Technical Questions and Answers from ICI’s Webinar on the Department of the Treasury’s Temporary Guarantee Program for Money Market Funds

Updated November 6, 2008

The following questions were submitted or covered during the Institute's October 1, 2008, Webinar on the Department of the Treasury's Temporary Guarantee Program for Money Market Funds (“Program”). We continue to have regular discussions with representatives of the Treasury Department, SEC, and FINRA. As a result, these answers may be modified to reflect those discussions. We also anticipate adding additional questions and answers in the coming days, so please continue to regularly check the Institute's website.

Please note that all communications from the Institute, including our answers to the following questions, do not constitute, and should not be considered a substitute for, legal or accounting advice.

Eligibility Questions

Can a publicly offered Rule 2a-7 money market feeder fund that invests its assets in a fund that is not publicly offered but otherwise complies with Rule 2a-7, qualify for the Program?

Yes.

Can a publicly offered Rule 2a-7 money market fund that invests its assets in another publicly offered Rule 2a-7 money market fund (“master fund”) qualify for the Program if the master fund chooses not to participate?

Yes.

What if a fund did not shadow price on September 19, 2008?

A fund should use its best efforts to compute its market-based NAV as of that date.

Can a fund that is an investment vehicle for an insurance company separate account (“insurance dedicated fund”) qualify for the Program?

Yes, provided the insurance-dedicated fund meets all of the other original Program requirements.

Are there adverse tax consequences to insurance dedicated funds participating in the Program?

No. The Internal Revenue Service has announced that it will not assert that participation in the Program by an insurance-dedicated fund causes the segregated asset accounts to violate the diversification requirements of Section 817(h) of the Internal Revenue Code. The announcement applies both to funds whose beneficial interests are held exclusively by one or more segregated assets of one or more insurance companies and to funds with other permitted investors. The notice is available at www.irs.gov/pub/irs-drop/n-08-92.pdf.

Can a fund that has a policy of maintaining a stable NAV or share price that is greater than $1.00 and had such policy on September 19, 2008, qualify for the Program?

Yes, provided the fund meets all of the other original Program requirements. The enrollment deadline for these funds is 11:59 p.m. Eastern time on October 10, 2008. Revised agreements for these funds can be found at: www.treas.gov/offices/domestic-finance/key-initiatives/money-market-fund.shtml.

Program Agreement Requirements

Should a fund’s market-based NAV include any NAV Support Agreements it has in place?

Yes.

A fund needs to calculate its market-based NAV for various purposes under the Support Agreement. Does that mean that the fund should be shadow pricing every day?

There is no explicit requirement in the Support Agreement (“Agreement”) to shadow price daily. However, Section 2(c) requires that a fund notify the Treasury of a Guarantee Event (as defined in the Agreement) on the business day following such occurrence. In addition, Section 5(b) of the Agreement requires the fund to promptly notify the Treasury and the SEC if its market-based NAV falls below a certain threshold level and then on the business day following the notification provide a Portfolio Schedule. The determination of whether or not a fund should shadow price daily in order to meet those notification and reporting requirements is one that must be made in light of the specific facts and circumstances applicable to each individual fund.

What requirements does a fund have with respect to NAV Support Agreements?

While participating in the Program, a fund must:

• Not amend, terminate, or withdraw any NAV Support Agreement that has been relied on by the fund on or after September 19, 2007, without a replacement agreement approved by Treasury;
• Renew or extend any NAV Support Agreement that has been relied on by the fund on or after September 19, 2007, that is subject to renewal or extension at the option of the fund; and
• Use its best efforts to obtain NAV Support Agreements “as may be necessary or appropriate” to support the fund’s stable share price.

A fund’s adviser cannot amend, terminate, or withdraw any NAV Support Agreement that has been relied on by the fund on or after September 19, 2007, without approval by the fund’s board and unless replaced as approved by the Treasury. The adviser also must use its best efforts to cause NAV Support Agreements provided by other affiliates to remain in place.

Upon the occurrence of a Guarantee Event, a fund must promptly demand payment of all amounts due to the fund from any person who has agreed to make a capital contribution or other payment to the fund pursuant to any NAV Support Agreement that is then in effect.

How can a fund “cure” a Guarantee Event?

Under Section 1(i), a fund that experiences a Guarantee Event may “cure” if at any time after that date, but before the fund commences liquidation of the fund, the Market-Based NAV increases to or above $0.995 or, for a fund that maintains a NAV or share price greater than $1.00, increases to or above an amount equal to 99.5 percent multiplied by the fund’s stable share price (“Guarantee Threshold Value”). Under Section 2(c)(iii) of the Agreement, a fund’s board must initiate the actions necessary under state and federal law to begin the liquidation of the fund “promptly, but in no event later than the fifth Business Day following the occurrence of the Guarantee Event.” It appears therefore that a fund that is below the Guarantee Threshold Value that believes the fund’s NAV may increase above that level in a short period of time (for example, in good faith, believing the drop in NAV to be a result of short-term market disruptions) or seeks to obtain a NAV Support Agreement may take the full five days to commence liquidation. If during that period the Market-based NAV equals or exceeds the Guarantee Threshold Value, the fund will be deemed to have cured the Guarantee Event. The fund must send Treasury and the SEC a Guarantee Event Cure Notice (Exhibit A-1 to the Agreement) and a Portfolio Schedule on the business day following the date of the Guarantee Cure Event.

What are a fund’s obligations if a Guarantee Event occurs?

Under Section 7, if a fund is unable to cure a Guarantee Event, it must:

• Provide a Form of Guarantee Event Notice (Exhibit A to the Agreement) of the Guarantee Event to the Treasury on the next business day;
• Initiate liquidation of the fund within five business days of the Guarantee Event, unless Treasury agrees to a later date;
• Cease the declaration and payment of dividends;
• Cease issuing new shares;
• Suspend redemptions in accordance with SEC rules, orders, and no-action letters;
• Consent to the appointment of any receiver, liquidation trustee, or similar official designated by the Treasury or the SEC to administer and oversee the liquidation of the fund;
• Liquidate the fund within 29 days, unless Treasury consents to a later date; and
• Provide a Payment Request Notice (Exhibit H to the Agreement) to the Treasury requesting payment of the Guarantee Payment.

What are a fund’s recordkeeping requirements under the Agreement?

A fund must maintain or cause the adviser or other service provider to maintain books and records as necessary to record the disbursements under the Program.

The Treasury can request to review the fund’s books and records, and the fund and its adviser must consent to sharing of this information with Treasury.

Upon request, a fund also must provide to the Treasury and the SEC a written plan addressing how disbursements will be made to “beneficial owners.”

Is there a template that can be used to submit a Portfolio Schedule as required under the Agreement?

Yes. A template for money market funds to use when submitting a Portfolio schedule to the Treasury can be found at: www.treas.gov/offices/domestic-finance/key-initiatives/money-market-docs/Portfolio-Schedule- Reporting-Template.xls.

How long is the Program? How can it be extended?

The Program runs for an initial term of three months unless extended at the discretion of the Secretary of the Treasury. The extension may be for an additional nine months, or for any shorter period, as the Secretary may determine. In no event will the Program extend past September 18, 2009.

Board Considerations

Do fund boards have to approve a fund’s participation in the Program?

A fund’s board, including a majority of the independent directors, must determine that enrolling in the Program is in the best interests of the fund and its shareholders. The board will have to make this determination again if the fund participates in an extension of the Program.

Does the board have to meet in-person to approve a fund’s participation in the Program?

No. A board could, for example, convene by telephone, approve participation through written consent, or by any other process used in the normal course of business.

Does a board have to approve a fund’s determination NOT to participate in the Program?

No. In an effort to keep the fund's board fully informed, the adviser may wish to discuss whether to participate in the Program with the board before the October 8 deadline or, at the very least, may wish to report the fund’s decision to not participate to the board before the deadline.

What if a fund’s board and adviser disagree about whether the fund should enroll in the Program?

The determination of whether or not a fund should enroll in the Program is one that must be made in light of the specific facts and circumstances applicable to each individual fund. There may be compelling reasons on both sides. As discussed above, a board must approve a fund’s participation in the Program.

Who should pay for the Program, the fund or the adviser?

The determination of who bears the cost of the Program is up to each individual fund. It is clear that this is a legitimate fund expense, and as such, could be borne by the adviser. This fee should be discussed with the fund's board as part of its consideration of the fund’s participation in the Program.

Prospectus and Advertising Disclosure

If a fund elects to participate in the Program should it make a supplemental filing to its prospectus pursuant to Rule 497 ("sticker")?

Yes. The sticker should describe the material terms and limitations of the Program.

Should the sticker disclose the changes in expenses as a result of the premium paid to participate in the Program?

If the fund concludes that any premium paid by the fund to participate in the program is material, then the Fee Table should be amended. For purposes of determining whether the premium materially affects the information disclosed in the Fee Table, the fund should not annualize the premium payment because there is no assurance that the Program will be continued, or that the fund will elect to participate if the Program is continued.

If a fund is a participant in the Program at its next annual prospectus update, can the fund file a Rule 485(b) amendment (assuming no other material revisions)?

Yes. The fund can use Rule 485(b) to update its registration statement.

Must a money market mutual fund that participates in the Program continue to disclose in its prospectus that “An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund” ("SEC Required Legend”)?

Yes. Such a fund should, however, as described immediately above, disclose information about the Program either by means of a sticker or a post-effective amendment which could be a Rule 485(b) amendment. In addition, a fund may include language immediately after the legend to the effect that “Notwithstanding the preceding statements, Fund shareholders will be guaranteed to receive $1.00 net asset value for amounts that they held as of September 19, 2008 subject to the terms of the U.S. Treasury’s Temporary Guarantee Program for Money Market Funds.”

Must advertisements under Rule 482 under the Securities Act of 1933 and supplemental sales literature under Rule 34b-1 under the Investment Company Act of 1940 (“sales material”) for money market mutual funds that participate in the Program include the SEC Required Legend?

Yes. In addition, this sales material would be considered fair and balanced under FINRA rules if either (1) no additional language followed the SEC Required Legend or (2) language is added immediately after the legend to the effect that “Notwithstanding the preceding statements, the Fund is participating in the U.S. Treasury’s Temporary Guarantee Program for Money Market Funds. The Program generally does not guarantee any new investments in the Fund made after September 19, 2008, and is scheduled to expire on December 18, 2008. For more information about the Program’s scope and limitations, please see the Fund’s most recent prospectus as supplemented on insert date.”

Also, if the sales material discusses the Program other than as provided above, under recently issued FINRA guidance www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117260.pdf, the sales material should provide in substance the following information:

• The U.S. Treasury Temporary Guarantee Program provides a guarantee to participating money market mutual fund shareholders based on the number of shares invested in the fund at the close of business on September 19, 2008.
• Any increase in the number of shares an investor holds after the close of business on September 19, 2008, will not be guaranteed.
• If a customer closes his/her account with a fund or broker-dealer, any future investment in the fund will not be guaranteed.
• If the number of shares an investor holds fluctuates over the period,1 the investor will be covered for either the number of shares held as of the close of business on September 19, 2008, or the current amount, whichever is less.
• The Program expires on December 18, 2008, unless extended by the United States Treasury.  

Designated Shareholders

How are “shareholders of record” as of September 19, 2008, defined in the Agreement for purposes of determining eligibility under the Program?

Under the Agreement, a “Designated Shareholder” of a fund is any shareholder of record of a fund on September 19, 2008 (after giving effect to the issuance and redemption of shares, the orders for which were deemed received by the fund prior to the determination of its final NAV for such date), or such shareholder’s estate or successor by will, intestacy, gift, court order, or court-approved settlement.

Is share eligibility based on settlement date or trade date?

If trades were received in good order by the intermediary prior to a fund’s close on September 19 and the transactions were received by the fund with a trade date of September 19, they are eligible to be included in the account value calculations as of September 19, even if they settled on a later date.

How is eligibility applied to broker-dealer money market sweep transactions with a trade date of September 19, 2008?

If broker-dealer money market sweep transactions were received by a fund with a trade date of September 19, they would be included in the shareholder’s account balance as of September 19. Sweep transactions with a trade date after September 19 would be excluded.

How is eligibility applied to retirement plan record keeper money market fund transactions with a trade date of September 19, 2008?

If participant instructions were received in good order by the record keeper before the fund’s close on September 19 and received by the fund with a trade date of September 19, the transactions are eligible to be included in the account value calculations as of September 19.

How should “as of” transactions be handled with a trade date of September 19, 2008, or before?

If an “as of” transaction (or correction) relates to a trade that was received by the fund as of September 19 or before, it should be included in the account value calculation for coverage purposes.

Does the Program look through to underlying shareholders in omnibus accounts that are “Designated Shareholders” of a fund in applying coverage limits?

Yes. Coverage under the Program applies to beneficial owner(s) account values in omnibus accounts of broker-dealers and other financial intermediaries who are Designated Shareholders of the fund. Specifically, Section 7(k) of the Agreement requires that a fund and its investment adviser use their “best efforts to assure that any Designated Shareholder that is not a beneficial owner of the Designated Shares promptly disburses the Designated Shareholder Payment to the beneficial owner or owners of the Designated Shares.”

Dividend Accruals

Is daily dividend accrual up to September 19 (accrued but not paid) included in a Designated Shareholder’s account value? Is daily dividend accrual after September 19 included?

The Agreement does not specifically discuss accrued dividends; however, the definition of Guarantee Payment allows retention of cash sufficient to meet fund liabilities. Since declared and unpaid dividends would be considered a fund liability, a fund would include them as remaining liabilities on the Certificate of Liquidation and Disbursement and retain sufficient assets to pay those liabilities. Consequently, there appears to be no need to include accrued dividends in account values as of September 19 or on the date of a Guarantee Event to determine the Designated Shareholder Amount.

Exchanges and Fully Liquidated Accounts

If a Designated Shareholder exchanges shares of one class of a participating money market fund for another class in the same fund, will the Program continue to cover the Designated Shareholder’s investment (assuming each class has its own separate CUSIP number)?

Yes. The Program coverage applies on a fund portfolio level.

If a Designated Shareholder exchanges shares from one participating money market fund (or fund portfolio) to another participating money market fund (or fund portfolio), will the Program coverage carry over to the new fund?

No.

If a Designated Shareholder (or beneficial owner) requests a full liquidation of its fund assets and the account has a zero balance after September 19, 2008, does coverage continue if the Designated Shareholder or the beneficial owner purchases shares for the same account for the same fund during the coverage period?

Yes. The Treasury has clarified in discussions that a shareholder’s account whose balance may fluctuate to zero during the coverage period will continue to be covered in accordance with the terms of the Agreement (the lesser of the balance in the account on September 19 or on the date of the Guarantee Event).

Re-Registrations and Transfers

Will account re-registrations and transfers that occur after September 19, 2008 still be covered under the Program?

No. The Treasury has recently provided the following guidance:

Assume an investor owns shares in a participating fund at the close of business on September 19, 2008 in one ownership structure (e.g. directly, through a broker or other intermediary, or through another vehicle like a 401(k) or IRA). Can the investor transfer his shares in the same specific fund and hold them through a different ownership structure (i.e. to a new direct ownership structure, a new broker or other intermediary, or a new vehicle like a 401(k) or IRA) and still be covered?

No. Transferring shares from one ownership structure to another would be deemed to be a new investment made after September 19, 2008 and would not be eligible for coverage. See http://www.treas.gov/press/releases/hp1163.htm.

However, re-registrations and transfers that involve a shareholder’s “estate or successor by will, intestacy, gift, court order, or court-approved settlement” will be eligible for coverage.

How will re-registration and transfer information be captured if there is a Guarantee Event during the Program coverage period?

Upon the occurrence of a Guarantee Event, a fund will need to consult with Designated Shareholders (intermediaries of record) that are not beneficial owners in order to determine which re-registrations and transfers are eligible for Program coverage.

Expenses

If a fund pays the premium to participate in the Program, should the payment be expensed or capitalized?

Paragraph 3.12 of the AICPA Audit and Accounting Guide for Investment Companies (May 1, 2008) suggests that the premium paid to participate in the Program should be treated as a fund expense.

If a fund pays the premium to participate in the Program, how should it be reflected in the fund’s daily expense accrual?

The premium paid should be reflected on the fund’s books as a prepaid asset and amortized to expense over the coverage period. The amortization period could begin as soon as the fund determines that it will participate in the Program and end on December 18, 2008.

If a fund pays the premium to participate in the Program, how should it be reflected in the fund’s financial statements?

Per 6-07 of Regulation S-X, any individual expense item that exceeds 5 percent of total expenses must be displayed separately in the Statement of Operations. The fund should consider whether participation requires separate note disclosure.

If a fund experiences a Guarantee Event and is in the process of liquidating, it will continue to receive income and incur expenses until the fund is completely wound up. How are those payments and expenses treated?

Upon the determination to liquidate, the fund would cease paying dividends, and the income received would be treated as a fund asset. Expenses would continue to accrue and be paid out of fund assets. Any income, net of expenses, would be paid to shareholders as part of the liquidation process and would decrease the amount of the Treasury’s obligation under the Program.

Where can I find out more information about the Program?

• Treasury website:  http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-fund.shtml
• SEC website:  http://www.sec.gov/divisions/investment/mmtempguarantee.htm

Who should a fund contact if it has further questions about this Program?

Please email the Treasury Department at moneymarketfundsguaranteeprogram@do.treas.gov.

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