[Federal Register Volume 79, Number 157 (Thursday, August 14, 2014)]
[Proposed Rules]
[Pages 47985-48014]
[FR Doc No: 2014-17746]

Vol. 79

Thursday,

No. 157

August 14, 2014

Part III

Securities and Exchange Commission

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17 CFR Parts 270 and 274

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

Federal Register / Vol. 79 , No. 157 / Thursday, August 14, 2014 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 270 and 274

[Release No. IC-31184; File No. S7-07-11]
RIN 3235-AK61

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

AGENCY: Securities and Exchange Commission.

ACTION: Re-proposed rule; proposed rule.

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

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

ADDRESSES: Comments may be submitted by any of the following methods:
    Electronic Comments
     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-07-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
    Paper Comments
     Send paper comments to Kevin M. O'Neill, Deputy Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090.

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

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

SUPPLEMENTARY INFORMATION: We are proposing for public comment
amendments to rule 2a-7 [17 CFR 270.2a-7] and Form N-MFP [17 CFR
274.201] under the Investment Company Act.\1\
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    \1\ Unless otherwise noted, all references to statutory sections
are to the Investment Company Act, and all references to rules under
the Investment Company Act, including rule 2a-7, will be to Title
17, Part 270 of the Code of Federal Regulations [17 CFR 270].
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Table of Contents

I. Background
    A. Credit Rating References
    B. Exclusion from the Issuer Diversification Requirement
II. Discussion
    A. Rule 2a-7
    1. Eligible Securities
    2. Conditional Demand Features
    3. Monitoring Minimal Credit Risks
    4. Stress Testing
    B. Form N-MFP
    C. Exclusion from the Issuer Diversification Requirement
III. Compliance Period for the Proposed Rule and Form Amendments
IV. Paperwork Reduction Act Analysis
V. Economic Analysis
VI. Regulatory Flexibility Act Certification Statutory Authority
Text of Rule and Form Amendments

I. Background

A. Credit Rating References

    Section 939A of the Dodd-Frank Act requires each Federal agency,
including the Commission, to ``review any regulation issued by such
agency that requires the use of an assessment of the credit-worthiness
of a security or money market instrument and any references to or
requirements in such regulations regarding credit ratings.'' \2\ That
section further provides that each such agency shall ``modify any such
regulations identified by the review . . . to remove any reference to
or requirement of reliance on credit ratings and to substitute in such
regulations such standard of credit-worthiness as each respective
agency shall determine as appropriate for such regulations.'' \3\
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    \2\ Public Law 111-203, section 939A(a)(1)-(2). Section 939A of
the Dodd-Frank Act applies to all Federal agencies.
    \3\ Public Law 111-203, section 939A(b). Section 939A of the
Dodd Frank Act provides that agencies shall seek to establish, to
the extent feasible, uniform standards of creditworthiness, taking
into account the entities the agencies regulate and the purposes for
which those entities would rely on such standards.
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    As a step toward implementing these mandates, in March 2011 we
proposed to replace references to credit ratings issued by nationally
recognized statistical rating agencies (``NRSROs'') in two rules and
four forms under the Securities Act of 1933 (``Securities Act'') and
the Investment Company Act, including rule 2a-7 and Form N-MFP under
the Investment Company Act.\4\ The 2011 proposal preceded other
amendments to rule 2a-7 and Form N-

MFP that we proposed last year as part of our broader efforts to reform
money market funds.\5\ At that time, we noted that we were not
rescinding our 2011 proposal to remove ratings references from certain
rules and forms under the Investment Company Act, but that we intended
to address the matter at another time.\6\
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    \4\ See References to Credit Ratings in Certain Investment
Company Act Rules and Forms, Investment Company Act Release No.
29592 (Mar. 3, 2011) [76 FR 12896 (Mar. 9, 2011)] (``2011 Proposing
Release''). Specifically, we proposed to: (i) Remove references to
credit ratings in rules 2a-7 and 5b-3 under the Investment Company
Act and replace them with alternative standards of creditworthiness;
(ii) adopt new rule 6a-5 under the Investment Company Act that would
establish a creditworthiness standard to replace the credit rating
reference in section 6(a)(5) removed by the Dodd-Frank Act; (iii)
eliminate required disclosures of credit ratings in Form N-MFP under
the Investment Company Act; and (iv) remove the requirement that
credit ratings be used when portraying credit quality in shareholder
reports from Forms N-1A, N-2, and N-3 under the Securities Act and
the Investment Company Act. In December 2013, we adopted amendments
removing references to credit ratings in rule 5b-3 and eliminating
the required use of credit ratings in Forms N-1A, N-2, and N-3. See
Removal of Certain References to Credit Ratings under the Investment
Company Act, Investment Company Act Release No. 30847 (Dec. 27,
2013) [79 FR 1316 (Jan. 8, 2014)] (``2013 Ratings Removal Adopting
Release''). We adopted new rule 6a-5 on November 19, 2012. See
Purchase of Certain Debt Securities by Business and Industrial
Development Companies Relying on an Investment Company Act
Exemption, Investment Company Act Release No. 30268 (Nov. 19, 2012)
[77 FR 70117 (Nov. 23, 2012)].
     Rule 3a-7 under the Investment Company Act also contains a
reference to ratings. In August 2011, in a concept release
soliciting comment on the treatment of asset-backed issuers under
the Investment Company Act, we sought comment on the role, if any,
that credit ratings should continue to play in the context of rule
3a-7. See Treatment of Asset-Backed Issuers under the Investment
Company Act, Investment Company Act Release No. 29779 (Aug. 31,
2011) [76 FR 55308 (Sept. 7, 2011)] at section III.A.1.
    \5\ See Money Market Fund Reform; Amendments to Form PF,
Investment Company Act Release No. 30551 (June 5, 2013) [78 FR 36834
(June 19, 2013)] (``2013 Money Market Fund Proposing Release''). The
2013 rule proposals were designed to address money market funds'
susceptibility to heavy redemptions, improve their ability to manage
and mitigate potential contagion from such redemptions, and increase
the transparency of their risks, while preserving, as much as
possible, the benefits of money market funds.
    \6\ Id. at text accompanying n.130.
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    We received several comments on the 2013 Money Market Fund
Proposing Release suggesting that we act on credit ratings as part of
our broader money market fund reforms.\7\ And today in another release,
we have adopted certain amendments to rule 2a-7 and Form N-MFP that we
proposed last year.\8\ We also received comments on the 2011 Proposing
Release that raised a number of concerns with respect to the proposed
amendments and suggested alternative rule text for some provisions. We
have determined to re-propose amendments to replace references to
credit ratings in rule 2a-7 and to modify provisions in Form N-MFP that
reference credit ratings, in consideration of the mandate of Dodd-Frank
Act section 939A, the comments on the 2011 Proposing Release, and the
broader money market fund reforms we have adopted today.\9\
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    \7\ See Comment Letter of Wells Fargo Funds Management, LLC
(Sept. 16, 2013); Comment Letter of Hester Pierce & Robert Greene,
Mercatus Center, George Mason University (Sept. 17, 2013); Comment
Letter of The Dreyfus Corporation (Sept. 17, 2013). Comments on the
2013 Money Market Fund Proposing Release are available at: http://www.sec.gov/comments/s7-03-13/s70313.shtml.
    \8\ See Money Market Fund Reform; Amendments to Form PF,
Investment Company Act Release No. 31166, (July 23, 2014) (``2014
Money Market Fund Adopting Release''), which is published elsewhere
in this issue of the Federal Register. With this re-proposal, the
Commission is not re-opening comment on the amendments adopted in
the 2014 Money Market Fund Adopting Release.
     Unless otherwise noted, all references to rule 2a-7 and Form N-
MFP in this release refer to rule 2a-7 and Form N-MFP as amended by
the 2014 Money Market Fund Adopting Release. References to
provisions of rule 2a-7 and Form N-MFP as they would be modified by
the amendments we re-propose in this release are preceded by the
term ``re-proposed'' (i.e., ``re-proposed rule 2a-7'').
    \9\ As discussed above, the Commission is not re-opening comment
on amendments to rule 2a-7 that were adopted in the 2014 Money
Market Fund Adopting Release. See supra note 8.
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    A number of other Federal agencies have also taken action to
implement section 939A of the Dodd-Frank Act, including regulations
proposed or adopted by the Commodity Futures Trading Commission, the
Office of the Comptroller of the Currency (``OCC''), the National
Credit Union Administration, the Federal Housing Finance Agency, the
Department of Labor, and jointly by the OCC and Board of Governors of
the Federal Reserve.\10\ In some of these initiatives, the references
to ratings were or would be replaced with an alternative standard
designed to retain the same degree of credit quality as reflected by
the use of credit ratings. We have considered the actions taken by
these other regulators in re-proposing the amendments discussed in this
release.
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    \10\ See OCC and Board of Governors of the Federal Reserve
System, Regulatory Capital Rules: Regulatory Capital, Implementation
of Basel III, Capital Adequacy, Transition Provisions, Prompt
Corrective Action, Standardized Approach for Risk-weighted Assets,
Market Discipline and Disclosure Requirements, Advanced Approaches
Risk-Based Capital Rule, and Market Risk Capital Rule [78 FR 62018
(Oct. 11, 2013)]; Department of Labor, Proposed Amendments to Class
Prohibited Transaction Exemptions to Remove Credit Ratings Pursuant
to the Dodd-Frank Wall Street Reform and Consumer Protection Act [78
FR 37572 (June 21, 2013)]; Federal Housing Finance Agency, Removal
of References to Credit Ratings in Certain Regulations Governing the
Federal Home Loan Banks [78 FR 30784 (May 23, 2013)]; National
Credit Union Administration, Alternatives to the Use of Credit
Ratings [77 FR 74103 (Dec. 13, 2012)]; OCC, Alternatives to the Use
of External Credit Ratings in the Regulations of the OCC [77 FR
35253 (June 13, 2012)]; Commodity Futures Trading Commission,
Removing Any Reference to or Reliance on Credit Ratings in
Commission Regulations; Proposing Alternatives to the Use of Credit
Ratings [76 FR 44262 (July 25, 2011)].
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B. Exclusion From the Issuer Diversification Requirement

    As noted above, today we adopted amendments to rule 2a-7 as part of
our broader money market fund reforms. These included amendments
relating to the rule's diversification provisions, which require a
money market fund to diversify its investments with respect to issuers
of the securities it acquires, as well as providers of demand features
and guarantees related to those securities. As discussed in the 2014
Money Market Fund Adopting Release,\11\ we sought comment on specific
amendments we proposed as well as more broadly on the issuer and
guarantor diversification requirements. Some of the comments we
received in response prompted us to re-evaluate the exclusion to the
issuer diversification requirement for securities subject to a
guarantee issued by a non-controlled person. After careful
consideration, and consistent with our reform goal of limiting
concentrated exposure of money market funds to particular economic
enterprises, we are proposing amendments that would eliminate this
exclusion from the issuer diversification requirement of rule 2a-7.
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    \11\ See 2014 Money Market Fund Adopting Release, supra note 7,
at section III.I.1.d.
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II. Discussion

A. Rule 2a-7

    The Investment Company Act and applicable rules generally require
investment companies (``funds'') to calculate current net asset value
per share by valuing their portfolio instruments at market value or, if
market quotations are not readily available, at fair value as
determined in good faith by the board of directors.\12\ These valuation
requirements are designed to prevent unfair share pricing from diluting
or otherwise adversely affecting the interests of investors.\13\ Rule
2a-7 under the Investment Company Act, which governs the operation of
money market funds, exempts certain money market funds from these
valuation requirements. Until today, all money market funds have been
permitted to value their portfolio securities using the amortized cost
method of valuation (``amortized cost method'') and to use the penny-
rounding method of pricing (``penny-rounding method'') to maintain a
stable share price, typically $1.00 per share.\14\

After the amendments adopted today go into effect, however,
institutional prime and institutional municipal money market funds
(collectively, ``institutional prime funds'' \15\) will be required to
sell and redeem shares at their net asset value calculated on the
current market-based value of the securities in their underlying
portfolios, rounded to the fourth decimal place (e.g., $1.0000 \16\),
i.e., transact at a ``floating'' net asset value per share
(``NAV'').\17\
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    \12\ See section 2(a)(41) of the Investment Company Act
(defining value), rule 2a-4 (defining current net asset value), and
rule 22c-1 (generally requiring open-end funds to sell and redeem
their shares at a price based on the funds' current net asset value
as next computed after receipt of a redemption, purchase, or sale
order).
    \13\ If shares are sold or redeemed based on a net asset value
that has been either understated or overstated compared to the
amount at which portfolio instruments could have been sold, then the
interests of either existing shareholders or new investors will have
been diluted. See Compliance Programs of Investment Companies and
Investment Advisers, Investment Company Act Release No. 26299 (Dec.
17, 2003) [68 FR 74714 (Dec. 24, 2003)] at text accompanying and
following nn. 39-40; see also 2014 Money Market Fund Adopting
Release, supra note 8, at section III.D (providing valuation
guidance aimed at, among other things, promoting stronger valuation
practices that may lessen a money market fund's susceptibility to
heavy redemptions by decreasing the likelihood of sudden portfolio
write-downs that could encourage financially sophisticated investors
to redeem early).
    \14\ Under the amortized cost method, portfolio instruments are
valued by reference to their acquisition cost as adjusted for
amortization of premium or accretion of discount. See rule 2a-
7(a)(2). Share price is determined under the penny-rounding method
by valuing securities at market value, fair value or amortized cost
and rounding the per share net asset value to the nearest cent on a
share value of a dollar, as opposed to the nearest one tenth of one
cent as otherwise would be required. See Valuation of Debt
Instruments and Computation of Current Price Per Share by Certain
Open-End Investment Companies (Money Market Funds), Investment
Company Act Release No. 13380 (July 11, 1983) [48 FR 32555 (July 18,
1983)] (``1983 Adopting Release''), at n.6 (``Release 9786 sets the
amount of less than 1/10 of one cent on a share value of one dollar
as the benchmark for materiality.''); Valuation of Debt Instruments
by Money Market Funds and Certain Other Open-End Investment
Companies, Investment Company Act Release No. 9786 (May 31, 1977)
[42 FR 28999 (June 7, 1977)] at text accompanying n.11; rule 2a-
7(a)(20) (defining penny-rounding method).
     While most money market funds maintain a stable net asset value
(``NAV''), some fund sponsors have established floating NAV money
market funds in past years. See Northern Trust Files to Launch
Investors Variable NAV Money Funds, Crane Data (Dec. 31, 2012),
http://cranedata.com/archives/all-articles/4314/.
    \15\ As part of these amendments, the Commission has amended
rule 2a-7 to rescind the exemptions that previously permitted
institutional prime funds (i.e., money market funds other than
government and retail money market funds, including municipal money
market funds that fall under the definition of ``retail money market
fund'' under rule 2a-7 as amended) to maintain a stable share price
by use of amortized cost valuation and/or penny rounding. See 2014
Money Market Fund Adopting Release, supra note 8, at section III.B.
    \16\ A money market fund could also price its shares at an
equivalent or more precise level of accuracy for funds with a
different share price. For example, a money market fund with a $10
target share price could price its shares at $10.000. See rule 2a-
7(c)(1)(ii).
    \17\ See 2014 Money Market Fund Adopting Release, supra note 8,
at section III.B. We note that the compliance date for the floating
NAV amendments adopted in the 2014 Money Market Fund Adopting
Release is three years after the amendments' effective date.
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    Rule 2a-7 contains ``risk limiting'' provisions designed to
minimize the amount of risk a money market fund may assume.\18\ For
those funds that are permitted to maintain a stable share price, these
conditions help reduce the deviation between a money market fund's
stabilized share price and the market value of its portfolio. For
floating NAV funds, these conditions help to limit the risk of loss by,
among other things, reducing principal volatility. Any fund that holds
itself out to investors as a money market fund or the equivalent of a
money market fund also must comply with these conditions.\19\ Among
these conditions, rule 2a-7 limits a money market fund's portfolio
investments to ``eligible securities,'' or securities that have
received credit ratings from the ``requisite NRSROs'' in one of the two
highest short-term rating categories or comparable unrated
securities.\20\ A requisite NRSRO is an NRSRO that a money market
fund's board of directors has designated for use (a ``designated
NRSRO'') and that issues credit ratings that the board determines, at
least annually, are sufficiently reliable for the fund to use in
determining the eligibility of portfolio securities.\21\ Rule 2a-7
further restricts money market funds to securities that the fund's
board of directors (or the board's delegate \22\) determines present
minimal credit risks, and specifically requires that determination ``be
based on factors pertaining to credit quality in addition to any
ratings assigned to such securities by an NRSRO.'' \23\ A money market
fund is required to invest at least 97 percent of its total assets in
eligible securities that have received a rating from the requisite
NRSROs in the highest short-term rating category for debt securities
(``first tier securities'' \24\) or unrated securities of comparable
quality.\25\
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    \18\ Rule 2a-7 contains conditions that apply to each investment
a money market fund proposes to make, as well as conditions that
apply to a money market fund's entire portfolio. Although
institutional prime funds are no longer permitted to maintain a
stable share price by use of amortized cost valuation and/or penny
rounding, these funds remain subject to the ``risk limiting''
provisions of rule 2a-7.
    \19\ See rule 2a-7(b) (prohibiting a fund from holding itself
out as a money market fund unless it complies with the provisions of
rule 2a-7, including the risk limiting conditions of rule 2a-7(d)).
    \20\ See rule 2a-7(d)(2)(i). The term ``eligible security'' is
defined in rule 2a-7(a)(12).
    \21\ See rule 2a-7(a)(11) (defining ``designated NRSRO''); rule
2a-7(a)(24) (defining ``requisite NRSRO'').
    \22\ A money market fund board may delegate minimal credit risk
determinations, and typically does to the fund's adviser, provided
that the board retains sufficient oversight. See rule 2a-7(j);
Revisions to Rules Regulating Money Market Funds, Investment Company
Act Release No. 18005 (Feb. 20, 1991) [56 FR 8113 (Feb. 27, 1991)]
(``1991 Adopting Release'') (permitting a money market fund's board
of directors to delegate the responsibility to make such
determinations). See also Investment Company Institute, Report of
the Money Market Working Group (Mar. 17, 2009) (``ICI Working Group
Report''), available at http://www.ici.org/pdf/ppr_09_mmwg.pdf, at
Appendix I (``In our experience, Boards uniformly delegate the
determination of minimal credit risks to their fund's adviser.'');
Comment Letter of Mutual Fund Directors Forum (Apr. 25, 2011)
(``MFDF Comment Letter'') (``as we have consistently commented in
the past, . . . money fund boards will not themselves determine the
creditworthiness of individual money market securities. Rather
consistent with the provisions of rule 2a-7, boards will delegate
this task in virtually all circumstances to the fund's adviser.'').
When discussing or requesting comment on policies, procedures or
practices regarding minimal credit risk determinations, this release
identifies fund advisers as making the determinations. Comments on
the 2011 Proposing Release are available at: http://www.sec.gov/comments/s7-07-11/s70711.shtm.
    \23\ Rule 2a-7(d)(2)(i). Thus, under the current rule, if the
security is rated, having the requisite NRSRO rating is a necessary
but not sufficient condition for investing in the security and
cannot be the sole factor considered in determining whether a
security presents minimal credit risks. See 1991 Adopting Release,
supra note 22, at text preceding n.18.
    \24\ See rule 2a-7(a)(14) (defining ``first tier security'').
    \25\ See rule 2a-7(d)(2)(ii) (prohibiting a fund immediately
after the acquisition of any second tier security from holding more
than 3% of its total assets in second tier securities).
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    To implement the mandate of Dodd-Frank Act section 939A, we are re-
proposing amendments to remove references to credit ratings in rule 2a-
7. The re-proposed amendments 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.\26\ The re-
proposed amendments to rule 2a-7 reflect our consideration of
commenters' concerns and suggested modifications to our 2011 proposal,
as well as the broader money market fund reforms we have adopted today.
These re-proposed amendments are designed to remove references to, or
requirement of reliance on, credit ratings in rule 2a-7 and to
substitute standards of creditworthiness that we believe are
appropriate.\27\
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    \26\ The re-proposed amendments also would make conforming
amendments to rule 2a-7's recordkeeping and reporting requirements.
See re-proposed rule 2a-7(h)(3).
    \27\ In addition, we are re-proposing a technical revision that
would update a cross-reference in rule 2a-7(a)(5) to reflect
amendments to rule 5b-3 adopted last year. See supra note 4.
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1. Eligible Securities
    In 2011, we proposed to eliminate the requirement that eligible
securities be rated.\28\ Instead, the Commission would have required
that fund boards: First, determine whether securities are eligible
securities based on minimal credit risks; and second, distinguish
between first and second tier securities based on subjective standards
similar to those the ratings agencies have developed to describe their
ratings.\29\ We requested comments on this proposal, including comments
on whether the Commission should limit money market funds to investing
in securities solely based on a minimal credit risk determination,
i.e., establish a single test for determining whether a fund could
invest in a security.
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    \28\ See 2011 Proposing Release, supra note 4.
    \29\ See id. at section II.A.1.
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    A number of commenters objected to our proposal to retain the
distinction between first and second tier

securities.\30\ They asserted that these proposed amendments were (i)
unworkable because of the difficulty in differentiating between first
and second tier securities and (ii) redundant because the amendments
would require fund boards and their advisers to apply almost
indistinguishable subjective judgments in determining whether
securities were both eligible securities and first tier securities.\31\
Instead, they urged that we combine the two criteria and require a
single, uniform, very high standard of quality.\32\ Specifically,
several commenters suggested that the rule define an ``eligible
security'' to mean a security with a remaining maturity of 397 calendar
days or less that the fund's board of directors (or the board's
delegate) determines presents minimal credit risks and include a
determination that the security's issuer has ``the highest capacity''
or ``a strong capacity'' to meet its short-term obligations.\33\ These
commenters noted that securities meeting this uniform standard would be
generally comparable to securities rated in the highest short-term
rating category, which are first tier securities under current rule 2a-
7.\34\
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    \30\ See, e.g., Comment Letter of Calvert Group, Ltd. (Apr. 25,
2011); Comment Letter of The Dreyfus Corporation (Apr. 25, 2011)
(``Dreyfus Comment Letter''); Comment Letter of Investment Company
Institute (Apr. 25, 2011) (``ICI Comment Letter''); Comment Letter
of the Independent Directors' Council (Apr. 25, 2011) (``IDC Comment
Letter''); Comment Letter of Charles Schwab Investment Management
Inc. (Apr. 25, 2011) (``Schwab Comment Letter''); Comment Letter of
T. Rowe Price Associates, Inc. (Apr. 25, 2011) (``T. Rowe Price
Comment Letter''); Comment Letter of Vanguard (Apr. 26, 2011)
(``Vanguard Comment Letter''). But see Comment Letter of Federated
Investors, Inc. (Apr. 25, 2011) (``Federated Comment Letter'')
(supporting a distinction between first and second tier securities);
Comment Letter of Invesco Advisers, Inc. (Apr. 25, 2011) (``Invesco
Comment Letter'') (also supporting this distinction).
    \31\ See, e.g., Comment Letter of Fidelity Investments (Apr. 28,
2011) (``Fidelity Comment Letter'') (``Under the [p]roposed [r]ule,
tier categorizations will no longer be determined by a clear,
objective standard based on published credit rating agency ratings;
rather, that determination will be put in the hands of myriad money
market mutual funds, and a fund's standards for the first and second
tiers could change from month to month, or even week to week . . .
result[ing] in less predictability and more confusion for investors
seeking a stable and consistent product . . . .''); Schwab Comment
Letter, supra note 30 (``[the retention of first tier and second
tier securities,] given the elimination of credit ratings, is
redundant with the investment adviser's ongoing obligation to
monitor for minimal credit risks.'').
    \32\ See ICI Comment Letter, supra note 30; Schwab Comment
Letter, supra note 30; T. Rowe Price Comment Letter, supra note 30.
But see MFDF Comment Letter, supra note 22 (advocating maintaining
the distinction between first and second tier securities as a risk-
limiting condition in rule 2a-7, but questioning the usefulness of
the distinction between first and second tier securities when the
proposed description of the difference ``comes dangerously close to
establishing a distinction that is more semantic than
substantive'').
    \33\ See ICI Comment Letter, supra note 30 (recommending that
the Commission adopt a ``strong capacity'' standard as an
appropriate substitute for the credit rating references in rule 2a-
7, noting that this standard reflects certain NRSROs' highest short-
term rating category, but also recommending that the Commission
adopt an ``exceptionally strong capacity'' standard, which would be
consistent with the definitions used by many NRSROs to define their
highest long-term category, as an alternative substitute for the
credit rating references in rule 5b-3); Vanguard Comment Letter,
supra note 30 (advocating a determination that the issuer have the
``highest capacity'' to meet those obligations).
    \34\ See id.
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    After consideration of the comments and the statutory directive to
eliminate references to ratings in our rules, and to seek consistent
standards of creditworthiness to the extent feasible, we are re-
proposing amendments to rule 2a-7. The re-proposal would combine the
two risk criteria into a single standard, which would be included as
part of rule 2a-7's definition of eligible security.\35\ As re-
proposed, an eligible security would be a security with a remaining
maturity of 397 calendar days or less that the fund's board of
directors (or its delegate) determines presents minimal credit risks,
which determination includes a finding that the security's issuer has
an exceptionally strong capacity to meet its short-term
obligations.\36\ Thus, under our re-proposal, a money market fund would
be limited to investing in securities that the fund's board (or its
delegate) has determined present minimal credit risks, notwithstanding
any rating the security may have received. In addition, fund boards
would no longer be required to designate NRSROs.\37\ The re-proposed
determination is designed to retain a degree of credit risk similar to
that in the current rule by allowing for gradations in credit quality
among securities that meet a very high standard of credit quality,\38\
while limiting a money market fund's investments in second tier
securities to those the fund determines do not diminish the overall
high quality of the fund's portfolio.\39\
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    \35\ Currently, the requirement that the fund board (or its
delegate) determine that a security presents minimal credit risks is
set forth in rule 2a-7(d)(2)(i) (requiring that the determination of
minimal credit risk be based on factors pertaining to credit quality
in addition to any rating assigned by a designated NRSRO). Under our
re-proposal, the definition of eligible security in the rule would
be restructured to include the minimal credit risk determination,
and would include government securities and securities issued by
money market funds, which are currently included in the definition
of first tier security. See rule 2a-7(a)(14).
    \36\ Re-proposed rule 2a-7(a)(11). The re-proposal would make a
conforming change to the recordkeeping requirements under the rule
to reflect that funds must retain a written record of the
determination that a portfolio security is an eligible security,
including the determination that it presents minimal credit risks.
See re-proposed rule 2a-7(h)(3).
     The re-proposal also would eliminate the following defined
terms from the rule: ``designated NRSRO,'' ``first tier security,''
``rated security,'' ``requisite NRSROs,'' ``second tier security,''
and ``unrated security.'' It also would revise a number of
provisions in the rule that currently reference these terms. See
rule 2a-7(a)(12) (eligible security); rule 2a-7(d)(2) (portfolio
quality); rule 2a-7(d)(3)(i)(A)(1) and (C) (portfolio
diversification); rule 2a-7(d)(3)(iii)(C) (portfolio
diversification); rule 2a-7(f)(1) (downgrades); rule 2a-7(h)(3)
(record keeping and reporting); rule 2a-7(j) (delegation).
    \37\ Nor would fund boards have to disclose designated NRSROs in
the statement of additional information (``SAI''). We note that
after enactment of the Dodd-Frank Act, our staff issued a no-action
letter assuring money market funds and their managers that, in light
of section 939A, the staff would not recommend enforcement action
under section 2(a)(41) of the Act and rules 2a-4 and 22c-1
thereunder if a money market fund board did not designate NRSROs and
did not make related disclosures in the fund's SAI before the
Commission had completed its review of rule 2a-7 required by the
Dodd-Frank Act and made any modifications to the rule. See SEC Staff
No-Action Letter to the Investment Company Institute (Aug. 19,
2010).
    \38\ See Fitch Ratings, Definitions of Ratings and Other Forms
of Opinion, Jan. 2014, http://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pdf (``Fitch
Ratings Scales''), at 18 (stating that a rating of F1 ``[i]ndicates
the strongest intrinsic capacity for timely payments of financial
commitments''); Moody's Investor Service, Rating Symbols and
Definitions, Apr. 2014, https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 (``Moody's Rating
Definitions''), at 6 (stating that Prime-1 issuers ``have a superior
ability to repay short-term debt obligations''); Standard & Poor's,
Standard & Poor's Ratings Definitions, Apr. 27, 2011, http://img.en25.com/Web/StandardandPoors/Ratings_Definitions.pdf (``S&P
Ratings Definitions''), at 5 (stating that for a rating of A-1,
``[t]he obligor's capacity to meet its financial commitment on the
obligation is strong'').
    \39\ A number of commenters expressed concern that the standards
proposed in 2011 would simultaneously raise the standards for first
tier securities and weaken the standards for second tier securities.
See ICI Comment Letter, supra note 30; T. Rowe Price Comment Letter,
supra note 30; Dreyfus Comment Letter, supra note 30. Each of these
comments notes that the proposed standard that a first tier security
issuer or guarantor have the ``highest'' capacity to meet its short-
term obligations could raise the standard above that in the current
rule because this standard, if taken literally, does not contemplate
any variation in creditworthiness among issuers of first tier
securities. In contrast, the current definition of first tier
security refers to issuers and guarantors falling within a certain
range of capacities to repay their short-term obligations. These
comments also maintain that the proposed standard for second tier
securities, which was not tied to minimum rating requirements, could
permit a fund to invest in securities that would not be eligible
securities under the current rule.
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    As a result of the single standard and elimination of the
distinction between first and second tier securities we are re-
proposing, we also are re-proposing to remove the current prohibition
on funds investing more than 3 percent of their portfolios in second
tier securities.\40\ In

2010, we imposed greater limits on investments in second tier
securities because they may experience greater price volatility and
illiquidity than first tier securities in times of market stress, which
could adversely affect a money market fund's ability to maintain a
stable net asset value.\41\ Nevertheless, as we acknowledged in 2010,
investors could benefit from these investments to the extent that a
money market fund could conclude, after a thorough risk analysis, that
second tier securities provide a higher yield than first tier
securities while maintaining a risk profile consistent with the fund's
investment objectives.\42\ By eliminating the rule's current
limitations on investments in second tier securities, funds
theoretically could invest in second tier securities to a greater
extent than permitted today.\43\ The re-proposed standard, however, is
designed to preserve the current degree of risk limitation in rule 2a-7
without reference to credit ratings by requiring a fund's board (or its
delegate) to determine that the issuer of a portfolio security has an
exceptionally strong capacity to meet its short-term obligations, a
finding that some boards or fund advisers may determine can be met by
second tier rated securities (but only of the highest quality).\44\
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    \40\ See rule 2a-7(d)(2)(ii). In conforming changes, we re-
propose to move the requirement currently in the definition of
eligible security that the issuer of a demand feature or guarantee
promptly notify the holder of the security in the event the demand
feature or guarantee is substituted with another demand feature or
guarantee (if such substitution is permissible) to the paragraphs of
the rule that address securities subject to guarantees and
conditional demand features. Compare rule 2a-7(a)(12)(iii)(B) with
re-proposed rules 2a-7(d)(2)(ii) and 2a-7(d)(2)(iii)(D).
    \41\ See Money Market Fund Reform, Investment Company Act
Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 2010)]
(``2010 Money Market Fund Adopting Release''), at nn.52-53 and
accompanying text (explaining that second tier securities are
subject to greater spread risk and trade in thinner markets than
first tier securities and noting that second tier securities are
more likely to be downgraded than first tier securities).
    \42\ See id. at text accompanying and following n.54.
    \43\ See rule 2a-7(c)(3)(ii). Money market funds also are
limited from investing more than \1/2\% of their assets in second
tier securities of a single issuer and 2.5% of their portfolios in
second tier securities issued, guaranteed or subject to a demand
feature issued by the same entity. See rule 2a-7(d)(3)(i)(C) and
rule 2a-7(d)(3)(iii)(C). These limits also would be eliminated under
our re-proposal.
    \44\ See ICI Comment Letter, supra note 30 (stating that the
Dodd-Frank Act ``does not leave any means of explicitly limiting
acquisitions of securities rated below the highest category [but a
single, uniform, very high standard] would at least require money
market funds to determine that such securities do not diminish the
overall credit quality of their portfolios'').
---------------------------------------------------------------------------

    We do not believe that securities that are rated in the third-
highest category for short-term ratings (or comparable unrated
securities), whose issuers need only have an acceptable or adequate
ability to repay short-term obligations under rating agency standards,
would satisfy the re-proposed ``exceptionally strong capacity''
standard.\45\ We therefore believe, as a practical matter, that the re-
proposed standard would generally preclude funds from determining that
securities rated ``third tier'' (or comparable unrated securities)
would be eligible securities under rule 2a-7.
---------------------------------------------------------------------------

    \45\ See Fitch Ratings Scales, supra note 38, at 18 (a rating of
F3 indicates the ``intrinsic capacity for timely payment of
financial commitments is adequate.''); Moody's Rating Definitions,
supra note 38, at 6 (``Issuers (or supporting institutions) rated
Prime-3 have an acceptable ability to repay short-term debt
obligations.''); S&P Ratings Definitions, supra note 38, at 5 (``A
short-term obligation rated `A-3' exhibits adequate protection
parameters.'').
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    In determining whether a security presents minimal credit risks, a
fund adviser could take into account credit quality determinations
prepared by outside sources, including NRSRO ratings, that the adviser
considers are reliable in assessing credit risk. In considering such
sources, an adviser should understand the particular NRSRO's
methodology for determining the rating at issue and make an independent
judgment of credit risks, and it should consider any outside source's
record with respect to evaluating the types of securities in which the
fund invests.
    We request comment on consolidating the credit quality standard and
eliminating the distinction between first and second tier securities.
Do commenters believe that the re-proposed standard is an appropriate
standard of creditworthiness for rule 2a-7? Is the re-proposed
``exceptionally strong capacity'' standard an appropriate substitute
for credit ratings in rule 2a-7? Is there another standard that would
be a more appropriate substitute for credit ratings in rule 2a-7? Would
the re-proposed consolidated standard, which requires a minimum credit
risk determination and includes a finding that the issuer has an
``exceptionally strong capacity'' to meet its short-term obligations,
provide sufficient clarity for money market fund boards and advisers
making credit quality determinations? Would such a standard impact
investors' understanding of credit quality? Would it promote greater or
less uniformity in credit quality determinations among funds than the
standard we proposed in 2011? Would the 2011 proposal establish risk
limitations more in line with those provided under the current rule? Is
there an alternative standard for making credit quality determinations
that is more objective than the re-proposed standard? We note that no
commenters provided suggestions when we sought comment in the 2011
proposal on alternatives that would provide a more objective evaluation
of credit quality; have commenters' positions on this issue evolved
since 2011?
    We also request specific comment on the finding, required as part
of the minimal credit risk determination, that the security's issuer
has an exceptionally strong capacity to meet its short-term financial
obligations. What impact is this proposed standard likely to have on
the overall risk of money market fund portfolios? What impact is this
re-proposed ``exceptionally strong capacity'' standard likely to have
on money market fund acquisitions of first tier securities? Does it
permit sufficient variation among the most creditworthy issuers?
Similarly, what impact is the re-proposed ``exceptionally strong
capacity'' standard likely to have on money market fund acquisitions of
second tier securities? Will this re-proposed standard, and the
elimination of the distinction between first and second tier securities
in rule 2a-7, lead money market funds to acquire more second tier
securities than they do currently? Would a finding that a security's
issuer instead has a ``superior,'' ``very strong,'' or ``strong''
capacity to meet its short-term financial obligations better reflect
the current risk limitation in rule 2a-7, or would it result in a
standard that is less stringent than under the current rule? Our goal
is to preserve a similar degree of risk limitation as in the current
rule, and we note that the phrase ``strong capacity'' reflects the
standard that one NRSRO articulates for securities with a second tier
rating.\46\
---------------------------------------------------------------------------

    \46\ See Moody's Rating Definitions, supra note 38, at 6
(``Issuers (or supporting institutions) rated Prime-2 have a strong
ability to repay short-term debt obligations.'').
---------------------------------------------------------------------------

    As discussed above, we believe that the re-proposed standard would
preclude funds from investing in securities rated third tier (or
comparable unrated securities).\47\ Do funds agree? We do not believe
that the re-proposed standard should significantly affect money market
funds' investment in unrated securities because we understand that
money market funds hold few unrated securities.\48\ We

request comment about the potential reasons for this current practice.
Specifically, is there currently a limited supply of unrated securities
that qualify as eligible securities, or do money market funds hold few
unrated securities for other reasons (e.g., investor or board of
directors' requirements for ratings)? Would money market funds invest
in more unrated securities under our re-proposed amendments?
---------------------------------------------------------------------------

    \47\ See supra note 45 and accompanying text.
    \48\ Based on Form N-MFP filings from February 28, 2014, we
estimate that 0.005% of money market fund assets under management
were invested in unrated securities. Many securities that funds list
as unrated in Form N-MFP filings actually are issued as part of a
rated program or have an issuer or guarantor that is rated. See rule
2a-7(a)(22)(i), (ii) (defining ``rated security'' to include a
security that has received the requisite short-term rating from a
designated NRSRO, or that is issued by an issuer or has a guarantee
with such a rating).
---------------------------------------------------------------------------

    As discussed in the 2014 Money Market Fund Adopting Release, we
recognize that certain of the amendments to rule 2a-7 adopted today
could affect money market fund managers' investment decisions. Under
the newly adopted amendments to rule 2a-7, certain money market funds
would be required to transact using a floating NAV. Managers of
floating NAV funds, in an effort to limit volatility, might further
limit their investments in relatively riskier portfolio securities, or
conversely, in an effort to increase yield, might increase their
investments in such securities. As described in more detail below, we
request comment on the extent to which the re-proposed standard may
affect the potential incentive for certain funds to invest in riskier
securities (i.e., those securities that would be second tier under
current rule 2a-7). Would a finding that issuers have an
``exceptionally strong capacity'' to meet their short-term obligations
mitigate any risks associated with floating NAV funds' potential
incentives to invest in riskier securities? Would a finding that
issuers have a ``superior,'' ``very strong,'' or ``strong'' repayment
ability be a sufficient risk mitigant?
    Also under the amendments to rule 2a-7 we adopted today, all money
market funds (including those still able to transact at a stable NAV)
will be required to disclose daily the market value of their portfolios
generally to the fourth decimal place.\49\ If a money market fund were
to invest to a greater extent than its peer funds in riskier second
tier securities, then that fund would have greater volatility in price
or market value of its shares, as compared to the volatility and price
of its peer funds' shares. We request comment on whether potential
incentives for increased investments in riskier second tier securities
would be reduced by market discipline resulting from these newly
required disclosures.
---------------------------------------------------------------------------

    \49\ See rule 2a-7(h)(10)(iii); 2014 Money Market Fund Adopting
Release, supra note 8, at section III.E.9.c. To the extent a money
market fund prices its shares using a share price other than
$1.0000, it would be required to disclose its share price at an
equivalent level of accuracy. See rule 2a-7(h)(10)(iii). See also
supra note 16 and accompanying text.
---------------------------------------------------------------------------

    Rule 2a-7 does not set forth any specific factors that a board (or
its delegate) should consider in determining minimal credit risks. In
response to our 2011 proposal to replace an objective standard of an
NRSRO rating for eligible securities with a subjective standard, some
commenters advocated that we develop specific guidance in connection
with assessments of credit quality.\50\ We have provided guidance
before regarding certain factors to be considered in minimal credit
risk determinations for asset-backed securities under rule 2a-7 and in
our release removing references to credit ratings from the net capital
rule under the Securities Exchange Act of 1934.\51\ Commission staff
also has provided guidance in the past on factors that a board could
consider in performing credit assessments under rule 2a-7.\52\
---------------------------------------------------------------------------

    \50\ See Comment Letter of Better Markets (Apr. 25, 2011);
Comment Letter of Americans for Financial Reform (Apr. 25, 2011).
    \51\ See 2010 Money Market Fund Adopting Release, supra note 41,
at section II.3; Removal of Certain References to Credit Ratings
Under the Securities Exchange Act of 1934, Securities Exchange Act
Release No. 71194 (Dec. 27, 2013) [79 FR 26550 (Jan. 8, 2014)]
(``2013 Net Capital Rule Amendments'') at section II.B.1.a.iii
(listing certain factors a broker-dealer could consider, as
appropriate, under policies and procedures it establishes to assess
whether a security or money market instrument has only a minimal
amount of credit risk for purposes of rule 15c3-1 under the
Securities Exchange Act of 1934). See also Comment Letter of
Consumer Federation of America (Apr. 25, 2011) (suggesting the
proposed standard could provide a limitation on money market fund
firms' investments by requiring fund boards to review specific types
of objective data that credit rating agencies and other risk
assessment specialists consider in developing credit ratings);
Comment Letter of Colorado Public Employees' Retirement Association
(Apr. 21, 2011) (advocating that any approach to replacing credit
ratings contain quantitative and qualitative elements with certain
specific characteristics).
    \52\ See Letter to Registrants from Kathryn McGrath, Director,
Division of Investment Management, SEC (May 8, 1990) (``1990 Staff
Letter''); Letter to Matthew Fink, President, Investment Company
Institute from Kathryn McGrath, Director, Division of Investment
Management, SEC (Dec. 6, 1989) (``1989 Staff Letter'').
---------------------------------------------------------------------------

    Our staff also has had opportunities to observe how money market
fund advisers evaluate minimal credit risk through its examinations of
money market funds. Although staff has noted a range in the quality and
breadth of credit risk analyses among the money market funds examined,
staff has also observed that when performing their minimal credit risk
determinations, most of the advisers to these funds evaluate some
common factors that bear on the ability of an issuer or guarantor to
meet its short-term financial obligations.\53\ Based on the staff's
experience and in consideration of general criteria included in
recommendations by an industry money market working group of best
practices for making minimal credit risk determinations,\54\ we believe
that an assessment of the strength of any issuer's or guarantor's
ability to satisfy these obligations generally should include an
analysis of the following factors to the extent appropriate: (i) The
issuer or guarantor's financial condition, i.e., analysis of recent
financial statements, including trends relating to cash flow, revenue,
expenses, profitability, short-term and total debt service coverage,
and leverage (including financial leverage and operating leverage);
\55\ (ii) the issuer or guarantor's liquidity, including bank lines of
credit and alternative sources of liquidity; (iii) the issuer or
guarantor's ability to react to future events, including a discussion
of a ``worst case scenario,'' and its ability to repay debt in a highly
adverse situation; and (iv) the strength of the issuer or guarantor's
industry within the economy and relative to economic trends as well as
the issuer or guarantor's competitive position within its industry
(including diversification in sources of profitability, if
applicable).\56\ In

addition, a minimal credit risk evaluation could include an analysis of
whether the price and/or yield of a security is similar to that of
other securities in the fund's portfolio.\57\
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    \53\ Under the current rule, a security may be determined to be
an eligible security or a first tier security based solely on
whether the guarantee is an eligible security or a first tier
security, as the case may be. Rule 2a-7(d)(2)(ii).
    \54\ ICI Working Group Report, supra note 22, at Appendix I.
    \55\ Under the current rule, when a security's maturity is
determined with reference to a demand feature, the fund's board of
directors must perform an ongoing review of the security's continued
minimal credit risks, and that review must be based on, among other
things, financial data for the most recent fiscal year of the demand
feature's issuer. Rule 2a-7(g)(3).
    \56\ Many of these considerations have been included in staff
guidance as well as in best practices for determining minimal credit
risk set forth in the Report of the Money Market Working Group
submitted to the Board of Governors of the Investment Company
Institute in 2009. See 1990 Staff Letter, supra note 52 (advising
registrants that in the staff's view a board of directors can only
make a minimal credit risk determination regarding a security based
on an analysis of the issuer's capacity to repay its short-term
debt, which analysis would include: (i) A cash flow analysis; (ii)
an assessment of the issuer's ability to react to future events,
including a review of the issuer's competitive position, cost
structure and capital intensiveness; (iii) an assessment of the
issuer's liquidity, including bank lines of credit and alternative
sources of liquidity to support its commercial paper; and (iv) a
``worst case scenario'' evaluation of the issuer's ability to repay
its short-term debt from cash sources or asset liquidations in the
event that the issuer's backup credit facilities are unavailable);
1989 Staff Letter, supra note 52 (advising that in making its
minimal credit risk determination, a money market fund board of
directors should take into account certain kinds of factors, such as
the issuer's or guarantor's current and future credit quality; the
strength of the issuer's or guarantor's industry within the economy
and relative to economic trends; the issuer's or guarantor's market
position within its industry; cash flow adequacy; the level and
nature of earnings; financial leverage; asset protection; the
quality of the issuer's or guarantor's accounting practices and
management; the likelihood and nature of event risks, and the effect
of any significant ownership positions; the degree of financial
flexibility of the issuer or guarantor to cope with unexpected
challenges and to take advantage of opportunities, as well as an
assessment of the degree and nature of event risks; the likelihood
of a sudden change of credit quality from external and internal
sources); ICI Working Group Report, supra note 22, at Appendix I
(recommending the same general criteria set forth in the 1990 Staff
Letter for assessing the credit risks of issuers and securities in
procedures for determining minimal credit risks as well as
consideration of financial and other information provided by the
issuer). See also OCC Guidance on Due Diligence Requirements in
Determining Whether Securities are Eligible for Investment, 77 FR
35259 (June 13, 2012) (``OCC Guidance'') (matrix of examples of
factors for national banks and Federal savings associations to
consider as part of a robust credit risk assessment framework (``OCC
credit risk factors'') for certain investment securities includes
capacity to pay and assess operating and financial performance
levels and trends).
    \57\ See 2013 Net Capital Rule Amendments, supra note 51, at
second paragraph preceding n.99.
---------------------------------------------------------------------------

    The staff has also observed other factors that money market fund
advisers may take into account when evaluating minimal credit risks of
particular asset classes. To the extent applicable, fund advisers may
wish to consider the following additional factors:
     For municipal securities: (i) Sources of repayment; (ii)
issuer demographics (favorable or unfavorable); \58\ (iii) the issuer's
autonomy in raising taxes and revenue; (iv) the issuer's reliance on
outside revenue sources, such as revenue from a state or Federal
government entity; and (v) the strength and stability of the supporting
economy.\59\
---------------------------------------------------------------------------

    \58\ Demographics could include considerations such as the type,
size, diversity and growth or decline of the local government's tax
base, including income levels of residents, and magnitude of
economic activity.
    \59\ See 1989 Staff Letter, supra note 52 (additional factors
such as sources of repayment, autonomy in raising taxes and revenue,
reliance on outside revenue sources and strength and stability of
the supporting economy should be considered with respect to tax-
exempt securities); OCC Guidance, supra note 56.
---------------------------------------------------------------------------

     For conduit securities under rule 2a-7: \60\ Analysis of
the underlying obligor as described above for all securities except
asset backed securities (including asset backed commercial paper).\61\
---------------------------------------------------------------------------

    \60\ Under rule 2a-7, a ``conduit security'' means a security
issued by a municipal issuer involving an arrangement or agreement
entered into, directly or indirectly, with a person other than a
municipal issuer, which arrangement or agreement provides for or
secures repayment of the security. Rule 2a-7(a)(7). A ``municipal
issuer'' is defined under the rule to mean a state or territory of
the United States (including the District of Columbia), or any
political subdivision or public instrumentality of a state or
territory of the United States. Id. A conduit security does not
include a security that is: (i) Fully and unconditionally guaranteed
by a municipal issuer; (ii) payable from the general revenues of the
municipal issuer or other municipal issuers (other than those
revenues derived from an agreement or arrangement with a person who
is not a municipal issuer that provides for or secures repayment of
the security issued by the municipal issuer); (iii) related to a
project owned and operated by a municipal issuer; or (iv) related to
a facility leased to and under the control of an industrial or
commercial enterprise that is part of a public project which, as a
whole, is owned and under the control of a municipal issuer. Id.
    \61\ See OCC Guidance, supra note 56 (OCC credit risk factors
for revenue bonds include consideration of the obligor's financial
condition and reserve levels).
---------------------------------------------------------------------------

     For asset backed securities (including asset backed
commercial paper): (i) Analysis of the underlying assets to ensure they
are properly valued and that there is adequate coverage for the cash
flows required to repay the asset backed security under various market
conditions; (ii) analysis of the terms of any liquidity or other
support provided; and (iii) legal and structural analyses to determine
that the particular asset backed security involves no more than minimal
credit risks for the money market fund.\62\
---------------------------------------------------------------------------

    \62\ See 2010 Money Market Fund Adopting Release, supra note 41,
at section II.A.3 (citing Revisions to Rules Regulating Money Market
Funds, Investment Company Act Release No. 21837 (Mar. 21, 1996) [61
FR 13956 (Mar. 28, 1996)] (``1996 Money Market Fund Adopting
Release'') at section II.E.4).
---------------------------------------------------------------------------

     For other structured securities, such as variable rate
demand notes,\63\ tender option bonds,\64\ extendible bonds \65\ or
``step up'' securities,\66\ or other structures, in addition to
analysis of the issuer or obligor's financial condition, as described
above, analysis of the protections for the money market fund provided
by the legal structure of the security.\67\
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    \63\ A variable rate demand obligation (which includes variable
rate demand notes) is a security for which the interest rate resets
on a periodic basis and holders are able to liquidate their security
through a ``put'' or ``tender'' feature, at par. To ensure that the
securities are able to be ``put'' or ``tendered'' by a holder in the
event that a remarketing agent is unable to remarket the security, a
VRDO typically operates with a liquidity facility--a Letter of
Credit or Standby Bond Purchase Agreement--that ensures that an
investor is able to liquidate its position. See Electronic Municipal
Market Access, Understanding Variable Rate Demand Obligations,
http://emma.msrb.org/EducationCenter/UnderstandingVRDOs.aspx.
    \64\ A tender option bond is an obligation that grants the
bondholder the right to require the issuer or specified third party
acting as agent for the issuer (e.g., a tender agent) to purchase
the bonds, usually at par, at a certain time or times prior to
maturity or upon the occurrence of specified events or conditions.
See Municipal Securities Rulemaking Board, Glossary of Municipal
Securities Terms, Tender Option Bond, http://www.msrb.org/glossary/definition/tender-option-bond.aspx. Tender option bonds are
synthetically created by a bond dealer or other owner of a long-term
municipal obligation purchased in either the primary or secondary
markets, or already in a portfolio.
    \65\ An extendible bond is a long-term debt security with an
embedded option for either the investor or the issuer to extend its
maturity date. To qualify as an eligible security under rule 2a-7,
the issuer must not have the right to extend the maturity of the
bond so that it is more than 397 days to maturity at any time.
Typically, if an extendible bond is of the type that qualifies as an
eligible security under rule 2a-7, a money market fund will have the
option to either extend the maturity of the bond to no more than 397
days in the future, or elect not to extend, in which case the bond's
maturity must be no longer than 397 days at that time.
    \66\ A ``step up'' security pays an initial interest rate for
the first period, and then a higher rate for the following periods.
    \67\ See OCC Guidance, supra note 56 (OCC credit risk factors
for structured securities include evaluation and understanding of
specific aspects of the legal structure including loss allocation
rules, potential impact of performance and market value triggers,
support provided by credit and liquidity enhancements, and adequacy
of structural subordination).
---------------------------------------------------------------------------

     For repurchase agreements that are ``collateralized
fully'' under rule 2a-7,\68\ an assessment of the creditworthiness of
the counterparty,\69\ of the volatility and liquidity of the market for
collateral, if the collateral is a government agency collateralized
mortgage obligation or mortgage backed security, or other non-
standardized security, and the process for liquidating collateral.\70\
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    \68\ Under rule 2a-7(a)(5), for a repurchase agreement to be
``collateralized fully,'' among other requirements, the collateral
must consist entirely of cash items or Government securities. See
rule 5b-3(c)(1).
    \69\ See rule 2a-7(d)(3)(ii)(A) (requiring the fund's board of
directors to evaluate the creditworthiness of the seller of a fully
collateralized repurchase agreement when looking to the collateral
issued for purposes of determining issuer's diversification under
the rule).
    \70\ See ICI Working Group Report, supra note 22, at Appendix I
('' When repayment of an obligation (such as a repurchase agreement)
may depend on the liquidation of securities or other assets
(Collateral), the credit analysis should include an assessment of
the volatility and liquidity of the market for the Collateral,
especially in times of market stress. The analysis also should
consider the process for liquidating the Collateral, who would be
likely buyers of the Collateral, and how long it might take to
complete the liquidation. These factors should be included in the
analysis of the Collateral's potential volatility and liquidity.'').

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     For repurchase agreements that are not fully
collateralized under rule 2a-7, a financial analysis and assessment of
the minimal credit risk of the counterparty, as described above,
without regard to the value of the collateral, and consideration of the
type of collateral accepted and the ability of the money market fund to
liquidate the collateral.\71\
---------------------------------------------------------------------------

    \71\ See id.
---------------------------------------------------------------------------

    This list is not meant to be exhaustive. We recognize that the
range and type of specific factors appropriate for consideration could
vary depending on the category of issuer and particular security or
credit enhancement under consideration, and may include any factors in
addition to those discussed above that the board determines appropriate
to the credit assessment.\72\ Individual purchases may require more or
less analysis depending on the security's risk characteristics. As
discussed in greater detail below, we also would expect that the
written record of the minimal credit risk determination generally would
address any factors considered and the analysis of those factors.\73\
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    \72\ See supra text accompanying and following notes 55-70. As
noted above, money market fund boards of directors typically
delegate minimal credit risk determinations to the fund's adviser.
See supra note 22. Rule 2a-7 requires money market fund boards to
establish and periodically review written procedures regarding the
delegation (including guidelines for determining whether securities
present minimal credit risks) and to take measures reasonably
necessary to assure that the guidelines and procedures are being
followed. See rule 2a-7(j); see also rule 38a-1 (requiring funds to
adopt and implement written policies and procedures reasonably
designed to prevent a fund from violating the Federal securities
laws). These policies and procedures generally should identify the
process to be followed by the adviser in performing credit
assessments, including, as appropriate, the types of data to be used
or factors to be considered with respect to particular securities
and the person(s) or position(s) responsible under the delegated
authority. They also generally should provide for regular reporting
to the board, as appropriate, about these evaluations, to allow the
board to provide effective oversight of the process. See 2013
Ratings Removal Adopting Release, supra note 4, at n.50; 1983
Adopting Release, supra note 14, at paragraph preceding paragraph
accompanying n.3.
    \73\ See infra section II.A.3; proposed rule 2a-7(h)(3).
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    We request comment on the factors discussed above for
consideration, as appropriate, in the determinations that portfolio
securities present minimal credit risk. Do commenters agree that these
are relevant factors for advisers to consider in assessing whether
portfolio securities present minimal credit risk? Are the factors
sufficiently clear? Would it be helpful to describe any of the factors
with additional specificity? To what extent do investment advisers
currently consider these factors in making minimal credit risk
determinations? Do commenters agree with our understanding that
consideration of these factors is consistent with current industry
practice? Are there factors we should omit or other factors we should
consider including, such as credit spreads or the issuer or guarantor's
risk management structure? \74\ If so, why? In light of the amendments
being considered in this re-proposal, would the guidance contribute to
more consistency in the quality and breadth of money market funds'
credit analyses? If so, would it reduce the potential for significant
variations in money market funds' risk profiles? \75\ Should the
factors address other asset classes? If so, what types of securities
should be included and what factors would be appropriate for
consideration? We do not presently propose to codify the factors as
part of rule 2a-7. We request comment, however, on whether codifying
these factors would further ensure that funds use objective factors and
market data in making credit quality determinations and thereby promote
uniformity in making minimal credit risk determinations and/or assist
money market fund managers in understanding their obligations
pertaining to portfolio quality under rule 2a-7.
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    \74\ These factors have been included in other guidance on
making creditworthiness determinations. See 2013 Net Capital Rule
Amendments, supra note 51; 1989 Staff Letter, supra note 52; OCC
Guidance, supra note 56.
    \75\ See Dreyfus Comment Letter, supra note 30.
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2. Conditional Demand Features
    Rule 2a-7 limits money market funds to investing in securities with
remaining maturities of no more than 397 days.\76\ A long-term security
subject to a conditional demand feature \77\ (``underlying security''),
however, 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.\78\ The rule currently requires this analysis of both the
short-term and long-term credit aspects of the demand instrument
because a security subject to a conditional demand feature combines
both short-term and long-term credit risks.\79\ Our re-proposal would
require a similar analysis, but consistent with section 939A of the
Dodd-Frank Act would remove the requirement in the rule that the fund
board (or its delegate) consider credit ratings of underlying
securities.\80\
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    \76\ See rule 2a-7(a)(12) (defining ``eligible security'' to
mean, among other things, a security with a remaining maturity of
397 calendar days or less).
    \77\ A conditional demand feature is a demand feature that a
fund may be precluded from exercising because of the occurrence of a
condition. See rule 2a-7(a)(6) (defining ``conditional demand
feature'' as a demand feature that is not an unconditional demand
feature); rule 2a-7(a)(30) and re-proposed rule 2a-7(a)(25)
(defining ``unconditional demand feature'' as a demand feature that
by its terms would be readily exercisable in the event of a default
in payment of principal or interest on the underlying security). For
purposes of rule 2a-7, a demand feature allows the security holder
to receive, upon exercise, the approximate amortized cost of the
security, plus accrued interest, if any, at the later of the time of
exercise or the settlement of the transaction, paid within 397
calendar days of exercise and upon no more than 30 calendar days'
notice. Rule 2a-7(a)(9).
    \78\ Rule 2a-7(d)(2)(iv). Although underlying securities are
generally long-term securities when issued originally, they become
short-term securities when the remaining time to maturity is 397
days or less.
    \79\ The quality of a conditional demand instrument depends both
on the ability of the issuer of the underlying security to meet
scheduled payments of principal and interest and upon the
availability of sufficient liquidity to allow a holder of the
instrument to recover the principal amount and accrued interest upon
exercise of the demand feature. See Acquisition and Valuation of
Certain Portfolio Instruments by Registered Investment Companies,
Investment Company Act Release No. 14607 (July 1, 1985) [50 FR 27982
(July 9, 1985)], at n.33. The rule permits the determination of
whether a security subject to an unconditional demand feature is an
eligible or first tier security to be based solely on whether the
unconditional demand feature is an eligible or first tier security
because credit and liquidity support will be provided even in the
event of default of the underlying security. See rule 2a-
7(d)(2)(iii).
    \80\ In a conforming change, we propose to remove two provisions
in current rule 2a-7 that reference credit ratings in connection
with securities subject to a demand feature or guarantee of the same
issuer that are second tier securities: Rule 2a-7(d)(3)(i)(C)
(limiting a fund's investments in securities subject to a demand
feature or guarantee of the same issuer that are second tier
securities to 2.5% of the fund's total assets); rule 2a-7(f)(1)(iii)
(providing that if, as a result of a downgrade, more than 2.5% of a
fund's total assets are invested in securities issued by or subject
to demand features from a single institution that are second tier
securities, a fund must reduce its investments in these securities
to no more than 2.5% of total assets by exercising the demand
feature at the next succeeding exercise date(s)). In other
conforming changes, we are re-proposing to amend two rules under the
Act that reference the definition of ``demand feature'' and
``guarantee'' under rule 2a-7, which references would change under
our re-proposed amendments. Specifically, we propose to amend: (i)
Rule 12d3-1(d)(7)(v), to replace the references to ``rule 2a-
7(a)(8)'' and ``rule 2a-7(a)(15)'' with ``Sec.  270.2a-7(a)(9)'' and
``Sec.  270.2a-7(a)(16)''; and (ii) rule 31a-1(b)(1), to replace the
phrase ``(as defined in Sec.  270.2a-7(a)(8) or Sec.  270.2a-
7(a)(15) respectively)'' with ``(as defined in Sec.  270.2a-7(a))(9)
or Sec.  270.2a-7(a)(16) respectively)''.
---------------------------------------------------------------------------

    Under our re-proposal, a fund would have to determine, as with any
short-term security, that the conditional

demand feature is an eligible security.\81\ In addition, a fund's board
of directors (or its delegate) would have to evaluate the long-term
risk of the underlying security and determine that it (or its
guarantor) ``has a very strong capacity for payment of its financial
commitments.'' \82\ This standard is similar to those articulated by
credit ratings agencies for long-term securities assigned the second-
highest rating.\83\ An issuer that the board determines has a very low
risk of default, and a capacity for payment of its financial
commitments that is not significantly vulnerable to reasonably
foreseeable events would satisfy the proposed standard. We do not
believe that securities that are rated in the third-highest category
for long-term ratings (or comparable unrated securities), which have
expectations of low credit risk or whose obligors have only a strong
capacity to meet their financial commitments, would satisfy the
proposed standard for underlying securities.\84\ In making the credit
quality determinations required under the re-proposed amendment, a fund
adviser could continue to take into account analyses provided by third
parties, including ratings provided by ratings agencies, that it
considers reliable for such purposes.\85\
---------------------------------------------------------------------------

    \81\ See re-proposed rule 2a-7(d)(2)(iii)(A).
    \82\ Re-proposed rule 2a-7(d)(2)(iii)(C). An underlying security
that is a short-term security (because its remaining maturity is
less than 397 days, although its original maturity may have been
longer) also would have to meet the re-proposed standard.
    \83\ See Fitch Ratings Scales, supra note 38, at 12, 15 (for
corporate finance obligations, ```AA' ratings denote expectations of
very low credit risk. They indicate very strong capacity for payment
of financial commitments;'' for structured, project and public
finance obligations, ```AA' ratings denote expectations of very low
default risk. They indicate very strong capacity for payment of
financial commitments.''); Moody's Rating Definitions, supra note
38, at 5 (on the global long-term rating scale, obligations ``rated
Aa are judged to be of high quality and are subject to very low
credit risk.''); and S&P Ratings Definitions, supra note 38, at 3
(``An obligation rated `AA' differs from the highest-rated
obligations only to a small degree. The obligor's capacity to meet
its financial commitment on the obligation is very strong.'').
    \84\ See Moody's Rating 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 12 (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.'').
    \85\ See supra paragraph following note 45.
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    The amendments that we are re-proposing to the provisions of rule
2a-7 affecting securities subject to a conditional demand feature are
designed to reflect the same standard as the amendment we proposed in
2011.\86\ Specifically, in 2011, we proposed to remove the credit
rating requirement from the rule 2a-7 provision setting forth the
conditions under which a security subject to a conditional demand
feature may be determined to be an eligible security and instead
require that the fund's board (or its delegate) determine that the
underlying security be of high credit quality and subject to very low
credit risk.\87\ The re-proposed standard differs in phrasing to more
closely parallel the required finding in our re-proposed minimal risk
determination.\88\ Comments we received on the 2011 proposal all urged
us to retain the requirement that a security subject to a demand
feature has received at least a second tier rating, to limit the risk
that a demand feature might terminate if its underlying security
receives a rating below investment grade (i.e., if the underlying
security receives a downgrade of two ratings categories under the
current rule).\89\
---------------------------------------------------------------------------

    \86\ See 2011 Proposing Release, supra note 4, at section
II.A.2.
    \87\ See id. at n.36 and accompanying text.
    \88\ See Schwab Comment Letter, supra note 30 (querying whether
different language for proposed descriptions of second tier
securities was intended to suggest different standards).
    \89\ See, e.g., Federated Comment Letter, supra note 30;
Fidelity Comment Letter, supra note 31; ICI Comment Letter, supra
note 30.
---------------------------------------------------------------------------

    The re-proposed amendments are consistent with section 939A of the
Dodd-Frank Act regarding the removal of ratings. Nevertheless, we
recognize the risks of a money market fund investing in securities
whose eligibility as portfolio securities depends on a demand feature
that would terminate if downgraded by a single rating category, and we
believe it would be prudent for a money market fund to avoid investing
in these securities. A downgrade of this type would result in the loss
of the demand feature, which would render the security no longer
eligible for the portfolio and expose the fund to the increased
interest rate risk associated with a long-term security. For this
reason, we would retain the current rule 2a-7 requirements that a
security subject to a conditional demand feature is an eligible
security only if at the time it is acquired, the fund's board (or the
board's delegate) determines that there is minimal risk that the
circumstances that would result in the conditional demand feature
terminating will occur, and that either (i) the conditions limiting the
demand feature's exercise can be monitored, or (ii) the fund otherwise
receives notice of the occurrence of a limiting condition and the
opportunity to exercise the demand feature in accordance with its
terms.\90\
---------------------------------------------------------------------------

    \90\ See re-proposed rule 2a-7(d)(2)(iii)(B) (providing that a
security subject to a conditional demand feature is an eligible
security only if, at the time of the acquisition of the underlying
security, the money market fund's board of directors has determined
that there is minimal risk that the circumstances that would result
in the conditional demand feature not being exercisable will occur;
and: (i) The conditions limiting exercise either can be monitored
readily by the fund or relate to the taxability, under Federal,
state or local law, of the interest payments on the security; or
(ii) the terms of the conditional demand feature require that the
fund will receive notice of the occurrence of the condition and the
opportunity to exercise the demand feature in accordance with its
terms).
---------------------------------------------------------------------------

    We request comment on our proposed credit quality standard for
securities with a conditional demand feature. Do commenters believe
that this is an appropriate standard of creditworthiness? Is it
consistent with our goal of retaining a similar degree of risk
limitation as in the current rule? Are there alternative standards that
would provide a more robust or objective evaluation of credit quality
for an underlying security? How should such criteria be applied and/or
used? Are there alternative subjective standards that would provide
meaningful distinctions among underlying securities? Is our
understanding of a fund's ability to monitor for conditions that would
terminate a demand feature correct? How do funds currently satisfy this
monitoring condition? Are we correct in our assumption that removing
references to ratings in the credit quality requirement for underlying
securities is not likely to change fund investment policies
significantly?
3. 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, and
take such action as it determines is in the best interests of the fund
and its shareholders.\91\ In addition, rule 2a-7 requires ongoing
review of the minimal credit risks associated with securities for which
maturity is determined by reference to a demand feature.\92\
---------------------------------------------------------------------------

    \91\ Rule 2a-7(f)(1)(i)(A). This current reassessment is not
required, however, if the downgraded security is disposed of or
matures within five business days of the specified event and in the
case of certain events (specified in rule 2a-7(f)(1)(i)(B)), the
board is subsequently notified of the adviser's actions. Rule 2a-
7(f)(1)(ii).
    \92\ Rule 2a-7(g)(3).
---------------------------------------------------------------------------

    In 2011, we proposed to amend the rule to require that, in the
event the

money market fund's 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 portfolio
security continues to present minimal credit risks.\93\
---------------------------------------------------------------------------

    \93\ See 2011 Proposing Release, supra note 4, at section
II.A.3.
---------------------------------------------------------------------------

    Most of those who commented on this proposed amendment objected to
it.\94\ They asserted that the proposed standard is too vague and would
be burdensome to administer.\95\ A number of commenters recommended
that we instead eliminate the requirement for reassessing minimal
credit risk when a security is downgraded by an NRSRO and include a
general ongoing obligation to monitor the credit risks of portfolio
securities, which would eliminate the need for a separate requirement
to identify specific triggers.\96\
---------------------------------------------------------------------------

    \94\ But see Comment Letter of CFA Institute (July 13, 2011)
(supporting the proposed monitoring standard).
    \95\ See, e.g., ICI Comment Letter, supra note 30 (there are
numerous sources of information about issuers, much of which is not
relevant to the issuer's ability to meet its short-term
obligations); Invesco Comment Letter, supra note 30 (the ambiguity
in the terms ``credible information'' and ``suggest'' will
complicate enforcement of the rule); Schwab Comment Letter, supra
note 30 (the word ``suggests'' is not constrained by a
reasonableness or likelihood standard).
    \96\ See, e.g., Federated Comment Letter, supra note 30; ICI
Comment Letter, supra note 30; T. Rowe Price Comment Letter, supra
note 30.
---------------------------------------------------------------------------

    We have carefully considered commenters' concerns and suggested
modifications and have been persuaded to re-propose a different
standard. In order to meet the requirements of section 939A of the
Dodd-Frank Act, we re-propose to eliminate the requirement that a fund
reassess credit risks of an issuer when a security is downgraded by an
NRSRO.\97\ In consideration of our re-proposed standard for credit
quality, and consistent with the approach suggested by a number of
commenters, we instead re-propose to require that each money market
fund adopt written procedures that require the fund adviser to provide
ongoing review of the credit quality of each portfolio security
(including any guarantee or demand feature on which the fund relies to
determine portfolio quality, maturity, or liquidity) to determine that
the security continues to present minimal credit risks.\98\ Ongoing
monitoring of minimal credit risks would include the determination of
whether the issuer of the portfolio security, and the guarantor or
provider of a demand feature, to the extent relied upon by the fund to
determine portfolio quality, maturity or liquidity, continues to have
an exceptionally strong capacity to repay its short-term financial
obligations.\99\ The review would typically update the information that
was used to make the initial minimal credit risk determination and
would have to be based on, among other things, financial data of the
issuer or provider of the guarantee or demand feature.\100\ We note
that funds could continue to consider external factors, including
credit ratings, as part of the ongoing monitoring process.\101\
---------------------------------------------------------------------------

    \97\ See rule 2a-7(f)(1).
    \98\ Re-proposed rule 2a-7(g)(3). Our re-proposal would remove
current rule 2a-7(f)(1)(i) (downgrades and rating below second tier
previously unrated securities) and 2a-7(g)(3) (securities for which
maturity is determined by reference to demand features). Re-proposed
rule 2a-7 includes a new paragraph (g)(3), which would contain the
required procedures for the ongoing review of credit risks.
    \99\ The re-proposal also would make conforming amendments to
the recordkeeping provision related to the determination of credit
risks, which among other things currently requires funds to retain a
written record of the determination that a portfolio security
presents minimal credit risks. See rule 2a-7(h)(3). As noted above,
the re-proposal would require funds to retain a written record of
the determination that a portfolio security is an eligible security,
including the determination that it presents minimal credit risks.
Re-proposed rule 2a-7(h)(3). Because under our re-proposal a fund
adviser would be required to conduct an ongoing review of the credit
quality of a fund's portfolio securities, rule 2a-7's current
recordkeeping requirement could be understood to require the fund to
provide for an ongoing documentation of the adviser's ongoing
review, which could prove burdensome. Accordingly, our re-proposal
would require the fund to maintain and preserve a written record of
the determination that a portfolio security 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. See re-proposed rule 2a-7(h)(3).
    \100\ See re-proposed rule 2a-7(g)(3)(ii). Currently, when a
security's maturity is determined by reference to a demand feature,
the board's review of the security's minimal credit risks must be
based on, among other things, financial data for the most recent
fiscal year of the issuer of a demand feature. See rule 2a-7(g)(3).
A fund also should review any other factors considered as part of
its initial minimal credit risk determination.
    \101\ See infra text following note 178 (discussing the
Commission's belief that the majority of funds would continue to
refer to credit ratings in making minimal credit risk
determinations).
---------------------------------------------------------------------------

    Although rule 2a-7 does not explicitly require ongoing monitoring
of whether a security presents minimal credit risks, as a practical
matter, we believe most fund advisers currently engage in similar types
of ongoing monitoring because (i) funds regularly ``roll over''
positions in portfolio securities, which triggers the obligation to
make a new minimal credit risk determination \102\ (ii) rule 2a-7
requires funds to reassess whether a security presents minimal credit
risks upon the occurrence of certain events \103\ (iii) events such as
downgrades can result in a decrease in the mark-to-market value of the
fund portfolio, threatening the ability of the fund to maintain a
stable net asset value \104\ (iv) changes in credit ratings of a fund's
portfolio securities may threaten the fund's own ability to maintain a
rating from an NRSRO \105\ and (v) shareholders may be more likely to
redeem if the credit quality of portfolio securities declines.\106\ We
do not believe that the re-proposal for an explicit monitoring
requirement would significantly change current fund practices in
monitoring minimal credit risks in the portfolio. Moreover, we do not
believe that the re-proposal to remove the credit reassessment
requirement in the event of a downgrade would result in less diligence
on the part of money market fund managers because, as discussed above,
a decline in the quality of a fund's portfolio securities could affect
a fund's own NRSRO rating and could increase shareholder redemptions.
---------------------------------------------------------------------------

    \102\ Funds must limit their portfolios to securities that,
among other requirements, are eligible securities at the time of
acquisition, which is defined to mean any purchase or subsequent
rollover. Rules 2a-7(a)(1); 2a-7(d)(2).
    \103\ Rule 2a-7(f)(1) (requiring a money market fund's board of
directors to reassess promptly whether a security continues to
present minimal credit risks if (i) a first tier portfolio security
has been downgraded (or an unrated security is no longer of
comparable quality to a first tier security), and (ii) the fund
adviser becomes aware that any unrated security or second tier
security has been given a rating below a second tier rating).
    \104\ See rule 2a-7(g)(1).
    \105\ See, e.g., Moody's Investors Service, Moody's Revised
Money Market Fund Rating Methodology and Symbols, Mar. 10, 2011,
available at http://www.citibank.com/transactionservices/home/oli/files/moodys_03_10_2011.pdf (discussing the assessment of a money
market fund's ``Portfolio Credit Profile'' as a part of Moody's
methodology for rating money market funds).
    \106\ See, e.g., 2013 Money Market Fund Proposing Release, supra
note 5, at text accompanying nn. 100-103; 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 33 (noting that investors began
redeeming government money market fund shares in July and August of
2011 when concerns about the U.S. debt ceiling impasse and possible
rating downgrades of government securities may have fueled investor
concerns); Report of the President's Working Group on Financial
Markets, Money Market Fund Reform Options (Oct. 2010), available at
http://www.treasury.gov/press-center/press-releases/Documents/10.21%20PWG%20Report%20Final.pdf, at 12.
---------------------------------------------------------------------------

    We also note that a fund adviser's obligation to monitor risks to
which the

fund is exposed would, as a practical matter, require the adviser to
monitor for downgrades by relevant credit rating agencies \107\ because
such a downgrade would likely affect the security's market value.
Nevertheless, we acknowledge that one consequence of our proposal would
be that a fund adviser could decide to keep a portfolio security that
has been downgraded from second tier status without involving the
fund's board in that decision. As part of its oversight of the
adviser's investment decisions, however, we would expect that a fund
board generally should establish procedures for the adviser to notify
the board in such circumstances.\108\
---------------------------------------------------------------------------

    \107\ We use the term ``relevant credit rating agencies'' to
mean those NRSROs whose downgrades would likely affect the value of
a portfolio security.
    \108\ See rule 2a-7(j)(2); rule 2a-7(g)(1) (requiring that for
funds using amortized cost, the board, as part of its overall duty
of care owed to its shareholders, adopt written procedures
reasonably designed, taking into account current market conditions
and the money market fund's investment objectives, to maintain a
stable net asset value per share).
---------------------------------------------------------------------------

    For the reasons discussed above, we believe this re-proposed
requirement to monitor credit risk would essentially codify the current
practices of fund managers, which are already explicit (and implicit)
in several provisions of the rule discussed above. Our re-proposal to
explicitly require that funds perform ongoing monitoring of credit
risks is designed to ensure that funds are better positioned to quickly
identify potential risks of credit events that could impact portfolio
security prices and ultimately, for certain funds, the ability of the
fund to maintain its stable net asset value.\109\
---------------------------------------------------------------------------

    \109\ As under the current rule, the process undertaken by the
fund's board (or adviser) for establishing credit quality and the
records documenting that process would be subject to review in
regulatory examinations by Commission staff. See Removal of Certain
References to Credit Ratings Under the Securities Exchange Act of
1934, Securities Exchange Act Release No. 64352 (Apr. 27, 2011) [76
FR 26550 (May 6, 2011)], at text following n.30. In the context of
such an examination, a fund should be able to support each minimal
credit risk determination it makes in light of financial data or
market data it has considered with appropriate documentation to
reflect that process and determination. A fund that acquires
portfolio securities without having adopted, maintained, or
implemented written policies and procedures reasonably designed to
assess minimal credit risk, as required under rules 2a-7 and 38a-1,
could be subject to disciplinary action for failure to comply with
those rules. See id. See also Ambassador Capital Management LLC, et
al., Investment Company Act Release No. 30809 (Nov. 26, 2013)
(alleging that money market fund adviser's failure to (i) make and
retain a written record of its minimal credit risk determinations
resulted in the fund's violation of rule 22c-1 and (ii) follow the
fund's compliance procedures regarding the determination of minimal
credit risk and the maintenance of records of the determination
resulted in the fund's violations of rule 38a-1).
---------------------------------------------------------------------------

    We request comment on the re-proposed monitoring requirement. Is
our understanding of how funds currently monitor fund portfolio
securities correct? If not, how are fund practices different? Would our
proposed amendments, if adopted, impose additional or different costs
on funds or their advisers, and if so, what would these costs be?
Should the rule include specific objective events that would require a
reevaluation of minimal credit risks? Would an explicit monitoring
requirement change current fund priorities in monitoring minimal credit
risks in the portfolio? Would the re-proposal assist funds to better
position themselves to quickly identify potential risks of credit
events that could impact portfolio security prices? Would replacing the
credit reassessment requirement in the event of a downgrade with a
requirement for ongoing monitoring result in less or more diligence on
the part of money market fund managers? As a practical matter, would a
fund adviser's obligation to monitor risks to which the fund is exposed
likely require the adviser to monitor for downgrades by relevant credit
ratings agencies, as well as monitor, for each portfolio security, each
NRSRO rating considered as part of the minimal credit risk
determination at the time the security was acquired? Are there any
alternatives to the re-proposed monitoring requirement that would
permit funds to monitor minimal credit risks more effectively, or that
would better reflect funds' current monitoring practices, than the re-
proposed requirement?
4. Stress Testing
    Money market funds currently must adopt written procedures for
stress testing their portfolios and perform stress tests according to
these procedures on a periodic basis.\110\ Specifically, a fund must
test its ability based on certain hypothetical events, including a
downgrade of particular portfolio security positions, to: (i) Have
invested at least 10 percent of its total assets in weekly liquid
assets; and (ii) 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).\111\ In 2011, we proposed to replace this
reference to ratings downgrades 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.\112\
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    \110\ See rule 2a-7(g)(8).
    \111\ See rule 2a-7(g)(8)(i) (requiring written procedures
providing for periodic stress testing in light of various events,
including 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''); 2014 Money Market Fund
Adopting Release, supra note 8, at section III.J.
    \112\ See 2011 Proposing Release, supra note 4, at section
II.A.4.
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    Commenters on the 2011 proposal who addressed this issue uniformly
advocated against eliminating the reference to a downgrade in the
stress testing conditions.\113\ They argued that the Dodd-Frank Act
does not prohibit regulations, such as this stress testing provision,
that refer to credit ratings without requiring an assessment of a
security's creditworthiness.
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    \113\ See, e.g., Dreyfus Comment Letter, supra note 30; ICI
Comment Letter, supra note 30.
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    In consideration of the comments we received and the mandate in
section 939A of the Dodd-Frank Act, we re-propose to replace the
reference to ratings downgrades in the stress testing requirement with
a hypothetical event that is designed to have a similar impact on a
money market fund's portfolio. Our re-proposed stress testing
amendments would require that money market funds stress test for an
event indicating or evidencing credit deterioration of particular
portfolio security positions, each representing various exposures in a
fund's portfolio.\114\ The re-proposed amendments would describe the
type of hypothetical event that funds should use for testing and
include a downgrade or default as examples of that type of event. Thus,
funds could continue to test their portfolios against a potential
downgrade or default in addition to any other indication or evidence of
credit deterioration they determine appropriate (and that might
adversely affect the value or liquidity of a portfolio security).
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    \114\ Re-proposed rule 2a-7(g)(8)(i)(B) (the re-proposal would
require stress testing for an event indicating or evidencing the
credit deterioration, such as a downgrade or default, of a portfolio
security position 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).
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    We note that the 2013 Money Market Fund Reform Proposing Release
requested comment on certain aspects of money market fund stress
testing as it relates to our obligation under section 165(i)(2) of the
Dodd-Frank Act to specify certain stress testing requirements for
nonbank financial

companies \115\ that have total consolidated assets of more than $10
billion and are regulated by a primary Federal financial regulatory
agency.\116\ As discussed in that release and the 2014 Money Market
Fund Adopting Release, we intend to engage in a separate rulemaking to
implement the requirements to section 165(i) of the Dodd-Frank
Act.\117\ We request comment on our re-proposed amendment to the stress
testing requirements. Should the rule require testing against
specifically named events rather than an event the fund chooses that
indicates or evidences credit deterioration? Does the re-proposed
hypothetical event provide adequate guidance to funds? Is there a
different hypothetical event, other than a downgrade, that we should
specify?
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    \115\ For a definition of ``nonbank financial companies'' for
these purposes, see Definition of ``Predominantly Engaged in
Financial Activities'' and ``Significant'' Nonbank Financial Company
and Bank Holding Company, Board of Governors of the Federal Reserve
System [78 FR 20756 (Apr. 5, 2013)].
    \116\ See 2013 Money Market Fund Proposing Release, supra note
5, at section III.L.
    \117\ See id. at section III.L; 2014 Money Market Fund Adopting
Release, supra note 8, at section III.J.5.
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B. Form N-MFP

    As part of the money market fund reforms adopted in 2010, money
market funds must provide to the Commission a monthly electronic filing
of portfolio holdings information on Form N-MFP.\118\ The information
that money market funds must disclose with respect to each portfolio
security (and any guarantee, demand feature, or other enhancement
associated with the portfolio security) includes the name of each
designated NRSRO for the portfolio security and the rating assigned to
the security.\119\
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    \118\ See rule 30b1-7; see also 2010 Money Market Fund Adopting
Release, supra note 41, at n.301 and accompanying and preceding
text.
    \119\ See Form N-MFP Items 34 (requiring disclosure of each
designated NRSRO for a portfolio security and the credit rating
given by the designated NRSRO for each portfolio security); 37b-c
(requiring disclosure of each designated NRSRO and the credit rating
given by the designated NRSRO for each portfolio security demand
feature); 38b-c (requiring disclosure of each designated NRSRO and
the credit rating given by the designated NRSRO for each portfolio
security guarantee); and 39c-d (requiring disclosure of each
designated NRSRO and the credit rating given by the designated NRSRO
for each portfolio security enhancement).
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    In 2011, we proposed to eliminate the form items that currently
require a fund to identify whether a portfolio security is a first tier
or second tier security or is an unrated security, and that require the
fund to identify the ``requisite NRSROs'' for each security (and for
each demand feature, guarantee or other credit enhancement). Several
commenters strongly objected to removing ratings disclosures in Form N-
MFP. They argued that the Dodd-Frank Act does not require us to
eliminate these disclosures because these references to ratings do not
require the use of an assessment of creditworthiness.\120\ We have
carefully considered these comments and are re-proposing instead to
require that each money market fund 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.\121\ The first prong of this requirement reflects
our assumption that a fund manager subscribes to the services of a
particular NRSRO because the manager has confidence in that NRSRO's
analysis and, therefore, when assessing the credit quality of a
portfolio security, would consider any rating the NRSRO assigns to the
security. If a fund's adviser has considered more than one NRSRO rating
in making a minimal credit risk determination for a particular
portfolio security, the Form N-MFP disclosure would need to reflect
each rating considered (in addition to each rating assigned by an NRSRO
if the fund or its adviser subscribes to its services). If the fund and
its adviser subscribe to no NRSRO ratings services, and no other rating
was considered in making a minimal credit risk determination, the fund
would disclose no rating for the portfolio security. We believe this
information on ratings may be useful both to the Commission and to
investors to monitor credit ratings that funds use in evaluating the
credit quality of portfolio securities and to evaluate risks that fund
managers take.\122\ Disclosures of individual portfolio securities
ratings would provide investors, Commission staff, and others with a
snapshot of potential trends in a fund's overall risk profile, which
could in turn prompt those monitoring to research or evaluate further
whether that profile is changing.
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    \120\ See, e.g., Federated Comment Letter, supra note 30;
Dreyfus Comment Letter, supra note 30.
    \121\ See re-proposed Form N-MFP Item C.10. In a conforming
change, the re-proposal would also amend Form N-MFP Item C.9 to
require disclosure of whether the portfolio security is an eligible
security.
    \122\ See Comment Letter of BlackRock, Inc. (Apr. 25, 2011)
(``BlackRock Comment Letter'') (``this disclosure facilitates
investors' ability to evaluate [money market fund] portfolios and to
compare [money market funds] to each other.'').
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    We seek comment on the re-proposed disclosures relating to credit
ratings in Form N-MFP. Are we correct in our assumption that as part of
its minimal credit risk determination a fund manager would consider
each rating assigned to a portfolio security by an NRSRO to whose
services the fund or the manager subscribes? Would the proposed
disclosures assist investors in monitoring credit risks in money market
fund portfolios? Would the disclosures be more useful if they required
funds that consider any rating to disclose the highest and lowest
rating assigned to the portfolio security, regardless of whether the
fund considered that rating? Should fund managers that consider more
than one credit rating in their credit evaluations be required to
disclose only one rating and its source? Would disclosure of only one
rating limit an investor's ability to monitor the fund's credit risk if
another rating assigned to a portfolio security differs from the rating
disclosed by the fund in Form N-MFP (i.e., the security is split-
rated)? Under such an approach, if a portfolio security is split-rated,
which rating should the fund have to disclose, or should a fund be able
to choose the rating it discloses? If a fund could choose, would any
funds disclose a lower rating assigned by an NRSRO? We took a similar
approach in recent amendments removing the required use of credit
ratings in Forms N-1A, N-2 and N-3. Under those amendments, funds that
choose to use credit quality to present their portfolio securities in
shareholder reports and use credit ratings to depict credit quality may
use credit ratings assigned by different rating agencies (including
credit rating agencies that are not NRSROs), provided that the fund
also describes how it determines the credit quality of portfolio
holdings and how ratings are identified and selected.\123\ Would a
similar disclosure describing how a money market fund determines the
credit quality of portfolio holdings, including how ratings are
identified and selected be appropriate considering the format of Form
N-MFP? If not, would disclosure in another form, such as Form N-1A,
appropriately mitigate the risk that a fund could ``cherry-pick'' the
rating to disclose on Form N-MFP? Would investors find disclosure about

the source of the credit rating to be useful information?
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    \123\ Form N-1A Item 27(d); Form N-2 Item 24, Instruction 6(a);
Form N-3 Item 28(a), Instruction 6(i); see also 2013 Ratings Removal
Adopting Release, supra note 4, at section III.B.
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C. Exclusion From the Issuer Diversification Requirement

    In addition to the provisions regarding credit quality discussed
above, rule 2a-7's risk limiting conditions require a money market
fund's portfolio to be diversified, both as to the issuers of the
securities it acquires and providers of guarantees and demand features
related to those securities.\124\ Generally, money market funds must
limit their investments in the securities of any one issuer of a first
tier security (other than government securities) to no more than 5
percent of total assets.\125\ They must also generally limit their
investments in securities subject to a demand feature or a guarantee to
no more than 10 percent of total assets from any one provider.\126\ We
adopted these requirements in order to limit the exposure of a money
market fund to any one issuer, guarantor, or demand feature
provider.\127\
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    \124\ See rule 2a-7(d)(3). The diversification requirements of
rule 2a-7 differ in significant respects from the requirements for
diversified management investment companies under section 5(b)(1) of
the Investment Company Act. A money market fund that satisfies the
applicable diversification requirements of paragraph (d)(3) of rule
2a-7 is deemed to have satisfied the requirements of section
5(b)(1). Rule 2a-7(d)(3)(v). Subchapter M of the Internal Revenue
Code contains other diversification requirements for a money market
fund to be a ``regulated investment company'' for Federal income tax
purposes. 26 U.S.C. 851 et seq.
    \125\ Rule 2a-7(d)(3)(i)(A) and (B). A single state fund,
however, may invest up to 25% of its total assets in the first tier
securities of any single issuer. Rule 2a-7(d)(3)(i)(B). A fund also
may invest no more than 0.5% of fund assets in any one issuer of a
second tier security. Rule 2a-7(d)(3)(i)(C). The rule provides a
safe harbor under which a taxable and national tax-exempt fund may
invest up to 25% of its total assets in the first tier securities of
a single issuer for a period of up to three business days after
acquisition (but a fund may use this exception for only one issuer
at a time). Rule 2a-7(d)(3)(i)(A). Under our re-proposal, which
would eliminate the distinction between first and second tier
securities, the issuer diversification requirements would apply
regardless of a portfolio security's rating and the safe harbor
would be available with respect to any portfolio security regardless
of its rating. See supra note 36.
    \126\ Rule 2a-7 also provides a ``fifteen percent basket'' for
tax-exempt (including single-state) money market funds, under which
as much as 15% of the value of securities held in a tax-exempt
fund's portfolio may be subject to guarantees or demand features
from a single institution. See rule 2a-7(d)(3)(iii)(B). The tax-
exempt fund, however, may only use the 15% basket to invest in
demand features or guarantees issued by non-controlled persons that
are first tier securities. See rule 2a-7(c)(4)(iii)(B) and (C).
Under our re-proposal, the 15% basket would be available with
respect to any demand feature or guarantee issued by a non-
controlled person without regard to the rating of the security,
guarantee or demand feature. See supra note 36.
    \127\ See Money Market Fund Reform, Investment Company Act
Release No. 28807 (June 30, 2009) [74 FR 32688 (July 8, 2009)]
(``2009 Money Market Fund Proposing Release'') at n.220 and
accompanying text; Revisions to Rules Regulating Money Market Funds,
Investment Company Act Release No. 17589 (July 17, 1990) [55 FR
30239 (July 25, 1990)], at text accompanying n.23 (``Diversification
limits investment risk to a fund by spreading the risk of loss among
a number of securities.'').
---------------------------------------------------------------------------

    By permitting money market funds a higher 10 percent limit on their
indirect exposures to a single provider of a guarantee or demand
feature than the 5 percent limit on direct investments in any one
issuer, rule 2a-7 permits a money market fund to take on greater
indirect exposures to providers of demand features and guarantees. That
is because, rather than looking solely to the issuer, the money market
fund would have two potential sources of repayment--the issuer whose
securities are subject to the demand features or guarantees and the
providers of those features or guarantees if the issuer defaults. Both
the issuer and the demand feature provider or guarantor would have to
default at the same time for the money market fund to suffer a loss.
And if a guarantor or demand feature provider were to come under
stress, the issuer may be able to obtain a replacement.\128\
---------------------------------------------------------------------------

    \128\ See, e.g., Revisions to Rules Regulating Money Market
Funds, Investment Company Act Release No.19959 (Dec. 17, 1993) [58
FR 68585 (Dec. 28, 1993)] at n.83 and accompanying text (observing
that, if the guarantor of one of the money market fund's securities
comes under stress, ``issuers or investors generally can either put
the instrument back on short notice or persuade the issuer to obtain
a substitute for the downgraded institution'').
---------------------------------------------------------------------------

    Today, we adopted amendments to certain provisions of these
diversification requirements in the 2014 Money Market Fund Adopting
Release.\129\ Among other things, our amendments require that money
market funds treat certain entities that are affiliated with each other
as single issuers when applying the 5 percent issuer diversification
provision of rule 2a-7 and treat the sponsors of asset-backed
securities as guarantors subject to the 10 percent diversification
provision of rule 2a-7 applicable to guarantees and demand features,
unless the fund's board makes certain findings. These amendments were
intended to increase the resiliency of and reduce risk in money market
funds by limiting their ability to concentrate investments in a single
economic enterprise.
---------------------------------------------------------------------------

    \129\ See 2014 Money Market Fund Adopting Release, supra note 8,
at section III.I.1.d.
---------------------------------------------------------------------------

    When we proposed these amendments, we also discussed and sought
comment on additional alternatives that we had considered to
appropriately limit money market funds' risk exposure.\130\ These
alternatives included requiring money market funds to be more
diversified by reducing the current 5 percent and 10 percent
diversification thresholds of rule 2a-7 and by imposing industry
concentration limits. Several commenters supported some of these
tighter diversification requirements.\131\ One of these commenters
suggested limiting any one corporate issuer to 2.5 percent of the
fund's total assets rather than the current 5 percent issuer
diversification requirement, while two others supported additional
sector diversification requirements.\132\ Others, however, argued
against further narrowing the diversification provisions of rule 2a-7
relating to issuers and guarantors.\133\
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    \130\ See 2013 Money Market Fund Proposing Release, supra note
5, at sections III.J.1-2.
    \131\ See Comment Letter of Eric S. Rosengren, President,
Federal Reserve Bank of Boston, et al. (Sept. 12, 2013) (``Boston
Federal Reserve Comment Letter''); Comment Letter of Robert Comment,
Ph.D. (Jun. 14, 2013) (``R. Comment Comment Letter''); Comment
Letter of John C. Barber, KeyBank, NA (Sept. 16, 2013) (``J. Barber
Comment Letter'').
    \132\ See J. Barber Comment Letter, supra note 131 (recommending
2.5% issuer limit); R. Comment Comment Letter, supra note 131
(advocating sector diversification); Boston Federal Reserve Comment
Letter, supra note 131 (same).
    \133\ Comment Letter of Phillip S. Gillespie, Executive Vice
President and General Counsel, State Street Global Advisors (Sept.
17, 2013) (opposing the additional alternatives because existing
diversification limits are already challenging due to the short-term
market's current supply structure); Comment Letter of Investment
Company Institute (Sept. 17, 2013) (``ICI 2013 Comment Letter'').
One of these expressed concern that further restricting
diversification limits may potentially force money market funds to
invest in less creditworthy issuers, which could have the effect of
increasing the risk within money market funds' portfolios, rather
than decreasing it. See id.
---------------------------------------------------------------------------

    We also asked in the 2013 Money Market Fund Proposing Release more
generally whether we should continue to distinguish between a fund's
exposure to guarantors and issuers by providing different
diversification requirements for these exposures.\134\ We explained
that rule 2a-7 permits a money market fund, when determining if a
security subject to a guarantee satisfies the credit quality standards,
to rely exclusively on the credit quality of the guarantor.\135\ We
specifically asked whether the guarantor should be treated as the
issuer and subject to a 5 percent

diversification requirement whenever the money market fund is relying
exclusively on the credit quality of the guarantor. No commenters
specifically addressed this issue, and we decided not to propose
amendments that would implement this approach, or any of the
alternative diversification approaches about which we sought comment as
discussed above.
---------------------------------------------------------------------------

    \134\ See 2013 Money Market Fund Proposing Release, supra note
5, at sections III.J.1-2.
    \135\ Rule 2a-7(d)(2)(iii). That a money market fund has both
the issuer and guarantor as sources of repayment may not
meaningfully reduce the risks of the investment in all cases because
the issuer of the guaranteed securities need not satisfy rule 2a-7's
credit quality requirements, and if the issuer of the guaranteed