or offshore or other enhanced cash funds unregulated by rule 2a-7 that
are able to offer a higher yield.\519\ Investors that choose to move to
unregulated products may have fewer protections than they had in money
market funds regulated under rule 2a-7. When markets come under stress,
investors may be more likely to withdraw their money from these
offshore or private funds due to their perceived higher risk\520\ and
substantial redemptions from those funds and accompanying sales of
their portfolio securities could increase systemic risk to short-term
credit markets, which would impact money market funds. In addition, the
stricter portfolio quality, maturity, and liquidity requirements may
result in some money market funds having fewer issuers from which to
select securities if some issuers only offer second tier securities,
less liquid securities, or a larger percentage of longer term
securities.
---------------------------------------------------------------------------

    \519\ Some commenters suggested this possibility. See, e.g.,
Goldman Sachs Comment Letter; State Street Comment Letter (making
this comment with respect to reducing the maximum permissible WAM).
    \520\ During the market events of 2007-2008, investors redeemed
substantial amounts of assets from certain bond funds and offshore
money market funds. See ICI Report, supra note 14, at 106-07.
---------------------------------------------------------------------------

    Issuers. Our new portfolio quality, maturity, and liquidity
restrictions also may impact issuers. Issuers may experience increased
financing costs to the extent that they are unable to find alternative
purchasers at previous market rates of second tier securities, less
liquid securities, longer term securities, or adjustable-rate
securities that money market funds determine to no longer acquire
because of the new restrictions. Several commenters stated that
elimination of money market funds' ability to acquire second tier
securities would increase issuers' borrowing costs and thus could
increase the cost of capital formation.\521\ No commenters provided
estimates of such costs.
---------------------------------------------------------------------------

    \521\ See, e.g., Am. Elec. P. Comment Letter; Chamber/Tier 2
Issuers Comment Letter. But see ICI Comment Letter (stating their
belief that elimination would have a manageable impact on second
tier security issuers).
---------------------------------------------------------------------------

    As noted earlier in this section, we do not believe that money
market funds currently hold a significant amount of second tier
securities or securities that are illiquid at acquisition in excess of
the newly adopted limitations for these securities. Thus, we expect
that the amendments' impact on issuers of these securities will be
minimal. We also know that few money market funds maintain a WAM in
excess of 60 days, and we therefore believe that our new WAM
restriction will not have a significant impact on issuers of longer
term securities.\522\ To the extent that the new WAM limitation results
in companies or governments issuing shorter maturity securities, those
issuers may be exposed to an increased risk of insufficient demand for
their securities and adverse credit market conditions because they must
roll over their short-term financing more frequently. We note that this
impact could be mitigated if money market funds sufficiently staggered
or ``laddered'' the maturity of the securities in their portfolios.
---------------------------------------------------------------------------

    \522\ See supra notes 482-483 and accompanying text.
---------------------------------------------------------------------------

    Finally, we estimate that one third of taxable money market funds
will have to reduce the WAL of their portfolio,\523\ and thus it is
possible that some adjustable-rate security issuers will need to
shorten the maturities of some of the securities they offer, which may
result in increased borrowing costs.\524\ In addition, the markets for
longer term securities may become less liquid if the

rule amendments cause issuance of these instruments to decline.\525\
---------------------------------------------------------------------------

    \523\ See supra note 489 and accompanying and following text.
    \524\ See supra note 491 and accompanying text for comments
asserting this possible negative impact.
    \525\ No commenters addressed this possibility.
---------------------------------------------------------------------------

    Government Securities. We do not believe that eliminating the
provision in rule 2a-7 that allowed money market funds relying solely
on the penny-rounding method of pricing to hold Government securities
with remaining maturities of up to 762 days will have a material impact
on money market funds, investors, or issuers of longer term Government
securities because we believe that substantially all money market funds
rely on the amortized cost method of valuation, and not exclusively on
the penny-rounding method of pricing, and thus are not eligible to rely
on this exception. We received one comment on this proposal, which
stated that they were not aware of any money market funds that relied
on the penny rounding method of pricing.\526\
---------------------------------------------------------------------------

    \526\ BlackRock Comment Letter.
---------------------------------------------------------------------------

2. Designation of NRSROs
    The amendments to rule 2a-7 require a money market fund's board of
directors to designate at least four NRSROs whose credit ratings the
fund will use in determining the eligibility of portfolio securities
under the rule and that the board determines annually issue credit
ratings that are sufficiently reliable for this use.\527\ In addition,
money market funds are required to disclose designated NRSROs in their
registration statements.\528\
---------------------------------------------------------------------------

    \527\ Amended rule 2a-7(a)(11) (defining the term ``designated
NRSRO'').
    \528\ Amended rule 2a-7(a)(11)(iii). The fund would be required
to make the disclosure in its SAI, under Part B of Form N-1A [17 CFR
239.15A].
---------------------------------------------------------------------------

    We anticipate that the requirement to designate at least four
NRSROs could foster competition among NRSROs to produce the most
accurate ratings in order to obtain designation by money market fund
boards. Several commenters agreed that designating at least three
NRSROs could encourage competition among NRSROs to achieve designation
by money market fund boards.\529\ To the extent that competition
increases the reliability of the credit ratings of designated NRSROs,
this could increase the efficiency of fund managers in determining
eligibility of portfolio securities. Some commenters expressed concern,
however, that a requirement to designate at least three NRSROs could
result in fund boards designating only the three largest NRSROs that
issue most of the ratings,\530\ which could result in decreased
competition among NRSROs. To address this concern, in light of the
Commission's goal of increasing competition among NRSROs, we are
requiring each fund to designate at least four NRSROs. In addition,
requiring designation of four NRSROs may encourage new NRSROs that
issue ratings specifically for money market fund instruments to enter
the market.
---------------------------------------------------------------------------

    \529\ See, e.g., HighMark Capital Comment Letter; Invesco Aim
Comment Letter.
    \530\ See DBRS Comment Letter; C. Wesselkamper Comment Letter.
We note that of the 10 registered NRSROs, three issued over 97% of
the ratings across categories that NRSROs reported to the
Commission. See SEC, Annual Report on Nationally Recognized
Statistical Rating Organizations at 9 (Sept. 2009).
---------------------------------------------------------------------------

    We recognize that the requirement to designate and annually
evaluate at least four NRSROs will result in costs to the fund.\531\
For the purposes of the PRA, we estimate that the requirement that
money market funds disclose this designation, including any limitations
on the use of the designations, in their SAIs will not result in
additional costs for funds.\532\ We expect that boards will designate
NRSROs based on recommendations from the fund's adviser and its credit
analysts. Similarly, we believe the board's annual determination
regarding designated NRSROs will be based on recommendations from the
adviser and its credit analysts. Staff estimates that it will take each
fund's board of directors approximately 6 hours each year to designate
NRSROs and determine whether the NRSROs ratings are sufficiently
reliable for such use. Based on an hourly rate for the board of $4000,
we estimate that each money market fund will incur $24,000 and all fund
complexes will incur $3.9 million annually for the boards of directors
to initially designate and determine the reliability and sufficiency of
the designated NRSROs' credit ratings for use in determining
eligibility of portfolio securities.\533\
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    \531\ While we received comments regarding the designation of
NRSROs, none of the comments discussed the costs of designation to
funds or their advisers.
    \532\ See supra Section IV.A.1.
    \533\ This estimate is based on the following calculation:
$24,000 x 163 (fund complexes) = $3,912,000. We have estimated total
costs for fund complexes because we assume that boards of directors
will undertake to designate and determine for all funds in the
complex at the same time (although boards may designate and make
annual determinations with respect to different NRSROs for different
money market funds).
---------------------------------------------------------------------------

    We expect that fund advisers currently evaluate the reliability of
NRSRO ratings and ratings criteria as part of the credit analysis they
perform (under delegated authority from the board) in determining the
eligibility of portfolio securities. We also assume that this
evaluation includes consideration and internal documentation of whether
an NRSRO's rating is sufficient for that use. Accordingly, while we do
not anticipate that fund advisers will incur additional time to prepare
their recommendations, we expect that fund advisers will incur costs to
draft those recommendations in a presentation or report for board
review regarding designation of NRSROs and the sufficiency of
designated NRSROs' ratings. Staff estimates that the investment adviser
for each complex will spend 6 hours annually to prepare a report based
on the adviser's internal review and documentation that summarizes its
recommendation with respect to each NRSRO that may be considered for
designation and any limits on the use of that NRSRO under the rule at a
cost per fund complex of $1770 and a total cost of $288,510.\534\
---------------------------------------------------------------------------

    \534\ These estimates are based on the following calculations:
($202/hour (intermediate portfolio manager) x 3 hours) + ($388/hour
(senior portfolio manager) x 3 hours) = $1770; $1770 x 163 fund
complexes = $288,510. Hourly wages used for purposes of the estimate
of portfolio manager salaries are from the SIFMA Report on
Management & Professional Salaries Data (Sept. 2008), modified to
account for an 1800-hour work-year and multiplied by 2.93 to account
for bonuses, firm size, employee benefits and overhead.
---------------------------------------------------------------------------

    As noted above, we understand that money market fund advisers
currently evaluate NRSROs that rate securities in which the fund
invests. We also understand that fund advisers monitor NRSROs for
potential downgrades of portfolio securities. Prior to today's
amendments, if the fund invested in unrated or second tier securities,
the adviser had to monitor all NRSROs in case there was a downgrade of
a second tier security or an unrated security received a rating below
one of the top two categories.\535\ Thus, we do not expect that
limiting the number of NRSROs that a fund must monitor to four (or
more, if the fund chooses) will result in increased costs to fund
advisers to monitor NRSROs.
---------------------------------------------------------------------------

    \535\ See current rule 2a-7(c)(6)(i)(A)(2).
---------------------------------------------------------------------------

3. Stress Testing
    As proposed, we are amending rule 2a-7 to require that a money
market fund's board of directors adopt written procedures that provide
for the periodic stress testing of each money market fund's
portfolio.\536\ A fund's board of directors determines the frequency of
stress testing. The procedures must require testing of the fund's
ability to

maintain a stable net asset value per share based upon certain
hypothetical events.\537\ The procedures also must provide for a report
to be delivered to the fund's board of directors at its next regularly
scheduled meeting on the results of the testing, or more often as
appropriate in light of the results.\538\ The report must include an
assessment by the fund's adviser 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.\539\
---------------------------------------------------------------------------

    \536\ See supra Section II.C.4. We did not receive any comment
on the estimates and assumptions included in our proposal.
Accordingly, we have not modified any of those estimates except to
reflect the new requirement included in the amended rule.
    \537\ As proposed, the hypothetical events described in the
final rule include a change in short-term interest rates, an
increase in shareholder redemptions, a downgrade of or default on a
portfolio security, and widening or narrowing of spreads between
yields on a benchmark selected by the fund and securities held by
the fund. See amended rule 2a-7(c)(10)(v)(A).
    \538\ Amended rule 2a-7(c)(10)(v)(B). The report must include
dates on which the testing was performed and the magnitude of each
hypothetical event that would cause the deviation of the money
market fund's net asset value, calculated using available market
quotations (or appropriate substitutes that reflect current market
conditions), from its net asset value per share, calculated using
amortized cost, to exceed \1/2\ of 1%. Amended rule 2a-
7(c)(10)(v)(B)(1).
    \539\ Amended rule 2a-7(c)(10)(v)(B)(2).
---------------------------------------------------------------------------

    We anticipate that stress testing will give fund advisers a better
understanding of the effect of potential market events and shareholder
redemptions on their funds' ability to maintain a stable net asset
value, the funds' exposure to the risk that they would break the buck,
and actions the advisers may need to take to mitigate the possibility
of the funds breaking the buck.\540\ We believe that many funds
currently conduct stress testing as a matter of routine fund management
and business practice.\541\ We anticipate, however, that funds that do
not currently perform stress testing and funds that may revise their
procedures in light of the amended rule will give their managers a tool
to better manage those risks. For fund boards of directors that do not
currently receive stress test results, we believe that the regular
reports of the testing and assessments will provide money market fund
boards a better understanding of the risks to which the fund is
exposed.
---------------------------------------------------------------------------

    \540\ See supra note 411 and accompanying and preceding text.
    \541\ See Proposing Release, supra note 2, at paragraph
following n.358.
---------------------------------------------------------------------------

    We understand that today rigorous stress testing is a best practice
followed by many money market funds.\542\ We understand that the fund
complexes that conduct stress tests include smaller complexes that
offer money market funds externally managed by advisers experienced in
this area of management.\543\ Accordingly, staff estimates that as a
result of the new requirement to adopt stress testing procedures: (i)
Funds that currently conduct rigorous stress testing, including tests
for hypothetical events listed in the amended rule (and concurrent
occurrences of those events), will incur some costs to evaluate whether
their current test procedures comply with the new requirement, but will
be likely to incur relatively few costs to revise those procedures or
continue the stress testing they currently perform; (ii) funds that
conduct less rigorous stress testing, or that do not test for all the
hypothetical events listed in the amended rule, will incur somewhat
greater expenses to revise those procedures in light of the new
requirement and maintain the revised testing; and (iii) funds that do
not conduct stress testing will incur costs to develop and adopt stress
test procedures and conduct stress tests.
---------------------------------------------------------------------------

    \542\ See id. at n.359 and accompanying text.
    \543\ These complexes do not, however, meet the definition of
``small entities'' under the Investment Company Act for purposes of
the Regulatory Flexibility Act of 1980. 17 CFR 270.0-10. See infra
note 636.
---------------------------------------------------------------------------

    As noted above, we believe that there is a range in the extent and
rigor of stress testing currently performed by money market funds. We
also expect that stress test procedures are being or will be developed
by the adviser to a fund complex for all money market funds in the
complex, while specific stress tests are performed for each individual
money market fund. We estimate that a fund complex that currently does
not conduct stress testing will require approximately 1 month for 2
risk management specialists and 2 systems analysts to develop stress
test procedures at a cost of approximately $155,000, 22 hours for a
risk management specialist to draft the procedures, and 3 hours of
board of directors' time to adopt the procedures for a total of
approximately $173,000.\544\ Costs for fund complexes that will have to
revise or fine-tune their stress test procedures would be less. For
purposes of this cost benefit analysis, we estimate that these funds
will incur half the costs of development, for a total of approximately
$96,000.\545\ Funds that will not have to change their test procedures
will incur approximately $20,000 to determine compliance with the new
requirement and to draft and adopt the procedures.\546\ We also
anticipate that in light of the new demand to develop stress testing
procedures, third parties will develop programs that funds will be able
to purchase for less than our estimated cost to develop the programs
themselves.
---------------------------------------------------------------------------

    \544\ This estimate is based on the following calculations:
$275/hour x 280 hours (collectively, 2 senior risk management
specialists) + $244/hour x 320 hours (collectively, 2 senior systems
analysts) = $155,080; $275/hour (senior risk management specialist)
x 22 hours = $6050; $4000/hour x 3 hours = $12,000; $155,080 + $6050
+ $12,000 = $173,130.
    \545\ This estimate is based on the following calculation:
($155,080 x 0.5) (revise procedures) + $6050 (draft procedures) +
$12,000 (board approval) = $95,590.
    \546\ This estimate is based on the following calculation: $275/
hour (senior risk management specialist) x 8 hours = $2200; $2200 +
$6050 + $12,000 = $20,250.
---------------------------------------------------------------------------

    As with the development of stress test procedures, the costs funds
will incur each year as a result of the proposed amendments to update
test procedures, conduct stress tests, and provide reports on the tests
and assessments to the board of directors will vary. Funds that
currently conduct stress tests already incur costs to perform the
tests. In addition, some of those funds may currently provide reports
to senior management (if not the board) of their test results. We
assume, however, that few, if any, fund advisers provide a regular
assessment to the board of the fund's ability to withstand the events
reasonably likely to occur in the following year. For that reason, we
estimate that for routine reports, each fund complex will incur costs
of $3000 to provide a written report on the test results to the board,
$4000 to provide the assessment in the report, and $10 to retain
records of the reports for a total annual cost to a fund complex of
$42,000.\547\ As noted above, however, the procedures must provide for
additional reports to the board as appropriate based on testing
results, and we estimate that each fund complex will incur costs of
$28,000 for an average of four of these reports each year.\548\ We
estimate that a portion of funds will incur additional costs to perform
stress tests and update their procedures each

year, up to a maximum of approximately $149,000.\549\
---------------------------------------------------------------------------

    \547\ See supra note 419 and preceding, accompanying, and
following text. This estimate is based on the following calculation:
Report: $275/hour x 10 hours (senior risk management specialist) +
$62 x 2 hours (administrative assistant) = $2874; Assessment: $275/
hour x 15 hours (senior risk management specialist) = $4125; Record
retention: $62/hour x 0.1667 hours (administrative assistant) =
$10.33; ($2874 + $4125 +$10) x 6 (board meetings per year) =
$42,054. Hourly wages used for purposes of the estimate of
administrative assistant salaries are from the SIFMA Report on
Management & Professional Salaries Data (Sept. 2008), modified to
account for an 1800-hour work-year and multiplied by 2.93 to account
for bonuses, firm size, employee benefits and overhead.
    \548\ See supra note 420 and accompanying text. This estimate is
based on the following calculation: ($2874 (reports) + ($4125)
(assessment) + $10 (recordkeeping)) x 4 = $28,036.
    \549\ This estimate is based on the following calculations:
Tests: $275/hour x 15 hours (senior risk management specialist) +
$244/hour x 20 hours (senior systems analyst) = $9005; $9005 x 12
(monthly testing) + ($9005 x 4 additional ``appropriate'' testing) =
$144,080; Update procedures: $275/hour x 5 hours (senior risk
management specialist) + $4000/hour x 1 hour = $5375; $144,080 +
$5375 = $149,455.
---------------------------------------------------------------------------

    For purposes of this cost benefit analysis, Commission staff has
estimated that 25 percent of fund complexes (or 41 complexes) will have
to develop stress test procedures, 50 percent (or 81) would have stress
test procedures, but have to revise those procedures, and 25 percent of
complexes (or 41 complexes) will review the procedures without having
to change them. Based on these estimates, staff further estimates that
the total one-time costs for fund complexes to develop or refine
existing stress test procedures will be approximately $16 million.\550\
In addition, staff estimates that the annual costs to all funds to
conduct stress tests, update test procedures, provide reports to fund
boards, and retain records of the reports will be approximately $24
million.\551\
---------------------------------------------------------------------------

    \550\ This estimate is based on the following calculation: (41 x
$173,000) + (81 x $95,000) + (41 x $20,000) = $15,608,000.
    \551\ This estimate is based on the following calculation: (41 x
$149,455) + (81 x $149,455 x 0.5) + (163 x $70,090 (reports,
including assessments)) = $23,605,252.5.
---------------------------------------------------------------------------

4. Repurchase Agreements
    We are adopting, as proposed, changes affecting a money market
fund's ability to ``look through'' a repurchase agreement for purposes
of rule 2a-7's diversification provisions.\552\ Under the amended rule,
a money market fund will be able to look through a repurchase agreement
only if it is collateralized by cash items or Government securities,
and if the fund's board of directors or its delegate evaluates the
counterparty's creditworthiness.
---------------------------------------------------------------------------

    \552\ See supra Section II.D; Proposing Release, supra note 2,
at Section II.E.
---------------------------------------------------------------------------

    The changes are designed to reduce money market funds' risks
related to repurchase agreement investments so that funds will be
better positioned to weather market turbulence and maintain a stable
net asset value per share. A money market fund that invests in a
repurchase agreement collateralized by cash items or Government
securities is less likely to experience losses upon the sale of
collateral in the event of a counterparty's default.\553\ The
creditworthiness evaluation, moreover, will diminish the risk that a
money market fund in the first place enters into a repurchase agreement
with a counterparty that subsequently defaults.
---------------------------------------------------------------------------

    \553\ See supra note 272 and accompanying text.
---------------------------------------------------------------------------

    We believe that the costs associated with these changes will be
minimal. As confirmed by commenters, most money market funds typically
do not look through repurchase agreements collateralized with
securities other than Government securities.\554\ Under the amended
rule, money market funds will be able, as they have in the past, to
invest in such repurchase agreements, although the funds will not be
able to look through the repurchase agreements for purposes of rule 2a-
7's diversification provisions.\555\
---------------------------------------------------------------------------

    \554\ See supra note 274 and accompanying text.
    \555\ No commenter has expressed the view that the new
diversification requirement will increase money market funds' cost
of investing in repurchase agreements.
---------------------------------------------------------------------------

    With regard to the new creditworthiness evaluation, several
commenters stated that money market funds already evaluate the credit
quality of counterparties under rule 2a-7(c)(3).\556\ We estimate,
therefore, that investment advisers to only approximately 20 percent of
all 163 fund complexes are not currently making such determinations. To
the extent that boards or their delegates, in response to the amended
rule, will make determinations that they would not otherwise make,
those parties will expend time and/or resources in making those
determinations. We estimate that, if an investment adviser were to
spend 10 hours a year making creditworthiness determinations that it
would not otherwise make concerning repurchase agreement
counterparties, it would spend approximately $2750 per year.\557\
Therefore the total cost to all money market funds would be
approximately $90,750 per year.\558\ In addition to these costs, we
also estimated above, for purposes of the Paperwork Reduction Act, that
funds might spend 2 hours per year maintaining records concerning the
determinations made under the amended rule.\559\ We estimate the
aggregate total costs associated with this recordkeeping to be $20,212
per year.\560\
---------------------------------------------------------------------------

    \556\ As discussed above, three commenters argued that the
proposed creditworthiness evaluation is unnecessary because it is
already an element of the minimal credit risk determination that a
fund makes pursuant to rule 2a-7(c)(3). See supra note 277.
    \557\ This estimate is based on the following calculation: $275/
hour (senior risk management specialist) x 10 hours = $2750.
    \558\ This estimate is based on the following calculation: $275/
hour (senior risk management specialist) x 10 hours x 33 fund
complexes = $90,750.
    \559\ See supra Section IV.A.4.
    \560\ This estimate is based on the following calculation: $62/
hour (administrative assistant) x 2 hours x 163 fund complexes =
$20,212.
---------------------------------------------------------------------------

5. Public Web site Posting
    The amendments to rule 2a-7 require money market funds to post
monthly portfolio information on their Web sites.\561\ The rule
amendments are intended to provide shareholders with timely information
about the securities held by the money market fund.
---------------------------------------------------------------------------

    \561\ Amended rule 2a-7(c)(12).
---------------------------------------------------------------------------

    We anticipate that requiring funds to post monthly portfolio
information on their Web sites will benefit investors by providing them
a better understanding of their own risk exposure enabling them to make
better informed investment decisions. The rule amendments may thus
instill more discipline into portfolio management and reduce the
likelihood of a money market fund breaking the buck.
    The Web site posting requirement will impose certain costs on
funds. We estimated in the Proposing Release that money market funds
would be required to spend 24 hours of internal money market fund staff
time initially to develop a webpage, at a cost of $4944 per fund.\562\
We also estimated that all money market funds would be required to
spend 4 hours of professional time to maintain and update the Webpage
each month, at a total annual cost of $9888 per fund.\563\ We also
stated that we believe, however, that our estimates may overstate the
actual costs that would be incurred to comply with the Web site posting
requirement because many funds currently post their portfolio holdings
on a monthly, or more frequent, basis.\564\ For purposes of the cost
benefit analysis in the Proposing Release, Commission staff estimated
that 20 percent of money market portfolios (150 portfolios) did not
post portfolio holdings information on their Web sites.\565\ We
requested comment on these estimated costs in the Proposing
Release.\566\ One commenter suggested that we may have underestimated
the costs associated with the initial development of the Web page, but
also may have overestimated the costs associated with the ongoing

maintenance of Web site reporting.\567\ The commenter did not provide
any cost estimates. Commission staff continues to believe that these
cost estimates are appropriate. In addition, as discussed above, we
have decided not to require some of the information required by
Regulation S-X, which we proposed that funds post on their Web
sites.\568\ We expect that eliminating the mandatory posting of this
information, which we believe is not critical to be made available to
investors, will reduce costs for funds and their advisers.\569\
---------------------------------------------------------------------------

    \562\ See Proposing Release, supra note 2, at n.374 and
accompanying text. The staff estimated that a webmaster at a money
market fund would require 24 hours (at $206 per hour) to develop and
review the webpage (24 hours x $206 = $4944).
    \563\ See Proposing Release, supra note 2, at n.375 and
accompanying text. The staff estimated that a webmaster would
require 4 hours (at $206 per hour) to maintain and update the
relevant webpages on a monthly basis (4 hours x $206 x 12 months =
$9888).
    \564\ See Proposing Release, supra note 2, at n.376 and
accompanying text.
    \565\ See Proposing Release, supra note 2, at text preceding
n.377.
    \566\ See Proposing Release, supra note 2, at Section V.A.5.
    \567\ See Clearwater Comment Letter.
    \568\ See supra note 285 and accompanying text.
    \569\ Id.
---------------------------------------------------------------------------

    One commenter, however, stated that the cost estimates did not
include the cost for the 80 percent of money market portfolios that
currently post portfolio holdings information at least quarterly on
their Web sites to develop the capability to retain previous months'
portfolio holdings information on their Web sites.\570\ Based on a
review of some of the commenters' current portfolio Web site disclosure
and follow-up discussions with some commenters, Commission staff
estimates that 500 funds will need to develop this capability.
Commission staff estimates that each of these 500 funds will spend
approximately 12 hours, at a one-time cost of $2472 per fund, to
develop this capability.\571\
---------------------------------------------------------------------------

    \570\ See Data Communiqu[eacute] Comment Letter. Under our
proposal, funds would have been required to maintain the portfolio
holdings information on their Web sites for at least twelve months.
We are adopting a six-month maintenance period for portfolio holding
information.
    \571\ The staff estimates that a Webmaster at a money market
fund would require 12 hours (at $206 per hour) to develop the
capability to retain previous months' portfolio holdings information
on their Web sites as required by the rule (12 hours x $206 =
$2472).
---------------------------------------------------------------------------

    Based on these estimates, we estimate that the total initial costs
for the Web site disclosure will be $1,947,936.\572\ In addition, we
estimate that the annual costs for all money market funds to maintain
and update their webpages will be $7.1 million.\573\
---------------------------------------------------------------------------

    \572\ This calculation was based on the following estimate:
($4944 x 144 portfolios) (cost to develop webpage) + ($2472 x 500
portfolios) (cost to develop capability to retain previous months'
portfolio holdings information on existing Web sites) = $1,947,936.
    \573\ This calculation was based on the following estimate:
($9888 x 719 portfolios) = $7,109,472.
---------------------------------------------------------------------------

    In addition, monthly Web site disclosure may impose other costs on
funds and their shareholders. For example, more frequent disclosure of
portfolio holdings may arguably expand the opportunities for
professional traders to exploit this information by engaging in
predatory trading practices, such as front-running. However, given the
short-term nature of money market fund investments and the restricted
universe of eligible portfolio securities, we believe that the risk of
trading ahead is severely curtailed in the context of money market
funds.\574\ For similar reasons, we believe that the potential for
``free riding'' on a money market fund's investment strategies, i.e.,
obtaining for free the benefits of fund research and investment
strategies, is minimal. Given that shares of money market funds are
ordinarily purchased and redeemed at the stable price per share, we
believe that there would be relatively few opportunities for profitable
arbitrage. Thus, we estimate that the costs of predatory trading
practices under the amended rule will be minimal. Furthermore, as
previously noted, most money market fund portfolios (80 percent)
already are posted on fund Web sites at least quarterly.
---------------------------------------------------------------------------

    \574\ See ICI Report, supra note 14, at 93.
---------------------------------------------------------------------------

6. Processing of Transactions
    The amendments to rule 2a-7 require a money market fund to have the
capacity to redeem and sell its securities at a price based on the
fund's current net asset value per share, including the capacity to
sell and redeem shares at prices that do not correspond to the stable
net asset value or price per share.\575\ As discussed above, the events
of fall 2008 revealed that some funds had not implemented automated
systems to process redemptions at prices other than the funds' stable
net asset value per share. As a result, transactions were processed
manually, which extended the time that investors had to wait for the
proceeds from their redeemed shares. This experience showed that funds
that cannot electronically process redemptions at prices other than the
funds' stable net asset value per share risk being unable to meet their
obligations to redeem shares and pay redemption proceeds within seven
days, as required under the Act.
---------------------------------------------------------------------------

    \575\ Amended rule 2a-7(c)(13).
---------------------------------------------------------------------------

    The amendments to rule 2a-7 mitigate the risk that money market
funds would not be able to meet these obligations in the event the fund
breaks a buck. These amendments benefit shareholders because they
increase the likelihood that shareholders will timely receive the
proceeds of their investments when a fund breaks the buck.
    Because funds have an existing obligation to redeem at other than
their stable net asset value per share, we do not believe that this
amendment to rule 2a-7 imposes any additional costs on funds or their
transfer agents.\576\ Nonetheless, to the extent that funds and
transfer agents have to change their systems, we estimated in the
Proposing Release that the total cost for a fund complex would be
$39,040.\577\ We further estimated that one-third of the fund complexes
are not currently able to redeem at prices other than stable net asset
value, and thus the total cost to all money market funds would be
$2,225,280.\578\
---------------------------------------------------------------------------

    \576\ See supra Section II.F.
    \577\ This estimate is based on the following calculation: $244/
hour x 160 hours (senior systems analyst) = $39,040.
    \578\ This estimate was based on the following calculation: (171
fund complexes / 3) x $39,040 = $2,225,280.
---------------------------------------------------------------------------

    Several commenters claimed that the costs of changing the systems
would exceed our estimates.\579\ One commenter estimated that the costs
of making the required changes to the core transfer agent and ancillary
systems would total approximately $24 million for ten fund complexes,
representing 63 percent of money market fund assets, and two of the
three largest transfer agent service providers.\580\ Based on those
figures, we have revised our estimate to reflect that the total cost of
making the required systems changes for all money market funds would be
approximately $38.1 million.\581\
---------------------------------------------------------------------------

    \579\ See, e.g., HighMark Capital Comment Letter; ICI Comment
Letter.
    \580\ See ICI Comment Letter. The ICI conducted a survey of its
members and gathered data from 10 fund complexes and 2 transfer
agent service providers. Six of the 12 respondents indicated that
their transfer agent system already had the capability to process
money market fund trades at other than a $1.00 stable net asset
value.
    \581\ We believe that the systems changes costs are correlated
to the size of the fund complex. Accordingly, this estimate is based
on the following calculations: $24 million / 63% = $38.1 million.
The ICI Comment Letter also provided additional cost estimates for
changes to the systems of intermediaries who perform sub-transfer
agency or similar recordkeeping functions. We do not discuss those
additional costs here because, as discussed above, the rule does not
impose any requirements on those intermediaries. See supra text
preceding note 363.
---------------------------------------------------------------------------

B. Rule 17a-9

    The Commission is amending rule 17a-9 to expand the circumstances
under which affiliated persons can purchase money market fund portfolio
securities. Under the amendment, a money market fund generally will be
able to sell a portfolio security that has defaulted to an affiliated
person for cash equal to the greater of the security's amortized cost
value or market value (including accrued interest), even though the
security continues to be an eligible security.\582\
---------------------------------------------------------------------------

    \582\ See amended rule 17a-9(a).

---------------------------------------------------------------------------

    The amendment essentially codifies past Commission staff no-action
letters \583\ and should benefit investors by enabling money market
funds to dispose of distressed securities (e.g., securities depressed
in value as a result of market conditions) from their portfolios
quickly without any loss to fund shareholders. It also benefits money
market funds by eliminating the cost and delay of requesting no-action
assurances in these scenarios and the uncertainty whether such
assurances will be granted.\584\ We do not believe that there are any
costs associated with this amendment, and we received no comments on
this analysis.
---------------------------------------------------------------------------

    \583\ See supra Section II.G.1.
    \584\ Commission staff estimates that the costs to obtain staff
no-action assurances range from $50,000 to $100,000.
---------------------------------------------------------------------------

    In addition, the amendment permits affiliated persons to purchase
other portfolio securities from an affiliated money market fund, for
any reason, as long as the security's purchase price meets the rules'
other conditions and such person promptly remits to the fund any profit
it realizes from the later sale of the security.\585\ Our staff
provided temporary no-action assurances during the fall of 2008 to
certain funds facing extraordinary levels of redemption requests for
affiliated persons of such funds to purchase eligible securities from
the funds at the greater of amortized cost or market value (plus
accrued and unpaid interest).\586\ In these circumstances, money market
funds may need to obtain cash quickly to avoid selling securities into
the market at fire sale prices to meet shareholder redemption requests,
to the detriment of remaining shareholders. The staff also provided no-
action assurances to money market funds for affiliated persons of the
fund to purchase at the greater of amortized cost or market value (plus
accrued and unpaid interest) certain distressed securities that were
depressed in value due to market conditions potentially threatening the
stable share price of the fund, but that remained eligible securities
and had not defaulted.\587\ Money market funds and their shareholders
benefit if affiliated persons are able to purchase securities from the
fund at the greater of amortized cost or market value (plus accrued and
unpaid interest) in such circumstances without the time, expense, and
uncertainty of applying to Commission staff for no-action assurances.
---------------------------------------------------------------------------

    \585\ See amended rule 17a-9(b).
    \586\ Many of the no-action letters can be found on our Web
site. See http://www.sec.gov/divisions/investment/im-
noaction.shtml#money.
    \587\ Id.
---------------------------------------------------------------------------

    Affiliated persons purchasing such securities will have costs in
creating and implementing a system for tracking the purchased
securities and remitting to the money market fund any profit ultimately
received as a result. We estimate that creating such a system on
average would require 5 hours of a senior programmer's time, at a cost
of $1460 for each of the 163 fund complexes with money market funds,
and a total cost of $237,980.\588\ After the initial creation of this
system, we expect that the time spent noting in this system that a
security was purchased under rule 17a-9 would require a negligible
amount of compliance personnel's time. Based on our experience, we do
not anticipate that there would be many instances, if any, in which an
affiliated person will be required to repay profits in excess of the
purchase price paid to the fund. However, if there is a payment, it
would be made to the fund. If the payment is sufficiently large, we
believe that funds are likely to include it with the next distribution
to shareholders, which would not result in any additional costs to the
fund. We received no comments on this analysis.
---------------------------------------------------------------------------

    \588\ This estimate is based on the following calculation: $292/
hour x 5 hours x 163 fund complexes = $237,980.
---------------------------------------------------------------------------

    The Commission also is adopting a related amendment to rule 2a-7,
which requires that funds report all transactions under rule 17a-9 to
the Commission. We believe that this reporting requirement benefits
fund investors by allowing the Commission to monitor the purchases for
possible abuses and conflicts of interest on the part of the
affiliates. It also allows the Commission to observe what types of
securities are distressed and which money market funds are holding
distressed securities or are subject to significant redemption
pressures. This information will assist us in monitoring emerging risks
at money market funds. For purposes of the Paperwork Reduction Act
analysis, we estimate this amendment will impose relatively small
reporting costs on money market funds of $7625 per year.\589\ We
received no comments on this analysis.
---------------------------------------------------------------------------

    \589\ This estimate is based on the following calculation: 25
(notices) x $305/hour (attorney) x 1 hour = $7625. See supra note
437 and accompanying text.
---------------------------------------------------------------------------

C. Rule 22e-3

    Rule 22e-3 permits a money market fund that has broken the buck, or
is at imminent risk of breaking the buck, to suspend redemptions and
postpone the payment of proceeds pending board-approved liquidation
proceedings. By facilitating orderly liquidations in distressed
circumstances, we anticipate that rule 22e-3 will reduce the
vulnerability of shareholders to the harmful effects of a run on a fund
and minimize the potential for market disruption. The rule also enables
funds to avoid the expense and delay of obtaining an exemptive order
from the Commission, which we estimate would otherwise cost
approximately $75,000, and will provide legal certainty to funds that
wish to suspend redemptions during a liquidation in the interest of
fairness to all shareholders.
    Rule 22e-3 will impose certain minimal costs on funds relying on
the rule by requiring them to provide prior notice to the Commission of
their decision to suspend redemptions in connection with a liquidation.
Furthermore, the rule will impose minimal costs on certain conduit
funds that have invested in money market funds that suspended
redemptions in reliance on the rule by also requiring those conduit
funds to provide notice to the Commission. We estimate that the total
annual burden of the notification requirement for all money markets
funds and conduit funds will be 110 minutes, at a cost of $559.\590\ In
addition, rule 22e-3 imposes costs on shareholders who seek to redeem
their shares, but are unable to do so. In those instances, shareholders
may have to borrow funds from another source, and thereby incur
interest charges and other transaction fees. We believe, however, that
the costs associated with rule 22e-3 are minimal because the rule
provides a very limited exemption that is triggered only when a fund
breaks the buck, or is in imminent risk of breaking the buck, and
liquidates.
---------------------------------------------------------------------------

    \590\ See supra note 443 and accompanying text. This estimate is
based on the following calculation: $305/hour x 110 minutes = $559.
---------------------------------------------------------------------------

D. Rule 30b1-7 and Form N-MFP: Monthly Reporting of Portfolio Holdings

    Rule 30b1-7 and Form N-MFP require money market funds to file with
the Commission interactive data-formatted portfolio holdings
information on a monthly basis. We expect that the rule and form will
improve the efficiency and effectiveness of the Commission's oversight
of money market funds by enabling Commission staff to manage and
analyze comprehensive money market fund portfolio information more
quickly and at a lower cost than is currently possible. The interactive
data will also facilitate the flow of information between money market
funds and other users of this information, such as information
services, academics, and

investors. As a result, users of this information, including investors,
may benefit by gaining a better understanding of money market funds'
risk exposure and becoming better informed in their investment
decisions. As the development of software products to analyze the data
continues to grow, we expect these benefits will increase. Finally, the
portfolio reporting may instill more discipline into portfolio
management and reduce the likelihood of a money market fund breaking
the buck.
    Money market funds may also realize cost savings from the rule.
Currently, money market funds provide portfolio holdings information in
a variety of formats to different third-parties, such as information
services and NRSROs. The rule may encourage the industry to adopt a
standardized format, thereby reducing the burdens on money market funds
of having to produce this information in multiple formats.
    The reporting requirement will also impose certain costs. We
estimated in the Proposing Release, that, for the purposes of the PRA,
these filing requirements (including collecting, tagging, and
electronically filing the report) would impose 128 burden hours at a
cost of $35,968 \591\ per money market fund for the first year, and 96
burden hours at a cost of $26,976 \592\ per money market fund in
subsequent years.\593\ We requested comment on these estimated costs in
the Proposing Release.\594\
---------------------------------------------------------------------------

    \591\ See Proposing Release, supra note 2, at n.396 and
accompanying text. This estimate was based on the following
calculation: $281/hour x 128 hours (senior database administrator) =
$35,968.
    \592\ See Proposing Release, supra note 2, at n.397 and
accompanying text. This estimate was based on the following
calculation: $281/hour x 96 hours (senior database administrator) =
$26,976.
    \593\ We understand that some money market funds may outsource
all or a portion of these responsibilities to a filing agent,
software consultant, or other third-party service provider. We
believe, however, that a fund would engage third-party service
providers only if the external costs were comparable, or less than,
the estimated internal costs of compiling, tagging, and filing the
Form N-MFP.
    \594\ See Proposing Release, supra note 2, at paragraph
following n.398.
---------------------------------------------------------------------------

    As discussed above, two commenters asserted that the Commission's
cost estimates did not include time to review the information required
in Form N-MFP.\595\ In response to these commenters, we revised our PRA
estimates to include an additional 2 hours per filing for review of the
information.\596\ As a result of this increase, we have revised our
cost estimates. We estimate that, for the purposes of the PRA, these
filing requirements (including collecting (and review), tagging, and
electronically filing the report) would impose 152 burden hours at a
cost of $42,712 \597\ per money market fund for the first year, and 120
burden hours at a cost of $33,720 \598\ per money market fund in
subsequent years.\599\ We estimate that the total cost for all money
market funds for the first year would be $30,709,928.\600\ The total
annual estimated cost for all money market funds in subsequent years
would be $24,244,680.\601\
---------------------------------------------------------------------------

    \595\ See Bowne Comment Letter; Data Communiqu[eacute] Comment
Letter. Another commenter suggested that we may have underestimated
the costs associated with the initial filing of Form N-MFP, but also
may have overestimated the ongoing costs associated with subsequent
filings. See Clearwater Comment Letter. The commenter, however, did
not provide any cost estimates.
    \596\ See supra Section IV.C.
    \597\ This estimate is based on the following calculation: $281/
hour x 152 hours (senior database administrator) = $42,712.
    \598\ This estimate is based on the following calculation: $281/
hour x 120 hours (senior database administrator) = $33,720.
    \599\ We understand that some money market funds may outsource
all or a portion of these responsibilities to a filing agent,
software consultant, or other third-party service provider. We
believe, however, that a fund would engage third-party service
providers only if the external costs were comparable, or less than,
the estimated internal costs of compiling, tagging, and filing the
Form N-MFP.
    \600\ This estimate is based on the following calculation:
$42,712 (total estimated cost per fund for first year) x 719 funds =
$30,709,928.
    \601\ This estimate is based on the following calculation:
$33,720 (total estimated cost per fund after the first year) x 719
funds = $24,244,680.
---------------------------------------------------------------------------

    In addition, funds may incur additional costs as a result of the
public availability of a fund's market-based net asset value, which is
required to be included in Form N-MFP filings. In particular, some
commenters noted that if investors systematically redeem shares for one
dollar when the market-based net asset value is less than one dollar,
the fund might have difficulty maintaining its stable price. However,
in response to concerns about the disclosure of market-based values, we
are delaying the public availability of the information filed on Form
N-MFP for 60 days after the end of the reporting period.\602\ We
acknowledge that investors might choose to sell their money market fund
shares that have a low market-based net asset value, and it is possible
that a run could develop. Nevertheless, at least two other factors will
reduce the risk of a run. First, portfolio managers may choose to
follow less risky investment strategies in an effort to maintain a high
market-based net asset value. Second, funds may be quicker to ask for
help from their affiliates through, for example, rule 17a-9
transactions.
---------------------------------------------------------------------------

    \602\ See rule 30b1-7(b). See also supra text accompanying note
320. As noted above, money market funds currently must disclose
their mark-to-market net asset value per share semi-annually in
their Form N-SAR filings [17 CFR 274.101], which are publicly
available. Form N-SAR must be filed with the Commission no later
than the 60th day after the end of the fiscal period for which the
report is being prepared. See supra note 337 and accompanying text.
Thus, investors already have access to market-based portfolio value
information on the basis of which they could make redemptions.
---------------------------------------------------------------------------

    The money market fund industry is characterized by a mix of
competitors with and without affiliates that can provide financial
support. The disclosure of a fund's market-based net asset value might
encourage funds that have affiliates with the ability to provide
financial support to request such support as soon as any problems
develop. This support could provide stability to funds that receive the
support. This support might also give a competitive advantage to funds
that receive it because they may be more willing to invest in
securities with higher risk and higher yields. However, the extent of
this competitive advantage may be mitigated because the amendments will
require the disclosure of the fund's market-based NAV with and without
capital support agreements. In addition, much of the extent to which
fund managers might take advantage of capital support arrangements to
boost fund yields is independent of the amendments we are adopting
today and affiliated persons of money market funds are not obligated to
support these funds. For the reasons outlined in the discussion on the
monthly Web site posting requirement, we estimate that there will be
minimal additional costs incurred from predatory trading practices
(e.g., front-running or ``free riding'') as a result of the reporting
requirement.\603\
---------------------------------------------------------------------------

    \603\ See supra note 574 and accompanying and following text.
---------------------------------------------------------------------------

E. Rule 30b1-6T

    We adopted rule 30b1-6T to enable the Commission staff to continue
to have effective oversight of money market funds. The rule was
designed to improve the efficiency and effectiveness of the
Commission's oversight by providing useful information about money
market funds that report under the rule, and by enabling the staff to
manage and analyze money market fund portfolio information more quickly
and at a lower cost than possible without electronic submissions of
portfolio schedules. When we adopted rule 30b1-6T in September 2009, we
requested

comments on the costs and benefits of the rule but received no
comments.\604\
---------------------------------------------------------------------------

    \604\ See Rule 30b1-6T Release, supra note 303, at Section VI.
---------------------------------------------------------------------------

    Rule 30b1-6T will impose some costs on funds. For the purposes of
the PRA, we estimated that the rule will result in an increase of 2100
burden hours per year. We estimate that these burden hours will cost a
total of $590,100.\605\ We do not believe that rule 30b1-6T will impose
other significant costs, especially given the nonpublic nature of the
reports required under the rule.
---------------------------------------------------------------------------

    \605\ This estimate is based on the following calculation: 2100
hours x $281/hour (senior database administrator) = $590,100.
---------------------------------------------------------------------------

VI. Competition, Efficiency, and Capital Formation

    Section 2(c) of the Investment Company Act requires the Commission,
when engaging in rulemaking that requires it to consider or determine
whether an action is consistent with the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.\606\
---------------------------------------------------------------------------

    \606\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

A. Rule 2a-7

1. Second Tier Securities, Portfolio Maturity, and Liquidity Limits
    We are adopting several amendments to rule 2a-7 to tighten the
risk-limiting conditions of the rule. As discussed above, we are
further restricting money market funds' ability to acquire second tier
securities. The amendments reduce the maximum weighted average maturity
of a money market fund permitted by rule 2a-7 from 90 days to 60
days.\607\ They also impose a new maturity limitation based on the
weighted average ``life'' of fund securities that limits the portion of
a fund's portfolio that can be held in longer term floating- or
variable-rate securities.\608\ We are deleting a provision in rule 2a-7
that permitted money market funds not relying on the amortized cost
method of valuation to acquire Government securities with a remaining
maturity of up to 762 calendar days.
---------------------------------------------------------------------------

    \607\ See amended rule 2a-7(c)(2)(ii).
    \608\ See amended rule 2a-7(c)(2)(iii).
---------------------------------------------------------------------------

    Finally, we are adopting new liquidity requirements for money
market funds. In particular, we are amending rule 2a-7 to (i) Require
that each money market fund hold securities that are sufficiently
liquid to meet reasonably foreseeable shareholder redemptions in light
of its obligations under section 22(e) of the Act and any commitments
the fund has made to shareholders; \609\ (ii) further limit a money
market fund's investments in illiquid securities (i.e. securities that
cannot be sold or disposed of in the ordinary course of business within
seven days at approximately the value ascribed to them by the money
market fund); \610\ and (iii) require a taxable money market fund to
hold at least 10 percent of its total assets in ``daily liquid assets''
and any money market fund to hold at least 30 percent of its total
assets in ``weekly liquid assets.'' \611\
---------------------------------------------------------------------------

    \609\ Amended rule 2a-7(c)(5).
    \610\ Amended rule 2a-7(c)(5)(i). Under the amended rule, a
money market fund cannot acquire illiquid securities if immediately
after the acquisition, the fund would have invested more than five
percent of its total assets in illiquid securities.
    \611\ See amended rule 2a-7(c)(5)(ii)-(iii). See also amended
rule 2a-7(a)(8) (defining ``daily liquid assets''); 2a-7(a)(32)
(defining ``weekly liquid assets'').
---------------------------------------------------------------------------

    We believe that these changes will reduce money market funds'
sensitivity to interest rate, credit, and liquidity risks. These
changes will also limit the spread risk produced by longer term
securities and second tier securities. A reduction of these risks will
help individual money market funds to weather market turbulence and
maintain a stable net asset value per share, which will increase the
stability of the entire money market fund industry. To the extent that
money market funds are more stable, the changes also will reduce
systemic risk to the capital markets and ensure a stable source of
financing for issuers of short-term credit instruments. We believe that
these effects will encourage capital formation by encouraging
investment in money market funds as well as the issuance of securities
that money market funds can purchase.
    These changes also may reduce maturities of short-term credit
securities that issuers offer, which may increase financing costs for
these issuers who might have to go back more frequently to the market
for financing. As discussed above, several commenters stated that the
elimination of money market funds' ability to acquire second tier
securities could increase second tier security issuers' borrowing costs
and thus increase capital formation costs.\612\ Some of these
commenters also asserted that such a prohibition could require second
tier security issuers to rely more on bank financing, which could
negatively impact banks' ability to lend to other parts of the
economy.\613\ We note that these impacts should be mitigated given that
we are limiting and not eliminating money market funds' ability to
acquire second tier securities. However, to the extent that some
issuers are unwilling or unable to issue securities that match money
market fund demand given these new restrictions or that banks become
less willing to lend to finance new businesses, the amendments could
have a negative impact on capital formation.
---------------------------------------------------------------------------

    \612\ See supra notes 48-49 and accompanying paragraph.
    \613\ See, e.g., Chamber/Tier 2 Issuers Comment Letter.
---------------------------------------------------------------------------

    As discussed in the cost benefit analysis above, we expect that the
amendments will reduce yields that some money market funds are able to
offer. The lower yields may affect the ability of money market funds to
compete with other investment vehicles. While money market funds
compete with each other, they also compete for investors on the basis
of risk-return tradeoff with other lower-risk investment vehicles, such
as offshore or unregulated money market funds, bank money market
deposit accounts, and deposit accounts in general. The reduction in
yield may cause some investors to move their money to, among other
places, offshore or unregulated money market funds that do not follow
rule 2a-7's strictures and thus are able to offer a higher yield.
Beyond the competitive impact, such a change could increase systemic
risks to short-term credit markets and capital formation by increasing
investment in less stable short-term instruments.
    Further limitations on money market funds' ability to acquire
second tier securities also may have anticompetitive effects on some
relatively small money market funds that may compete with larger funds
on the basis of yield. One commenter stated that elimination of money
market funds' ability to acquire second tier securities could have a
disproportionate impact on smaller money market funds.\614\ Our review
of money market fund holdings of second tier securities during
September 2008 did not reveal smaller money market funds holding second
tier securities to a greater extent than larger funds, although smaller
funds may try to increase their holdings of second tier securities in
different market environments. Even if there were any anticompetitive
effects on smaller money market funds, these effects should be reduced
by the fact that we are only further limiting, and not eliminating,
money market funds' ability to acquire second tier securities.
---------------------------------------------------------------------------

    \614\ See Thrivent Comment Letter.
---------------------------------------------------------------------------

    The further limitations on the ability of money market funds to
invest in second tier securities may affect the capital raising ability
and strategies of second tier security issuers or otherwise

affect their financing arrangements, and may affect the flexibility of
investing options for funds. As a preliminary matter, taking into
account commenters' concerns, we have determined not to eliminate money
market funds' ability to acquire second tier securities. Further, as
noted above, second tier securities represent only a very small
percentage of money market fund portfolios today and money market funds
are not the primary purchasers of second tier securities, which
suggests that our amendments would not in themselves have a material
effect on capital formation.\615\ Nonetheless, we recognize that some
non-rule 2a-7 regulated cash management funds and investment pools
voluntarily use rule 2a-7 as an investment guideline.\616\ However,
since we are only further limiting, and not eliminating, money market
funds' ability to acquire second tier securities, we do not believe
that the behavior of these non-rule 2a-7 funds will have a material
adverse effect on capital formation.
---------------------------------------------------------------------------

    \615\ Based on discussions with one commenter to clarify certain
aspects of its comment letter, however, we understand that money
market funds purchase approximately 80% of the commercial paper of
at least one second tier issuer. See Chamber/Tier 2 Issuers Comment
Letter. We understand that such a significant reliance on money
market funds to purchase a second tier issuer's securities is quite
unusual.
    \616\ See, e.g., Chamber/Tier 2 Issuers Comment Letter.
---------------------------------------------------------------------------

2. Designation of NRSROs
    We are adopting amendments requiring money market fund boards to
designate at least four NRSROs that the fund will use in determining
the eligibility of portfolio securities and that the board determines
annually issue credit ratings that are sufficiently reliable for this
use.\617\ As noted above, several commenters suggested that designating
at least three NRSROs could encourage competition among NRSROs to
achieve designation by money market fund boards.\618\ We assume that
three NRSROs issue more than 90 percent of ratings of short-term
debt.\619\ Requiring the designation of at least four NRSROs will
ensure that money market funds will consider NRSROs beyond the dominant
three. In addition, the amendment may encourage new NRSROs that issue
ratings specifically for money market fund instruments to enter the
market. To the extent that requiring designation of at least four
NRSROs will further increase competition, it also should increase the
reliability of the credit ratings of designated NRSROs. Having better
information about risk could increase the efficiency of fund managers
in determining eligibility of portfolio securities. We do not
anticipate that the proposed designation of NRSROs will have an adverse
impact on capital formation.
---------------------------------------------------------------------------

    \617\ Amended rule 2a-7(a)(11)(i).
    \618\ See, e.g., HighMark Capital Comment Letter; Invesco Aim
Comment Letter.
    \619\ See Proposing Release, supra note 2, at text accompanying
and following n.116. See also supra note 104 and accompanying text.
---------------------------------------------------------------------------

3. Stress Testing
    We are amending rule 2a-7 to require the board of directors of each
money market fund to adopt procedures providing for periodic stress
testing of the money market fund's portfolio, reporting the results of
the testing to fund boards, and providing an assessment to the
board.\620\ We believe that stress testing will increase the efficiency
of money market funds by enhancing their risk management and thus
making it more likely that the fund will be better prepared for
potential stress on the fund due to market events or shareholder
behavior. Money market funds will likely become more stable as a result
of the risk management benefits provided by stress testing, allowing
them to expand and attract further investment. If so, this result will
promote capital formation. We do not believe that stress testing will
have an adverse impact on competition or capital formation.\621\
---------------------------------------------------------------------------

    \620\ Amended rule 2a-7(c)(10)(v).
    \621\ No commenters addressed the analysis in the Proposing
Release regarding whether the proposed stress testing requirements
would promote competition, efficiency, and capital formation.
---------------------------------------------------------------------------

4. Repurchase Agreements
    We are adopting, as proposed, changes to the conditions under which
a money market fund may take advantage of the special look-through
treatment of repurchase agreements under rule 2a-7's diversification
provisions.\622\ In order to obtain such special treatment, a money
market fund will be limited to investing in repurchase agreements
collateralized by cash items or Government securities and the fund's
board of directors or its delegate will have to evaluate the
creditworthiness of the repurchase agreement's counterparty.
---------------------------------------------------------------------------

    \622\ See supra Section II.D; Proposing Release, supra note 2,
at Section II.E.
---------------------------------------------------------------------------

    We believe that these changes will limit the risk that a money
market fund incurs losses upon the sale of collateral in the event of a
counterparty's default.\623\ The lower risk will in turn increase money
market funds' ability to maintain a stable net asset value per share,
thereby preventing losses to fund investors. More stable money market
funds may attract greater investments, thus promoting capital formation
and providing a greater source of financing in the capital markets. The
changes will not negatively impact competition, efficiency, or capital
formation. In particular, commenters noted that most money market funds
typically do not look through to collateral consisting of non-
Government securities.\624\
---------------------------------------------------------------------------

    \623\ See supra note 272 and accompanying text.
    \624\ See supra note 274. Wells Fargo stated that the amendment
would negatively affect capital formation because money market funds
will no longer invest in repurchase agreements collateralized with
securities with the highest rating or unrated securities of
comparable quality, which would negatively affect counterparties and
issuers of collateral. See Wells Fargo Comment Letter. We discuss
those comments above. See supra note 273.
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5. Public Web Site Disclosure
    One of the amendments to rule 2a-7 requires money market funds to
disclose certain portfolio holdings information on their Web sites on a
monthly basis.\625\ In the Proposing Release, we requested comment on
what effect this rule amendment would have on competition, efficiency,
and capital formation.\626\ No commenters addressed the effect of this
amendment on competition, efficiency, and capital formation.
---------------------------------------------------------------------------

    \625\ See supra Section II.E.1.
    \626\ See Proposing Release, supra note 2, at Section VI.A.4.
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    The rule amendment will provide greater transparency of the fund's
investments for current and prospective shareholders, and may thus
promote more efficient allocation of investments by investors.\627\ We
believe the rule amendment may also improve competition, as better-
informed investors may prompt funds managers to provide better services
and products. We do not anticipate that funds would be disadvantaged,
with respect to competition, because so many already have chosen to
provide the information more frequently than monthly. In addition, the
investments selected by money market funds are less likely than, for
example, equity funds, to be investments from which competing funds
would obtain benefit by scrutinizing on a monthly basis.
---------------------------------------------------------------------------

    \627\ Due to the availability of the portfolio holding
information on fund Web sites, investors may allocate their
investments away from funds with riskier portfolios. Among other
things, this may reduce systemic risks as money market funds may
respond by investing in securities with less risk.
---------------------------------------------------------------------------

    The rule amendment may also promote capital formation by making
portfolio holdings information readily accessible to investors, who may
thus be more inclined to allocate their investments in a particular
fund or in money market funds instead of an

alternative product. Alternatively, the rule amendment might have the
reverse effect if the portfolio holdings information makes investors
less confident regarding the risks associated with money market funds,
including the risk that market participants might use the information
obtained through the disclosures to the detriment of the fund and its
investors, such as by trading along with the fund or ahead of the fund
by anticipating future transactions based on past transactions. We also
recognize the potential for runs on money market funds that might
result from any investors who compute market-based net asset values
from the public disclosure of portfolio holdings. As discussed above,
however, most money market funds currently disclose their portfolio
holdings on their Web sites, and therefore we do not believe that our
requirement that funds post monthly portfolio holdings will have a
material effect on the ability of investors to compute market-based
values and incite a run on the fund.
6. Processing of Transactions
    The amendments to rule 2a-7 require a money market fund to have the
capacity to redeem and sell its securities at a price based on the
fund's current net asset value per share, even if the fund's current
net asset values does not correspond to the fund's stable net asset
value or price per share. This amendment increases efficiency at money
market funds that break the buck by increasing the speed and minimizing
the operational difficulties in satisfying shareholder redemption
requests in such circumstances. It may also reduce investors' concerns
that redemptions would be unduly delayed if a money market fund were to
break the buck. We do not believe that this amendment has a material
impact on competition or capital formation.

B. Rule 17a-9

    The Commission is amending rule 17a-9 to expand the circumstances
under which affiliated persons can purchase money market fund
securities. Under the amendments, a money market fund generally will be
able to sell a portfolio security that has defaulted to an affiliated
person for the greater of the security's amortized cost value or market
value (including accrued interest), even though the security continued
to be an eligible security.\628\ In addition, the amendment permits
affiliated persons, for any reason, to purchase other portfolio
securities from an affiliated money market fund on the same terms as
long as such person is required to promptly remit to the fund any
profit it realizes from the later sale of the security.\629\ These
amendments increase the efficiency of both the Commission and money
market funds by allowing affiliated persons to purchase portfolio
securities from money market funds under distress without having to
seek no-action assurances from Commission staff. The money market fund
industry is competitive; some money market funds have well-funded
affiliates to support the money market fund while others do not. This
amendment may increase the competitive advantage of money market funds
with well-funded affiliates relative to other money market funds, which
we balanced against the need to promote stability in money market
funds. We do not believe that the amendments will have any material
impact on capital formation. We received no comments on this analysis.
---------------------------------------------------------------------------

    \628\ See amended rule 17a-9(a).
    \629\ See amended rule 17a-9(b).
---------------------------------------------------------------------------

C. Rule 22e-3

    Rule 22e-3 permits a money market fund that has broken the buck, or
is at imminent risk of breaking the buck, to suspend redemptions and
postpone the payment of proceeds pending board-approved liquidation
proceedings. We anticipate the rule will promote efficiency in the
financial markets by facilitating the orderly disposal of assets during
a liquidation. To the extent that investors choose money market funds
over alternative investments because the rule provides reassurance as
to the protection of fund assets in the event a money market fund
breaks the buck, the rule also may promote capital formation. If,
however, the possibility that redemptions may be suspended during a
liquidation makes money market funds less appealing to investors, the
rule may have a negative effect on capital formation. The rule also may
help make investors more confident that they will receive the proceeds
from their investment in the event of a liquidation. We do not believe
that the rule will have any adverse effect on competition. We received
no comments on this analysis.

D. Rule 30b1-7 and Form N-MFP: Monthly Reporting of Portfolio Holdings

    New rule 30b1-7 and Form N-MFP mandate the monthly electronic
filing of each money market fund's portfolio holdings information in
XML-tagged format. As discussed above, we believe the new reporting
requirement will improve the efficiency and effectiveness of the
Commission's oversight of money market funds. The availability, and
usability, of this data will also promote efficiency for other third
parties that may be interested in collecting and analyzing money market
funds' portfolio holdings information. Money market funds currently are
often required to provide this information to various third parties in
different formats. To the extent that the new reporting requirement may
encourage a standardized format for disclosure or transmission of
portfolio holdings information, it may promote efficiency for money
market funds. We do not believe that the reporting requirement will
have an adverse effect on capital formation.
    In the Proposing Release, we requested comment on what effect the
proposed rule \630\ would have on competition, efficiency, and capital
formation.\631\ One commenter stated that the Commission's view that
the proposed rule would not have an adverse effect on competition may
be incorrect for subadvised money market funds, because a number of the
information items in Form N-MFP require information that typically is
in the possession of the subadviser who manages the portfolio and not
the principal adviser who, in most cases, would be responsible for
preparing Form N-MFP. The commenter stated that obtaining the data from
subadvisers would be costly because it would have to be done on a real-
time basis, which would require a significant investment in new
infrastructure.\632\ The information required by the items cited by the
commenter, however, already should be readily available to the
subadviser.\633\ The information also is

not needed on a real-time basis by the principal adviser because the
form requires information as of the last business day of the preceding
month. Moreover, we have lengthened the time for filing Form N-MFP from
the proposed two business days after the end of each month to five
business days after the end of each month. This change should provide
subadvisers with sufficient time to send the information to the
principal adviser without having to invest in new infrastructure to
provide the information on a real-time basis.\634\ We therefore
continue to believe that the reporting requirement will not have an
adverse effect on competition.
---------------------------------------------------------------------------

    \630\ The rule was proposed as rule 30b1-6. As noted above, in
September 2009 we adopted interim final temporary rule 30b1-6T. We
therefore have adopted proposed rule 30b1-6 as rule 30b1-7.
    \631\ See Proposing Release, supra note 2, at Section VI.D.
    \632\ See Committee Ann. Insur. Comment Letter. In particular,
the commenter stated that the information required by Items 17
(dollar weighted average life maturity), 20 (CIK of the issuer of
security), 26(b) (credit rating given by the NRSROs for the
security), and 30-35 (information on enhancements) of proposed Form
N-MFP are not typically in the possession of the principal adviser
and must be obtained from the subadviser managing the portfolio. The
commenter asserted that the Commission's estimate of 128 burden
hours per money market fund for the first year (1 filing x 40 hours
+ 11 filings x 8 hours) is far too low for subadvised funds. For the
reasons discussed below, we do not believe that subadvised funds
would be subject to significant investment in new infrastructure and
thus we believe that the burden estimate is not too low for
subadvised funds. The commenter does not state that there would be
any ongoing additional costs for compliance with Form N-MFP by
subadvised money market funds.
    \633\ Subadvisers must have all of the information required by
the particular items the commenter specifies in order to manage the
portfolio on a day-to-day basis in compliance with rule 2a-7, other
than an issuer's CIK. Under Form N-MFP, as adopted, the CIK of the
issuer of the security is only required if the security does not
have a CUSIP and the issuer has a CIK. Under our proposal the CIK
number of the issuer would have been required for all securities.
    \634\ By increasing the deadline to five business days, filers
also will have at least two non-business days (in addition to the
extra three business days) in which to complete and submit the form.
---------------------------------------------------------------------------

    The amendments also will require the public disclosure of a money
market fund's market-based net asset value. We expect that the
disclosure of month-end market-based NAV may discourage the fund's
portfolio manager from taking certain risks that could reduce the
fund's market-based NAV. The money market fund industry is
characterized by a mix of competitors with and without affiliates that
can provide financial support. The new disclosure might encourage funds
that have affiliates with the ability to provide financial support to
request such support as soon as any problems develop. This support
could provide stability to funds that receive the support. This support
might also give a competitive advantage to funds that receive it
because they may be more willing to invest in securities with higher
risk and higher yields. However, the extent of this competitive
advantage may be mitigated because the amendments will require the
disclosure of the fund's market-based NAV with and without capital
support agreements. In addition, much of the extent to which fund
managers might take advantage of capital support arrangements to boost
fund yields is independent of the amendments we are adopting today and
affiliated persons of money market funds are not obligated to support
these funds.
    The disclosure of a market-based net asset value below $1.00 also
might precipitate a run on the fund. If one fund were to fail for this
reason, runs might develop in other money market funds, even those with
relatively high market-based net asset values. However, we believe that
shareholders will benefit from knowing the monthly market-based net
asset values of money market funds. We anticipate that the public
availability of these values will help investors make informed
decisions about whether to invest, or maintain their investments, in
money market funds. We also anticipate that retail investors over time
will become acclimated to the market-based net asset value information
that money market funds will be required to disclose, and that most of
those investors will not likely make decisions based on immaterial
changes to funds' portfolio values. In response to concerns expressed
by some commenters about the potential for harm that immediate public
disclosure may pose for funds, we will delay for 60 days after the end
of the reporting period, public disclosure of the information filed on
Form N-MFP, including the market-based net asset values.\635\
---------------------------------------------------------------------------

    \635\ See supra Section II.E.2.
---------------------------------------------------------------------------

E. Rule 30b1-6T

    Rule 30b1-6T is intended to facilitate oversight of money market
funds that present a greater risk that they will be unable to maintain
their primary investment objectives. As noted above, the nonpublic
reports are designed to improve the efficiency and effectiveness of the
Commission's oversight of such money market funds, which may also
provide reassurance to investors, which may in turn promote capital
formation. We do not believe that the rule will have any effect on
competition.

VII. Regulatory Flexibility Act Certification

    The Commission certified, pursuant to section 605(b) of the
Regulatory Flexibility Act of 1980 that the proposed amendments to
rules 2a-7, 17a-9, and 30b1-5, and proposed rules 30b1-6 and 22e-3
under the Investment Company Act would not have a significant economic
impact on a substantial number of small entities.\636\ We included this
certification in Section VII of the Proposing Release. Although we
encouraged written comments regarding this certification, no commenters
responded to this request.\637\
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    \636\ 5 U.S.C. 605(b). Based on information in filings submitted
to the Commission, we believe that there are no money market funds
that are small entities. Under rule 0-10 under the Investment
Company Act, an investment company is considered a small entity if
it, together with other investment companies in the same group of
related investment companies, has net assets of $50 million or less
as of the end of its most recent fiscal year.
    \637\ We also certified that rule 30b1-6T would not have a
significant economic impact on a substantial number of small
entities. See Rule 30b1-6T Release, supra note 303, at Section VIII.
We received no comment on that certification.
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VIII. Statutory Authority

    The Commission is adopting amendments to rule 2a-7 under the
exemptive and rulemaking authority set forth in sections 6(c), 8(b),
22(c), and 38(a) of the Investment Company Act [15 U.S.C. 80a-6(c),
80a-8(b), 80a-22(c), 80a-37(a)]. The Commission is adopting amendments
to rule 17a-9 pursuant to the authority set forth in sections 6(c) and
38(a) of the Investment Company Act [15 U.S.C. 80a-6(c), 80a-37(a)].
The Commission is adopting rule 22e-3 pursuant to the authority set
forth in sections 6(c), 22(e) and 38(a) of the Investment Company Act
[15 U.S.C. 80a-6(c), 80a-22(e), and 80a-37(a)]. The Commission is
adopting an amendment to rule 30b1-6T pursuant to authority set forth
in sections 8(b), 30(b), 31(a), and 38(a) of the Investment Company Act
[15 U.S.C. 80a-8(b), 80a-29(b), 80a-30(a), and 80a-37(a)]. The
Commission is adopting new rule 30b1-7 and Form N-MFP pursuant to
authority set forth in sections 8(b), 30(b), 31(a), and 38(a) of the
Investment Company Act [15 U.S.C. 80a-8(b), 80a-29(b), 80a-30(a), and
80a-37(a)].

List of Subjects in 17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements,
Securities.

Text of Rules, Rule Amendments, and Form

0
For reasons set out in the preamble, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
1. The authority citation for Part 270 continues to read, in part, as
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *
0
2. Section 270.2a-7 is revised to read as follows:

Sec.  270.2a-7  Money market funds.

    (a) Definitions.
    (1) Acquisition (or Acquire) means any purchase or subsequent
rollover (but does not include the failure to exercise a Demand
Feature).

    (2) Amortized Cost Method of valuation means the method of
calculating an investment company's net asset value whereby portfolio
securities are valued at the fund's Acquisition cost as adjusted for
amortization of premium or accretion of discount rather than at their
value based on current market factors.
    (3) Asset Backed Security means a fixed income security (other than
a Government Security) issued by a Special Purpose Entity (as defined
in this paragraph), substantially all of the assets of which consist of
Qualifying Assets (as defined in this paragraph). Special Purpose
Entity means a trust, corporation, partnership or other entity
organized for the sole purpose of issuing securities that entitle their
holders to receive payments that depend primarily on the cash flow from
Qualifying Assets, but does not include a registered investment
company. Qualifying Assets means financial assets, either fixed or
revolving, that by their terms convert into cash within a finite time
period, plus any rights or other assets designed to assure the
servicing or timely distribution of proceeds to security holders.
    (4) Business Day means any day, other than Saturday, Sunday, or any
customary business holiday.
    (5) Collateralized Fully means ``Collateralized Fully'' as defined
in Sec.  270.5b-3(c)(1) except that Sec.  270.5b-3(c)(1)(iv)(C) and (D)
shall not apply.
    (6) Conditional Demand Feature means a Demand Feature that is not
an Unconditional Demand Feature. A Conditional Demand Feature is not a
Guarantee.
    (7) Conduit Security means a security issued by a Municipal Issuer
(as defined in this paragraph) involving an arrangement or agreement
entered into, directly or indirectly, with a person other than a
Municipal Issuer, which arrangement or agreement provides for or
secures repayment of the security. Municipal Issuer means a State or
territory of the United States (including the District of Columbia), or
any political subdivision or public instrumentality of a State or
territory of the United States. A Conduit Security does not include a
security that is:
    (i) Fully and unconditionally guaranteed by a Municipal Issuer;
    (ii) Payable from the general revenues of the Municipal Issuer or
other Municipal Issuers (other than those revenues derived from an
agreement or arrangement with a person who is not a Municipal Issuer
that provides for or secures repayment of the security issued by the
Municipal Issuer);
    (iii) Related to a project owned and operated by a Municipal
Issuer; or
    (iv) Related to a facility leased to and under the control of an
industrial or commercial enterprise that is part of a public project
which, as a whole, is owned and under the control of a Municipal
Issuer.
    (8) Daily Liquid Assets means:
    (i) Cash;
    (ii) Direct obligations of the U.S. Government; or
    (iii) Securities that will mature or are subject to a Demand
Feature that is exercisable and payable within one Business Day.
    (9) Demand Feature means:
    (i) A feature permitting the holder of a security to sell the
security at an exercise price equal to the approximate amortized cost
of the security plus accrued interest, if any, at the time of exercise.
A Demand Feature must be exercisable either:
    (A) At any time on no more than 30 calendar days' notice; or
    (B) At specified intervals not exceeding 397 calendar days and upon
no more than 30 calendar days' notice; or
    (ii) A feature permitting the holder of an Asset Backed Security
unconditionally to receive principal and interest within 397 calendar
days of making demand.
    (10) Demand Feature Issued By A Non-Controlled Person means a
Demand Feature issued by:
    (i) A person that, directly or indirectly, does not control, and is
not controlled by or under common control with the issuer of the
security subject to the Demand Feature (control means ``control'' as
defined in section 2(a)(9) of the Act) (15 U.S.C. 80a-2(a)(9)); or
    (ii) A sponsor of a Special Purpose Entity with respect to an Asset
Backed Security.
    (11) Designated NRSRO means any one of at least four nationally
recognized statistical rating organizations, as that term is defined in
section 3(a)(62) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(62)), that:
    (i) The money market fund's board of directors:
    (A) Has designated as an NRSRO whose credit ratings with respect to
any obligor or security or particular obligors or securities will be
used by the fund to determine whether a security is an Eligible
Security; and
    (B) Determines at least once each calendar year issues credit
ratings that are sufficiently reliable for such use;
    (ii) Is not an ``affiliated person,'' as defined in section
2(a)(3)(C) of the Act (15 U.S.C. 80a-2(a)(3)(C)), of the issuer of, or
any insurer or provider of credit support for, the security; and
    (iii) The fund discloses in its statement of additional information
is a Designated NRSRO, including any limitations with respect to the
fund's use of such designation.
    (12) Eligible Security means:
    (i) A Rated Security with a remaining maturity of 397 calendar days
or less that has received a rating from the Requisite NRSROs in one of
the two highest short-term rating categories (within which there may be
sub-categories or gradations indicating relative standing); or
    (ii) An Unrated Security that is of comparable quality to a
security meeting the requirements for a Rated Security in paragraph
(a)(12)(i) of this section, as determined by the money market fund's
board of directors; provided, however, that: a security that at the
time of issuance had a remaining maturity of more than 397 calendar
days but that has a remaining maturity of 397 calendar days or less and
that is an Unrated Security is not an Eligible Security if the security
has received a long-term rating from any Designated NRSRO that is not
within the Designated NRSRO's three highest long-term ratings
categories (within which there may be sub-categories or gradations
indicating relative standing), unless the security has received a long-
term rating from the Requisite NRSROs in one of the three highest
rating categories.
    (iii) In addition, in the case of a security that is subject to a
Demand Feature or Guarantee:
    (A) The Guarantee has received a rating from a Designated NRSRO or
the Guarantee is issued by a guarantor that has received a rating from
a Designated NRSRO with respect to a class of debt obligations (or any
debt obligation within that class) that is comparable in priority and
security to the Guarantee, unless:
    (1) The Guarantee is issued by a person that, directly or
indirectly, controls, is controlled by or is under common control with
the issuer of the security subject to the Guarantee (other than a
sponsor of a Special Purpose Entity with respect to an Asset Backed
Security);
    (2) The security subject to the Guarantee is a repurchase agreement
that is Collateralized Fully; or
    (3) The Guarantee is itself a Government Security; and
    (B) The issuer of the Demand Feature or Guarantee, or another
institution, has undertaken promptly to notify the holder of the
security in the event the Demand Feature or Guarantee is

substituted with another Demand Feature or Guarantee (if such
substitution is permissible under the terms of the Demand Feature or
Guarantee).
    (13) Event of Insolvency means ``Event of Insolvency'' as defined
in Sec.  270.5b-3(c)(2).
    (14) First Tier Security means any Eligible Security that:
    (i) Is a Rated Security that has received a short-term rating from
the Requisite NRSROs in the highest short-term rating category for debt
obligations (within which there may be sub-categories or gradations
indicating relative standing);
    (ii) Is an Unrated Security that is of comparable quality to a
security meeting the requirements for a Rated Security in paragraph
(a)(14)(i) of this section, as determined by the fund's board of
directors;
    (iii) Is a security issued by a registered investment company that
is a money market fund; or
    (iv) Is a Government Security.
    (15) Floating Rate Security means a security the terms of which
provide for the adjustment of its interest rate whenever a specified
interest rate changes and that, at any time until the final maturity of
the instrument or the period remaining until the principal amount can
be recovered through demand, can reasonably be expected to have a
market value that approximates its amortized cost.
    (16) Government Security means any ``Government security'' as
defined in section 2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16)).
    (17) Guarantee means an unconditional obligation of a person other
than the issuer of the security to undertake to pay, upon presentment
by the holder of the Guarantee (if required), the principal amount of
the underlying security plus accrued interest when due or upon default,
or, in the case of an Unconditional Demand Feature, an obligation that
entitles the holder to receive upon exercise the approximate amortized
cost of the underlying security or securities, plus accrued interest,
if any. A Guarantee includes a letter of credit, financial guaranty
(bond) insurance, and an Unconditional Demand Feature (other than an
Unconditional Demand Feature provided by the issuer of the security).
    (18) Guarantee Issued By A Non-Controlled Person means a Guarantee
issued by:
    (i) A person that, directly or indirectly, does not control, and is
not controlled by or under common control with the issuer of the
security subject to the Guarantee (control means ``control'' as defined
in section 2(a)(9) of the Act) (15 U.S.C. 80a-2(a)(9)); or
    (ii) A sponsor of a Special Purpose Entity with respect to an Asset
Backed Security.
    (19) Illiquid Security means a security that cannot be sold or
disposed of in the ordinary course of business within seven calendar
days at approximately the value ascribed to it by the fund.
    (20) Penny-Rounding Method of pricing means the method of computing
an investment company's price per share for purposes of distribution,
redemption and repurchase whereby the current net asset value per share
is rounded to the nearest one percent.
    (21) Rated Security means a security that meets the requirements of
paragraphs (a)(21)(i) or (ii) of this section, in each case subject to
paragraph (a)(21)(iii) of this section:
    (i) The security has received a short-term rating from a Designated
NRSRO, or has been issued by an issuer that has received a short-term
rating from a Designated NRSRO with respect to a class of debt
obligations (or any debt obligation within that class) that is
comparable in priority and security with the security; or
    (ii) The security is subject to a Guarantee that has received a
short-term rating from a Designated NRSRO, or a Guarantee issued by a
guarantor that has received a short-term rating from a Designated NRSRO
with respect to a class of debt obligations (or any debt obligation
within that class) that is comparable in priority and security with the
Guarantee; but
    (iii) A security is not a Rated Security if it is subject to an
external credit support agreement (including an arrangement by which
the security has become a Refunded Security) that was not in effect
when the security was assigned its rating, unless the security has
received a short-term rating reflecting the existence of the credit
support agreement as provided in paragraph (a)(21)(i) of this section,
or the credit support agreement with respect to the security has
received a short-term rating as provided in paragraph (a)(21)(ii) of
this section.
    (22) Refunded Security means ``Refunded Security'' as defined in
Sec.  270.5b-3(c)(4).
    (23) Requisite NRSROs means:
    (i) Any two Designated NRSROs that have issued a rating with
respect to a security or class of debt obligations of an issuer; or
    (ii) If only one Designated NRSRO has issued a rating with respect
to such security or class of debt obligations of an issuer at the time
the fund acquires the security, that Designated NRSRO.
    (24) Second Tier Security means any Eligible Security that is not a
First Tier Security.
    (25) Single State Fund means a Tax Exempt Fund that holds itself
out as seeking to maximize the amount of its distributed income that is
exempt from the income taxes or other taxes on investments of a
particular State and, where applicable, subdivisions thereof.
    (26) Tax Exempt Fund means any money market fund that holds itself
out as distributing income exempt from regular Federal income tax.
    (27) Total Assets means, with respect to a money market fund using
the Amortized Cost Method, the total amortized cost of its assets and,
with respect to any other money market fund, the total market-based
value of its assets.
    (28) Unconditional Demand Feature means a Demand Feature that by
its terms would be readily exercisable in the event of a default in
payment of principal or interest on the underlying security or
securities.
    (29) United States Dollar-Denominated means, with reference to a
security, that all principal and interest payments on such security are
payable to security holders in United States dollars under all
circumstances and that the interest rate of, the principal amount to be
repaid, and the timing of payments related to such security do not vary
or float with the value of a foreign currency, the rate of interest
payable on foreign currency borrowings, or with any other interest rate
or index expressed in a currency other than United States dollars.
    (30) Unrated Security means a security that is not a Rated
Security.
    (31) Variable Rate Security means a security the terms of which
provide for the adjustment of its interest rate on set dates (such as
the last day of a month or calendar quarter) and that, upon each
adjustment until the final maturity of the instrument or the period
remaining until the principal amount can be recovered through demand,
can reasonably be expected to have a market value that approximates its
amortized cost.
    (32) Weekly Liquid Assets means:
    (i) Cash;
    (ii) Direct obligations of the U.S. Government;
    (iii) Government Securities that are issued by a person controlled
or supervised by and acting as an instrumentality of the Government of
the United States pursuant to authority granted by the Congress of the
United States that:

    (A) Are issued at a discount to the principal amount to be repaid
at maturity; and
    (B) Have a remaining maturity date of 60 days or less; or
    (iv) Securities that will mature or are subject to a Demand Feature
that is exercisable and payable within five Business Days.
    (b) Holding Out and Use of Names and Titles. (1) It shall be an
untrue statement of material fact within the meaning of section 34(b)
of the Act (15 U.S.C. 80a-33(b)) for a registered investment company,
in any registration statement, application, report, account, record, or
other document filed or transmitted pursuant to the Act, including any
advertisement, pamphlet, circular, form letter, or other sales
literature addressed to or intended for distribution to prospective
investors that is required to be filed with the Commission by section
24(b) of the Act (15 U.S.C. 80a-24(b)), to hold itself out to investors
as a money market fund or the equivalent of a money market fund, unless
such registered investment company meets the conditions of paragraphs
(c)(2), (c)(3), (c)(4), and (c)(5) of this section.
    (2) It shall constitute the use of a materially deceptive or
misleading name or title within the meaning of section 35(d) of the Act
(15 U.S.C. 80a-34(d)) for a registered investment company to adopt the
term ``money market'' as part of its name or title or the name or title
of any redeemable securities of which it is the issuer, or to adopt a
name that suggests that it is a money market fund or the equivalent of
a money market fund, unless such registered investment company meets
the conditions of paragraphs (c)(2), (c)(3), (c)(4), and (c)(5) of this
section.
    (3) For purposes of this paragraph, a name that suggests that a
registered investment company is a money market fund or the equivalent
thereof shall include one that uses such terms as ``cash,'' ``liquid,''
``money,'' ``ready assets'' or similar terms.
    (c) Share Price Calculations. The current price per share, for
purposes of distribution, redemption and repurchase, of any redeemable
security issued by any registered investment company (``money market
fund'' or ``fund''), notwithstanding the requirements of section
2(a)(41) of the Act (15 U.S.C. 80a-2(a)(41)) and of Sec. Sec.  270.2a-4
and 270.22c-1 thereunder, may be computed by use of the Amortized Cost
Method or the Penny-Rounding Method; provided, however, that:
    (1) Board Findings. The board of directors of the money market fund
shall determine, in good faith, that it is in the best interests of the
fund and its shareholders to maintain a stable net asset value per
share or stable price per share, by virtue of either the Amortized Cost
Method or the Penny-Rounding Method, and that the money market fund
will continue to use such method only so long as the board of directors
believes that it fairly reflects the market-based net asset value per
share.
    (2) Portfolio Maturity. The money market fund shall maintain a
dollar-weighted average portfolio maturity appropriate to its objective
of maintaining a stable net asset value per share or price per share;
provided, however, that the money market fund will not:
    (i) Acquire any instrument with a remaining maturity of greater
than 397 calendar days;
    (ii) Maintain a dollar-weighted average portfolio maturity that
exceeds 60 calendar days; or
    (iii) Maintain a dollar-weighted average portfolio maturity that
exceeds 120 calendar days, determined without reference to the
exceptions in paragraph (d) of this section regarding interest rate
readjustments.
    (3) Portfolio Quality--(i) General. The money market fund shall
limit its portfolio investments to those United States Dollar-
Denominated securities that the fund's board of directors determines
present minimal credit risks (which determination must be based on
factors pertaining to credit quality in addition to any rating assigned
to such securities by a Designated NRSRO) and that are at the time of
Acquisition Eligible Securities.
    (ii) Second Tier Securities. No money market fund shall Acquire a
Second Tier Security with a remaining maturity of greater than 45
calendar days. Immediately after the Acquisition of any Second Tier
Security, a money market fund shall not have invested more than three
percent of its Total Assets in Second Tier Securities.
    (iii) Securities Subject to Guarantees. A security that is subject
to a Guarantee may be determined to be an Eligible Security or a First
Tier Security based solely on whether the Guarantee is an Eligible
Security or First Tier Security, as the case may be.
    (iv) Securities Subject to Conditional Demand Features. A security
that is subject to a Conditional Demand Feature (``Underlying
Security'') may be determined to be an Eligible Security or a First
Tier Security only if:
    (A) The Conditional Demand Feature is an Eligible Security or First
Tier Security, as the case may be;
    (B) At the time of the Acquisition of the Underlying Security, the
money market fund's board of directors has determined that there is
minimal risk that the circumstances that would result in the
Conditional Demand Feature not being exercisable will occur; and
    (1) The conditions limiting exercise either can be monitored
readily by the fund, or relate to the taxability, under Federal, State
or local law, of the interest payments on the security; or
    (2) The terms of the Conditional Demand Feature require that the
fund will receive notice of the occurrence of the condition and the
opportunity to exercise the Demand Feature in accordance with its
terms; and
    (C) The Underlying Security or any Guarantee of such security (or
the debt securities of the issuer of the Underlying Security or
Guarantee that are comparable in priority and security with the
Underlying Security or Guarantee) has received either a short-term
rating or a long-term rating, as the case may be, from the Requisite
NRSROs within the NRSROs' two highest short-term or long-term rating
categories (within which there may be sub-categories or gradations
indicating relative standing) or, if unrated, is determined to be of
comparable quality by the money market fund's board of directors to a
security that has received a rating from the Requisite NRSROs within
the NRSROs' two highest short-term or long-term rating categories, as
the case may be.
    (4) Portfolio Diversification--(i) Issuer Diversification. The
money market fund shall be diversified with respect to issuers of
securities Acquired by the fund as provided in paragraphs (c)(4)(i) and
(c)(4)(ii) of this section, other than with respect to Government
Securities and securities subject to a Guarantee Issued By A Non-
Controlled Person.
    (A) Taxable and National Funds. Immediately after the Acquisition
of any security, a money market fund other than a Single State Fund
shall not have invested more than five percent of its Total Assets in
securities issued by the issuer of the security; provided, however,
that such a fund may invest up to twenty-five percent of its Total
Assets in the First Tier Securities of a single issuer for a period of
up to three Business Days after the Acquisition thereof; provided,
further, that the fund may not invest in the securities of more than
one issuer in accordance with the foregoing proviso in this paragraph
at any time.
    (B) Single State Funds. With respect to seventy-five percent of its
Total Assets, immediately after the Acquisition of any security, a
Single

State Fund shall not have invested more than five percent of its Total
Assets in securities issued by the issuer of the security.
    (C) Second Tier Securities. Immediately after the Acquisition of
any Second Tier Security, a money market fund shall not have invested
more than one half of one percent of its Total Assets in the Second
Tier Securities of any single issuer.
    (ii) Issuer Diversification Calculations. For purposes of making
calculations under paragraph (c)(4)(i) of this section:
    (A) Repurchase Agreements. The Acquisition of a repurchase
agreement may be deemed to be an Acquisition of the underlying
securities, provided the obligation of the seller to repurchase the
securities from the money market fund is Collateralized Fully and the
fund's board of directors has evaluated the seller's creditworthiness.
    (B) Refunded Securities. The Acquisition of a Refunded Security
shall be deemed to be an Acquisition of the escrowed Government
Securities.
    (C) Conduit Securities. A Conduit Security shall be deemed to be
issued by the person (other than the Municipal Issuer) ultimately
responsible for payments of interest and principal on the security.
    (D) Asset Backed Securities--(1) General. An Asset Backed Security
Acquired by a fund (``Primary ABS'') shall be deemed to be issued by
the Special Purpose Entity that issued the Asset Backed Security,
provided, however:
    (i) Holdings of Primary ABS. Any person whose obligations
constitute ten percent or more of the principal amount of the
Qualifying Assets of the Primary ABS (``Ten Percent Obligor'') shall be
deemed to be an issuer of the portion of the Primary ABS such
obligations represent; and
    (ii) Holdings of Secondary ABS. If a Ten Percent Obligor of a
Primary ABS is itself a Special Purpose Entity issuing Asset Backed
Securities (``Secondary ABS''), any Ten Percent Obligor of such
Secondary ABS also shall be deemed to be an issuer of the portion of
the Primary ABS that such Ten Percent Obligor represents.
    (2) Restricted Special Purpose Entities. A Ten Percent Obligor with
respect to a Primary or Secondary ABS shall not be deemed to have
issued any portion of the assets of a Primary ABS as provided in
paragraph (c)(4)(ii)(D)(1) of this section if that Ten Percent Obligor
is itself a Special Purpose Entity issuing Asset Backed Securities
(``Restricted Special Purpose Entity''), and the securities that it
issues (other than securities issued to a company that controls, or is
controlled by or under common control with, the Restricted Special
Purpose Entity and which is not itself a Special Purpose Entity issuing
Asset Backed Securities) are held by only one other Special Purpose
Entity.
    (3) Demand Features and Guarantees. In the case of a Ten Percent
Obligor deemed to be an issuer, the fund shall satisfy the
diversification requirements of paragraph (c)(4)(iii) of this section
with respect to any Demand Feature or Guarantee to which the Ten
Percent Obligor's obligations are subject.
    (E) Shares of Other Money Market Funds. A money market fund that
Acquires shares issued by another money market fund in an amount that
would otherwise be prohibited by paragraph (c)(4)(i) of this section
shall nonetheless be deemed in compliance with this section if the
board of directors of the Acquiring money market fund reasonably
believes that the fund in which it has invested is in compliance with
this section.
    (iii) Diversification Rules for Demand Features and Guarantees. The
money market fund shall be diversified with respect to Demand Features
and Guarantees Acquired by the fund as provided in paragraphs
(c)(4)(iii) and (c)(4)(iv) of this section, other than with respect to
a Demand Feature issued by the same institution that issued the
underlying security, or with respect to a Guarantee or Demand Feature
that is itself a Government Security.
    (A) General. Immediately after the Acquisition of any Demand
Feature or Guarantee or security subject to a Demand Feature or
Guarantee, a money market fund, with respect to seventy-five percent of
its Total Assets, shall not have invested more than ten percent of its
Total Assets in securities issued by or subject to Demand Features or
Guarantees from the institution that issued the Demand Feature or
Guarantee, subject to paragraphs (c)(4)(iii)(B) and (C) of this
section.
    (B) Second Tier Demand Features or Guarantees. Immediately after
the Acquisition of any Demand Feature or Guarantee (or a security after
giving effect to the Demand Feature or Guarantee) that is a Second Tier
Security, a money market fund shall not have invested more than 2.5
percent of its Total Assets in securities issued by or subject to
Demand Features or Guarantees from the institution that issued the
Demand Feature or Guarantee.
    (C) Demand Features or Guarantees Issued by Non-Controlled Persons.
Immediately after the Acquisition of any security subject to a Demand
Feature or Guarantee, a money market fund shall not have invested more
than ten percent of its Total Assets in securities issued by, or
subject to Demand Features or Guarantees from the institution that
issued the Demand Feature or Guarantee, unless, with respect to any
security subject to Demand Features or Guarantees from that institution
(other than securities issued by such institution), the Demand Feature
or Guarantee is a Demand Feature or Guarantee Issued By A Non-
Controlled Person.
    (iv) Demand Feature and Guarantee Diversification Calculations--(A)
Fractional Demand Features or Guarantees. In the case of a security
subject to a Demand Feature or Guarantee from an institution by which
the institution guarantees a specified portion of the value of the
security, the institution shall be deemed to guarantee the specified
portion thereof.
    (B) Layered Demand Features or Guarantees. In the case of a
security subject to Demand Features or Guarantees from multiple
institutions that have not limited the extent of their obligations as
described in paragraph (c)(4)(iv)(A) of this section, each institution
shall be deemed to have provided the Demand Feature or Guarantee with
respect to the entire principal amount of the security.
    (v) Diversification Safe Harbor. A money market fund that satisfies
the applicable diversification requirements of paragraphs (c)(4) and
(c)(6) of this section shall be deemed to have satisfied the
diversification requirements of section 5(b)(1) of the Act (15 U.S.C.
80a-5(b)(1)) and the rules adopted thereunder.
    (5) Portfolio Liquidity. The money market fund shall hold
securities that are sufficiently liquid to meet reasonably foreseeable
shareholder redemptions in light of the fund's obligations under
section 22(e) of the Act (15 U.S.C. 80a-22(e)) and any commitments the
fund has made to shareholders; provided, however, that:
    (i) Illiquid Securities. The money market fund shall not Acquire
any Illiquid Security if, immediately after the Acquisition, the money
market fund would have invested more than five percent of its Total
Assets in Illiquid Securities.
    (ii) Minimum Daily Liquidity Requirement. The money market fund
shall not Acquire any security other than a Daily Liquid Asset if,
immediately after the Acquisition, the fund would have invested less
than ten percent of its Total Assets in Daily Liquid Assets. This
provision shall not apply to Tax Exempt Funds.

    (iii) Minimum Weekly Liquidity Requirement. The money market fund
shall not Acquire any security other than a Weekly Liquid Asset if,
immediately after the Acquisition, the fund would have invested less
than thirty percent of its Total Assets in Weekly Liquid Assets.
    (6) Demand Features and Guarantees Not Relied Upon. If the fund's
board of directors has determined that the fund is not relying on a
Demand Feature or Guarantee to determine the quality (pursuant to
paragraph (c)(3) of this section), or maturity (pursuant to paragraph
(d) of this section), or liquidity of a portfolio security, and
maintains a record of this determination (pursuant to paragraphs
(c)(10)(ii) and (c)(11)(vi) of this section), then the fund may
disregard such Demand Feature or Guarantee for all purposes of this
section.
    (7) Downgrades, Defaults and Other Events--(i) Downgrades--(A)
General. Upon the occurrence of either of the events specified in
paragraphs (c)(7)(i)(A)(1) and (2) of this section with respect to a
portfolio security, the board of directors of the money market fund
shall reassess promptly whether such security continues to present
minimal credit risks and shall cause the fund to take such action as
the board of directors determines is in the best interests of the money
market fund and its shareholders:
    (1) A portfolio security of a money market fund ceases to be a
First Tier Security (either because it no longer has the highest rating
from the Requisite NRSROs or, in the case of an Unrated Security, the
board of directors of the money market fund determines that it is no
longer of comparable quality to a First Tier Security); and
    (2) The money market fund's investment adviser (or any person to
whom the fund's board of directors has delegated portfolio management
responsibilities) becomes aware that any Unrated Security or Second
Tier Security held by the money market fund has, since the security was
Acquired by the fund, been given a rating by a Designated NRSRO below
the Designated NRSRO's second highest short-term rating category.
    (B) Securities To Be Disposed Of. The reassessments required by
paragraph (c)(7)(i)(A) of this section shall not be required if the
fund disposes of the security (or it matures) within five Business Days
of the specified event and, in the case of events specified in
paragraph (c)(7)(i)(A)(2) of this section, the board is subsequently
notified of the adviser's actions.
    (C) Special Rule for Certain Securities Subject to Demand Features.
In the event that after giving effect to a rating downgrade, more than
2.5 percent of the fund's Total Assets are invested in securities
issued by or subject to Demand Features from a single institution that
are Second Tier Securities, the fund shall reduce its investment in
securities issued by or subject to Demand Features from that
institution to no more than 2.5 percent of its Total Assets by
exercising the Demand Features at the next succeeding exercise date(s),
absent a finding by the board of directors that disposal of the
portfolio security would not be in the best interests of the money
market fund.
    (ii) Defaults and Other Events. Upon the occurrence of any of the
events specified in paragraphs (c)(7)(ii)(A) through (D) of this
section with respect to a portfolio security, the money market fund
shall dispose of such security as soon as practicable consistent with
achieving an orderly disposition of the security, by sale, exercise of
any Demand Feature or otherwise, absent a finding by the board of
directors that disposal of the portfolio security would not be in the
best interests of the money market fund (which determination may take
into account, among other factors, market conditions that could affect
the orderly disposition of the portfolio security):
    (A) The default with respect to a portfolio security (other than an
immaterial default unrelated to the financial condition of the issuer);
    (B) A portfolio security ceases to be an Eligible Security;
    (C) A portfolio security has been determined to no longer present
minimal credit risks; or
    (D) An Event of Insolvency occurs with respect to the issuer of a
portfolio security or the provider of any Demand Feature or Guarantee.
    (iii) Notice to the Commission. The money market fund shall
promptly notify the Commission by electronic mail directed to the
Director of Investment Management or the Director's designee, of any:
    (A) Default or Event of Insolvency with respect to the issuer of
one or more portfolio securities (other than an immaterial default
unrelated to the financial condition of the issuer) or any issuer of a
Demand Feature or Guarantee to which one or more portfolio securities
is subject, and the actions the money market fund intends to take in
response to such event, where immediately before default the securities
(or the securities subject to the Demand Feature or Guarantee)
accounted for \1/2\ of 1 percent or more of the money market fund's
Total Assets; or
    (B) Purchase of a security from the fund by an affiliated person,
promoter, or principal underwriter of the fund, or an affiliated person
of such a person, in reliance on Sec.  270.17a-9, including
identification of the security, its amortized cost, the sale price, and
the reasons for such purchase.
    (iv) Defaults for Purposes of Paragraphs (c)(7)(ii) and (iii). For