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Home Money Market Fund Resource Center 2010: SEC Reforms Fact Sheets

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2010 Money Market Fund Reform

Summary of Money Market Fund Regulatory Requirements

This chart compares money market fund regulations following the Securities and Exchange Commission’s 2010 amendments to Rule 2a-7 (“Current Requirements”) to the rules prior to those amendments (“Old Requirements”).

Current Requirements Old Requirements

VALUATION
A fund may stabilize its share price by using the amortized cost method of valuation or the penny-rounding method of pricing, provided the board of directors believes that it fairly reflects the market-based net asset value per share. Same.

A fund that uses the amortized cost method must periodically compare its price per share calculated using the amortized cost method to the price per share based on market prices (or appropriate substitutes that reflect current market conditions, e.g., matrix pricing), known as its “shadow price.” 

If the per-share market value deviates from the stable price by more than 50 basis points (e.g., the shadow price falls below $0.9950 or rises above $1.0050), a fund’s board must promptly consider what action, if any, it should initiate (e.g., a decision to discontinue the use of the amortized cost method and price the fund’s portfolio below or above $1.00 per share (“breaking the dollar”)).

Even if the deviation is less than 50 basis points, a fund’s board must take appropriate action if it believes the deviation may result in material dilution or unfair results to new investors or existing shareholders.

 Same.

PORTFOLIO QUALITY
Restricts a fund’s investment in rated securities to those securities rated in the top two nationally recognized statistical rating organizations’ (“NRSROs”) rating categories (or unrated securities of comparable quality) and requires a fund to perform an independent credit analysis of every security purchased. Same.
Requires funds to annually designate in the registration statement at least four NRSROs whose ratings the fund would use to determine the eligibility of portfolio securities (SEC suspended this requirement pending their review of credit ratings in Rule 2a-7). No corresponding requirement.
Restricts a fund’s investment to securities that are U.S. dollar-denominated. Same.
Eliminates the requirement that a fund invest only in asset backed securities that have been rated by an NRSRO. Generally required that a fund only invest in asset backed securities that have been rated by an NRSRO.

• Securities Subject to Guarantees and Demand Features
Requires that third-party guarantors have received a rating from at least one NRSRO. Same.
Requires notice prior to the substitution of a new guarantee or demand features. Same.
Requires a determination that there is a minimal risk of any event that would terminate a conditional demand feature and that such events can be readily monitored. Same.
Limits securities underlying a conditional demand feature to those rated by the requisite NRSROs in their two highest long or short-term rating categories, as applicable, or unrated securities determined to be of comparable quality. Same.

• Second Tier Securities

Restricts a fund from investing more than 3 percent of its assets in second tier securities. 

Additional maturity and diversification restrictions regarding second tier securities are discussed below.

Restricted a fund from investing more than 5 percent of its assets in second tier securities.  Tax exempt funds were subject to 5 percent limit only with respect to second tier conduit securities.

 

PORTFOLIO MATURITY
Restricts a fund to investments in securities with a remaining maturity of 397 days or less (with exceptions for certain types of securities, including variable- and floating-rate securities that have a demand feature or have an interest rate reset of no more than 397 days). Same (but a fund utilizing the penny-rounding method was permitted to invest in government securities with remaining maturities of 762 days or less).
Requires a periodic determination that variable and floating rate securities not subject to a demand feature are reasonably expected to approximate their amortized cost whenever their interest rate is adjusted. Same.
Requires a fund to maintain a dollar-weighted average maturity of 60 days or less. Required a fund to maintain a dollar-weighted average maturity of 90 days or less.
Requires a fund to maintain a weighted average life maturity of 120 days or less without consideration of interest rate reset dates on variable- or floating-rate securities. No corresponding requirement.

• Second Tier Securities
Restricts a fund from investing in second tier securities that mature in more than 45 days. Restricted a fund from investing in second tier securities that matured in more than 397 days.

PORTFOLIO DIVERSIFICATION
Restricts a fund from investing more than 5 percent of its total assets in any one issuer (other than government securities).  Single state tax-exempt funds are subject to the 5 percent limit only with respect to 75 percent of total assets.  Other funds may invest up to 25 percent of their total assets in a single issuer for a period of not more than three business days. Same.
Fund must “look through” the issuer of a conduit security and treat the person ultimately responsible for payment as the issuer for purposes of diversification. Same.
Funds must determine if 10 percent or more of the qualifying assets underlying an asset backed security are obligations of a single issuer, and treat any such “10 percent obligor” as an issuer of a pro rata share of the asset backed security for purposes of diversification. Same.
Funds may invest in other money market funds without regard for the diversification limits, provided the other funds are reasonably believed to comply with such limits. Same.

• Repurchase Agreements and Refunded Securities
Permits a fund to “look through” the repurchase counterparty to the underlying collateral securities for diversification purposes to the extent the collateral consists of cash items or government securities. Permitted a fund to “look through” to collateral rated by an NRSRO in the highest rating category (or determined to be of comparable credit quality), as well as cash items and government securities.
Requires a fund to evaluate the creditworthiness of the repurchase counterparty if the repo is “looked through” for purposes of diversification. No corresponding requirement (although generally an element in the determination that the repo presents minimal credit risk).
Permits a fund to “look through” a pre-refunded security to the escrowed government securities deposited to defease the issuer’s obligations. Same.

• Guarantees and Demand Features
Restricts a fund from investing more than 10 percent of its total assets in demand features and guarantees.  (25 percent basket exception:  25 percent of total assets may exceed 10 percent limit if they are first tier guarantees/demand features/securities issued by “non-controlled” entities (can be used for exposure to one or more entities)). Same.
Permits a fund to ignore a guarantee or demand features if it is not relied upon for purposes of quality, maturity or liquidity. Same.

• Second Tier Securities
Restricts a fund from investing in second tier securities issued by any single issuer to ½ of 1 percent of its total assets. Restricted a fund from investing in second tier securities issued by any single issuer to no more than 1 percent (or $1 million, if greater) of its total assets.
Restricts a fund from investing more than 2 ½ percent of its total assets in second tier demand features and guarantees. Restricted a fund from investing more than 5 percent of its total assets in second tier demand features or guarantees.

PORTFOLIO LIQUIDITY

• General Liquidity Requirements
Requires a fund to hold securities sufficiently liquid to meet reasonably foreseeable redemptions. No corresponding requirement.
Funds must develop procedures to identify investors whose redemption requests may pose risks for funds. No corresponding requirement.

• Minimum Liquidity Requirements
Daily requirement:  For all taxable funds, at least 10 percent of assets must be in “daily liquid assets”—(i) cash; (ii) Treasury securities; or (iii) securities that mature or are subject to a demand feature that is exercisable and payable within one business day. No corresponding requirement.
Weekly requirement:  For all funds, at least 30 percent of assets must be in “weekly liquid assets”—(i) cash; (ii) Treasury securities; (iii) discount notes issued by federal agencies and instrumentalities with remaining maturities of 60 days or less; or (iv) securities that mature or are subject to a demand feature that is exercisable and payable within five business days. No corresponding requirement.

• Illiquid Securities
Restricts a fund from investing more than 5 percent of its assets in “illiquid” securities, which is defined as any security that cannot be sold or disposed of within seven days at approximately the market value ascribed to it by the fund. No corresponding requirement in Rule 2a-7; however, SEC policy limited a money market fund’s investment in illiquid securities to 10 percent or less of total assets.

STRESS TESTING
Requires a fund to periodic stress test its ability to maintain a stable share price based on hypothetical events including changes in short-term interest rates, increased redemptions, downgrades and defaults, and changes in spreads from selected benchmarks. No corresponding requirement.

ENHANCED DISCLOSURE OF PORTFOLIO HOLDINGS AND SHADOW PRICES
Form N-MFP requires a fund to provide detailed monthly reporting to the SEC of shadow prices and other information, all of which will be made publicly available after a 60-day delay. No corresponding requirement.
Form N-SAR requires a fund to report, among other things, its shadow price semiannually (also made publicly available after 60 days). Same.
Requires a fund to post on its web site portfolio holdings on a monthly basis and maintain such posting for no less than six months after posting. No corresponding requirement.

CHANGES IN CREDIT QUALITY
Requires a fund to take certain actions (and its board to make certain determinations) upon the occurrence of downgrades, defaults, and other credit events with respect to portfolio securities. Same.

BREAKING THE DOLLAR
New Rule 22e-3 permits a fund’s board to suspend redemptions if a fund has broken or is about to break the dollar, and the board decides to liquidate the fund. No corresponding provision.
Requires a fund or its transfer agent to be able to process purchases and redemptions electronically at a price other than $1.00 per share. No corresponding requirement.
Expands the ability under Rule 17a-9 of affiliates to purchase securities from a fund in order to protect the fund from losses or provide liquidity.  Securities must be purchased for the greater of amortized cost or market value and any profit subsequently realized by the affiliate must be restored to the fund.  Requires reporting to the SEC with respect to these transactions. Permitted Rule 17a-9 affiliated purchases at the greater of amortized cost or market value only if the security no longer met the quality and maturity requirements for an eligible security under Rule 2a-7.