fund that had exposure to an entity greater than 5 percent when those
assets matured would have to reinvest the proceeds of the securities
creating that exposure in different securities or securities with a
different guarantor. Those changes may or may not require those funds
to invest in alternative securities, and those securities might present
greater risk if they offered lower yields, lower liquidity, or lower
credit quality. In addition, we believe the approach we take today is
preferable to making both the guarantor and issuer subject to a 5
percent diversification requirement because unlike a security that is
not subject to a guarantee, a security that is subject to a guarantee
would continue to have two sources of repayment.
    Another commenter stated that the Commission has provided for the
higher 10 percent limit on indirect exposure of money market funds to
guarantors in part because of the ``double-barreled'' protection, as
discussed above, and suggested that the same logic should apply in
imposing an issuer diversification limit on guaranteed securities.\180\
This commenter recommended that a 10 percent issuer diversification
limit be applied under the rule for securities of an issuer that are
guaranteed by a non-controlled person.\181\ Rather than subject these
issuers to a unique 10 percent requirement, however, we continue to
believe that a better approach would be to restrict risk exposures to
all issuers of securities subject to a guarantee or demand feature
under rule 2a-7 in the same way. As noted above, a money market fund is
permitted to take on greater exposure to guarantees because rather than
solely looking to the issuer, the money market fund would have two
sources of repayment. We believe that this rationale applies to all
securities equally (whether the security is subject to a guarantee by a
controlled person or a non-controlled person), and that if a money
market fund is permitted to take on a greater exposure to a guarantor,
then it must also comply with the underlying 5 percent issuer
diversification provision. Therefore, under these amendments, each
money market fund that invests in securities subject to a guarantee
(whether or not the guarantor is a non-controlled person) will have to
comply with both the 10 percent diversification requirement for the
guarantor as well as the 5 percent diversification requirement for the
issuer. As a result, except for the special provisions regarding single
state money market funds, no money market fund non-government portfolio
security would be excluded from rule 2a-7's limits on issuer
concentration. \182\
---------------------------------------------------------------------------

    \180\ See SFIG Comment Letter.
    \181\ See id.
    \182\ See rule 2a-7(d)(3)(i)(B) (issuer diversification
requirements for single state money market funds).
---------------------------------------------------------------------------

2. Tax-Exempt Funds
    Several commenters argued that the proposed issuer diversification
amendment should not be applied to tax-exempt money market funds in
particular.\183\ A couple of these commenters stated that the
Commission has previously recognized that tax-exempt money market funds
should have unique treatment in certain instances due to the particular
characteristics of tax-exempt money market funds, including the more
constrained supply of investable securities as opposed to other types
of money market funds.\184\ Several

commenters argued that removing the issuer diversification exclusion
would cause greater supply challenges, particularly in the tax-exempt
market.\185\ One of these commenters stated that the proposed amendment
would be particularly difficult for single state money market funds due
to the limited supply of eligible securities, but these commenters did
not acknowledge that the 5 percent issuer diversification limit for
single state funds applies to only 75 percent of a single state fund's
total assets.\186\ Another commenter stated that the proposal assumes a
ready supply of securities supported by the same guarantor with
different issuers so that a fund could comply with the issuer
diversification requirement without reducing its holdings of the
guarantor's securities, but that this is not the case, particularly in
the tax-exempt market.\187\
---------------------------------------------------------------------------

    \183\ See Dreyfus Comment Letter; Fidelity Comment Letter; ICI
Comment Letter.
    \184\ See ICI Comment Letter; Fidelity Comment Letter.
    \185\ See Dreyfus Comment Letter; Fidelity Comment Letter; ICI
Comment Letter.
    \186\ See Dreyfus Comment Letter. See also rule 2a-
7(d)(3)(i)(B).
    \187\ See ICI Comment Letter.
---------------------------------------------------------------------------

    One commenter suggested that tax-exempt money market funds
regularly rely on the exclusion for securities guaranteed by non-
controlled persons to exceed the 5 percent diversification limit.\188\
In the Proposing Release, staff believed that based on an analysis of
February 2014 Form N-MFP data, only 8 out of 559 money market funds,
the majority of which were tax-exempt money market funds, held
securities with a guarantee issued by a non-controlled person that
exceeded the 5 percent diversification requirement for issuers. A
couple commenters suggested that Commission staff review a broader
sample of data from Form N-MFP to determine the magnitude of funds that
rely on the issuer diversification exclusion.\189\ One of these
commenters also suggested that Commission staff confirm that for any
given fund the staff are aggregating an issuer's securities subject to
guarantees by non-controlled persons with the issuer's securities
subject to guarantees by control persons and the issuer's securities
that are not guaranteed, in order to determine whether a fund is
potentially relying on the issuer diversification exclusion by
exceeding the 5 percent issuer diversification limit.\190\
---------------------------------------------------------------------------

    \188\ See id.
    \189\ See Dreyfus Comment Letter; ICI Comment Letter.
    \190\ See ICI Comment Letter.
---------------------------------------------------------------------------

    In order to obtain a greater sample, and in response to commenters,
the staff supplemented its analysis using October 2014 and April 2015
Form N-MFP data to review the number of funds that exceeded the 5
percent issuer diversification limit, which would indicate that such
funds were potentially relying on the 5 percent issuer diversification
exclusion.\191\ As discussed further in the economic analysis section
below, the staff's analysis shows that for October 2014, 60 money
market funds out of 553 total money market funds, or approximately 10.8
percent of all money market funds, were potentially relying on the 5
percent issuer diversification exclusion. In addition, staff analysis
shows that as of October 2014, only 0.0482 percent of total money
market fund assets were above the 5 percent issuer diversification
threshold.\192\ For April 2015, staff analysis shows that 63 money
market funds out of 542 total money market funds, or approximately 11.6
percent of all money market funds, were potentially relying on the 5
percent issuer diversification exclusion. In addition, staff analysis
shows that as of April 2015, only 0.0624 percent of total money market
fund assets were above the 5 percent issuer diversification
threshold.\193\
---------------------------------------------------------------------------

    \191\ In calculating funds' issuer concentrations, staff made
assumptions about the relationships among issuers. Such assumptions
may have caused the number of funds that appear to be relying on the
5 percent issuer diversification exclusion to be overstated. To be
conservative, staff assumed, for example, that a position in a
tender option bond that is over 5 percent of the fund's assets is
exposure to a single issuer, even though tender option bond trusts
may have more than one issuer as the underlying obligor. We expect
that funds' analysts, portfolio managers and counsel can make these
determinations based on specific facts that were not available to
the staff.
    \192\ This percentage amount corresponds to $1,447,300,000 in
assets.
    \193\ This percentage amount corresponds to $1,833,000,000 in
assets.
---------------------------------------------------------------------------

    Based on their updated analysis, Commission staff believes that
only tax-exempt money market funds appeared to be relying on the 5
percent issuer diversification exclusion. For October 2014, staff
analysis shows that 16 national tax-exempt money market funds out of 72
total national tax-exempt money market funds were potentially relying
on the 5 percent issuer diversification exclusion. In addition, staff
analysis shows that as of October 2014, only 0.1 percent of national
tax-exempt money market fund assets were above the 5 percent issuer
diversification threshold.\194\ For April 2015, staff analysis shows
that 25 national tax-exempt money market funds out of 71 total national
tax-exempt money market funds were potentially relying on the 5 percent
issuer diversification exclusion. In addition, staff analysis shows
that as of April 2015, only 0.5 percent of national tax-exempt money
market fund assets were above the 5 percent issuer diversification
threshold.\195\
---------------------------------------------------------------------------

    \194\ This percentage amount corresponds to $198,500,000 in
assets.
    \195\ This percentage amount corresponds to $893,400,000 in
assets.
---------------------------------------------------------------------------

    One commenter argued that the proposed amendment would particularly
affect single state money market funds.\196\ In response to this
commenter, and because a single state fund may currently invest up to
25 percent of its total assets in the first tier securities of any
single issuer, Commission staff also separately identified the number
of single state money market funds that appear to be relying on the
issuer diversification exclusion. For October 2014, staff analysis
shows that 44 single state money market funds out of 97 total single
state money market funds were potentially relying on the 5 percent
issuer diversification exclusion. In addition, staff analysis shows
that as of October 2014, only 1.7 percent of single state money market
fund assets were above the 5 percent issuer diversification threshold
(while taking into account the 25 percent issuer diversification
basket).\197\ For April 2015, staff analysis shows that 38 single state
money market funds out of 90 total single state money market funds were
potentially relying on the 5 percent issuer diversification exclusion.
In addition, staff analysis shows that as of April 2015, only 1.3
percent of single state money market fund assets were above the 5
percent issuer diversification threshold (while taking into account the
25 percent issuer diversification basket).\198\
---------------------------------------------------------------------------

    \196\ See Dreyfus Comment Letter.
    \197\ This percentage amount corresponds to $1,248,800,000 in
assets.
    \198\ This percentage amount corresponds to $939,600,000 in
assets.
---------------------------------------------------------------------------

    These updated analyses confirm the Commission's initial assumption
that overall, few money market funds would be affected by the issuer
diversification amendment. As indicated by the staff's analysis above,
and as discussed further in the economic analysis section below, we
continue to believe a small number of all money market funds rely on
the 5 percent issuer diversification exclusion and therefore believe
the amendment's effect on funds, including the available supply of
investable securities, would be minimal. We recognize that although
overall few money market funds are relying on the 5 percent issuer
exclusion, the amendment to remove such exclusion would
disproportionately affect tax-exempt money market funds and single

state money market funds. However, we believe that our staff's analysis
of the percentage of assets in excess of the 5 percent issuer
diversification threshold provides an accurate reflection of the
potential impact that the elimination of the 5 percent issuer
diversification exclusion would have on money market funds. We also
believe that looking to the percentage of assets in addition to the
number of funds (which shows only absolute numbers), comprehensively
shows the corresponding level of assets that will need to be
reinvested. The above data shows that for October 2014 and April 2015,
approximately 99.95 percent and 99.94 percent, respectively, of total
money market fund assets are not above the 5 percent issuer
diversification threshold. Thus, because most money market funds are
not using the exclusion and because a very high percentage of money
market fund assets are not above the threshold, we continue to believe
any negative effects for money market funds will generally be minimal.
    We also note that money market funds will not be required to sell
any of their portfolio securities as a result of our diversification
amendment because rule 2a-7's diversification limits are measured at
acquisition, and they may therefore retain these assets until they
mature. Although we understand that national tax-exempt money market
funds and single state money market funds may have made greater use of
the 5 percent issuer exclusion in the past (and might do so in the
future if we retained the 5 percent issuer diversification exclusion),
we remain concerned that funds were previously exposed to concentrated
risks inconsistent with the purposes of rule 2a-7's diversification
requirements. As discussed above, we also continue to believe that
restricting risk exposures to all issuers of securities subject to a
guarantee or demand feature in the same way will appropriately limit
the concentration of exposure that a money market fund could otherwise
have to a particular issuer. Accordingly, we continue to believe that
removing the exclusion to the 5 percent issuer diversification
provision furthers our reform goal of limiting concentrated exposure of
money market funds to particular economic enterprises.
3. Technical Amendments
    The Commission is also making technical amendments to certain
diversification provisions in rule 2a-7.\199\ First, the Commission is
amending rule 2a-7(d)(3)(i)(A)(2) to clarify that a tax-exempt fund
(other than a single state fund) is required to comply with rule 2a-
7(d)(3)(i)(A)(2) with respect to only 85 percent of its total
assets.\200\
---------------------------------------------------------------------------

    \199\ See rule 2a-7(d)(3)(i) (issuer diversification) and rule
2a-7(d)(3)(iii) (diversification rules for demand features and
guarantees).
    \200\ See rule 2a-7(d)(3)(i)(A)(2). Current rule 2a-
7(d)(3)(i)(A)(2) could be read to suggest that a tax-exempt money
market fund must not invest more than 10 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.
However, the 2014 money market fund reform amendments provided that
as much as 15 percent of the value of securities held in a tax-
exempt money market fund's portfolio may be subject to guarantees or
demand features from a single institution. The technical amendment
incorporates and reflects these 2014 money market fund reform
amendments and clarifies that a tax-exempt fund need only comply
with this provision with respect to 85 percent of its total assets,
and not with respect to all of its total assets.
---------------------------------------------------------------------------

    Second, the Commission is clarifying the use of the three-day safe
harbor as it pertains to issuer diversification. The current three-day
safe harbor provides that a money market fund may invest up to 25
percent of its total assets in first tier securities of a single issuer
for a period of three business days after the acquisition thereof.\201\
Specifically, rule 2a-7(d)(3)(i)(A)(1) generally prohibits a money
market fund (other than a single state fund) from investing more than 5
percent of its total assets in an issuer's first tier securities,
provided that such a fund may invest up to 25 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. In addition,
rule 2a-7(d)(3)(i)(A)(2) prohibits, at the time of any acquisition,
investment of more than ten percent of a money market fund's total
assets in securities issued by or subject to demand features or
guarantees from the institution that issued the demand feature or
guarantee, without making reference to the three-day safe harbor.
Because the three-day safe harbor is referenced solely in subparagraph
(1) of rule 2a-7(d)(3)(i)(A) and not in subparagraph (2) of rule 2a-
7(d)(3)(i)(A), it may have been unclear as to whether a money market
fund (other than a single state fund) could invest up to 25 percent of
its total assets in a single issuer's securities for a period of up to
three business days if some of the money market fund's securities were
subject to guarantees or demand features provided by such issuer. In
order to clarify that a money market fund (other than a single state
fund) can invest up to 25 percent of its total assets in a single
issuer's securities for a period of up to three business days if some
of the money market fund's securities are subject to guarantees or
demand features provided by such issuer, the Commission is amending
rule 2a-7(d)(3)(i)(A) to clarify that the three-day safe harbor for
issuer diversification should be read to apply to both subparagraphs
(1) and (2).\202\
---------------------------------------------------------------------------

    \201\ See supra note 161. In the amendments we are adopting
today, the three-day safe harbor will not refer to investments in
first-tier securities.
    \202\ See rule 2a-7(d)(3)(i)(A).
---------------------------------------------------------------------------

    Last, the Commission is amending rule 2a-7(d)(3)(i)(B)(2) to
clarify that a single state fund is required to comply with the
diversification limitations of rule 2a-7(d)(3)(i)(B)(2) with respect to
only 75 percent of its total assets, so long as not more than 15
percent of its total assets are invested in securities subject to
guarantees or demand features provided by an institution as provided
for in rule 2a-7(d)(iii)(B).\203\ These amendments are intended only to
clarify the diversification amendments that the Commission adopted as
part of the 2014 money market reform.
---------------------------------------------------------------------------

    \203\ See rule 2a-7(d)(3)(i)(B)(2). Current rule 2a-
7(d)(3)(i)(B)(2) could be read to suggest that a single state fund
must not invest more than 10 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.
However, a single state fund may invest up to 25 percent of its
total assets in securities of any single issuer. In addition, the
2014 money market fund reform amendments provided that as much as 15
percent of the value of securities held in a single state fund's
portfolio may be subject to guarantees or demand features from a
single institution. The technical amendment incorporates and
reflects these provisions and clarifies that a single state fund
need only comply with this provision with respect to 75 percent of
its total assets, and not with respect to all of its total assets.
---------------------------------------------------------------------------

III. Compliance Period for the Final Rule and Form Amendments

    In the Proposing Release, we proposed a compliance date for the
final amendments to rule 2a-7 and Form N-MFP that would coordinate
compliance with the rule 2a-7 amendments relating to diversification,
stress testing, and Form N-MFP, adopted in the 2014 Money Market Fund
Adopting Release. We solicited comments on this compliance period in
the Proposing Release, and one commenter addressed the issue,
suggesting that the date be pushed back so that funds will have at
least one full year to comply.\204\
---------------------------------------------------------------------------

    \204\ Schwab Comment Letter.
---------------------------------------------------------------------------

    In response to this comment, we are now adopting October 14, 2016
as the compliance date for this final rule. This date will give funds
more than a full year to comply, which we agree is appropriate, and
will also coordinate with the floating net asset value, liquidity fee,
and redemption gate

provisions in the 2014 Money Market Fund Adopting Release. We believe
that this compliance date will provide an adequate period of time for
money market funds to review and revise their policies and procedures
for complying with amended rule 2a-7.\205\ Although this compliance
date will not coincide with the compliance date for the rule 2a-7
amendments relating to diversification, stress testing, and Form N-MFP
adopted in the 2014 Money Market Fund Adopting Release, we believe that
coordinating the compliance date of these amendments with the
compliance date of the floating net asset value amendments adopted in
the 2014 Money Market Fund Adopting Release should reduce costs by
consolidating changes to be made to a fund's policies and procedures at
that time, while also providing more than a year for implementation of
these amendments.
---------------------------------------------------------------------------

    \205\ See infra section V.A.2.v.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act Analysis

    Certain provisions of this final rule contain ``collections of
information'' within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\206\ An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid control number. The titles and control
numbers for the existing collections of information that are affected
by the rule amendments are: (1) ``Rule 2a-7 under the Investment
Company Act of 1940, Money market funds'' (OMB Control No. 3235-0268);
(2) ``Rule 30b1-7 under the Investment Company Act of 1940, Monthly
report for money market funds'' (OMB Control No. 3235-0657); and (3)
``Form N-MFP under the Investment Company Act of 1940, Monthly schedule
of portfolio holdings of money market funds'' (OMB Control No. 3235-
0657). This final rule contains no new collections of information not
present in the proposed rule. The Commission published notice
soliciting comments on the collection of information requirements in
the Proposing Release and submitted the proposed collections of
information to the Office of Management and Budget (``OMB'') for review
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. We did not
receive any comments on the collection of information requirements.
---------------------------------------------------------------------------

    \206\ 44 U.S.C. 3501-3520.
---------------------------------------------------------------------------

A. Rule 2a-7

    As discussed above, we are removing references to credit ratings in
rule 2a-7, which affect five elements of the rule: (i) Determination of
whether a security is an eligible security; (ii) determination of
whether a security is a first tier security; (iii) credit quality
standards for securities with a conditional demand feature; (iv)
requirements for monitoring securities for ratings downgrades and other
credit events; and (v) stress testing. These amendments involve
collections of information, and the respondents to the collections of
information are money market funds. This collection of information will
be mandatory for money market funds that rely on rule 2a-7, and to the
extent that the Commission receives confidential information pursuant
to the collection of information, such information will be kept
confidential, subject to the provisions of applicable law.\207\
---------------------------------------------------------------------------

    \207\ See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of
Information Act provides an exemption for ``trade secrets and
commercial or financial information obtained from a person and
privileged or confidential.'' 5 U.S.C. 552(b)(4). Exemption 8 of the
Freedom of Information Act provides an exemption for matters that
are ``contained in or related to examination, operating, or
condition reports prepared by, or on behalf of, or for the use of an
agency responsible for the regulation or supervision of financial
institutions.'' 5 U.S.C. 552(b)(8)).
---------------------------------------------------------------------------

1. Eligible Security Determinations for Money Market Fund Portfolio
Securities, Including Securities That Are Subject to a Conditional
Demand Feature
    Rule 2a-7 limits a money market fund's portfolio investments to
``eligible securities,'' which are currently defined as securities that
have received credit ratings from a requisite NRSRO in one of the two
highest short-term rating categories, or comparable unrated
securities.\208\ The rule also restricts money market fund investments
to securities that the fund's board, or its delegate, determines
present minimal credit risks, and requires a fund to adopt policies and
procedures regarding minimal credit risk determinations.\209\ As
discussed above, we are adopting amendments to rule 2a-7 that will
remove any reference to, or requirement of reliance on, credit ratings
in rule 2a-7 and modify the credit quality standard to be used in
determining the eligibility of a money market fund's portfolio
securities, including securities that are subject to a conditional
demand feature. Specifically, the amendments will eliminate the current
requirement that an eligible security be rated in one of the two
highest short-term rating categories by an NRSRO or be of comparable
quality, and will combine the current ``first tier'' and ``second
tier'' credit risk categories into a single standard, which will be
included as part of rule 2a-7's definition of eligible security. A
security will be an eligible security only if the money market fund's
board of directors (or its delegate) determines that it presents
minimal credit risks, which determination will involve consideration of
specified credit analysis factors that are listed in the rule.\210\ The
amendments also require that, with respect to a security (or its
guarantee) subject to a conditional demand feature, the underlying
security (or its guarantee) must meet the same minimal credit risks
standard.\211\
---------------------------------------------------------------------------

    \208\ See current rule 2a-7(a)(12).
    \209\ See rules 2a-7(d)(2)(i); 2a-7(j)(1); 38a-1.
    \210\ Rule 2a-7(a)(11); see supra section II.A.
    \211\ Rule 2a-7(d)(2)(iii)(C); see supra section II.B. The
proposal included a further finding that the issuer of the demand
feature would have a very strong capacity for payment of its
financial commitments. See proposed rule 2a-7(d)(2)(iii)(C). As
discussed below, because the minimal credit risk standard, as
proposed, remains in the amendments we are adopting today, and,
because the strong capacity standard, as commenters noted, would be
generally superfluous and subsumed by the overriding minimal credit
risk determination, we are not revising our burden estimate from the
proposal.
---------------------------------------------------------------------------

    Money market funds are required to have written policies and
procedures regarding minimal credit risk determinations.\212\ Thus,
each money market fund complex will incur one-time costs to comply with
these amendments. Specifically, each fund complex will incur costs to
review the amended provisions of rule 2a-7 and, as it determines
appropriate in light of the amendments, revise its policies and
procedures to incorporate the amended credit quality standards to be
used in determining the eligibility of a money market fund's portfolio
securities. As discussed below, we anticipate that many funds are
likely to retain their investment policies as currently required under
rule 2a-7, which incorporate NRSRO ratings and which will be permitted
under the rule amendments.\213\ Some funds, on the other hand, may
choose to revise their investment policies to remove references to
NRSRO ratings and to incorporate the standards provided in the rule.
Even if funds choose to eliminate references to ratings in their
investment policies, funds' investment policies may not change
substantially, as funds are already required to assess credit quality
apart from ratings as part of their minimal credit risk
determinations.\214\ As we noted in the discussion above, based on
staff observations in examinations and prior staff guidance, we believe
that most

money market fund managers currently take the codified credit analysis
factors into account, as appropriate, when they determine that a
portfolio security presents minimal credit risks.
---------------------------------------------------------------------------

    \212\ See rule 2a-7(j)(1).
    \213\ See infra section V.A.
    \214\ See current rule 2a-7(d)(2)(i).
---------------------------------------------------------------------------

    The Proposing Release provided the credit analysis factors as
guidance, rather than in rule text, and required that the fund make a
finding that the issuer of a security had an ``exceptionally strong
capacity'' to meet its short-term financial obligations.\215\ Because
the final rule is merely codifying the analysis that staff believes
money market fund managers currently take into account, we do not
believe that the burden associated with the final rule will be
different from that estimated for the proposed rule. The estimates
associated with the analysis for the proposal assumed use of the credit
analysis factors presented as guidance, thus providing the fund
sufficient information to make the minimal credit risk and
``exceptionally strong capacity'' findings. Therefore, we believe that
codifying the factors and eliminating the ``exceptionally strong
capacity'' finding will have no effect on the burden estimates, because
use of the factors was already assumed in those estimates and the
``exceptionally strong capacity'' finding was assumed to be built into
that analysis, creating no additional burden. Similarly, the proposal
included a further finding that the issuer of a conditional demand
feature would have a ``very strong capacity'' for payment of its
financial commitments.\216\ As with the ``exceptionally strong
capacity'' finding, this ``very strong capacity'' finding was assumed
to be built into the credit analysis, and we do not believe that
removal of this finding will change the estimated burden associated
with this requirement.
---------------------------------------------------------------------------

    \215\ See proposed rule 2a-7(a)(11).
    \216\ See proposed rule 2a-7(d)(2)(iii)(C).
---------------------------------------------------------------------------

    While we cannot predict with precision the extent to which funds
may revise their policies and procedures for determining minimal credit
risk, we estimate that each money market fund complex on average will
incur a one-time burden of 9 hours,\217\ at a cost of $2,838,\218\ to
review and revise, as appropriate, its policies and procedures. Using
an estimate of 103 money market fund complexes,\219\ we estimate that
money market funds would incur, in aggregate, a total one-time burden
of 927 hours,\220\ at a cost of $292,314,\221\ to comply with the
amended provisions of rule 2a-7 modifying the credit quality standard
to be used in determining the eligibility of a fund's portfolio
securities. Amortizing these hourly and cost burdens over three years
results in an average annual increased burden for all money market fund
complexes of 309 hours \222\ at a cost of $97,438.\223\ We do not
believe that funds would newly implement or change any annual review of
policies and procedures that they currently perform as a result of the
adopted amendments. There will be no external costs associated with
this collection of information.
---------------------------------------------------------------------------

    \217\ We estimate that the lower range of the one-time hour
burden for a money market fund complex to review and revise, as
appropriate, its policies and procedures for determining minimal
credit risk would be 6 hours (4 hours by a compliance manager, and 2
hours by an attorney). We estimate that the upper range of the one-
time hour burden for a money market fund complex to review and
revise, as appropriate, its policies and procedures for determining
minimal credit risk would be 12 hours (8 hours by a compliance
manager, and 4 hours by an attorney). For purposes of our estimates
for the PRA analysis, we have taken the mid-point of this range
(mid-point of 6 hours and 12 hours = 9 hours (6 hours by a
compliance manager, and 3 hours by an attorney)).
    \218\ This estimate is based on the following calculation: (6
hours (mid-point of 4 hours and 8 hours incurred by a compliance
manager) x $283 (rate for a compliance manager) = $1,698) + (3 hours
(mid-point of 2 hours and 4 hours incurred by an attorney) x $380
(rate for an attorney) = $1,140) = $2,838. All estimated wage
figures discussed here and throughout this release are based on
published rates that have been taken from SIFMA's Management &
Professional Earnings in the Securities Industry 2013, available at
http://www.sifma.org/research/item.aspx?id=8589940603, modified by
Commission staff to account for an 1800 hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
    \219\ Based on data from Form N-MFP and iMoneyNet as of April
30, 2015. The Proposing Release PRA statement was based on data as
of February 28, 2014. We have updated the estimates used in this
final PRA to reflect more current data as of April 30, 2015.
    \220\ This estimate is based on the following calculation: 9
hours x 103 money market fund complexes = 927 hours.
    \221\ This estimate is based on the following calculation:
$2,838 x 103 money market fund complexes = $292,314.
    \222\ This estimate is based on the following calculation: 927
hours / 3 years = 309 hours.
    \223\ This estimate is based on the following calculation:
$292,314 / 3 years = $97,438.
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2. Monitoring Minimal Credit Risks
    Rule 2a-7 currently requires a money market fund board (or its
delegate) to promptly reassess whether a security that has been
downgraded by an NRSRO continues to present minimal credit risks.\224\
As discussed above, we are adopting as proposed amendments to rule 2a-7
that will eliminate the current use of credit ratings in the rule's
downgrade and default provisions. Rule 2a-7 instead will require a
money market fund to adopt written procedures requiring the fund
adviser, or any person to whom the fund's board of directors has
delegated portfolio management responsibilities, to provide ongoing
review of each portfolio security to determine that the issuer
continues to present minimal credit risks.\225\ To comply with these
amendments, a fund complex will incur one-time costs to review the
amended provisions of rule 2a-7 and adopt policies and procedures
providing for ongoing review to determine whether a money market fund's
portfolio securities continue to present minimal credit risks. Money
market funds are not currently required to maintain policies and
procedures that specifically address ongoing minimal credit risk
monitoring. Although we understand, based on staff experience, that
most money market funds currently monitor portfolio securities for
minimal credit risk on an ongoing basis,\226\ we are assuming that all
money market fund complexes would need to adopt new written policies
and procedures to provide for this ongoing review in order to comply
with the amended provisions of rule 2a-7.
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    \224\ See current rule 2a-7(f)(1)(i).
    \225\ Rule 2a-7(g)(3); see supra section II.C.
    \226\ See supra note 116 and accompanying text.
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    We estimate that each money market fund complex on average would
incur a one-time burden of 5 hours,\227\ at a cost of $3,619,\228\ to
adopt policies and

procedures for ongoing review of minimal credit risks. Using an
estimate of 103 money market fund complexes,\229\ we estimate that
money market funds will incur, in aggregate, a total one-time burden of
515 hours,\230\ at a cost of $372,757,\231\ to comply with the amended
provisions of rule 2a-7. Amortizing these hourly and cost burdens over
three years results in an average annual increased burden for all money
market fund complexes of 172 hours\232\ at a cost of $124,252.\233\
There will be no external costs associated with this collection of
information.
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    \227\ These hour estimates assume that the process of adopting
written policies and procedures will consist primarily of
transcribing and reviewing any existing policies and procedures that
funds currently use when monitoring minimal credit risk on an
ongoing basis. Because we cannot predict the extent to which funds
may need to develop these policies and procedures to comply with the
amended provisions of rule 2a-7, or may need to transcribe and
review any existing policies and procedures, we have taken, as an
estimated average burden, the mid-point of a range of hour estimates
discussed below in the following paragraph for purposes of our PRA
analysis.
     We estimate that the lower range of the one-time hour burden
for a money market fund complex to adopt policies and procedures for
ongoing review to determine whether a money market fund's portfolio
securities continue to present minimal credit risks would be 3.5
hours (2 hours by a compliance manager and 1 hour by an attorney to
develop and review policies and procedures (or transcribe and review
pre-existing policies and procedures) + 0.5 hours for the fund's
board to adopt the policies and procedures). We estimate that the
upper range of the one-time hour burden for a money market fund
complex to adopt such policies and procedures would be 6.5 hours (4
hours by a compliance manager and 2 hours by an attorney to develop
and review policies and procedures (or transcribe and review pre-
existing policies and procedures) + 0.5 hours for the fund's board
to adopt the policies and procedures). The mid-point of the lower
range estimate and the upper range estimate is 5 hours.
    \228\ This estimate is based on the following calculation: (3
hours (mid-point of 2 hours and 4 hours incurred by a compliance
manager) x $283 (rate for a compliance manager) = $849) + (1.5 hours
(mid-point of 1 hour and 2 hours incurred by an attorney) x $380
(rate for an attorney) = $570) + (0.5 hours x $4,400 per hour for a
board of 8 directors = $2,200) = $3,619. The staff previously
estimated in 2009 that the average cost of board of director time
was $4,000 per hour for the board as a whole, based on information
received from funds and their counsel. Adjusting for inflation, the
staff estimates that the current average cost of board of director
time is approximately $4,400 per hour.
    \229\ Based on data from Form N-MFP and iMoneyNet as of April
30, 2015. The Proposing Release PRA statement was based on data as
of February 28, 2014. We have updated the estimates used in this
final PRA to reflect more current data as of April 30, 2015.
    \230\ This estimate is based on the following calculation: 5
hours x 103 money market fund complexes = 515 hours.
    \231\ This estimate is based on the following calculation:
$3,619 x 103 money market fund complexes = $372,757.
    \232\ This estimate is based on the following calculation: 515
hours / 3 years = 172 hours.
    \233\ This estimate is based on the following calculation:
$372,757 / 3 years = $124,252.
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3. Stress Testing
    Rule 2a-7 currently requires money market funds to adopt written
stress testing procedures and to perform stress tests according to
these procedures on a periodic basis.\234\ We are adopting as proposed
amendments to rule 2a-7 that would replace the reference to ratings
downgrades in the rule's stress testing provisions with a hypothetical
event that is designed to have a similar impact on a money market
fund's portfolio.\235\ The amendment is designed to retain a similar
standard for stress testing as under current rule 2a-7. Specifically,
while rule 2a-7 currently requires a fund to stress test its portfolio
based on certain hypothetical events, including a downgrade of
portfolio securities, the adopted amendment will require a fund to
stress test for an event indicating or evidencing credit deterioration
in a portfolio security, and will include a downgrade or default as
examples of that type of event. As discussed below, we recognize that a
money market fund could use its current policies and procedures to
comply with the amendment, and could continue to use credit quality
evaluations prepared by outside sources, including NRSRO downgrades, in
stress tests.\236\ Because the rule currently requires testing for a
downgrade as a hypothetical event, we do not believe that funds will
take any additional time to review and revise their policies and
procedures with respect to the continued use of downgrades in stress
testing. Accordingly, we do not expect the amendments will
significantly change current collection of information burden estimates
for rule 2a-7.\237\
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    \234\ See current rule 2a-7(g)(8).
    \235\ Rule 2a-7(g)(8)(i)(B); see supra section II.D.
    \236\ See infra text surrounding note 288.
    \237\ See id.
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    Total Burden for Rule 2a-7. The current approved collection of
information for rule 2a-7 is 632,244 annual aggregate hours. The
aggregate additional burden hours associated with the adopted
amendments to rule 2a-7 increase the burden estimate to 632,725 hours
annually for all funds.\238\
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    \238\ This estimate is based on the following calculation:
632,244 hours (current approved burden) + 309 hours (eligible
security determinations for money market fund portfolio securities,
including securities that are subject to a conditional demand
feature) + 172 hours (monitoring minimal credit risks) = 632,725
hours.
---------------------------------------------------------------------------

B. Rule 30b1-7 and Form N-MFP

    Rule 30b1-7 requires money market funds to file a monthly report
electronically on Form N-MFP within five business days after the end of
each month. The information required by the form must be data-tagged in
XML format and filed through EDGAR. Preparing Form N-MFP is a
collection of information under the PRA.\239\ The respondents to this
collection of information are money market funds. A fund must comply
with the requirement to prepare Form N-MFP in order to hold itself out
to investors as a money market fund or the equivalent of a money market
fund in reliance on rule 2a-7. This collection of information is
mandatory for money market funds that rely on rule 2a-7, and responses
to the disclosure requirements of Form N-MFP are not kept confidential.
---------------------------------------------------------------------------

    \239\ For purposes of the PRA analysis, the current burden
associated with the requirements of rule 30b1-7 is included in the
collection of information requirements of Form N-MFP.
---------------------------------------------------------------------------

    Money market funds are currently required to disclose on Form N-
MFP, with respect to each portfolio security, whether the security is a
first or second tier security or is unrated, as well as the
``designated NRSROs'' for each security (and for each demand feature,
guarantee, or credit enhancement).\240\ As discussed above, the adopted
amendments will require that each money market fund disclose on Form N-
MFP, for each portfolio security, any rating assigned by an NRSRO that
the fund's board of directors (or its delegate) considered in
determining that the security presents minimal credit risks (together
with the name of the assigning NRSRO).\241\ Because we believe that the
majority of funds will continue to refer to credit ratings in making
minimal credit risk determinations, we do not believe the amendments to
Form N-MFP will result in material changes to the ongoing burden for
most funds.\242\ However, we believe that funds will incur one-time
costs to re-program their filing software to reflect the new
requirements of Form N-MFP.
---------------------------------------------------------------------------

    \240\ See Form N-MFP Items C.9, C.10, C.14.b-c, C.15.b-c,
C.16.c-d.
    \241\ See Form N-MFP Items C.9, C.10, C.14.e, C.15.c, C.16.d;
supra section II.E. The proposal also would have required disclosure
of any rating assigned by an NRSRO to whose services the fund or its
adviser subscribes (together with the name of the assigning NRSRO).
Because the estimated burden assigned to the form amendments is only
the one-time re-programming cost, which will not be affected by the
change from the proposal to the adopting release, the burden
estimate above has not been reduced to reflect the removal of this
requirement.
    \242\ See supra note 114.
---------------------------------------------------------------------------

    We estimate that each fund will incur a one-time burden of 3
hours,\243\ at a cost of $943 per fund,\244\ to comply with the amended
disclosure requirements of Form N-MFP. Using an estimate of 537 money
market funds that are required to file reports on Form N-MFP,\245\ we
estimate that money market funds will incur, in the aggregate, a total
one-time burden of 1,611 hours,\246\ at a cost of $506,391,\247\ to
comply with the amended disclosure requirements of Form N-MFP.
Amortizing these hourly and cost burdens over three years results in an
average annual increased burden for all money market funds of 537 hours
\248\ at a cost of $168,797.\249\

There will be no external costs associated with complying with the
amended disclosure requirements of Form N-MFP.\250\
---------------------------------------------------------------------------

    \243\ We estimate that the one-time hour burden for a money
market fund to re-program its Form N-MFP filing software to reflect
the new requirements of Form N-MFP would be 3 hours (1 hour by a
senior systems analyst, 1 hour by a senior programmer, and 1 hour by
an attorney).
    \244\ This estimate is based on the following calculation: (1
hour x $260 (rate for a senior systems analyst) = $260) + (1 hour x
$303 (rate for a senior programmer) = $303) + (1 hour x $380 (rate
for an attorney) = $380) = $943.
    \245\ This estimate is based on a review of reports on Form N-
MFP filed with the Commission for the month ended April 30, 2015.
The Proposing Release PRA statement was based on data as of February
28, 2014. We have updated the estimates used in this final PRA to
reflect more current data as of April 30, 2015.
    \246\ This estimate is based on the following calculation: 3
hours x 537 money market funds = 1,611 hours.
    \247\ This estimate is based on the following calculation: $943
x 537 money market funds = $506,391.
    \248\ This estimate is based on the following calculation: 1,611
hours / 3 years = 537 hours.
    \249\ This estimate is based on the following calculation:
$506,391 / 3 years = $168,797.
    \250\ We understand that a certain percentage of money market
funds that report information on Form N-MFP license a software
solution from a third party that is used to assist the funds to
prepare and file the required information, and that a certain
percentage of money market funds retain the services of a third
party to provide data aggregation and validation services as part of
the preparation and filing of reports on Form N-MFP. See 2014 Money
Market Fund Adopting Release, supra note 6, at text accompanying
nn.2334-2336.
     We recognize that, in general, software service providers that
modify their software may incur additional external costs, which
they may pass on to money market funds in the form of higher annual
licensing fees. See id. at text accompanying n. 2340. However, on
account of the relatively low per-fund one-time hour burden that we
estimate in connection with the amended disclosure requirements of
Form N-MFP, we expect that any increase in licensing fees will be
insignificant, and thus we estimate that there are no external costs
associated with the amended Form N-MFP disclosure requirements.
---------------------------------------------------------------------------

    The current approved collection of information for Form N-MFP is
83,412 annual aggregate hours and $4,780,736 in external costs. The
aggregate additional hours associated with the amendments to Form N-MFP
increase the burden estimate to 83,949 hours annually for all
funds.\251\ Because we estimate no external costs associated with
complying with the amended Form N-MFP disclosure requirements, the
annual external costs associated with the Form N-MFP collection of
information would remain $4,780,736.
---------------------------------------------------------------------------

    \251\ This estimate is based on the following calculation:
83,412 hours (current approved burden) + 537 hours = 83,949 hours.
---------------------------------------------------------------------------

V. Economic Analysis

    As discussed above, we are adopting amendments to rule 2a-7 and
Form N-MFP under the Investment Company Act to implement Section 939A
of the Dodd-Frank Act, which requires the Commission, to ``review any
regulation issued by [the Commission] that requires the use of an
assessment of the credit-worthiness of a security or money market
instrument; and any references to or requirements in such regulations
regarding credit ratings.'' \252\ That section further provides that
the Commission shall ``modify any such regulations identified by the
review . . . to remove any reference to or requirement of reliance on
credit ratings and to substitute in such regulations such standard of
credit-worthiness as [the Commission] shall determine as appropriate
for such regulations.'' \253\
---------------------------------------------------------------------------

    \252\ Public Law 111-203, Sec. 939A(a)(1)-(2). Section 939A of
the Dodd-Frank Act applies to all federal agencies.
    \253\ Public Law 111-203, Sec. 939A(b). Section 939A of the Dodd
Frank Act provides that agencies shall seek to establish, to the
extent feasible, uniform standards of creditworthiness, taking into
account the entities the agencies regulate and the purposes for
which those entities would rely on such standards.
---------------------------------------------------------------------------

    We are also amending rule 2a-7 to eliminate the exclusion to the
issuer diversification requirement for securities subject to a
guarantee issued by a non-controlled person. As a result, most non-
government securities subject to a guarantee (including an asset-backed
security with a presumed sponsor guarantee) will have to comply with
both the 5 percent diversification requirement for issuers (including
SPE issuers) and the 10 percent diversification requirement for
guarantors and providers of demand features.\254\
---------------------------------------------------------------------------

    \254\ As discussed above, the asset-backed security presumed
guarantee is counted toward the 10% limitation on guarantees and
demand features provided by the same institution. Up to 15% of the
value of securities held in a tax-exempt money market fund's
portfolio may be subject to guarantees or demand features from a
single institution, and up to 25% of the value of securities held in
a single state money market fund portfolio may be issued by any
single issuer. See supra section II.F.
---------------------------------------------------------------------------

    The economic baseline for our economic analysis is the regulatory
framework as it exists immediately before the adoption of these
amendments, that is, the regulatory framework after the amendments to
rule 2a-7 were adopted in the 2014 Money Market Fund Adopting Release.
As discussed in more detail below, that release makes material changes
to rule 2a-7 that we believe may result in material changes to the
money market fund industry. Because there is an extended compliance
period for those amendments, and we are not aware of any funds that are
already complying with all of the amendments, we do not know how market
participants, including money market fund managers selecting portfolio
securities, may react as a result. Thus, we are not able to provide
quantitative estimates for the incremental effects of this rule's
amendments. For example, under the baseline, institutional prime money
market funds have floating NAVs and maintain the distinction between
first and second tier securities. We are unable to estimate how
institutional prime funds will choose to allocate their portfolios
among first and second tier securities under our amendments when they
have floating NAVs and no commenters provided any estimates. We discuss
potential economic effects of complying with the amendments to the
rule, but without knowing how fund portfolio allocations may change we
cannot quantify these potential effects. For the remainder of our
economic analysis, we discuss separately the rule 2a-7 amendments to
remove and replace ratings references, Form N-MFP amendments, and the
amendments to rule 2a-7's issuer diversification provision.

A. Rule 2a-7: Ratings Removal and Related Amendments

    The amendments to rule 2a-7 will affect five elements of the
current rule. These are: (i) Determination of whether a security is an
eligible security; (ii) determination of whether a security is a first
tier security; (iii) credit quality standards for securities with a
conditional demand feature; (iv) requirements for monitoring securities
for ratings downgrades and other credit events; and (v) stress
testing.\255\ The amendments are designed to remove any requirement of
reliance on credit ratings and to substitute standards of
creditworthiness that we believe are appropriate.
---------------------------------------------------------------------------

    \255\ The final rule will also make conforming amendments to
rule 2a-7's recordkeeping and reporting requirements. See rule 2a-
7(h)(3).
---------------------------------------------------------------------------

1. Economic Baseline
    As discussed above, the current credit risk limitations in rule 2a-
7 require that money market funds undertake a two-step analysis before
acquiring a portfolio security.\256\ First, funds must determine
whether a security has received credit ratings from the ``requisite
NRSROs'' in one of the two highest short-term rating categories or, if
the security is unrated, determine that it is of comparable quality. A
money market fund must currently invest at least 97 percent of its
portfolio in first tier securities, which are eligible securities that
have received a rating from the requisite NRSROs in the highest short-
term rating category for debt obligations, or unrated securities of
comparable quality. Second, the fund's board of directors (or its
delegate) must determine that the security presents minimal credit
risks, based on factors pertaining to credit quality in addition to any
rating assigned to such securities by a designated NRSRO. In addition,
under current rule 2a-7, a security subject to a conditional demand
feature may be determined to be an eligible security or a first tier
security if, among other conditions: (i) The conditional demand feature
is an eligible security or a first tier security, and (ii) the
underlying security (or its guarantee) has received either a short-term
rating or a long-term

rating, as the case may be, within the highest two categories from the
requisite NRSROs or is a comparable unrated security.
---------------------------------------------------------------------------

    \256\ See supra note 25 and accompanying and preceding text. The
credit risk limitations of current rule 2a-7, as well as the other
specific provisions of current rule 2a-7 that reference credit
ratings, were not changed by the adoption of the amendments
discussed in the 2014 Money Market Fund Adopting Release.
---------------------------------------------------------------------------

    Based on Form N-MFP filings from April 30, 2015, the Commission
estimates that 98.26 percent of aggregate money market fund assets are
in first tier securities, 0.14 percent of aggregate money market fund
assets are in second tier securities, and 1.6 percent of aggregate
money market fund assets are in unrated securities. Among the 537 funds
that filed Form N-MFP that month, 412 funds reported that they held
only first tier securities, 477 funds reported that they held no second
tier securities, and 447 funds reported that they held no unrated
securities. In addition, less than 4 percent of all money market funds
held the maximum amount of second tier securities permitted under
current rule 2a-7. Using additional data from the Federal Reserve
Board, we estimate that money market fund holdings of second tier
commercial paper represent 0.9 percent of the outstanding issues of
second tier commercial paper.\257\
---------------------------------------------------------------------------

    \257\ This data is based on the Federal Reserve Board's
statistics on outstanding volume of commercial paper as of April 30,
2015. See Commercial Paper Outstanding by special categories,
available at http://www.federalreserve.gov/releases/cp/outstanding.htm. The Proposing Release used earlier data from this
Web site. We have updated the figures used in this final rule
analysis to reflect more current data as of April 30, 2015.
---------------------------------------------------------------------------

    Securities subject to a conditional demand feature are typically
variable rate demand notes issued by municipalities that have a
conditional demand feature issued by a bank. Based on Form N-MFP
filings as of April 30, 2015, the Commission estimates that 9.3 percent
of money market fund assets are invested in securities with a demand
feature. We estimate further that securities with conditional demand
features represent 3.9 percent of securities with demand features and
0.4 percent of all securities held by money market funds. We further
estimate that 77 percent of those underlying securities (or their
issuers or guarantors) have received an NRSRO rating in the second-
highest long-term rating category, while 23 percent have received an
NRSRO rating in the highest long-term category.\258\
---------------------------------------------------------------------------

    \258\ An underlying long-term security would become a short-term
security when its remaining time to maturity is less than 397 days.
See supra note 94. These estimates are based on a random sample of
10% of the securities that have demand features that were reported
in April 2015 Form N-MFP filings.
---------------------------------------------------------------------------

    Rule 2a-7 currently requires a money market fund board (or its
delegate) to promptly reassess whether a security that has been
downgraded by an NRSRO continues to present minimal credit risks.\259\
We understand that downgrades are rare among money market fund
portfolio securities.\260\ As discussed above, we believe, based on
staff experience, that most, if not all, money market funds currently
monitor portfolio securities for minimal credit risk on an ongoing
basis.\261\ We assume for purposes of this analysis, however, that
these funds do not have written policies and procedures that
specifically address ongoing minimal credit risk monitoring.
---------------------------------------------------------------------------

    \259\ See supra note 111 and accompanying text.
    \260\ See, e.g., Response to Questions Posed by Commissioners
Aguilar, Paredes, and Gallagher, a report by staff of the Division
of Risk, Strategy, and Financial Innovation (Nov. 30, 2012),
available at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf, at 14-16 (discussing events such as credit
rating downgrades that have led money market fund sponsors to choose
to provide support to the fund or to seek staff no-action assurances
permitting such support). Staff continues to monitor credit rating
downgrades among portfolio securities and other issues concerning
money market funds through the monthly information provided on Form
N-MFP.
    \261\ See supra note 116 and accompanying text.
---------------------------------------------------------------------------

    Finally, rule 2a-7 currently requires money market funds to stress
test their portfolios.\262\ Under the rule, a money market fund's board
of directors must adopt written procedures to test the ability of a
fund to maintain at least 10 percent of its total assets in weekly
liquid assets and minimize principal volatility (and, in the case of a
money market fund using the amortized cost method of valuation or penny
rounding method of pricing, the fund's ability to maintain a stable
price per share) based on certain hypothetical events, including a
downgrade or default of particular portfolio security positions, each
representing various portions of the fund's portfolio. We believe that
funds stress test at least monthly.\263\
---------------------------------------------------------------------------

    \262\ Current rule 2a-7(g)(8).
    \263\ See 2014 Money Market Fund Adopting Release, supra note 6,
at section IV.A.5.
---------------------------------------------------------------------------

2. Economic Analysis
    The amendments to rule 2a-7 will assist in further implementing
Section 939A of the Dodd-Frank Act. They are designed to establish
credit quality standards similar to those currently in the rule. By
replacing references to credit ratings, the amendments will,
particularly when considered together with other amendments the
Commission has adopted that remove credit ratings references in other
rules and forms under the federal securities laws, contribute to the
Dodd-Frank Act goals of reducing perceived government endorsement of
NRSROs and over-reliance on credit ratings by market participants.\264\
---------------------------------------------------------------------------

    \264\ See 2014 Money Market Fund Adopting Release, supra note 6,
at n.202 and accompanying text.
---------------------------------------------------------------------------

i. Eligible Securities
    Under the final rule, a money market fund board (or its delegate)
will be required to determine minimal credit risk by applying certain
credit quality factors. Because the application of these factors may
differ among fund boards and their advisers, the possible range of
securities available for investment may differ from that under the
current rule. However, inclusion of the credit analysis factors in the
rule, as opposed to the more subjective standard in the proposed rule,
should limit this range by helping to make compliance more uniform
across money market funds. The final rule also clarifies that, when
making minimal credit risk determinations, the fund's board (or its
delegate) should consider the contribution of the security to aggregate
credit risks and not just evaluate the security in isolation. In
particular, a potential addition to the portfolio that has low risk by
itself might increase portfolio risk to unacceptable levels if it is
sufficiently correlated with the overall portfolio. For example, a
security that has a very low probability of default might be
inappropriate for the fund if that security is likely to default at the
same time as other securities in the fund's portfolio.
    In addition, we believe that fund managers are generally unlikely
to increase exposure of their funds to riskier second tier securities
in light of both current market practices and amendments to rule 2a-7
adopted in the 2014 Money Market Fund Adopting Release.\265\ First, we
anticipate that many money market funds, particularly those that are
themselves rated, are likely to retain their current investment
policies, which incorporate NRSRO ratings and would be permitted under
the rule amendments. Indeed, we understand that many funds today have
investment policies that are more restrictive than rule 2a-7 requires,
including policies that, for example, limit investments to first tier
securities.\266\ As a result, we do not

expect that these money market funds will change current policies and
procedures they have adopted that limit their investments to those
assigned the highest NRSRO ratings. We also noted above that according
to Form N-MFP filings from April 30, 2015, fund assets in second tier
securities represented 0.14 percent of total money market fund assets
and that 18 funds (out of a total of 537) currently hold the maximum
amount of second tier securities permissible under current rule 2a-7.
We do not anticipate that money market funds representing the
significant majority of assets under management are likely to increase
substantially their investments in riskier securities as a result of
our rule because these funds do not currently invest in second tier
securities to the extent permitted now.
---------------------------------------------------------------------------

    \265\ See, e.g., 2010 Money Market Fund Adopting Release, supra
note 84, at section II.A.1 (discussing tradeoff between risk and
yield for second tier securities). We do not believe fund managers
are likely to invest in securities rated below the second highest
short-term rating category of an NRSRO (or comparable unrated
securities) because those securities would not satisfy the standard
for eligible securities that the security present minimal credit
risks to the fund. See discussion infra section V.2.ii.
    \266\ As of February 2014, 179 money market funds, representing
approximately 59% of all money market fund assets (88% of all
institutional money market fund assets) were themselves rated by
credit rating agencies, and approximately 98% of rated money market
funds were rated in the top credit quality category by an NRSRO. For
a money market fund to receive this top rating, credit rating
agencies generally require the fund to limit its portfolio
securities to first tier securities. See, e.g., FitchRatings, Global
Money Market Fund Rating Criteria (Mar. 26, 2013), available at
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704145 (registration required) (stating that
its ``AAAmmf '' top rating requires that a money market fund have
100% of its portfolio securities rated first tier (``F1+'' or
``F1'')); Standard & Poor's, Methodology: Principal Stability Fund
Ratings (Jun. 8, 2011), available at https://www.sbafla.com/prime/portals/8/RiskMan_Oversight/FundProfile/201106_SPPrincipalStabilityFundRatingsMethodology.pdf (stating that
``[i]n order for a fund to be eligible for an investment-grade
rating, all investments should carry a Standard & Poor's short-term
rating of `A-1+' or `A-1' (or SP-1+ or SP-1), or Standard & Poor's
will consider all of the investments to be of equivalent credit
quality'').
---------------------------------------------------------------------------

    Second, as discussed above, the 2014 amendments to rule 2a-7 should
reduce the potential that funds will invest in riskier securities.
Under the 2014 reforms, money market funds other than government money
market funds are allowed to impose fees and gates, while institutional
prime money market funds will be required to transact at a floating
NAV.\267\ We believe that those reforms may encourage non-government
funds to more closely monitor fund liquidity and hold more liquid
securities to increase the level of daily and weekly liquid assets in
the fund to lessen the likelihood of needing to impose a fee or gate.
These newly adopted money market fund reforms also require each fund to
disclose daily its market value rounded to four decimal points (or an
equivalent level of accuracy for a fund using a share price other than
$1.0000 \268\) and to depict historical information about its daily NAV
for the previous six months. These disclosures may increase
informational efficiency by allowing investors to see variations in
share value that are not apparent in the current share price and
compare the volatility of share values among funds over time. As a
result, to the extent that institutional investors continue to value
price stability and can see these variations in share value, we believe
that institutional prime funds will endeavor to reduce NAV
fluctuations.
---------------------------------------------------------------------------

    \267\ Rule 2a-7(a)(14) defines a government money market fund as
a money market fund that invests 99.5% or more of its total assets
in cash, government securities, and/or repurchase agreements that
are collateralized fully.
    \268\ Rule 2a-7(h)(10)(iii).
---------------------------------------------------------------------------

    Third, under the final rule funds are permitted to refer to credit
ratings while making their minimal credit risk determinations. A credit
rating in the top short-term credit quality category by an NRSRO might
help support the fund's determination that the security is an eligible
security, while a credit rating in a lower category might not support
the same determination. Thus, fund managers may have to perform
additional credit research and analysis on the issuers of second tier
securities in order to determine whether the investment is permitted
under the adopted amendments. We believe that many fund managers may
not wish to invest in the additional resources necessary to make this
assessment with respect to second tier securities unless the fund
believes that the expected risk-adjusted return of doing so would be
greater than the expected costs. Thus, the demand for securities rated
second tier will likely be lower.
    The final rule would eliminate the current limitations on fund
investments in second tier securities.\269\ As a result, funds may
increase their holdings of second tier securities despite the
considerations discussed above. Commenters on the 2014 Proposing
Release were mixed in their opinions as to whether the proposed changes
would have this effect. Some believed that the standard proposed would
appropriately limit funds' purchases of riskier securities,\270\ while
others thought that it would not.\271\ The Commission believes that the
changes to the proposed standard made in this final rule should reduce
the likelihood of increased credit risk because funds will have to
perform a rigorous analysis using the codified factors and consider a
security's potential addition to the aggregate risk of the portfolio.
We also believe that, to the extent money market funds increase
investments in riskier securities, institutional prime funds are more
likely than stable-NAV funds to do so because stable-NAV funds will
need to maintain stability to avoid falling below $1 per share.
Although some shareholders may continue to value price stability more
than yield from institutional prime funds, if enough shareholders value
yield more than price stability, institutional prime funds will be
incentivized to increase their investments in second tier securities.
Allocative efficiency may improve if such preferences result in
relatively riskier securities moving from the portfolios of stable NAV
funds to the portfolios of institutional prime funds, allowing money
market fund shareholders to choose funds that better match their
preferences for risk and return. We do not, however, know whether
institutional prime funds with floating NAVs, which will have to
compete with other money market funds, including stable-NAV government
funds, will focus on maintaining comparatively stable NAVs or on
generating comparatively high yields.
---------------------------------------------------------------------------

    \269\ See supra note 30 and accompanying text and note 62.
    \270\ See, e.g., Invesco Comment Letter; MFDF Comment Letter.
    \271\ See, e.g., BlackRock Comment Letter; CFA Comment Letter;
Vanguard Comment Letter.
---------------------------------------------------------------------------

    If we were to assume that money market funds increase their
relative holdings of second tier securities with the adoption of the
amendments, the effects on competition and capital formation would
depend, in part, on whether the increased demand for second tier
investments comes from new assets that investors bring to money market
funds, which are then disproportionately invested in second tier
securities, or whether the increased second tier investments would come
from a shift of existing money market fund assets from first tier
securities to second tier securities. If the former, the effects on
competition between issuers of first and second tier securities might
be small, and capital formation might improve in the second tier market
as the size of the new investment increases. If the latter, an increase
in capital formation from issuers of second tier securities may result
in a corresponding decrease in capital formation from issuers of first
tier securities, which, in turn, may lead to increased competition
between issuers of first and second tier securities. We are unable to
estimate these effects because we do not know how shareholders and
funds will respond to the elimination of the current limitation on fund
investments in second tier securities and no commenters provided any
estimates.
    The amendments to Form N-MFP, which are discussed in more detail
below, may make it easier for fund shareholders and other third parties
to

monitor the level of credit risk borne by funds that use credit
ratings. As a result, this increased transparency may reduce the
likelihood that fund boards (or managers) increase significantly fund
investments in second tier securities. We are requiring each money
market fund to disclose on Form N-MFP those NRSRO ratings the fund's
board (or its delegate) has considered, if any, in determining whether
a security presents minimal credit risks.\272\ The disclosure to
investors of these ratings may have the effect of reducing the demand
for funds that assume a level of risk that is different from that which
is desired by their shareholders.
---------------------------------------------------------------------------

    \272\ Because the fund may only choose to consider one or two
ratings, the specific rating or ratings disclosed by a fund on Form
N-MFP may not always be indicative of the overall universe of
ratings for that security. However, investors who wish to have a
larger sample may choose to subscribe to other ratings themselves.
---------------------------------------------------------------------------

    As discussed above, the vast majority of money market funds held no
second tier securities on April 30, 2015, and few funds held the
maximum permissible 3 percent. We therefore believe that a reduction or
even elimination of second tier securities from the money market fund
industry's aggregate portfolio will not likely have a material effect
on issuers of either first or second tier securities. However, removing
second tier securities from the portfolios of individual money market
funds may negatively affect yields in certain funds, especially during
periods when second tier securities offer substantially higher yields
than the yields offered by first tier securities.
    We believe that most money market funds are not likely to change
their current investment policies in response to the adopted
amendments. Nevertheless, we recognize that some fund boards might
choose not to consider NRSRO ratings in their credit assessments or as
noted above, fewer securities may be rated. If, as a result, the demand
for NRSRO ratings were significantly reduced, NRSROs might invest less
in producing quality ratings. The importance attached to NRSRO ratings
currently as a result of the history of their use in regulatory
requirements may impart franchise value to the NRSRO rating business.
By eliminating references to NRSRO ratings in federal regulations,
Section 939A of the Dodd-Frank Act could reduce these franchise values
and reduce NRSROs' incentives to produce credible and reliable ratings.
If the quality and accuracy of NRSRO ratings were adversely affected,
yet the ratings continued to be used by enough other parties, the
capital allocation process and economic efficiency might be impaired as
investors make investment decisions using lower-quality information.
    Conversely, the removal of ratings requirements in Commission rules
may enhance incentives for NRSROs to produce credible and reliable
ratings, in order to remain competitive, maintain revenue, and protect
franchise value. In addition, certain industry commenters on the 2014
Proposing Release expressed support for the continued use of ratings as
a tool in determining creditworthiness.\273\ Thus, we believe that a
large majority of institutional money market funds will continue to
consider credit ratings in their evaluation of securities, at least as
a screening measure, and will continue to be rated themselves. To the
extent that funds continue to use ratings, which we believe most will,
investors would be able to determine the ratings, and the extent to
which funds are considering those ratings, of fund portfolio securities
from the disclosures required under the amendments to Form N-MFP.
Consequently, we believe it is unlikely that the capital allocation
process and economic efficiency will be materially impaired.
---------------------------------------------------------------------------

    \273\ See IDC Comment Letter; Invesco Comment Letter; MFDF
Comment Letter.
---------------------------------------------------------------------------

    The Proposing Release provided the credit analysis factors as
guidance, rather than in rule text, and required that the fund make a
finding that the issuer of a security had an ``exceptionally strong
capacity'' to meet its short-term financial obligations.\274\ Because
the final rule is largely codifying the analysis that the staff
believes money market fund managers currently take into account, as
discussed above,\275\ the economic analysis for this final rule is
similar to that of the proposed rule. In this adopting release, we have
incorporated into the rule credit analysis factors, as well as
providing asset-specific factors as guidance. As we noted in the
discussion above, based on staff observations in examinations and prior
staff guidance, we believe that most money market fund managers
currently take these factors into account, as appropriate, when they
determine that a portfolio security presents minimal credit risks.
Moreover, the factors listed in the rule are to be considered ``to the
extent appropriate'' \276\ and are not intended to rigidly define the
parameters of an appropriate credit quality assessment; that is for the
fund's board and its adviser to determine with respect to each
particular security and the fund's overall risk profile. Thus, we do
not anticipate that the rule's inclusion of factors that a fund manager
should consider will significantly change the process for evaluating
credit quality or that consideration of the factors listed in the rule
and discussed in the release will significantly affect the holdings in
money market fund portfolios. For these reasons, we continue to believe
that the factors will not have a material effect on efficiency,
competition, or capital formation. Funds may, however, consider whether
their policies and procedures for credit quality assessment should be
revised in light of the factors as codified, and, as a result, may need
to update them.
---------------------------------------------------------------------------

    \274\ See proposed rule 2a-7(a)(11).
    \275\ See supra section IV.A.1.
    \276\ Rule 2a-7(a)(11).
---------------------------------------------------------------------------

    Finally, we note that Commission staff engages in ongoing
monitoring of money market fund risks and operations, through review of
Form N-MFP filings, examinations, and other outreach efforts, and
provides regular updates to the Commission about relevant issues. As
part of these ongoing monitoring efforts, the staff also will undertake
to study and report to the Commission no later than 3 years following
the adoption of these amendments to rule 2a-7 and Form N-MFP the impact
of these amendments on capital formation and investor protection. The
study will include, but not be limited to, a review of any changes in
the risk profile of money market fund portfolio security investments
during the period studied and whether any additional measures,
including further investor protections, may be necessary.
ii. Conditional Demand Feature
    The final rule provides the same credit quality standard for
securities with a conditional demand feature as for other portfolio
securities. The fund's board (or its delegate) must determine that a
security with a conditional demand feature presents minimal credit
risks to the fund. We do not believe that fund managers will likely
interpret this standard in a manner that results in funds increasing
the risk profiles of their underlying securities. First, as discussed
above, we do not believe that securities that are rated by NRSROs in
the third-highest category for long-term ratings (or comparable unrated
securities) would satisfy the standard that underlying securities
present minimal credit risks to the fund. We also note that funds
currently can invest exclusively in underlying securities rated in the
second-highest category if the instrument meets the other

conditions for eligibility.\277\ We estimate that most underlying
securities held by money market funds (77 percent) are rated in the
second-highest long-term category, and a smaller portion (23 percent)
are rated in the highest long-term category.\278\ For these reasons, we
do not currently anticipate that funds are likely to increase the
portion of their underlying securities that are rated in the second-
highest long-term category as a result of the adopted amendments since
these funds do not currently invest in these securities to the extent
permitted under existing rules.
---------------------------------------------------------------------------

    \277\ Current rule 2a-7(d)(2)(iv).
    \278\ See supra note 258 and accompanying text.
---------------------------------------------------------------------------

    For the reasons explained above, and because the minimal credit
risk standard is largely the same as what we understand that many funds
apply now, and also the same as will be required for all eligible
portfolio securities, we believe that our rule will result in only
small changes to the practices of funds with respect to investments in
securities with conditional demand features. In addition, the
elimination of the ``very strong capacity'' standard presented in the
proposal should result in little or no change to this analysis, as
discussed above.\279\ Thus, we continue to believe that the conditional
demand feature provision will result in little or no effect on
efficiency, competition, or capital formation for either funds or
issuers.
---------------------------------------------------------------------------

    \279\ See supra section IV.A.1.
---------------------------------------------------------------------------

    As discussed above, we believe that the amendments to rule 2a-7
will cause money market fund complexes to incur certain costs in
reviewing and updating their policies and procedures. Specifically,
each complex is likely to review the amendments to the credit quality
standards in rule 2a-7 and, as it determines appropriate in light of
the amendments, revise its policies and procedures to incorporate the
amended credit quality evaluation method to be used in determining the
eligibility of a money market fund's portfolio securities, including
securities that are subject to a conditional demand feature.
iii. Ongoing Monitoring of Minimal Credit Risk
    The Commission is adopting the ongoing monitoring provision as
proposed. As discussed above, we believe that the requirement that each
money market fund adopt written policies and procedures for ongoing
monitoring of minimal credit risks for each portfolio security
essentially codifies the current practices of fund managers.\280\
Although based on staff experience we believe that most, if not all,
money market funds currently monitor portfolio securities for minimal
credit risk on an ongoing basis (as rule 2a-7 requires \281\), we note
that money market funds are not currently required to maintain written
policies and procedures that specifically address monitoring. We
believe that to the extent that some money market funds may not have
written procedures to regularly monitor minimal credit risks, our
provision to require such procedures is designed to ensure that funds
are better positioned to identify quickly potential risks of credit
impairment that could impact portfolio security prices. The costs
associated with the minimal credit risk monitoring requirement, as
discussed above, will vary based on the extent to which funds' existing
procedures need to be transcribed and reviewed.\282\ We continue to
believe that the requirement for written procedures in the final rule
will not materially affect efficiency, competition, or capital
formation because we expect no material changes in how funds invest.
---------------------------------------------------------------------------

    \280\ See supra section II.C.
    \281\ See id.
    \282\ See supra note 226 and accompanying text.
---------------------------------------------------------------------------

iv. Stress Testing
    The Commission is adopting the stress testing provision as
proposed. As discussed above, the amendments are designed to retain
similar standards for stress testing as under current rule 2a-7.
Specifically, the amendments will remove the current reference to
ratings downgrades in the rule 2a-7 stress testing requirement, and
instead require funds to test for an event indicating or evidencing
credit deterioration of particular portfolio security positions, with a
downgrade or default provided as examples of such an event.
Consequently, we recognize that a money market fund could use its
current policies and procedures for stress testing, including testing
for a downgrade, to comply with the amendments. We believe that funds
will do so because a downgrade by a relevant NRSRO may impact the price
of a portfolio security.\283\ Commenters on the stress testing
provision of the Proposing Release were uniformly supportive of this
approach,\284\ and one specifically stated that the amendments would
not significantly change the substance of current stress tests.\285\ We
believe this provision thus provides a clear benefit by reducing any
perceived endorsement of NRSRO ratings. Because we believe that funds
will not change their stress testing policies and procedures in
response to these amendments, we also believe there will be little or
no costs associated with them.\286\ Thus we do not anticipate that
these amendments are likely to affect efficiency, competition, or
capital formation.
---------------------------------------------------------------------------

    \283\ See Comment Letter of Investment Company Institute (Apr.
25, 2011) on the 2011 Proposing Release.
    \284\ See Barnard Comment Letter; BlackRock Comment Letter; ICI
Comment Letter; Vanguard Comment Letter; CFA Institute Comment
Letter; MFDF Comment Letter.
    \285\ See MFDF Comment Letter.
    \286\ See supra note 236 and accompanying text.
---------------------------------------------------------------------------

v. Policies and Procedures
    As discussed above, money market funds have written policies and
procedures for complying with rule 2a-7, including policies and
procedures for determining and reassessing minimal credit risk and for
stress testing the portfolio.\287\ Although our final rule should not
require changes to these policies and procedures for most money market
funds, we anticipate that funds will likely review them and may revise
them in consideration of the uniform credit quality standard provided
in the rule. We also anticipate that after such a review, many fund
boards and advisers will retain investment policies that reference
NRSRO ratings.\288\ Although we cannot predict the number of funds that
will review and revise their policies and procedures or the extent to
which funds may do so, we estimate that each fund will incur, at a
minimum, the collection of information costs discussed in the Paperwork
Reduction Act section for a total average one-time cost of
approximately $2,838 per fund complex.\289\ These minimum costs assume
that a fund will review its policies and procedures in consideration of
the amendments and make minor changes to conform with the revised rule
text, but will not change significantly the policies and procedures
relating to the fund's credit quality assessments, monitoring for
minimal credit risk or stress testing,

which currently include consideration of NRSRO ratings.
---------------------------------------------------------------------------

    \287\ See rule 38a-1(a); rule 2a-7.
    \288\ See supra note 213 and accompanying text. We also note
that most commenters on the 2011 proposal supported permitting funds
to continue to use ratings, and some asked us to clarify that
ratings continue to be a permissible factor for boards or their
delegates to consider in making credit quality determinations. See,
e.g., 2011 Comment Letter of BlackRock Inc. (Apr. 25, 2011) (``2011
BlackRock Comment Letter''); Comment Letter of the Independent
Directors' Council (Apr. 25, 2011). Commenters on the 2014 proposal
continued to stress the usefulness of credit ratings. See IDC
Comment Letter; Invesco Comment Letter; MFDF Comment Letter. Our
amendments to Form N-MFP, discussed above, reflect our clarification
that ratings continue to be a permissible tool to use in making
credit quality determinations.
    \289\ See supra note 218.
---------------------------------------------------------------------------

    As noted above, we believe that while funds currently monitor for
minimal credit risks on an ongoing basis, we assume that funds do not
have written policies and procedures to address monitoring.\290\ We
estimate the average one-time costs to adopt those written policies
will be $3,619 per fund.\291\ Because we anticipate that our rule is
not likely to change these fund policies significantly, we believe it
is not likely to have a significant impact on efficiency, competition,
or capital formation.
---------------------------------------------------------------------------

    \290\ See supra notes 116 and 226 and accompanying text.
    \291\ See supra note 228.
---------------------------------------------------------------------------

3. Alternatives
    The Commission chose not to adopt certain credit quality standards
and requirements from the Proposing Release. First, the proposed rule
would have required that a portfolio security not only present minimal
credit risks, but also that its issuer has an ``exceptionally strong
capacity'' to meet its short-term financial obligations.\292\ As many
commenters suggested,\293\ we now believe that this determination could
create an unclear standard for determining eligible securities that
might change the current credit quality profile of money market funds,
possibly creating risk profiles in money market funds that are even
more stringent than the current rule provides for, as the discussion
above details.\294\ We believe that the rulemaking goal associated with
this aspect of the proposal of ensuring that only very high quality
securities are purchased by money market funds is more effectively
carried out instead by the second change we have made from the proposed
rule, the codification of the general credit analysis factors.\295\
---------------------------------------------------------------------------

    \292\ Proposed rule 2a-7(a)(11).
    \293\ See, e.g., Dreyfus Comment Letter; NYC Bar Comment Letter;
Schwab Comment Letter.
    \294\ See supra section II.A.
    \295\ Rule 2a-7(a)(11).
---------------------------------------------------------------------------

    The Proposing Release provided two lists of credit analysis factors
for use in determining whether a security presented only minimal credit
risks to a fund.\296\ The first was a list of general factors for use
with any security, and the second was an asset-specific list. The final
rule incorporates the list of general factors into the rule text, and
we discuss in this release the asset-specific list as guidance.\297\ As
discussed above,\298\ we believe that codifying the general factors
will help provide a uniform and objective check on credit risk that can
be verified by our examiners. We also believe that incorporating these
factors into the rule text will further promote effective and uniform
application of the risk standard. These two changes together,
elimination of the ``exceptionally strong capacity'' language and
codification of the factors, should help to ensure that the rule will
maintain the current risk characteristics of money market funds and
thus is not likely to have a significant effect on efficiency,
competition, or capital formation.
---------------------------------------------------------------------------

    \296\ Proposing Release, supra note 3, at 47991-47993.
    \297\ The general factors have also been amended based on
comments received, with one new factor added. See rule 2a-7(a)(11).
We chose not to codify the asset-specific factors. See supra section
II.A.2.
    \298\ See supra section II.A.2.
---------------------------------------------------------------------------

    In addition to the changes to the primary risk standard, the final
rule also changed the risk standard for securities with conditional
demand features.\299\ The proposed rule would have required that the
issuer of the underlying security or the provider of a conditional
demand feature have a ``very strong'' capacity to meet its financial
obligations.\300\ As with the proposed ``exceptionally strong
capacity'' standard, some commenters felt that this standard could be
interpreted very differently by different funds.\301\ In order to
reduce confusion and preserve a similar degree of credit quality to
that currently present in fund portfolios, the Commission determined
instead to require that the issuer of the underlying security and the
provider of the conditional demand feature meet the same ``minimal
credit risks'' standard.
---------------------------------------------------------------------------

    \299\ See rule 2a-7(d)(2)(iii).
    \300\ See proposed rule 2a-7(d)(2)(iii).
    \301\ See, e.g., Dreyfus Comment Letter; Fidelity Comment
Letter. Some commenters also felt that the need to apply two
different standards would add to compliance costs without providing
benefits in improving credit quality. See, e.g., Dreyfus Comment
Letter; ICI Comment Letter; IDC Comment Letter.
---------------------------------------------------------------------------

    In developing this final rule, we also considered changes
consistent with the amendments we proposed in 2011. The 2011 proposal
would have required fund boards first to determine whether securities
are eligible securities based on minimal credit risks, and second to
distinguish between first and second tier securities based on
subjective standards similar to those the ratings agencies have
developed to describe their ratings. However, we were persuaded by the
concerns some commenters expressed on the 2011 proposal,\302\ and did
not adopt these alternatives. In particular, as several commenters
noted, a two-tier approach could be confusing without reference to
objective standards, and fund advisers are likely to make many of the
same considerations in evaluating first and second tier
securities.\303\ In addition, we believe that the adopted single
standard will better reflect the risk limitation in the current rule.
The 2011 proposal described the standard for second tier securities in
language similar to the descriptions NRSROs use for second tier
securities, which fund managers might interpret as permitting funds to
invest in riskier second tier securities to a greater extent than under
our final rule, which is designed to limit investments to very high
quality second tier securities. Such increased investments in riskier
second tier securities would have had the potential to increase the
risk profile of money market funds.
---------------------------------------------------------------------------

    \302\ See Proposing Release, supra note 3, at 47988-47989.
    \303\ See id.
---------------------------------------------------------------------------

    The two industry commenters on the 2014 proposal who discussed the
elimination of the first and second tier distinction supported it.\304\
However, two other commenters expressed concern that removal of the
distinction and the limit on second tier securities could lead to funds
purchasing more risky securities.\305\ As discussed above,\306\ we
believe that the codification of the credit analysis factors in the
final rule, combined with market discipline and staff oversight of
required N-MFP disclosures, should reduce this possibility.
---------------------------------------------------------------------------

    \304\ See Fidelity Comment Letter; MFDF Comment Letter.
    \305\ See Better Markets Comment Letter; CFA Comment Letter.
    \306\ See supra section II.A.2.
---------------------------------------------------------------------------

    The two-tier approach discussed above could have had different
effects on competition and capital formation than the effects on
competition and capital formation stemming from the adopted approach,
as a result of ensuing increased or decreased investments in second
tier securities. However, we are unable to estimate the relative
effects on competition or capital formation because we do not know how
shareholders and funds would respond to this approach as compared to
the final rule, and no commenters provided any estimates.
    With respect to replacing the reference to ratings in determining
the eligibility of underlying securities (i.e., those that are subject
to a conditional demand feature), we considered a qualitative standard
that NRSROs use to articulate long-term securities in the highest
rating category. We note generally that few issuers or guarantors have
received long-term ratings in the highest category.\307\ Moreover,
issuers

assigned a short-term credit rating in the top category by an NRSRO may
have received a long-term rating in the second-highest (or lower)
category.\308\ Because of the limited NRSRO assignments of the highest
long-term ratings to issuers, managers might have interpreted this
alternative to preclude fund investments in a security subject to a
conditional demand feature (that is itself an eligible security) if the
underlying security's issuer or guarantor is rated in the second-
highest category. Such an interpretation could significantly deviate
from the credit quality standards in the current rule, which was not
our intent. It also would likely reduce money market fund investments
in these securities.
---------------------------------------------------------------------------

    \307\ See Vipal Monga & Mike Cherney, CFO Journal: Lose your
Triple-A Rating? Who Cares?, Wall St. J. (Apr. 29, 2014) (noting the
decline in companies with triple A long-term ratings).
    \308\ See Moody's Investors Service, Rating Symbols and
Definitions, Apr. 2014, https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004, at 6 (showing the
linkage between short-term and long-term ratings when such long-term
ratings exist and indicating that long-term ratings of ``A3'' or
higher are compatible with the highest short-term rating of ``P-
1''); Standard &Poor's, About Credit Ratings (2012), http://www.standardandpoors.com/aboutcreditratings/RatingsManual_PrintGuide.html (each short-term rating corresponds to
a band of long-term ratings. ``For instance, the A-1 short-term
rating generally corresponds to the long-term ratings of `A+,' `A,'
and `A-'.''); FitchRatings, Ratings Definitions (2014), https://www.fitchratings.com/jsp/general/RatingsDefinitions.faces?context=5&detail=507&context_ln=5&detail_ln=500 (indicating the relationship between short-term and long-term
ratings with a table and acknowledging that ``lower relative short-
term default risk, perhaps through factors that lend the issuer's
profile temporary support, may coexist with higher medium-or longer
term default risk'').
---------------------------------------------------------------------------

    In choosing to eliminate the current reference to ratings
downgrades in the monitoring standard of rule 2a-7, we considered the
rule 2a-7 amendments that we proposed in 2011.\309\ These proposed
amendments would have required that, in the event the money market fund
adviser (or any person to whom the board has delegated portfolio
management responsibilities) becomes aware of any credible information
about a portfolio security or an issuer of a portfolio security that
suggests that the security is no longer a first tier security or a
second tier security, as the case may be, the board or its delegate
would have to promptly reassess whether the security continues to
present minimal credit risks.\310\ Most of those who commented on this
proposed amendment objected to it as an inefficient method of notifying
funds if a portfolio security is potentially impaired. We were
persuaded by these commenters' concerns.\311\
---------------------------------------------------------------------------

    \309\ See 2011 Proposing Release, supra note 4, at section
II.A.3.
    \310\ Id.
    \311\ See 2014 Proposing Release, supra note 3, at section
II.A.3.
---------------------------------------------------------------------------

    Finally, we also considered removing the current reference to
ratings downgrades in the stress testing provisions of rule 2a-7 and
replacing this reference with the requirement that money market funds
stress test their portfolios for an adverse change in the ability of a
portfolio security issuer to meet its short-term credit obligations. We
had proposed this alternative in 2011, and commenters on the 2011
proposal who addressed this issue uniformly advocated against removing
the reference to a downgrade in the stress testing conditions.\312\ We
believe that the 2011 proposed standard, as compared to the standard we
are adopting today, was less clear and that it would lead to more
burdensome monitoring and greater inefficiencies in developing
hypothetical events for stress testing. In light of these commenters'
concerns, we thus decided to adopt stress testing provisions in rule
2a-7 that would permit funds to continue to test their portfolios
against a potential downgrade or default, as discussed in more detail
above.\313\ As also discussed above, commenters uniformly supported
this provision.\314\
---------------------------------------------------------------------------

    \312\ We had proposed this alternative in 2011 and received
comments on it at that time. See id, section II.A.4.
    \313\ See supra section V.A.2.iv.
    \314\ See supra notes 284-285 and accompanying text.
---------------------------------------------------------------------------

Form N-MFP
    The final rule's amendments to Form N-MFP will require money market
funds to disclose NRSRO ratings that they use in their evaluations of
portfolio securities. Specifically, a fund will have to disclose for
each portfolio security any NRSRO rating that the fund's board of
directors (or its delegate) considered in making its minimal credit
risk determination, as well as the name of the agency providing the
rating. NRSRO ratings provide one indicator of credit risk of a fund's
portfolio securities and, as discussed above, we anticipate that they
will continue to be considered by many money market fund managers in
performing credit quality assessments. We believe this ratings
information will be useful to the Commission, to investors, and to
various third parties as they monitor and evaluate the risks that fund
managers take in both stable-NAV and institutional prime funds.
1. Economic Baseline
    Under the economic baseline outlined above, money market funds are
required to disclose in Form N-MFP the credit ratings for each
portfolio security.\315\ More specifically, funds are currently
required to identify whether a portfolio security is a first or second
tier security or is unrated, and to identify the ``designated NRSROs''
for each security (and for each demand feature, guarantee, or other
credit enhancement). This disclosure requirement was not changed by the
2014 Money Market Fund Adopting Release.
---------------------------------------------------------------------------

    \315\ Although some money market funds voluntarily disclose
security credit ratings, money market funds often rely on a staff
no-action letter in not disclosing security credit ratings and
``designated NRSROs.'' See supra note 142 and accompanying text.
---------------------------------------------------------------------------

    As noted above, based on Form N-MFP filings from April 30, 2015,
the Commission estimates that 98.26 percent of aggregate money market
fund assets are invested in first tier securities, 0.14 percent of
aggregate money market fund assets are invested in second tier
securities, and 1.6 percent of aggregate money market fund assets are
invested in unrated securities. Among the 537 funds that filed that
month, 412 funds reported that they held only first tier securities,
477 funds reported that they held no second tier securities, and 447
funds reported that they held no unrated securities.
2. Economic Analysis
    We anticipate that our amendments are likely to have two primary
benefits. First, they should reduce perceived government endorsement of
NRSROs, particularly when considered together with other amendments the
Commission has adopted that remove credit ratings references in this
rule and other rules and forms under the federal securities laws.
Second, they will provide transparency on whether or not specific funds
use credit ratings when making investment decisions, and might make it
easier, if ratings are used, for shareholders and other interested
parties to also use those ratings as part of their own risk
assessments.
    We anticipate that our amendments are likely to have two primary
costs. First, they may impose administrative costs on funds that need
to re-program their Form N-MFP filing software.\316\ Second, because
only funds that choose to consider credit ratings in assessing minimal
credit risk will be permitted to disclose NRSRO ratings on Form N-MFP,
our final rule may reduce transparency into one measure of the credit
risk associated with securities purchased by funds that do not choose

to consider credit ratings. This loss of transparency could create
additional servicing costs for such funds if shareholders demanded new
communications regarding the credit quality of the portfolio,\317\
though this problem may be mitigated by the fact that sophisticated
shareholders will often be aware of the ratings and other measures of
credit risk, even if they are not disclosed on Form N-MFP.
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    \316\ See supra notes 243-244 and accompanying text (discussion
of re-programming costs in PRA analysis).
    \317\ See Comment Letter of the Dreyfus Corporation (Apr. 25,
2011) (``2011 Dreyfus Comment Letter'') (opposing the elimination of
credit ratings disclosures in Form N-MFP because of the potential
that the fund would bear increased shareholder servicing costs to
provide additional communications regarding the credit quality of
the portfolio).
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    The net effect of the amendments to Form N-MFP is that funds will
not be required or permitted to disclose credit ratings if credit
ratings are not considered in determining whether a security is
eligible for the portfolio. However, as discussed above, we believe
that our amendments will not result in any material changes for the
majority of funds because they will, we believe, continue to refer to
credit ratings. We believe, therefore, that the amendments' effects on
efficiency, competition, and capital formation will likely be
negligible. To the extent that money market funds continue to consider
NRSRO ratings in making their minimal credit risk determinations, the
amendments to Form N-MFP may reduce the potential that fund managers
will increase significantly fund investments in riskier second tier
securities; a fund will be required to disclose ratings considered in
those credit determinations, and the ratings will reflect that
increased risk. As a result, the disclosure to investors of these risk
indicators may have the effect of penalizing funds that assume more
risk.
    Although this final rule reflects a change from the proposal by not
requiring disclosure of every rating that a fund subscribes to, we
believe that it will have a negligible impact on the overall costs and
benefits of these amendments to Form N-MFP. Just as in the proposed
rule, funds will still have to report the ratings they considered, and
adjust their compliance programs to ensure such reporting. The extra
reporting that would have been required under the proposed rule would
likely only have caused a very small burden on funds because funds
would incur the same reprogramming costs under either approach.
3. Alternatives
    In the 2014 Proposing Release, the Commission presented an
alternative to the now adopted amendments to Form N-MFP that would have
required greater disclosure of credit ratings. Specifically, a fund
would have had to disclose not only the ratings that it considered in
evaluating a security and the name of the NRSRO providing the rating,
but also each rating assigned by any NRSRO if the fund or its adviser
subscribed to that NRSRO's services, and the name of that NRSRO.
Several commenters on the proposed rule objected strongly to this
requirement, stating that it would be costly, onerous and that mere
subscription to an NRSRO's services was not a good indication that a
particular rating was part of the evaluation of a particular
security.\318\ In developing this final rule, we were persuaded by
these commenters and now believe that requiring this level of
disclosure is unnecessary. In addition, as noted by commenters,
requiring disclosure based on subscription might have increased costs
and therefore created a financial disincentive to the use of ratings
subscriptions by funds. As a result, this alternative might have
decreased the amount of information used by fund managers to monitor
risk in the market. For all of these reasons, we believe that the
alternative chosen in the final rule is less likely than the other
alternatives to impair efficiency, competition, and capital formation.
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    \318\ See, e.g., SIFMA Comment Letter; BlackRock Comment Letter.
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    In developing this final rule, we also considered the 2011 proposal
to completely eliminate the following two form items: the item that
requires a fund to identify whether a portfolio security is a first
tier security, a second tier security, or an unrated security; and the
item that requires the fund to identify the ``requisite NRSROs'' for
each security (and for each demand feature, guarantee, or other credit
enhancement). Although we have eliminated the terminology ``requisite
NRSRO'', we did not adopt this alternative because we now believe that
completely eliminating such disclosure requirements masks not only the
credit ratings but also information on whether or not the fund uses
credit ratings when making its investment decisions.
    We also considered not removing the current disclosure requirement
as recommended by several commenters to the 2011 Proposing
Release.\319\ We elected not to leave the current disclosure
requirements as is, but instead to adopt the required disclosure of
NRSRO ratings only in certain circumstances, with the final rule
narrowing those circumstances to situations where the fund actually
uses the rating in its evaluation of credit quality. We believe these
final amendments are more in keeping with Congressional intent
underlying Section 939A of the Dodd-Frank Act to reduce perceived
government endorsement of credit ratings.
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    \319\ See 2011 BlackRock Comment Letter; 2011 Dreyfus Comment
Letter; Comment Letter of Federated Investors, Inc. (Apr. 25, 2011);
Comment Letter of the Securities Industry and Financial Markets
Association (Apr. 18, 2011).
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B. Exclusion From the Issuer Diversification Requirement

1. Economic Baseline
    As discussed above, most money market fund portfolio securities
that are subject to a guarantee by a non-controlled person are
currently subject to a 10 percent diversification requirement on
guarantors but no diversification requirement on issuers, while non-
government securities with guarantors that do not qualify as non-
controlled persons are generally subject to both a 5 percent
diversification requirement with respect to issuers and a 10 percent
diversification requirement with respect to guarantors.\320\ In July
2014, we adopted amendments to rule 2a-7 that deem sponsors of asset-
backed securities to be guarantors of the asset-backed security (unless
the fund's board rebuts the presumption).\321\ As a result, under rule
2a-7's definition of a guarantee issued by a non-controlled person,
both non-asset-backed securities and asset-backed securities subject to
such a guarantee (including asset-backed securities with a presumed
sponsor guarantee) are excluded from the rule's issuer diversification
requirement. That is, non-asset-backed securities and asset-backed
securities subject to a guarantee by a non-controlled person are
subject to a 10 percent diversification requirement on guarantors, but
they are not subject to a 5 percent issuer diversification requirement
on the issuer.\322\ This forms

the economic baseline for the new diversification amendments that we
are adopting today.
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    \320\ We note that single state funds may invest up to 25
percent of fund assets in securities of any single issuer, and tax-
exempt funds may have as much as 15 percent of the value of
portfolio securities invested in securities subject to guarantees or
demand features issued by a single provider that is a non-controlled
person. Rule 2a-7(d)(3)(i)(B); rule 2a-7(d)(3)(iii)(B).
    \321\ We also adopted an amendment to rule 2a-7's
diversification provisions to provide that money market funds limit
their exposure to affiliated groups, rather than to discrete
issuers. See rule 2a-7(d)(3)(ii)(F).
    \322\ See current rule 2a-7(a)(18) (definition of guarantee);
current rule 2a-7(a)(19) (definition of guarantee issued by a non-
controlled person); current rule 2a-7(d)(3)(i) (issuer
diversification).
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2. Economic Analysis
    We believe that a small number of money market funds rely on the
issuer diversification exclusion for securities subject to a guarantee
by a non-controlled person. In the Proposing Release, staff's analysis
of February 2014 Form N-MFP data showed that only 8 out of 559 money
market funds held securities with a guarantee by a non-controlled
person that exceeded the 5 percent diversification requirement for
issuers. We stated in the Proposing Release that we believed that these
funds in February 2014 relied on the exclusion from the 5 percent
issuer diversification requirement with respect to issuers of
securities that are subject to a guarantee issued by a non-controlled
person.
    In response to commenters, staff supplemented its analysis using
October 2014 and April 2015 Form N-MFP data to review the number of
funds that exceeded the 5 percent diversification limit.\323\ Staff
found, as discussed above, that as of October 2014 and April 2015, only
0.0482 percent and 0.0624 percent, respectively, of total money market
fund assets were above the 5 percent issuer diversification threshold.
As noted above, Commission staff found that only tax-exempt money
market funds appeared to be relying on the 5 percent issuer
diversification exclusion in October 2014 and April 2015. For October
2014 and April 2015, staff found that only 0.1 percent and 0.5 percent,
respectively, of national tax-exempt money market fund assets were
exposed to issuers above the 5 percent threshold.
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    \323\ See supra note 191 and accompanying text.
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    Commission staff also separately analyzed the number of single
state money market funds that appear to be relying on the issuer
diversification exclusion.\324\ Because single state funds have a 25
percent issuer diversification basket, staff analyzed issuer exposure
above this 25 percent limit, which would suggest that the fund may be
relying on the 5 percent issuer diversification exclusion in order to
obtain additional issuer exposure. In their analysis, staff recognized
that a single state money market fund could be relying on the issuer
diversification exclusion even when a fund's exposure to a single
issuer is below 25 percent. For example, using the 25 percent issuer
basket, a single state fund technically could have a 10 percent
exposure to Issuer A and a 15 percent exposure to Issuer B, while
having an additional 7 percent exposure to Issuer B using the 5 percent
issuer diversification exclusion. In this scenario the total amount of
exposure to Issuer B is less than 25 percent, but the money market fund
is nonetheless relying on the issuer diversification exclusion. Staff
analysis suggests that for October 2014, 44 single state money market
funds out of 97 total single state money market funds were potentially
relying on the 5 percent issuer diversification exclusion, and for
April 2015, 38 single state money market funds out of 90 total single
state money market funds were potentially relying on the 5 percent
issuer diversification exclusion. However, for October 2014 and April
2015, staff found that only 1.7 percent and 1.3 percent, respectively,
of single state money market fund assets were above the 5 percent
issuer diversification threshold (while taking into account the 25
percent issuer diversification basket). Therefore, while a number of
single state money market funds may be affected by the amended rule, a
very small portion of their assets will be affected.
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    \324\ As noted above, rule 2a-7 currently permits a single state
fund to invest up to 25 percent of its assets in any single issuer.
See supra note 161 and accompanying text.
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    We recognize that changes in fund assets could mask which funds
rely on the issuer diversification exclusion at acquisition: A fund
might be above the 5 percent limit today solely due to a decline in
fund assets after acquisition, and a fund might be below the 5 percent
limit today solely due to an increase in fund assets after
acquisition.\325\ Whatever the cause, a money market fund that has
invested more than 5 percent of its assets in an issuer of securities
subject to a guarantee issued by a non-controlled person in reliance on
the exclusion under current rule 2a-7 would, when those investments
mature, have to reinvest the proceeds over 5 percent elsewhere. Based
on the additional analysis of Form N-MFP filings, we believe that a
small percentage of all money market funds (including a higher
proportion of single state funds) would have to make changes to their
portfolios to bring them into compliance with the amendments. These
changes may or may not require the funds to invest in alternative
securities, and the alternative securities may or may not be inferior
because they offer, for example, lower yields, lower liquidity, or
lower credit quality.
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    \325\ All of rule 2a-7's diversification limits are applied at
the time of acquisition. For example, a fund may not invest in a
particular issuer if, after acquisition, the fund's aggregate
investments in the issuer would exceed 5 percent of fund assets. But
if the fund's aggregate exposure after making the investment was
less than 5 percent, the fund would not be required to later sell
the securities if the fund's assets decreased and the fund's
investment in the issuer came to represent more than 5 percent of
the fund's assets.
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    In response to commenters' suggestion that the Commission consider
a broader sample of data, as discussed above, and to assess the
amendment's effect on yield, our staff examined whether the 7-day gross
yields of funds that use the 5 percent issuer diversification exclusion
were higher than the 7-day gross yields for funds that do not. Our
staff found: (i) For national tax-exempt money market funds in October
2014, the average yield for funds using the 5 percent issuer
diversification exclusion was 0.10 percent as compared to the average
yield for funds that did not use the 5 percent issuer diversification
exclusion of 0.08 percent; (ii) for national tax-exempt money market
funds in April 2015, the average yield for funds using the 5 percent
issuer diversification exclusion was 0.12 percent as compared to the
average yield for funds that did not use the 5 percent issuer exclusion
of 0.11 percent; (iii) for single state money market funds in October
2014, the average yield for funds using the 5 percent issuer
diversification exclusion was 0.10 percent as compared to the average
yield for funds that did not use the 5 percent issuer exclusion of 0.08
percent; and (iv) for single state money market funds in April 2015,
the average yield for funds using the 5 percent issuer diversification
exclusion was 0.12 percent as compared to the average yield for funds
that did not use the 5 percent issuer exclusion of 0.07 percent.
Although we do not believe the above differences in yield are material,
we do recognize that funds that appear to be relying on the exclusion
have, on average, a higher yield than money market funds that do not
rely on the exclusion. In addition, we acknowledge that the current
low-interest rate environment may cause the yield spread in each
comparison above to be less than if we were measuring the yield spreads
in a higher interest rate environment.
    It appears that the elimination of the exclusion would affect the
63 money market funds out of a total of 542 money market funds (or
approximately 11.6 percent of all money market funds) that exceeded the
5 percent issuer diversification limit as of April 2015, and would
affect the 0.0624 percent of total money market fund assets that were
above the 5 percent issuer diversification threshold, such that

when those investments mature, the affected funds would have to
reinvest the proceeds over 5 percent elsewhere. Because of the minimal
amount of money market fund assets that would be affected by our
amendment, we believe that the potential lower yields, less liquidity
or increased risks associated with the amendment will be small for the
affected funds.\326\