The Securities & Exchange Commission posted a document late yesterday entitled, "Staff Responses to Questions About Money Market Fund Reform," which answers a number of questions related to liquidity, stress testing, NRSROs, and Form N-MFP, among other things. The document says, "The staff of the Division of Investment Management has prepared the following responses to questions related to rule 2a-7, the 'money market fund rule' under the Investment Company Act of 1940, and other rules applicable to money market funds in light of the amendments recently approved by the Securities and Exchange Commission and expects to update this document from time to time to include responses to additional questions."
The intro adds, "These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved this information. The adopting release for the money market fund reforms (dated February 23, 2010, the 'Adopting Release') can be found at: http://www.sec.gov/rules/final/2010/ic-29132.pdf. Responses to questions on rule 30b1-7 and Form N-MFP will be included in a separate document that will be accessible through a hyperlink when available."
The first question asks, "Is a money market fund required to dispose of securities owned or terminate repurchase agreements entered into as of the time of adoption of the Amendments (February 23, 2010) in order to meet the new maximum WAM and WAL limits by June 30, 2010?" The document answers, "A money market fund must be in compliance with the WAM limit of 60 days and the WAL limit of 120 days by June 30, 2010. Funds may use alternative portfolio strategies in order to comply with these requirements, including the acquisition of securities with shorter maturities to offset securities with longer maturities held at the time the rule was adopted or, if necessary, disposal of those portfolio securities."
It also says about the new Liquidity provisions, "Section II.C.3 of the Adopting Release explains that Daily Liquid Assets and Weekly Liquid Assets include 'only cash and securities that can readily be converted to cash.' The maturity shortening provisions of paragraphs (d)(1) through (d)(8) are not always consistent with this requirement and therefore should not be relied upon in interpreting those definitions. The term 'mature' in these definitions should be understood to mean only the date on which the principal amount must unconditionally be paid, or in the case of a security called for redemption, the date on which the redemption payment must be made."
Regarding "Stress Testing," the SEC says, "We would not object if an investment adviser of a U.S. Treasury money market fund refrained from stress testing for downgrades or defaults if the board makes a determination that these types of stress events are not relevant for the particular fund." They are also asked, "[M]ust a money market fund stress test its portfolio for the risk of breaking the buck on the upside?" The SEC says, "No."
The Q&A adds, "[T]he rule requires the board of directors to receive a report on all periodic testing performed. The Division believes that a single report presenting data from each of the monthly stress tests conducted between meetings would satisfy the rule. We encourage reports to present results (including results previously reported to the directors) in a manner that would facilitate directors' observation of trends in stress testing results."
It also says, "The Adopting Release states that a money market fund should incorporate 'know your customer' evaluations in its stress testing procedures. How could money market funds incorporate these evaluations in their stress tests? It answers, "A money market fund should incorporate an evaluation of the liquidity needs of its shareholder base into its stress testing procedures. For example, testing of the fund's ability to maintain a stable net asset value per share based upon specified hypothetical events should account for the fund's anticipated redemption activity for the relevant period. In addition, the investment adviser's assessment of the fund's ability to withstand the events (and concurrent occurrences of those events) that are reasonably likely to occur within the following year should be based, in part, on the redemption activity that the investment adviser believes is reasonably likely to occur in the following year."
The Q&A says funds do not need to designate NRSROs (ratings agencies) if it only invests in government securities, and says, "The board of directors of a money market fund does not have to designate four NRSROs for every type of security held by the fund (or one NRSRO for every type of security held by the fund, given that a fund may hold Unrated Securities). As long as a Designated NRSRO rates at least one type or class of securities in which the fund invests, the Designated NRSRO will count toward the required four."
Finally, the document says, "Form N-MFP filings must first be made no later than December 7, 2010 for the period ending November 30, 2010, and will first be made publicly available on the SEC website on January 31, 2011. How should funds comply with the requirement to provide the required link during the initial start-up period? A: Funds should provide the link beginning with the monthly website posting for the month ending November 30, 2010, which will be available on the SEC website on January 31, 2011."
