that are “first tier securities” (as defined in Rule 2a-7) with a maturity of 60 days or less that the fund reasonably expects to hold to maturity. In addition, the relief is intended to apply only to fixed rate commercial paper maturing in 60 days, and not to any security subject to the maturity-shortening provisions of Rule 2a-7(d), such as variable rate demand notes and floating rate commercial paper. Moreover, if particular circumstances exist, such as if the creditworthiness of a security’s issuer were impaired, the SEC staff explained that using the amortized cost to value such security would no longer be appropriate.
Funds that want to avail themselves of the relief in the no-action letter may want to consider additional board actions and/or amendments to their Rule 2a-7 procedures that may be necessary to comply with Rule 2a-7.