News Column

Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule

August 14, 2014



SUMMARY: The Securities and Exchange Commission ("SEC" or "Commission") is re-proposing certain amendments, initially proposed in March 2011, related to the removal of credit rating references in rule 2a-7, the principal rule that governs money market funds, and Form N-MFP, the form that money market funds use to report information to the Commission each month about their portfolio holdings, under the Investment Company Act of 1940 ("Investment Company Act" or "Act"). The re-proposed amendments would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). We are issuing this re-proposal in consideration of comments received on our March 2011 proposal. In addition, we are proposing to amend rule 2a-7's issuer diversification provisions to eliminate an exclusion from these provisions that is currently available for securities subject to a guarantee issued by a non-controlled person.

EFFECTIVE DATE: Comments should be received on or before October 14, 2014.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

* Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or

* Send an email to rule-comments@sec.gov. Please include File Number S7-07-11 on the subject line; or

* Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

* Send paper comments to Kevin M. O'Neill, Deputy Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-07-11. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments also are available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Erin C. Loomis, Senior Counsel; Amanda Hollander Wagner, Senior Counsel; Penelope W. Saltzman, Senior Special Counsel; Investment Company Rulemaking Office, at (202) 551-6792, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: We are proposing for public comment amendments to rule 2a-7 [17 CFR 270.2a-7] and Form N-MFP [17 CFR 274.201] under the Investment Company Act. /1/

FOOTNOTE 1 Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all references to rules under the Investment Company Act, including rule 2a-7, will be to Title 17, Part 270 of the Code of Federal Regulations [17 CFR 270]. END FOOTNOTE

Table of Contents

I. Background

A. Credit Rating References

B. Exclusion from the Issuer Diversification Requirement

II. Discussion

A. Rule 2a-7

1. Eligible Securities

2. Conditional Demand Features

3. Monitoring Minimal Credit Risks

4. Stress Testing

B. Form N-MFP

C. Exclusion from the Issuer Diversification Requirement

III. Compliance Period for the Proposed Rule and Form Amendments

IV. Paperwork Reduction Act Analysis

V. Economic Analysis

VI. Regulatory Flexibility Act Certification Statutory Authority Text of Rule and Form Amendments

I. Background

A. Credit Rating References

Section 939A of the Dodd-Frank Act requires each Federal agency, including the Commission, to "review any regulation issued by such agency that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any references to or requirements in such regulations regarding credit ratings." /2/ That section further provides that each such agency shall "modify any such regulations identified by the review . . . to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as each respective agency shall determine as appropriate for such regulations." /3/

FOOTNOTE 2 Public Law 111-203, section 939A(a)(1)-(2). Section 939A of the Dodd-Frank Act applies to all Federal agencies. END FOOTNOTE

FOOTNOTE 3 Public Law 111-203, section 939A(b). Section 939A of the Dodd Frank Act provides that agencies shall seek to establish, to the extent feasible, uniform standards of creditworthiness, taking into account the entities the agencies regulate and the purposes for which those entities would rely on such standards. END FOOTNOTE

As a step toward implementing these mandates, in March 2011 we proposed to replace references to credit ratings issued by nationally recognized statistical rating agencies ("NRSROs") in two rules and four forms under the Securities Act of 1933 ("Securities Act") and the Investment Company Act, including rule 2a-7 and Form N-MFP under the Investment Company Act. /4/ The 2011 proposal preceded other amendments to rule 2a-7 and Form N- MFP that we proposed last year as part of our broader efforts to reform money market funds. /5/ At that time, we noted that we were not rescinding our 2011 proposal to remove ratings references from certain rules and forms under the Investment Company Act, but that we intended to address the matter at another time. /6/

FOOTNOTE 4 See References to Credit Ratings in Certain Investment Company Act Rules and Forms, Investment Company Act Release No. 29592 (Mar. 3, 2011) [76 FR 12896 (Mar. 9, 2011)] ("2011 Proposing Release"). Specifically, we proposed to: (i) Remove references to credit ratings in rules 2a-7 and 5b-3 under the Investment Company Act and replace them with alternative standards of creditworthiness; (ii) adopt new rule 6a-5 under the Investment Company Act that would establish a creditworthiness standard to replace the credit rating reference in section 6(a)(5) removed by the Dodd-Frank Act; (iii) eliminate required disclosures of credit ratings in Form N-MFP under the Investment Company Act; and (iv) remove the requirement that credit ratings be used when portraying credit quality in shareholder reports from Forms N-1A, N-2, and N-3 under the Securities Act and the Investment Company Act. In December 2013, we adopted amendments removing references to credit ratings in rule 5b-3 and eliminating the required use of credit ratings in Forms N-1A, N-2, and N-3. See Removal of Certain References to Credit Ratings under the Investment Company Act, Investment Company Act Release No. 30847 (Dec. 27, 2013) [79 FR 1316 (Jan. 8, 2014)] ("2013 Ratings Removal Adopting Release"). We adopted new rule 6a-5 on November 19, 2012. See Purchase of Certain Debt Securities by Business and Industrial Development Companies Relying on an Investment Company Act Exemption, Investment Company Act Release No. 30268 (Nov. 19, 2012) [77 FR 70117 (Nov. 23, 2012)].

Rule 3a-7 under the Investment Company Act also contains a reference to ratings. In August 2011, in a concept release soliciting comment on the treatment of asset-backed issuers under the Investment Company Act, we sought comment on the role, if any, that credit ratings should continue to play in the context of rule 3a-7. See Treatment of Asset-Backed Issuers under the Investment Company Act, Investment Company Act Release No. 29779 (Aug. 31, 2011) [76 FR 55308 (Sept. 7, 2011)] at section III.A.1. END FOOTNOTE

FOOTNOTE 5 See Money Market Fund Reform; Amendments to Form PF, Investment Company Act Release No. 30551 (June 5, 2013) [78 FR 36834 (June 19, 2013)] ("2013 Money Market Fund Proposing Release"). The 2013 rule proposals were designed to address money market funds' susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds. END FOOTNOTE

FOOTNOTE 6 Id. at text accompanying n.130. END FOOTNOTE

We received several comments on the 2013 Money Market Fund Proposing Release suggesting that we act on credit ratings as part of our broader money market fund reforms. /7/ And today in another release, we have adopted certain amendments to rule 2a-7 and Form N-MFP that we proposed last year. /8/ We also received comments on the 2011 Proposing Release that raised a number of concerns with respect to the proposed amendments and suggested alternative rule text for some provisions. We have determined to re-propose amendments to replace references to credit ratings in rule 2a-7 and to modify provisions in Form N-MFP that reference credit ratings, in consideration of the mandate of Dodd-Frank Act section 939A, the comments on the 2011 Proposing Release, and the broader money market fund reforms we have adopted today. /9/

FOOTNOTE 7 See Comment Letter of Wells Fargo Funds Management, LLC (Sept. 16, 2013); Comment Letter of Hester Pierce & Robert Greene, Mercatus Center, George Mason University (Sept. 17, 2013); Comment Letter of The Dreyfus Corporation (Sept. 17, 2013). Comments on the 2013 Money Market Fund Proposing Release are available at: http://www.sec.gov/comments/s7-03-13/s70313.shtml. END FOOTNOTE

--This is a summary of a Federal Register article originally published on the page number listed below--

Re-proposed rule; proposed rule.

CFR Part: "17 CFR Parts 270 and 274"

RIN Number: "RIN 3235-AK61"

Citation: "79 FR 47986"

Document Number: "Release No. IC-31184; File No. S7-07-11"

Federal Register Page Number: "47986"

"Proposed Rules"


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