securities is of lesser credit quality, allowing the money market
fund to have up to 10% of its assets indirectly exposed to the
guarantor may not be justified.
---------------------------------------------------------------------------

    In considering the comments we received on the proposed amendments
to the diversification provisions and the alternatives discussed above,
we noted that money market funds also may effectively rely exclusively
on the credit quality of certain guarantors for purposes of the
diversification requirements. Notwithstanding the 5 percent issuer
diversification provision, rule 2a-7 does not require a money market
fund to be diversified with respect to issuers of securities that are
subject to a guarantee by a non-controlled person.\136\ This exclusion
could allow, for example, a fund to invest a significant portion or all
of the value of its portfolio in securities issued by the same entity
if the securities were guaranteed by different non-controlled person
guarantors such that none guaranteed securities with a value exceeding
10 percent of the fund's total assets. By diversifying solely against
the guarantor, the fund could be relying on the guarantors' credit
quality or repayment ability, not the issuer's. Thus, the fund would
effectively substitute the credit of the guarantor for that of the
issuer for diversification purposes, without imposing the tighter 5
percent requirement that rule 2a-7 generally applies for issuer
diversification. The fund also would have a highly concentrated
portfolio and would be subject to substantial risk if the single issuer
in whose securities it had such a significant investment were to come
under stress or default.
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    \136\ Rule 2a-7(d)(3)(i). A guarantee issued by a non-controlled
person means a guarantee issued by: (i) A person that, directly or
indirectly, does not control, and is not controlled by or under
common control with the issuer of the security subject to the
guarantee; or (ii) a sponsor of a special purpose entity with
respect to an asset-backed security. Rule 2a-7(a)(19). Control has
the same meaning as in section 2(a)(9) of the Investment Company
Act, 15 U.S.C. 80a-2(a)(9).
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    We are concerned that a money market fund relying on the exclusion
from the issuer diversification provision need only comply with the 10
percent guarantor diversification requirement, notwithstanding the
credit substitution discussed above. In consideration of our reform
goal of limiting concentrated exposure of money market funds to
particular economic enterprises, we no longer believe that ignoring a
fund's exposure to the issuer in these circumstances is
appropriate.\137\ Rather than subject these guarantors to a unique 5
percent requirement, however, we 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. That is,
under today's proposed amendment, each money market fund that invests
in securities subject to a guarantee (whether or not the guarantor is a
non-controlled person) would 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.
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    \137\ See 2014 Money Market Fund Adopting Release, supra note 8,
at text following n.1600 and accompanying n.1601. The exclusion from
the 5% issuer diversification requirement for certain guaranteed
securities was adopted in the 1996 money market fund amendments to
provide flexibility in municipal investments, and was premised on
the ability of a money market fund to rely on the guarantee if an
issuer became distressed. See 1996 Money Market Fund Adopting
Release, supra note 62. Since 1996, our amendments have generally
scaled back on the amount of additional flexibility focused on the
municipal markets, particularly where money market funds do not
heavily rely on the exclusion. See, e.g., 2010 Money Market Fund
Adopting Release, supra note 41.
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    We recognize that the proposed removal of this exclusion and
tightening of issuer diversification requirements for securities
subject to a guarantee by a non-controlled person could impact issuers
of these securities and the fund's risk profile (although we note that
fewer than 2 percent of money market funds appear to be relying on this
exclusion).\138\ The proposed amendments could occasionally prevent
some issuers from selling securities to a money market fund that would
otherwise invest in the issuer's securities above the 5 percent
diversification requirement. In addition, while we recognize that
removing the exclusion could cause some money market funds to invest in
securities with higher credit risk, we note that a money market fund's
portfolio securities must meet certain credit quality requirements,
such as posing minimal credit risks, as discussed above.\139\ We
therefore believe that the substantial risk limiting provisions of rule
2a-7 would mitigate the potential that these money market funds would
significantly increase their investments in securities with higher
credit risk. We also believe that eliminating this exclusion would more
appropriately limit money market fund risk exposures by limiting the
concentration of exposure that a money market fund could have otherwise
had to a particular issuer.\140\
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    \138\ See infra section V.C.2.
    \139\ See rule 2a-7(d)(2) (portfolio quality); supra notes 20-24
and accompanying text.
    \140\ See infra section V.C.2.
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    We request comment on our proposal to eliminate the exclusion from
the issuer diversification requirement. Do commenters agree with our
approach to treat securities subject to a guarantee by a non-controlled
person similar to other securities with a guarantee or demand feature
under rule 2a-7? Should we instead, as discussed above, require that a
guarantor be treated as the issuer and subject to a 5 percent
diversification requirement when a money market fund is relying
exclusively on the credit quality of the guarantor or when the security
need not meet the issuer diversification requirements? Or should we
impose a higher limit on issuer exposure when the security is
guaranteed by a non-controlled person? If so, what would be an
appropriate limit? For example, would a 10 percent, 15 percent, or some
other limit be appropriate? What limit would appropriately balance the
interests discussed above--allowing greater flexibility for funds with
respect to indirect exposures to providers of guarantees and demand
features because of the potential that tighter diversification
provisions could lead to investments in lower quality securities and
limiting exposure risk when a fund is relying solely on such a provider
for repayment? Could commenters provide empirical analysis to support a
particular percentage? Do commenters agree with our understanding that
most money market funds do not currently rely on the issuer
diversification exclusion for securities subject to a guarantee issued
by a non-controlled person? Do commenters believe that many money
market funds have used this exclusion in the past or may do so in the
future absent our proposed amendment? We note that most of the funds
whose portfolios have greater than 5 percent exposure to an issuer are
tax-exempt funds, and that most of these funds exceed the 5 percent
threshold by less than 2 percent of fund assets. In addition, none of
the funds that appear to have relied on the exclusion is a single state
fund.\141\ As a result, we have assumed that tax-exempt funds do not

need this exclusion. Is this assumption correct? Is the supply of high
quality eligible municipal investments sufficiently limited such that
we should preserve the exclusion for tax-exempt or single state funds?
Are there any other particular types of funds for which the current
exclusion from the issuer diversification requirement should be
preserved? Is the proposed amendment likely to result in money market
funds investing in securities that present higher credit risk, or not,
given the credit quality requirements of rule 2a-7?
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    \141\ As noted above, rule 2a-7 currently permits a single state
fund to invest up to 25% of its assets in any single issuer, thus
these funds appear not to need the exclusion. See supra note 125.
---------------------------------------------------------------------------

III. Compliance Period for the Proposed Rule and Form Amendments

    We anticipate that the compliance date for the re-proposed
amendments to rule 2a-7 and Form N-MFP and the proposed amendments to
the issuer diversification requirements would be [INSERT DATE 18 MONTHS
AFTER JULY 2014 MONEY MARKET FUND RULES' EFFECTIVE DATE]. We expect
that this compliance date should provide an adequate period of time for
money market funds to review and revise their policies and procedures
for complying with rule 2a-7, as funds deem appropriate in connection
with the re-proposed and proposed amendments, if adopted.\142\ We note
that this compliance date would coincide with the compliance date for
the rule 2a-7 amendments relating to diversification and stress testing
adopted in the 2014 Money Market Fund Adopting Release, as well as the
Form N-MFP amendments also adopted in that release. As discussed below,
we believe that coordinating the compliance date of the re-proposed
amendments with the compliance date of certain related amendments
adopted in the 2014 Money Market Fund Adopting Release should reduce
costs to the extent feasible by consolidating changes to be made to a
fund's policies and procedures, as well as changes to Form N-MFP, at a
single time.\143\ We request comment on this compliance date.
---------------------------------------------------------------------------

    \142\ See infra note 219 and accompanying text.
    \143\ See infra note 233 and accompanying text.
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IV. Paperwork Reduction Act Analysis

    Certain provisions of our proposal contain ``collections of
information'' within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\144\ The titles for the existing collections of information
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). The Commission is
submitting these 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. 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.
---------------------------------------------------------------------------

    \144\ 44 U.S.C. 3501-3520.
---------------------------------------------------------------------------

    The agency has submitted the proposed collections of information to
OMB for approval. Comments on the proposed collections of information
should be directed to: (i) Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Office of
Management and Budget, Room 10102, New Executive Office Building,
Washington, DC 20503, or by sending an email to<EMAIL_ADDRESS>and (ii) Thomas Bayer, Chief Information Officer,
Securities and Exchange Commission, c/o Remi Pavlik-Simon, 6432 General
Green Way, Alexandria, VA 22312 or send an email to<EMAIL_ADDRESS>OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication of
this Release; therefore, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days after publication of this
Release. Requests for materials submitted to OMB by the Commission with
regard to this collection of information should be in writing, refer to
File No. S7-07-11, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE., Washington, DC
20549-2736.

A. Rule 2a-7

    As discussed above, we are re-proposing to remove references to
credit ratings in rule 2a-7, which would 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 would 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.\145\
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    \145\ 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.\146\ 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.\147\ As
discussed above, we are re-proposing amendments to rule 2a-7 that would
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 re-proposed amendments would
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 would combine the current ``first tier'' and
``second tier'' credit risk categories into a single standard, which
would be included as part of rule 2a-7's definition of eligible
security. A security would 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 would include a
finding that the security's issuer has an exceptionally strong capacity
to meet its

short-term obligations.\148\ The re-proposed amendments also would
require that, with respect to a security (or its guarantee) subject to
a conditional demand feature, the underlying security (or its
guarantee) must have a very strong capacity for payment of its
financial commitments.\149\
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    \146\ See rule 2a-7(a)(12).
    \147\ See rules 2a-7(d)(2)(i); 2a-7(j)(1); 38a-1.
    \148\ Re-proposed rule 2a-7(a)(11); see supra section II.A.1.
    \149\ Re-proposed rule 2a-7(d)(2)(iii)(C); see supra section
II.A.2.
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    Money market funds are required to have written policies and
procedures regarding minimal credit risk determinations.\150\ Thus,
each money market fund complex would incur one-time costs to comply
with these re-proposed amendments, if adopted. Specifically, each fund
complex would incur costs to review the amended provisions of rule 2a-7
and, as it determines appropriate in light of the re-proposed
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, including
securities that are subject to a conditional demand feature. 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 would be permitted under the re-
proposed rule amendments.\151\ 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 re-
proposal, if adopted. 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.\152\ In addition to revisions concerning NRSRO ratings,
some funds may choose to revise their policies and procedures to
address certain factors discussed above (to the extent those factors
are not considered currently) in their credit assessment policies and
procedures.
---------------------------------------------------------------------------

    \150\ See rule 2a-7(j)(1); supra note 22.
    \151\ See infra note 204 and accompanying paragraph.
    \152\ See rule 2a-7(d)(2)(i).
---------------------------------------------------------------------------

    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 would
incur a one-time burden of 9 hours,\153\ at a cost of $2,838,\154\ to
review and revise, as appropriate, its policies and procedures. Using
an estimate of 84 money market fund complexes,\155\ we estimate that
money market funds would incur, in aggregate, a total one-time burden
of 756 hours,\156\ at a cost of $238,392,\157\ 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 252 hours \158\ at a cost of $79,464.\159\ 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
re-proposed amendments. There would be no external costs associated
with this collection of information.
---------------------------------------------------------------------------

    \153\ 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)).
    \154\ 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.
    \155\ Based on data from Form N-MFP and iMoneyNet data as of
February 28, 2014.
    \156\ This estimate is based on the following calculation: 9
hours x 84 money market fund complexes = 756 hours.
    \157\ This estimate is based on the following calculation:
$2,838 x 84 money market fund complexes = $238,392.
    \158\ This estimate is based on the following calculation: 756
hours / 3 years = 252 hours.
    \159\ This estimate is based on the following calculation:
$238,392 / 3 years = $79,464.
---------------------------------------------------------------------------

2. Monitoring Minimal Credit Risks
    Rule 2a-7 currently requires a money market fund board (or its
delegate) promptly to reassess whether a security that has been
downgraded by an NRSRO continues to present minimal credit risks.\160\
As discussed above, we are re-proposing amendments to rule 2a-7 that
would eliminate the current use of credit ratings in the rule's
downgrade and default provisions. Rule 2a-7 instead would 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.\161\ To comply with these
re-proposed amendments, if adopted, a fund complex would 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,\162\ 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.
---------------------------------------------------------------------------

    \160\ See rule 2a-7(f)(1)(i).
    \161\ Re-proposed rule 2a-7(g)(3); see supra section II.A.3.
    \162\ See supra notes 102-106 and accompanying text.
---------------------------------------------------------------------------

    We estimate that each money market fund complex on average would
incur a one-time burden of 5 hours,\163\ at a cost

of $3,619,\164\ to adopt policies and procedures for ongoing review of
minimal credit risks. Using an estimate of 84 money market fund
complexes,\165\ we estimate that money market funds would incur, in
aggregate, a total one-time burden of 378 hours,\166\ at a cost of
$303,996,\167\ 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
126 hours \168\ at a cost of $101,332.\169\ There would be no external
costs associated with this collection of information.
---------------------------------------------------------------------------

    \163\ 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, if adopted, 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 this note 163 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.
    \164\ 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.
    \165\ Based on data from Form N-MFP and iMoneyNet data as of
February 28, 2014.
    \166\ This estimate is based on the following calculation: 4.5
hours x 84 money market fund complexes = 378 hours.
    \167\ This estimate is based on the following calculation:
$3,619 x 84 money market fund complexes = $303,996.
    \168\ This estimate is based on the following calculation: 378
hours / 3 years = 126 hours.
    \169\ This estimate is based on the following calculation:
$303,996 / 3 years = $101,332.
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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.\170\ We are re-proposing
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.\171\ The re-proposed 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 re-proposed amendment would
require a fund to stress test for an event indicating or evidencing
credit deterioration in a portfolio security, and would 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 re-proposed amendment, and
could continue to use credit quality evaluations prepared by outside
sources, including NRSRO downgrades, in stress tests.\172\ Because the
rule currently requires testing for a downgrade as a hypothetical
event, we do not believe that funds would 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 proposed amendments would significantly change current
collection of information burden estimates for rule 2a-7.\173\
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    \170\ See rule 2a-7(g)(8).
    \171\ Re-proposed rule 2a-7(g)(8)(i)(B); see supra section
II.A.4.
    \172\ See infra text accompanying and preceding note 217.
    \173\ See infra note 174.
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    Total Burden for Rule 2a-7. The current approved collection of
information for rule 2a-7 is 517,228 annual aggregate hours.\174\ The
aggregate additional burden hours associated with the re-proposed
amendments to rule 2a-7 increase the burden estimate to 517,606 hours
annually for all funds.\175\
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    \174\ The Commission has submitted an application to the OMB for
revision of the current approved collection of information for rule
2a-7 in connection with the 2014 Money Market Fund Adopting Release.
When and if approved, the collection of information for rule 2a-7
will increase to 617,653 hours annually for all funds.
    \175\ This estimate is based on the following calculation:
517,228 hours (current approved burden) + 252 hours (eligible
security determinations for money market fund portfolio securities,
including securities that are subject to a conditional demand
feature) + 126 hours (monitoring minimal credit risks) = 517,606
hours. If the revised collection of information for rule 2a-7 in
connection with the 2014 Money Market Fund Adopting Release is
approved, as well as the collection of information associated with
the re-proposed amendments to rule 2a-7 as discussed in this
release, the collection of information for rule 2a-7 would increase
to 618,031 hours (617,653 hours + 252 hours + 126 hours). See supra
note 174.
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4. Request for Comment
    We request comment on these assumptions and estimates. If
commenters believe these assumptions or estimates are not accurate, we
request they provide specific data that would allow us to make more
accurate estimates.

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.\176\ 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. Responses to the disclosure requirements
of Form N-MFP are not kept confidential.
---------------------------------------------------------------------------

    \176\ 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. See infra note
188.
---------------------------------------------------------------------------

    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).\177\ As discussed above, the re-
proposed amendments would require that each money market fund disclose
on Form N-MFP, for each portfolio security, each rating assigned by any
NRSRO to whose services the fund or its adviser subscribes (together
with the name of the assigning NRSRO), and any other NRSRO rating that
the fund's board of directors considered in determining that the
security presents minimal credit risks (together with the name of the
assigning NRSRO).\178\ Because we believe that the majority of funds
would continue to refer to credit ratings in making minimal credit risk
determinations, we do not believe the re-proposed amendments to Form N-
MFP would result in material changes to the ongoing burden for most
funds.\179\ 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.
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    \177\ See Form N-MFP Items C.9, C.10, C.14.b-c, C.15.b-c,
C.16.c-d.
    \178\ See re-proposed Form N-MFP Items C.9, C.10, C.14.e,
C.15.c, C.16.d; supra section II.B.
    \179\ See infra note 204 and accompanying paragraph.
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    We estimate that each fund will incur a one-time burden of 3
hours,\180\ at a cost of $943 per fund,\181\ to comply with

the amended disclosure requirements of Form N-MFP, if adopted. Using an
estimate of 559 money market funds that are required to file reports on
Form N-MFP,\182\ we estimate that money market funds would incur, in
the aggregate, a total one-time burden of 1,677 hours,\183\ at a cost
of $527,137,\184\ 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 559 hours \185\ at a cost of $175,712.\186\ There would be no
external costs associated with complying with the amended disclosure
requirement of Form N-MFP.\187\
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    \180\ 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).
    \181\ 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.
    \182\ This estimate is based on a review of reports on Form N-
MFP filed with the Commission for the month ended February 28, 2014.
    \183\ This estimate is based on the following calculation: 3
hours x 559 money market funds = 1,677 hours.
    \184\ This estimate is based on the following calculation: $943
x 559 money market funds = $527,137.
    \185\ This estimate is based on the following calculation: 1,677
hours / 3 years = 559 hours.
    \186\ This estimate is based on the following calculation:
$527,137 / 3 years = $175,712.
    \187\ 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 8, 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
45,214 annual aggregate hours and $4,424,480 in external costs.\188\
The aggregate additional hours associated with the re-proposed
amendments to Form N-MFP increase the burden estimate to 45,773 hours
annually for all funds.\189\ 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 $4,424,480.
---------------------------------------------------------------------------

    \188\ The Commission has submitted an application to the OMB for
revision of the current approved collection of information for Form
N-MFP in connection with the 2014 Money Market Fund Adopting
Release. When and if approved, the collection of information for
Form N-MFP will increase to 83,412 hours.
    \189\ This estimate is based on the following calculation:
45,214 hours (current approved burden) + 559 hours = 45,773 hours.
If the revised collection of information for Form N-MFP in
connection with the 2014 Money Market Fund Adopting Release is
approved, as well as the collection of information associated with
the re-proposed amendments to Form N-MFP as discussed in this
release, the collection of information for Form N-MFP would increase
to 83,971 hours (83,412 hours + 559 hours). See supra note 188.
---------------------------------------------------------------------------

    We request comment on these estimates. If commenters believe these
estimates are not accurate, we request they provide specific data that
would allow us to make more accurate estimates.

V. Economic Analysis

    As discussed above, we are re-proposing 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.'' \190\ 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.'' \191\
---------------------------------------------------------------------------

    \190\ Public Law 111-203 Sec.  939A(a)(1)-(2). Section 939A of
the Dodd-Frank Act applies to all Federal agencies.
    \191\ 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 also are proposing to amend 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) would 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.\192\
---------------------------------------------------------------------------

    \192\ 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 for 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 notes 125-126.
---------------------------------------------------------------------------

    The economic baseline for our economic analysis is the regulatory
framework as it exists immediately before the re-proposal, that is, the
regulatory framework after the amendments to rule 2a-7 were adopted
today in the 2014 Money Market Fund Adopting Release. As discussed in
more detail below, that adopting release makes material changes to
money market fund regulation that we believe may result in material
changes to the money market fund industry. Because there is an extended
compliance period for those 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 our re-proposal.
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 re-proposal when they have floating
NAVs. We can describe potential economic effects of complying with the
re-proposed and proposed 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 re-proposed rule 2a-7 amendments to remove and
replace ratings references, the re-proposed Form N-MFP amendments, and
the proposed amendments to rule 2a-7's issuer diversification
provision.

A. Rule 2a-7

    The re-proposed amendments to rule 2a-7 would affect five elements
of the 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.\193\ The re-proposed amendments, which are similar to those we
proposed in 2011,

are designed to remove any requirement of reliance on credit ratings
and to substitute standards of creditworthiness that we believe are
appropriate.
---------------------------------------------------------------------------

    \193\ The re-proposed rule also would make conforming amendments
to rule 2a-7's recordkeeping and reporting requirements. See re-
proposed rule 2a-7(h)(3).
---------------------------------------------------------------------------

1. Economic Baseline
    As discussed above, the credit risk limitations in rule 2a-7
currently require that money market funds undertake a two-step analysis
before acquiring a portfolio security.\194\ 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 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 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.
---------------------------------------------------------------------------

    \194\ See supra notes 20-25 and accompanying text. The credit
risk limitations of rule 2a-7, as well as the other specific
provisions of 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 February 28, 2014, the Commission
estimates that 99.75 percent of aggregate money market fund assets are
in first tier securities, 0.24 percent of aggregate money market fund
assets are in second tier securities, and 0.01 percent of aggregate
money market fund assets are in unrated securities. Among the 559 funds
that filed Form N-MFP that month, we estimate that 488 funds held only
tier one rated securities, 503 funds held no tier two rated securities,
and 537 funds held no unrated securities. In addition, less than 5
percent of all money market funds, and only 6 prime funds out of 229
prime funds held the maximum amount of second tier securities permitted
under rule 2a-7. Using additional data from the Federal Reserve Board,
we estimate that money market fund holdings of second tier commercial
paper represent 5.1 percent of the outstanding issues of second tier
commercial paper.\195\
---------------------------------------------------------------------------

    \195\ This data is based on the Federal Reserve Board's
statistics on outstanding volume of commercial paper. See Commercial
Paper Outstanding by special categories, available at http://www.federalreserve.gov/releases/cp/outstanding.htm.
---------------------------------------------------------------------------

    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 February 28, 2014, the Commission estimates that 11
percent of money market fund assets are invested in securities with a
demand feature. We estimate further that securities with conditional
demand features represent 25 percent of securities with demand features
and 3 percent of all securities held by money market funds. We further
estimate that 81 percent of those underlying securities (or their
issuers or guarantors) have received an NRSRO rating in the second-
highest long-term rating category, while 19 percent have received an
NRSRO rating in the highest long-term category.\196\
---------------------------------------------------------------------------

    \196\ 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 78. These estimates are based on a random sample of
10% of the securities that have demand features that were reported
in February 2014 Form N-MFP filings.
---------------------------------------------------------------------------

    Rule 2a-7 currently requires a money market fund board (or its
delegate) promptly to reassess whether a security that has been
downgraded by an NRSRO continues to present minimal credit risks.\197\
We understand that downgrades are rare among money market fund
portfolio securities.\198\ 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.\199\ 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.
---------------------------------------------------------------------------

    \197\ See supra notes 91-92 and accompanying text.
    \198\ 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).
    \199\ See supra notes 102-106 and accompanying text.
---------------------------------------------------------------------------

    Finally, rule 2a-7 currently requires money market funds to stress
test their portfolios.\200\ 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
share 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.\201\
---------------------------------------------------------------------------

    \200\ Rule 2a-7(g)(8).
    \201\ See 2014 Money Market Fund Adopting Release, supra note 8,
at section IV.A.5.
---------------------------------------------------------------------------

2. Economic Analysis
    The re-proposed amendments to rule 2a-7 would assist in further
implementing section 939A of the Dodd-Frank Act. These amendments are
designed to establish credit quality standards similar to those
currently in the rule. By replacing references to credit ratings, the
re-proposed amendments may, 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.\202\
---------------------------------------------------------------------------

    \202\ See Report of the House of Representatives Financial
Services Committee to Accompany H.R. 4173, H. Rep. No. 111-517 at
871 (2010). But see infra notes 209-210 and accompanying text
(discussing a commenter's view that the Commission's re-proposal to
eliminate credit ratings could actually increase money market fund
investor reliance on credit ratings).
---------------------------------------------------------------------------

    Eligible securities. Under the re-proposal, a money market fund
board (or its delegate) would be required to determine minimal credit
risk by applying a subjective credit quality standard. Because the
interpretation of this subjective standard may differ among fund boards
and their advisers, the possible range of securities available for
investment may differ from that under the current rule if the re-
proposed standard is adopted. Aggressive risk assessments may result in
a broader set of securities holdings through investments in more second
tier securities with a wider range of credit quality, while
conservative risk

assessments may result in a more restricted set of securities holdings
with a narrower range of credit quality. 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.\203\ First, we anticipate that many money market funds are
likely to retain their current investment policies, which incorporate
NRSRO ratings and would be permitted under the re-proposed 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.\204\ As a result, we do not expect that these money market
funds would change current policies and procedures they have adopted
that limit their investments to those assigned the highest NRSRO
ratings. We also note that according to Form N-MFP filings from
February 28, 2014, fund assets in second tier securities represented
0.24 percent of total money market fund assets and that 24 funds (out
of a total of 559) currently hold the maximum amount of second tier
securities permissible under 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 proposal because these funds do
not currently invest in second tier securities to the extent permitted
now.
---------------------------------------------------------------------------

    \203\ As noted above, we do not believe fund managers are likely
to invest in third tier securities (or comparable unrated
securities) because those securities would not satisfy the re-
proposed standard for eligible securities that the security's issuer
have an exceptionally strong capacity to meet its short-term
financial obligations. See supra note 45 and accompanying and
following text.
    \204\ As of February 28, 2014, 179 money market funds,
representing approximately 59% of all money market funds assets (88%
of all institutional money market fund assets) were invested in
money market funds that were themselves rated by credit rating
agencies, and approximately 98% of rated money market funds were
rated first tier. For a money market fund to receive a first tier
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 (June 8, 2011), available at https://www.sbafla.com/prime/portals/8/RiskMan_Oversight/FundProfile/201106_SPPrincipalStabilityFundRatingsMethodology.pdf (stating that ``[i]n
In 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 new amendments to rule 2a-7 may
reduce the potential that funds would invest in riskier securities.
Under the reforms, money market funds other than government money
market funds are subject to fees and gates, while institutional prime
money market funds will be required to transact at a floating NAV.\205\
We believe that these amendments 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
because doing so will tend to lessen the likelihood of a fee or gate
being imposed. The newly-adopted money market fund reforms also require
each fund daily to disclose 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 \206\) 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 share price and
compare the principal volatility 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.
---------------------------------------------------------------------------

    \205\ Rule 2a-7(a)(16) 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. See supra note 15.
    \206\ See supra note 49.
---------------------------------------------------------------------------

    Third, funds are permitted to refer to credit ratings while making
their minimal credit risk determinations. A first tier credit rating
might help support the fund's determination that the security is an
eligible security, while a second tier credit rating 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 would be
permitted under the re-proposed 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.
    The re-proposal would eliminate the current limitations on fund
investments in second tier securities.\207\ As a result, funds may
increase their holdings of second tier securities despite the
considerations discussed above. We 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 only
stable-NAV funds will break the buck if the economic value of the
underlying portfolio changes too much. While some shareholders may
continue to demand price stability rather than high yield from
institutional prime funds, if enough shareholders prefer yield over
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 because the reallocation may
enable 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.
---------------------------------------------------------------------------

    \207\ See supra notes 25 and 43 and accompanying text.
---------------------------------------------------------------------------

    Under the assumption that money market funds would increase their
relative holdings of second tier securities if the re-proposed
amendments were adopted, the effects on competition and capital
formation will depend, in part, on whether the increased second tier
investments come from new assets outside the funds, which when invested
by money market funds are disproportionately invested in second tier
securities or whether the increased second tier investments will come
from a shift of assets from first tier securities to second tier
securities. If the former, the effects of 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.
    The re-proposed amendments to Form N-MFP, which are discussed in
more detail below, may reduce the potential that fund boards (or
managers) that use credit ratings will increase significantly fund
investments in second tier securities beyond the level desired by fund
shareholders. We would require 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. The disclosure to investors of these risk indicators may
have the effect of penalizing funds that assume a level of risk that is
different from that which is desired by their shareholders.
    As discussed above, the vast majority of money market funds held no
second tier securities on February 28, 2014, 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.
    One commenter suggested that eliminating references to credit
ratings in the definition of eligible security would lead to more
unrated securities issuances in the market.\208\ The commenter argued
that some issuers of money market instruments might forego the expense
of ratings because they would face greater uncertainty as to market
acceptance under the subjective determinations of money market fund
advisers. In addition, some issuers of instruments that might not
receive a rating in the highest category might choose not to obtain a
rating. This commenter opined that such a result would make it more
difficult to retain a degree of risk limitation similar to that in the
current rule.
---------------------------------------------------------------------------

    \208\ See Schwab Comment Letter, supra note 30.
---------------------------------------------------------------------------

    We believe that most money market funds would not likely change
their current investment policies if the re-proposed amendments were
adopted. 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 reduced significantly, 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.
In addition, eliminating the required use of credit ratings in
Commission rules and forms may reduce the incentive for credit rating
agencies to register as NRSROs with the Commission, which registration
subjects them to Commission oversight and the statutory and regulatory
requirements applicable to NRSROs. 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.
    Another commenter stated that our re-proposal to eliminate
references to credit ratings could increase investor reliance on credit
ratings.\209\ This commenter stated that to the extent that investors
cannot be reassured that money market funds are investing in rated
securities, they can reasonably be expected to seek the ``reassurance''
ratings provide in other ways. Specifically, investors could seek rated
funds in even greater numbers ``as the ratings, and the investment
guidelines that underlie them, will provide an objective standard that
investors can use to distinguish amongst funds,'' which would encourage
more funds to become rated.\210\ If, as a result of the re-proposed
amendments, currently unrated money market funds obtain ratings to
compete in the market, it could increase their costs. Such a result
also might increase rather than reduce investor reliance on credit
ratings. To the extent that funds continue to use ratings, which we
believe most will, investors would be able to determine the ratings of
fund portfolio securities from the disclosures required under the re-
proposed amendments to Form N-MFP.
---------------------------------------------------------------------------

    \209\ See Comment Letter of Wells Fargo Funds Management, LLC
(Apr. 25, 2011).
    \210\ Id. The comment letter stated that over 80% of
institutional assets were in rated money market funds.
---------------------------------------------------------------------------

    In our discussion above, we have suggested guidance that a fund
board (or its delegate) should consider in making credit quality
assessments. As we noted, based on staff observations in examinations
and prior staff guidance, we assume 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, as noted above, the guidance is not intended to 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 portfolio security. Thus, we do not anticipate that the re-
proposal's discussion of factors that a fund manager should consider
would significantly change the process for evaluating credit quality or
that consideration of the factors listed above would significantly
impact the holdings in money market fund portfolios. For these reasons,
we believe that the guidance 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 guidance, and, as a
result, may update them.
    Conditional Demand Feature. The re-proposed amendments would
replace the current objective standard for determining the credit
quality of an underlying security with a subjective standard, which is
based on the qualitative standard NRSROs use to describe a security
with the second-highest long term rating. We recognize that fund
managers could interpret this subjective standard in different ways,
which could widen the range of credit quality in underlying securities
in which money market funds invest. However, we do not believe that
fund managers will likely interpret this subjective standard in a
manner that results in funds increasing the risk profiles of their
underlying securities. For the reasons 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 proposed standard that the issuer of underlying securities
have a very strong capacity to meet its financial commitments.\211\ 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.\212\ We estimate that most underlying
securities held by money market funds (81 percent) are rated in the
second-highest long-term category, and a smaller portion (19 percent)
are rated in the highest long-term category.\213\ For these reasons, we
have no reason to 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 re-proposed amendments.
Because we believe that our re-proposal will result in only small
changes to the behavior of funds with respect to investments in
securities with conditional demand features, we believe that this re-
proposed amendment will result in little to no effect on efficiency,
competition, or capital formation for either funds or issuers.
---------------------------------------------------------------------------

    \211\ See text accompanying supra note 84. Securities with these
ratings generally have expectations of low credit risk or have
obligors have only a strong capacity to meet their financial
commitments. See Moody's Ratings Definitions, supra note 38, at 5
(long-term obligations ``rated A are judged to be upper-medium grade
and are subject to low credit risk.''); Fitch Ratings Scales, supra
note 38, at 9 (long-term ``A ratings denote expectations of low
credit risk. The capacity for payment of financial commitments is
considered strong.''); S&P Ratings Definitions, supra note 38, at 4
(a long-term obligation ``rated `A' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories. However, the
obligor's capacity to meet its financial commitment on the
obligation is still strong.'').
    \212\ Rule 2a-7(d)(2)(iv).
    \213\ See supra note 196 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, we believe that if the re-proposed amendments
to rule 2a-7 were adopted, money market fund complexes would incur
certain costs in reviewing and updating their policies and procedures.
Specifically, each complex would 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 standards 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.
    Monitoring Minimal Credit Risk. As discussed above, we believe the
re-proposed 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, which are already explicit (and implicit) in several
provisions of the rule and are discussed above.\214\ 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 \215\), 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 re-proposal to require such
procedures is designed to ensure that funds are better positioned to
identify quickly potential risks of credit events that could impact
portfolio security prices. The costs associated with the re-proposed
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.\216\ We believe that the written-procedure
requirement in the re-proposal will not materially affect efficiency,
competition, or capital formation because we expect no material changes
in how funds invest.
---------------------------------------------------------------------------

    \214\ See supra notes 91-92, 102-106 and accompanying text.
    \215\ See id.
    \216\ See supra note 163.
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    Stress Testing. As discussed above, the re-proposed amendments are
designed to retain similar standards for stress testing as under
current rule 2a-7. Specifically, while the re-proposed amendments would
replace the current reference to ratings downgrades in the rule 2a-7
stress testing requirement, the amendments would instead require funds
to test for an event indicating or evidencing credit deterioration of
particular portfolio security positions, each representing various
positions of the fund's portfolio, and include a downgrade or default
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 proposed
amendments. And we believe that funds will do so because a downgrade by
a relevant NRSRO may impact the price of a portfolio security.\217\
Because we believe that funds will not change their stress testing
policies and procedures in response to this re-proposed amendment, we
do not believe there would be any costs associated with it.\218\ Thus
we do not anticipate that this re-proposed amendment is likely to
impact efficiency, competition, or capital formation.
---------------------------------------------------------------------------

    \217\ See ICI Comment Letter, supra note 30.
    \218\ See supra text accompanying and following note 172.
---------------------------------------------------------------------------

    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.\219\ Although
our re-proposal would not require changes to these policies and
procedures for most money market funds, we anticipate that funds would
likely review them and may revise them in consideration of the standard
provided in the re-proposal, if adopted. We also anticipate that after
such a review, many fund boards and advisers would retain investment
policies tied to NRSRO ratings required under the current rule.\220\
Although we cannot predict the number of funds that would review and
revise their policies and procedures or the extent to which funds may
do so, we estimate that each fund would 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.\221\ These minimum costs assume that a fund would
review its policies and procedures in consideration of the re-proposed
amendments and make minor changes to conform with revised rule text,
but would 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.
---------------------------------------------------------------------------

    \219\ See rule 38a-1(a).
    \220\ See supra paragraph including note 151. 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.,
BlackRock Comment Letter, supra note 122; IDC Comment Letter, supra
note 30. Our re-proposed amendments to Form N-MFP, discussed above,
reflect our clarification that ratings continued to be a permissible
factor to use in making credit quality determinations.
    \221\ See supra note 154.
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    As noted above, we believe that while funds monitor for minimal
credit risks on an ongoing basis currently, we assume that funds do not
have written policies and procedures to address monitoring.\222\ We
estimate the average one-time costs to adopt those written policies
would be $3,619 per fund.\223\ Because we anticipate that our re-
proposal 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.
---------------------------------------------------------------------------

    \222\ See supra notes 102-106 and accompanying text.
    \223\ See supra note 164.
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3. Alternatives
    In addition to the re-proposed amendments to rule 2a-7, we

considered adopting the amendments we proposed in 2011. That 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. As discussed above, we have been
persuaded by the concerns some commenters expressed on the 2011
proposal. 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.\224\ In addition, on
balance, we believe that the re-proposed single standard may better
reflect the risk limitation in the current rule. The 2011 Proposing
Release 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 re-
proposal, which is designed to limit investments in very high quality
second tier securities. Such increased investments in riskier second
tier securities would increase the risk profile of money market funds.
---------------------------------------------------------------------------

    \224\ See supra note 31 and accompanying text.
---------------------------------------------------------------------------

    We also considered proposing a single standard that would require a
minimal credit risk determination, but with a finding different from
what we are re-proposing today. For example, the board could be
required to find that the issuer or guarantor has a repayment capacity
that reflects the standard that NRSROs articulate for second tier
securities. We did not re-propose this alternative because of concerns
that such a standard could lower the credit quality of money market
fund portfolios. Under this single standard, there would be no
distinction between first tier and second tier securities and no
limitation on fund holdings of second tier securities, unlike the
current rule, which limits a money market fund to investing no more
than 3 percent of its total assets in second tier securities. Without
that investment limitation, a manager could invest a significantly
greater portion of the fund's portfolio in second tier securities,
which could result in an increase in the portfolio risk of some funds
that is inconsistent with the relevant risk limitations in the current
rule. Both this alternative single standard approach and the two-tier
approach discussed above could have different effects on competition
and capital formation than the effects on competition and capital
formation stemming from the re-proposed 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 these approaches as compared to the re-proposed
elimination of the current limitation on fund investments in second
tier securities.
    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.\225\ Moreover,
issuers assigned a first tier short-term rating may have received a
long-term rating in the second-highest category.\226\ Because of the
limited NRSRO assignments of the highest long-term ratings to issuers,
managers might interpret 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 is not our intent. It also would likely reduce money market
fund investments in these securities.
---------------------------------------------------------------------------

    \225\ 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).
    \226\ See Moody's Ratings Definitions, supra note 38, at 6
(showing the linkage between short-term and long-term ratings when
such long-term ratings exist); 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 re-proposing 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.\227\ 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 reassess promptly whether the security continues to
present minimal credit risks.\228\ 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. As discussed in
more detail above, we have been persuaded by commenters' concerns in
re-proposing a different standard than that proposed in 2011.\229\
---------------------------------------------------------------------------

    \227\ See supra notes 91-93 and accompanying text.
    \228\ Id.
    \229\ See supra notes 97-100 and accompanying text.
---------------------------------------------------------------------------

    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. As
discussed above, we 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.\230\ We believe that the 2011 proposed standard, as
compared to the standard we re-propose in this release, 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 have thus decided to re-propose
amendments to the stress testing provisions of 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.\231\
---------------------------------------------------------------------------

    \230\ See supra notes 112-113 and accompanying text.
    \231\ See supra note 114 and accompanying text.
---------------------------------------------------------------------------

4. Request for Comment
    We request comment on our estimates and assumptions regarding the
costs and benefits of the re-proposed amendments to rule 2a-7 and the
effects of these amendments on efficiency, competition, or capital
formation. For purposes of the Small Business Regulatory Enforcement

Fairness Act of 1996 (``SBREFA''),\232\ we also request information
regarding the potential annual effect of the re-proposed amendments to
rule 2a-7 on the U.S. economy. Commenters are requested to provide
empirical data to support their views.
---------------------------------------------------------------------------

    \232\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    In addition to our general request for comment on the costs and
benefits of the re-proposed amendments, we request specific comment on
certain aspects of the amendments. What additional operational costs,
if any, may result from making minimal credit risk determinations based
on a subjective credit quality standard? Specifically, would the
potentially broader range of securities available for investment that
could result from a board's interpretation of this standard produce
additional or different costs than the current costs of determining
minimal credit risks? Likewise, what additional operational costs, if
any, may result from using a subjective standard for determining the
credit quality of securities subject to a conditional demand feature?
Would the potentially broader range of underlying securities available
for investment produce additional or different costs than the current
costs of evaluating the credit quality of underlying securities?
    We have given guidance on the factors that advisers should
consider, as appropriate, in determining that a fund's portfolio
securities present minimal credit risk. To the extent that
consideration of these factors is not consistent with current industry
practice, how would funds benefit from consideration of these factors?
Would this guidance result in money market funds or their advisers
incurring additional costs, such as costs to change the process for
evaluating credit quality? What type of costs would funds and advisers
incur, and how much? With respect to our proposed requirement for money
market funds to adopt written policies and procedures for ongoing
monitoring of minimal credit risks to what extent do commenters
currently have written policies and procedures covering this type of
monitoring?
    We also request comment on our re-proposed stress test amendments.
Do commenters agree with our assessment that, under the amendments to
rule 2a-7 that we re-propose, funds would retain downgrades by relevant
NRSROs as hypothetical events for stress testing, as under current rule
2a-7? What hypothetical events are funds likely to use in addition to
or in place of downgrades and why?
    Finally, we request comment on the costs and benefits of the
alternatives to the re-proposed amendments discussed above.

B. Form N-MFP

    The re-proposed amendments would require money market funds to
disclose NRSRO ratings in certain circumstances. Specifically, a fund
would have to disclose for each portfolio security, (i) each rating
assigned by any NRSRO if the fund or its adviser subscribes to that
NRSRO's services, as well as the name of the agency providing the
rating, and (ii) any other 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 riskiness 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 may 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. We
believe that this ratings information might be especially useful during
periods in which funds impose fees and/or gates even though ratings are
not immediately updated.
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. More specifically, the baseline form requires a
fund to identify whether a portfolio security is a first or second tier
security or is unrated, and it requires the fund 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.
    As noted above, based on Form N-MFP filings from February 28, 2014,
the Commission estimates that 99.75 percent of aggregate money market
fund assets are invested in first tier securities, 0.24 percent of
aggregate money market fund assets are invested in second tier
securities, and 0.01 percent of aggregate money market fund assets are
invested in unrated securities. Among the 559 funds that filed that
month, we estimate that 488 funds held only tier one securities, 503
funds held no tier two securities, and 537 funds held no unrated
securities.
2. Economic Analysis
    We anticipate that our re-proposal is likely to have two primary
benefits. First, it may contribute to eliminating perceived government
endorsement of NRSROs and reducing over-reliance on credit ratings,
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. Second, it will
provide transparency on whether or not specific funds use credit
ratings when making investment decisions, and, if credit ratings are
used, it allows shareholders and other interested parties to use those
ratings to make their own risk assessments.
    We anticipate that our re-proposal is likely to have two primary
costs. First, it may impose administrative costs on funds that need to
re-program their Form N-MFP filing software.\233\ 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 re-proposal may reduce transparency of risks taken 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.\234\
---------------------------------------------------------------------------

    \233\ See supra notes 180-181 and accompanying text (discussion
of re-programming costs in PRA analysis).
    \234\ See Dreyfus Comment Letter supra note 30 (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).
---------------------------------------------------------------------------

    The net effect of the re-proposed amendments to Form N-MFP is that
funds could not 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 re-proposal
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 re-proposal's effects on efficiency,
competition, and capital formation likely will be negligible. To the
extent that money market funds continue to consider NRSRO ratings in
making their minimal credit risk determinations, the re-proposed
amendments to Form N-MFP may reduce the potential that fund managers

will increase significantly fund investments in riskier second tier
securities; a fund would be required to disclose ratings considered in
those credit determinations, and the ratings would 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.
3. Alternatives
    In considering how to meet our obligations under the Dodd-Frank Act
with respect to Form N-MFP, we evaluated two primary alternatives. In
2011, we proposed 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). We are not re-proposing 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 disclosure requirement as
recommended by several commenters to the 2011 Proposing Release.\235\
We elected not to leave the current disclosure requirements as is, but
instead to re-propose the required disclosure of NRSRO ratings only in
certain circumstances. We believe this re-proposal would be in keeping
with Congressional intent underlying section 939A of the Dodd-Frank Act
to reduce perceived government endorsement of credit ratings.
---------------------------------------------------------------------------

    \235\ See BlackRock Comment Letter, supra note 122; Dreyfus
Comment Letter, supra note 30; Federated Comment Letter, supra note
30; Comment Letter of the Securities Industry and Financial Markets
Association (Apr. 18, 2011).
---------------------------------------------------------------------------

4. Request for Comment
    We request comment on our estimates and assumptions regarding the
costs and benefits of the re-proposed amendments to Form N-MFP and the
effects of these amendments on efficiency, competition, or capital
formation. As discussed above, we believe that most, if not all, money
market funds will continue to consider NRSRO ratings in some form. We
request comment on whether any funds expect that they will not report
NRSRO ratings, and on shareholders' and third parties' likely response
to funds that do not report NRSRO credit ratings. We also request
comment on our assumption that the costs to money market funds to
reprogram their Form N-MFP filing software, in order to comply with the
re-proposed amendments, would be the same costs that we discuss in the
Paperwork Reduction Act analysis of this release.\236\ Finally, we
request comment on the costs and benefits of the alternatives to the
re-proposed amendments discussed above.
---------------------------------------------------------------------------

    \236\ See supra notes 180-187 and accompanying text.
---------------------------------------------------------------------------

    For purposes of SBREFA, we also request information regarding the
potential annual effect of the re-proposed amendments to Form N-MFP on
the U.S. economy. Commenters are requested to provide empirical data to
support their views.

C. 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.\237\ Today, 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). 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.\238\ This forms the economic baseline for the new
diversification amendments that we are proposing today.
---------------------------------------------------------------------------

    \237\ We note that single state funds may invest up to 25% of
fund assets in securities of any single issuer, and tax-exempt funds
may have as much as 15% 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); 2a-7(d)(3)(iii)(B).
    \238\ See rule 2a-7(a)(18) (definition of guarantee); rule 2a-
7(a)19) (definition of guarantee issued by a non-controlled person);
rule 2a7(d)(3)(i) (issuer diversification).
---------------------------------------------------------------------------

2. Economic Analysis
    We believe that very few money market funds rely on the issuer
diversification exclusion for securities subject to a guarantee by a
non-controlled person. This belief is based on our analysis of February
2014 Form N-MFP data, which shows 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
believe that these and only 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. However, we recognize that changes in fund
assets could mask which funds rely on this 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.\239\ 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 current exclusion under current rule 2a-7 would, when those
investments mature, have to reinvest the proceeds over 5 percent
elsewhere. Based on the February 2014 Form N-MFP filings, we believe
that only a few funds would have to make changes to their portfolios to
bring them into compliance with the proposed 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. It appears that the proposed elimination of the exclusion
would have affected only 8 funds in February 2014. Five of these 8
funds exceeded the 5 percent issuer concentration limit by less than 1
percent of fund assets, 2 of the 8 exceeded that limit by less than 2

percent, and the remaining fund exceeded the limit by slightly more
than 5 percent. In most cases, the fund exceeded the 5 percent
diversification requirement with respect to only one issuer (one fund
exceeded the requirement by less than 1 percent with respect to two
issuers, and two funds had greater than 5 percent exposure to the same
issuer). Because of the less than significant impact on these funds, we
believe that the potential lower yields, less liquidity or increased
risks associated with the proposal would be small for the affected
funds.\240\
---------------------------------------------------------------------------

    \239\ 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% of fund assets. But if the
fund's aggregate exposure after making the investment was less than
5%, 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% of the fund's assets.
    \240\ Consider, for example, how reducing a position from 7% to
5% might affect fund yields. The effect could be as small as 0% if
the 2% of assets are reinvested in securities that offer the same
yield as the original 7% of assets. On the other hand, the portfolio
change could decrease fund yields by as much as 2/7 [ap] 29% if all
of the portfolio yield came from the 7% security. We believe that
funds will choose alternative securities that have similar yields as
the securities replaced.
---------------------------------------------------------------------------

    We assume that all funds would incur costs associated with updating
their systems to reflect the proposed amendment, as well as the
associated compliance costs, if their systems already incorporate this
issuer diversification exclusion. We believe that these costs would be
small for all funds because we believe that all funds currently have
the ability to monitor issuer diversification to comply with rule 2a-
7's limits on issuer concentration.\241\
---------------------------------------------------------------------------

    \241\ See 1991 Adopting Release, supra note 22, at section
II.B.1 (adopting the issuer concentration limit).
---------------------------------------------------------------------------

    Our proposed amendment offers two primary benefits. First, the
amendment simplifies rule 2a-7's diversification requirements by
eliminating the exclusion for securities with a guarantee issued by a
non-controlled person. This would lower certain compliance and
operational costs to the extent that funds no longer have to keep track
of the securities that have such guarantees and would be eligible for
the exclusion. Second, by requiring greater issuer diversification for
those funds that rely on the exclusion, the proposed amendments will
reduce concentration risk in those funds and may make it easier for
funds to maintain or generate liquidity during periods when they impose
fees and/or gates.\242\ We estimate that 8 funds exceeded the 5 percent
issuer diversification limit in February 2014; nevertheless, we
recognize that these amendments may constrain more funds in the future
that otherwise would have less issuer diversification.
---------------------------------------------------------------------------

    \242\ See supra section II.C.
---------------------------------------------------------------------------

    Because we believe that the universe of potentially affected funds
and issuers is small, we believe that our proposed amendments will have
only negligible effects on efficiency, competition, and capital
formation. Although we recognize that our proposed amendments may
affect more funds and more issuers in the future, we estimate that they
will affect only 8 funds and 8 issuers today. These 8 funds exceed the
proposed issuer diversification limit by only a small amount for the 8
issuers. We believe that the 8 funds will find comparable alternative
securities for the amount that exceeds 5 percent, and we believe that
the 8 issuers will find other investors willing to buy the amount that
exceeds the 5 percent for a comparable price.
3. Alternatives
    As an alternative to eliminating the exclusion from issuer
diversification for securities with a guarantee issued by a non-
controlled person, we considered requiring money market funds to be
more diversified by lowering a fund's permitted exposure to any
guarantor or provider of a demand feature from 10 percent to 5 percent
of total assets. We discussed potential benefits and costs of this
alternative approach, and we requested comment on it in the 2013 Money
Market Fund Proposing Release.\243\ As discussed in more detail above,
we decided that the current requirements for diversification of
guarantors and providers of demand features together with the issuer
diversification requirement if applied generally to all securities, as
under the proposed amendment, appropriately address our concerns
relating to money market fund risk exposures.\244\ We also believe that
the potential costs of this alternative approach would likely be more
significant than the costs of our proposal. As of the end of February
2014, we estimate that 107 (of 229) prime money market funds had total
exposure to a single entity (including directly issued, asset backed
commercial paper sponsorship, and provision of guarantees and demand
features) in excess of 5 percent. Under the alternative, any 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. The alternative approach would appear to affect many more
funds than would the proposed amendment. As a result, we believe that a
better approach to achieving our reform goal would be to restrict risk
exposures to all non-government issuers of securities subject to a
guarantee or demand feature in the same way, and to require money
market funds (other than tax-exempt and single state funds as described
above) that invest in non-government securities subject to a guarantee
to comply with the 5 percent issuer diversification requirement and the
10 percent diversification requirement on guarantors and demand feature
providers.
---------------------------------------------------------------------------

    \243\ See 2013 Money Market Fund Proposing Release, supra note
5, at section III.J.4. We received no comments on this alternative
approach. We also requested comment in 2009 on whether to reduce
rule 2a-7's current diversification limits. See 2009 Money Market
Fund Proposing Release, supra note 127, at section II.D. Most
commenters opposed these reforms because, among other reasons, the
reductions could increase risks to funds by requiring the funds to
invest in relatively lower quality securities. See id. at n.909.
    \244\ See supra text following note 137 and accompanying notes
138-140.
---------------------------------------------------------------------------

4. Request for Comment
    We request comment on our estimates and assumptions regarding the
costs and benefits of the proposed amendments to rule 2a-7 that would
remove the issuer diversification exclusion for securities subject to a
guarantee by a non-controlled person, as well as the effects of this
amendment on efficiency, competition, and capital formation. For
purposes of SBREFA, we also request information regarding the potential
annual effect of this proposed amendment to rule 2a-7 on the U.S.
economy. Commenters are requested to provide empirical data to support
their views.
    In addition to our general request for comment on the costs and
benefits of the proposed amendment, we request specific comment on
certain aspects of the amendment. Are we correct in assuming that funds
would not make substantial changes to their securities holdings as a
result of the proposal? Do commenters expect that funds would incur
operational costs in addition to, or that differ from, the costs we
outlined above? What would be the costs of making such changes? Do
commenters expect that money market funds would encounter any
difficulties in finding alternative investments under our proposal that
have suitable characteristics? Why or why not? How would this proposal
affect fund yields and the stability of fund NAVs and liquidity? Will
any of these or other effects be large enough to affect the behavior of
money market fund shareholders? How will shareholders

respond? Would any of these effects be different in floating NAV funds
than they would be in non-floating NAV funds? Would our proposed
amendments have a differential effect on funds that impose fees and/or
gates? Do commenters agree that our proposed amendments will have only
negligible effects on issuers? Why or why not? Are there benefits or
costs in any part of the money market fund industry that we have not
identified or discussed? If so, what are those costs or benefits? Are
we correct in our belief that there will be only negligible effects on
efficiency, competition, and capital formation? If not, what are the
effects that we overlooked?

VI. Regulatory Flexibility Act Certification

    Section 3(a) of the Regulatory Flexibility Act of 1980 \245\
(``RFA'') requires the Commission to undertake an initial regulatory
flexibility analysis (``IRFA'') of the proposed rule amendments on
small entities unless the Commission certifies that the rule, if
adopted, would not have a significant economic impact on a substantial
number of small entities.\246\ Pursuant to 5 U.S.C. section 605(b), the
Commission hereby certifies that the re-proposed and proposed
amendments to rule 2a-7 under the Investment Company Act and the re-
proposed amendments to Form N-MFP under the Investment Company Act
would not, if adopted, have a significant economic impact on a
substantial number of small entities.
---------------------------------------------------------------------------

    \245\ 5 U.S.C. 603(a).
    \246\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    We are re-proposing amendments to replace references to credit
ratings in rule 2a-7 and modify disclosures of credit ratings in Form
N-MFP. In addition, we are proposing to amend rule 2a-7's provisions
relating to issuer diversification to eliminate an exclusion from the
current issuer diversification requirement for securities that are
subject to a guarantee issued by a non-controlled person.
    Based on information in filings submitted to the Commission, we
believe that there are no money market funds that are small
entities.\247\ For this reason, the Commission believes that the re-
proposed and proposed amendments to rule 2a-7 and the re-proposed
amendments to Form N-MFP would not, if adopted, have a significant
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \247\ Under the Investment Company Act, an investment company is
considered a small business or small organization if it, together
with other investment companies in the same group of related
investment companies, has net assets of $50 million or less as of
the end of its most recent fiscal year. See 17 CFR 270.0-10.
---------------------------------------------------------------------------

    We encourage written comments regarding this certification. We
solicit comment as to whether the re-proposed and proposed amendments
to rule 2a-7 and the re-proposed amendments to Form N-MFP could have an
effect on small entities that has not been considered. We request that
commenters describe the nature of any impact on small entities and
provide empirical data to support the extent of such impact.

Statutory Authority

    The Commission is proposing amendments to rule 2a-7 under the
authority set forth in sections 6(c) and 38(a) of the Investment
Company Act [15 U.S.C. 80a-6(c), 80a-37(a)] and section 939A of the
Dodd-Frank Act. The Commission is proposing amendments to Form N-MFP
under the authority set forth in sections 8(b), 30(b), 31(a) and 38(a)
of the Investment Company Act [15 U.S.C. 80a-8(b), 80a-29(b), 80a-30(a)
and 80a-37(a)] and section 939A of the Dodd-Frank Act.

List of Subjects in 17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements,
Securities.

Text of Rule and Form Amendments

    In accordance with the foregoing, 17 CFR parts 270 and 274, as
amended elsewhere in this issue of the Federal Register, are proposed
to be amended as follows:

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

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

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless
otherwise noted.
* * * * *
0
2. Section 270.2a-7 is amended by:
0
a. In paragraph (a)(5), removing the words ``and (D)'';
0
b. Removing paragraph (a)(11);
0
c. Redesignating paragraphs (a)(12) through (a)(13) as (a)(11) through
(a)(12);
0
d. Revising newly designated paragraph (a)(11);
0
e Removing paragraph (a)(14);
0
f. Redesignating paragraphs (a)(15) through (a)(21) as (a)(13) through
(a)(19);
0
g. In newly designated paragraph (a)(16):
0
i. Removing the phrase ``(a)(12)(iii) (definition of eligible
security)'' from paragraph (a)(16)(ii);
0
ii. Removing the phrase ``(d)(2)(iii)'' and adding in its place
``(d)(2)(ii)'' in paragraph (a)(16)(ii);
0
h. Revising newly designated paragraph (a)(17);
0
i. Removing paragraph (a)(22);
0
j. Redesignating paragraph (a)(23) as paragraph (a)(20);
0
k. Removing paragraph (a)(24);
0
l. Redesignating paragraph (a)(25) as paragraph (a)(21);
0
m. Removing paragraph (a)(26);
0
n Redesignating paragraphs (a)(27) through (a)(31) as paragraphs
(a)(22) through (a)(26);
0
o. Removing paragraph (a)(32);
0
p. Redesignating paragraphs (a)(33) and (a)(34) as paragraphs (a)(27)
and (a)(28);
0
q Revising paragraph (d)(2)(i);
0
r. Removing paragraph (d)(2)(ii);
0
s. Redesignating paragraphs (d)(2)(iii) and (d)(2)(iv) as paragraphs
(d)(2)(ii) and (d)(2)(iii);
0
t. Revising newly designated paragraph (d)(2)(ii);
0
u. In newly designated paragraph (d)(2)(iii):
0
i. Removing the words ``or a first tier security'' from the
introductory text;
0
ii. removing the words ``or first tier security, as the case may be''
from paragraph (A);
0
v. Revising newly designated paragraph (d)(2)(iii)(C);
0
w. Adding paragraph (d)(2)(iii)(D);
0
x. In paragraph (d)(3);
0
i. Removing the words ``and securities subject to a guarantee issued by
a non-controlled person'' in paragraph (d)(3)(i);
0
ii. Removing the words ``first tier'' in paragraph (d)(3)(i)(A)(1);
0
iii. Removing paragraph (d)(3)(i)(C);
0
iv. Removing paragraph (d)(3)(iii)(C);
0
y. In paragraph (f):
0
i. Removing the word ``Downgrades,'' from the paragraph heading;
0
ii. Removing paragraph (f)(1);
0
iii. Redesignating paragraphs (f)(2) through (f)(4) as paragraphs
(f)(1) through (f)(3);
0
iv. Removing the words ``and other events'' in the heading of newly
designated paragraph (f)(1);
0
v. In the introductory text of newly designated paragraph (f)(1),
removing the phrase ``paragraphs (f)(2)(i) through (iii)'' and adding
in its place ``paragraphs (f)(1)(i) through (iii)'';
0
vi. Revising newly designated paragraph (f)(1)(ii);
0
vii. Removing newly designated paragraph (f)(1)(iii) and redesignating
paragraph (f)(1)(iv) as paragraph (f)(1)(iii);
0
viii. In the heading of newly designated paragraph (f)(3), removing the
phrase ``paragraphs (f)(2) and (3)''

and adding in its place ``paragraphs (f)(1) and (2)'';
0
ix. In the introductory text of newly designated paragraph (f)(3),
removing the phrase ``paragraphs (f)(2) and (3)'' and adding in its
place ``paragraphs (f)(1) and (2)'';
0
x. In newly designated paragraph (f)(3)(iii), removing the phrase
``paragraph (a)(18)(ii)'' and adding in its place ``paragraph
(a)(16)(ii)'';
0
z. Revising paragraph (g)(3);
0
aa. Revising paragraph (g)(8)(i)(B);
0
bb. Revising paragraph (h)(3);
0
cc. In paragraph (j):
0
i. Removing the words ``(a)(11)(i) (designation of NRSROs)'' in the
introductory text; and
0
ii. Removing the phrase ``(f)(2)'' and adding in its place ``(f)(1)''
in the introductory text;
0
iii. Removing the phrase ``in paragraph (d)(2)'' and adding in its
place the phrase ``in paragraphs (d)(2) and (g)(3)'' in paragraph (1);
0
iv. Removing the phrase ``(f)(3)'' and adding in its place ``(f)(2)''
in paragraph (2).
    The additions and revisions read as follows:

Sec.  270.2a-7  Money market funds.

    (a) * * *
    (11) Eligible security means a security:
    (i) With a remaining maturity of 397 calendar days or less that the
fund's board of directors determines presents minimal credit risks,
which determination must include a finding that the security's issuer
has an exceptionally strong capacity to meet its short-term financial
obligations;

    Note to paragraph (a)(11)(i): For a discussion of the phrase
``exceptionally strong capacity to meet its short-term financial
obligations,'' see Investment Company Act Release No. 31184, (July
23, 2014).

    (ii) That is issued by a registered investment company that is a
money market fund; or
    (iii) That is a government security.
* * * * *
    (17) Guarantee issued by a non-controlled person means a guarantee
issued by a person that, directly or indirectly, does not control, and
is not controlled by or under common control with the issuer of the
security subject to the guarantee (control means ``control'' as defined
in section 2(a)(9) of the Act) (15 U.S.C. 80a-2(a)(9)).
* * * * *
    (d) * * *
    (2) * * *
    (i) General. The money market fund shall limit its portfolio
investments to those United States dollar-denominated securities that
are at the time of acquisition eligible securities.
    (ii) Securities subject to guarantees. A security that is subject
to a guarantee may be determined to be an eligible security based
solely on whether the guarantee is an eligible security, provided
however, that the issuer of the guarantee, or another institution, has
undertaken to promptly notify the holder of the security in the event
the guarantee is substituted with another guarantee (if such
substitution is permissible under the terms of the guarantee).
    (iii) * * *
    (C) The fund's board of directors determines that the issuer of the
underlying security or any guarantor of such security has a very strong
capacity for payment of its financial commitments; and
    (D) The issuer of the conditional demand feature, or another
institution, has undertaken to promptly notify the holder of the
security in the event the conditional demand feature is substituted
with another conditional demand feature (if such substitution is
permissible under the terms of the conditional demand feature).
* * * * *
    (f) * * *
    (1) * * *
    (ii) A portfolio security ceases to be an eligible security (e.g.,
no longer presents minimal credit risks); or
* * * * *
    (g) * * *
    (3) Ongoing review of credit risks. The written procedures must
require the adviser to provide ongoing review of whether each security
(other than a government security) continues to present minimal credit
risks. The review must:
    (i) Include an assessment of each security's credit quality,
including the issuer's capacity to meet its short-term financial
obligations; and
    (ii) Be based on, among other things, financial data of the issuer
of the portfolio security or provider of the guarantee or demand
feature, as the case may be, and in the case of a security subject to a
conditional demand feature, the issuer of the security whose financial
condition must be monitored under paragraph (e)(2)(iii) of this
section, whether such data is publicly available or provided under the
terms of the security's governing documents.
* * * * *
    (8) * * *
    (i) * * *
    (B) An event indicating or evidencing credit deterioration, such as
a downgrade or default, of particular portfolio security positions,
each representing various portions of the fund's portfolio (with
varying assumptions about the resulting loss in the value of the
security), in combination with various levels of an increase in
shareholder redemptions;
* * * * *
    (h) * * *
    (3) Credit risk analysis. For a period of not less than three years
from the date that the credit risks of a portfolio security were most
recently reviewed, a written record must be maintained and preserved in
an easily accessible place of the determination that a portfolio
security is an eligible security, including the determination that it
presents minimal credit risks at the time the fund acquires the
security, or at such later times (or upon such events) that the board
of directors determines that the investment adviser must reassess
whether the security presents minimal credit risks.
* * * * *
0
3. Section 270.12d3-1(d)(7)(v) is amended by removing the phrase
``Sec. Sec.  270.2a-7(a)(8) and 270.2a-7(a)(15)'' and adding in its
place the phrase ``Sec. Sec.  270.2a-7(a)(9) and 270.2a-7(a)(16)'';
0
4. Section 270.31a-1(b)(1) is amended by removing the phrase ``(as
defined in Sec.  270.2a-7(a)(8) or Sec.  270.2a7(a)(15) respectively)''
and adding in its place the phrase ``(as defined in Sec.  270.2a-
7(a)(9) or ``Sec.  270.2a-7(a)(16) respectively)''.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
5. The authority citation for Part 274 continues to read, in part, as
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise
noted.
* * * * *
0
4. Form N-MFP (referenced in Sec.  274.201) is amended by:
0
a. Revising Item C.9;
0
b. Revising Item C.10;
0
d. Removing Items C.14.b and C.14.c;
0
e. Redesignating Items C.14.d through C.14.f as Items C.14.b through
C.14 d;
0
f. Adding new Item C.14.e;
0
g. Removing Items C.15.b and C.15.c;
0
h. Redesignating Item C.15.d as Item C.15.b;
0
i. Adding new Item C.15.c;
0
j. Removing Items C.16.c and C.16.d;
0
k. Redesignating Item C.16.e as Items C.16.c; and
0
l. Adding new Item C.16.d.
    The revisions read as follows:

    Note: The text of Form N-MFP does not, and this amendment will
not, appear in the Code of Federal Regulations.

FORM N-MFP

* * * * *
    Item C.9 Is the security an Eligible Security? [Y/N]
    Item C.10 Security rating(s) considered. Provide each rating
assigned by any NRSRO to whose services the fund or its adviser
subscribes (together with the name of the assigning NRSRO), and any
other NRSRO rating that the fund's board of directors considered in
determining that the security presents minimal credit risks (together
with the name of the assigning NRSRO). If none, leave blank.
* * * * *
    Item C.14 * * *
    e. Rating(s) considered. Provide each rating assigned to the demand
feature(s) or demand feature provider(s) by any NRSRO to whose services
the fund or its adviser subscribes (together with the name of the
assigning NRSRO), and any other NRSRO rating assigned to the demand
feature(s) or demand feature provider(s) that the board of directors
considered in evaluating the quality, maturity or liquidity of the
security (together with the name of the assigning NRSRO). If none,
leave blank.
* * * * *
    Item C.15 * * *
    c. Rating(s) considered. Provide each rating assigned to the