and, if so, should the net asset value be publicly disclosed? Should
the suspension period be longer or shorter than five days? What factors
should the board of directors take into consideration when deciding
whether to suspend redemptions temporarily? How would directors weigh
the various and possibly competing interests of shareholders?
b. Options for Shareholders in Liquidating Funds
    If a fund suspends redemptions in order to liquidate, the directors
would likely distribute money to investors as it becomes available from
the sale of portfolio securities, while maintaining a reserve to cover
expenses and potential liabilities. As we have seen, this process

can be lengthy. Should we include conditions in any rule regarding the
treatment of shareholders in a liquidation? \293\ For example, should
we require that fund assets be distributed on a pro rata basis? Should
there be a limit on allowable reserves?
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    \293\  The Investment Company Act does not contain any
provisions governing the liquidation of an investment company,
including a money market fund; rather, liquidations are primarily
effected in accordance with applicable state law. The Act does
include, however, a provision authorizing Federal district courts to
enjoin a plan of reorganization upon a proceeding initiated by the
Commission on behalf of security holders, if the court determines
that the plan of reorganization is not ``fair and equitable to all
security holders.'' Section 25(c) of the Act. A plan of
``reorganization'' includes a voluntary dissolution or liquidation
of a fund. Section 2(a)(33) of the Act.
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    Alternatively, should we permit or require a fund board to
recognize that investors will have different preferences for liquidity
and capital preservation? For example, a fund that decides to liquidate
and suspend redemptions could be allowed to offer shareholders the
choice of redeeming their shares immediately at a reduced net asset
value per share that reflects the fair market value of fund assets,
i.e., at a price below the fund's stable net asset value. Remaining
shareholders would receive their redemption proceeds at the end of the
liquidation process and may receive the economic benefit of an orderly
disposal of assets. Would such an approach be fair to all fund
shareholders? What conditions would be necessary and appropriate to
ensure that shareholders are treated fairly? Specifically, how would
such a mechanism operate? Should funds be able to deduct an additional
discount or ``haircut'' from earlier redeeming shareholders to provide
additional protection for later redeeming shareholders? Should we
permit boards to decide the amount of the haircut? If so, what factors
should boards use to decide such haircuts? What disclosures and
information would be necessary to permit shareholders to make an
informed decision between the options?
    Should investors be required to choose their preferences at the
time they purchase fund shares? Should investors be able to change
their preferences? If so, how and when? Should they be able to choose
their preferences when a fund announces its intention to liquidate and
suspend redemptions under the rule? If so, should we (or the fund
board) establish a default assumption for investors that fail to
respond to the inquiry?

III. Request for Comment

    The Commission requests comment on the rules and amendments
proposed in this release. Commenters are requested to provide empirical
data to support their views. The Commission also requests suggestions
for additional changes to existing rules or forms, and comments on
other matters that might have an effect on the proposals contained in
this release.
    We recognize that the events of the last two years raise the
question of whether further and perhaps more fundamental changes to the
regulatory structure governing money market funds may be warranted.
Therefore we are exploring other ways in which we could improve the
ability of money market funds to weather liquidity crises and other
shocks to the short-term financial markets. We invite interested
persons to submit comments on the advisability of pursuing any or all
of the following possible reforms, as well as to provide other
approaches that we might consider to achieve our goals. We expect to
benefit from the comments we receive before deciding whether to propose
these changes.\294\
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    \294\ In addition, we note that the U.S. Department of the
Treasury's white paper on Financial Regulatory Reform calls for the
President's Working Group on Financial Markets to prepare a report
by September 15, 2009 assessing whether more fundamental changes are
necessary to further reduce the money market fund industry's
susceptibility to runs, such as eliminating the ability of a money
market fund to use a stable net asset value or requiring money
market funds to obtain access to reliable emergency liquidity
facilities from private sources. See Department of the Treasury,
Financial Regulatory Reform, A New Foundation: Rebuilding Financial
Supervision and Regulation, at 38-39 (June 2009).
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A. Floating Net Asset Value

    When the Commission adopted rule 2a-7 in 1983,\295\ it facilitated
money market funds' maintenance of a stable net asset value by
permitting them to use the amortized cost method of valuing their
portfolio securities. As discussed above, section 2(a)(41) of the Act,
in conjunction with rules 2a-4 and 22c-1, normally require a registered
investment company to calculate its current net asset value per share
by valuing its portfolio securities for which market quotations are
readily available at current market value and its other securities at
their fair value as determined, in good faith, by the board of
directors. Therefore, using the amortized cost method of valuation is
an exception to the general requirement under the Act that investors in
investment companies should pay and receive market value or fair value
for their shares.\296\ The Commission did not take lightly its decision
to permit money market funds to use the amortized cost method of
valuation. Rule 2a-7 essentially codified several of the Commission's
exemptive orders relating to money market funds, and these orders were
issued only after an administrative hearing in the late 1970s at which
the use of the amortized cost method of valuation was a matter of
considerable debate.\297\
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    \295\ See 1983 Adopting Release, supra note 3.
    \296\ Rule 2a-7 is not the only exception permitting open-end
investment companies to value short-term debt securities in their
portfolios on an amortized cost basis. Subject to certain
conditions, the amortized cost method of valuation may be used by
open-end investment companies to value investments with a remaining
maturity of 60 days or less in accordance with the Commission's
interpretation set forth in 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)].
    \297\ See 1982 Proposing Release, supra note 25, at text
preceding, accompanying, and following nn.2-4.
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    The balance the Commission struck was that, in exchange for
permitting this valuation method, it would impose certain conditions on
money-market funds designed to ensure that these funds invested only in
instruments that would tend to promote a stable net asset value per
share and would impose on the funds' boards of directors an ongoing
obligation to determine that it remains in the best interest of the
funds and their shareholders to maintain a stable net asset value.
Further, money market funds are permitted to use the amortized cost
method of valuation only so long as their boards believe that it fairly
reflects the funds' market-based net asset value per share.\298\
---------------------------------------------------------------------------

    \298\ See rule 2a-7(c)(1).
---------------------------------------------------------------------------

    The $1.00 stable net asset value per share has been one of the
trademark features of money market funds. It facilitates the funds'
role as a cash management vehicle, provides tax and administrative
convenience to both money market funds and their shareholders,\299\ and
promotes money market funds' role as a low-risk investment option. Many
investors may hold shares in money market funds in large part because
of these features.\300\ We are mindful that if we were to require a
floating net asset value, a substantial number of investors might

move their investments from money market funds to other investment
vehicles.
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    \299\ A $1.00 stable net asset value per share relieves
shareholders of the administrative task of tracking the timing and
price of purchase and sale transactions for capital gain and wash
sale purposes under tax laws.
    \300\ Some institutional investors are prohibited by board-
approved guidelines or firm policies from investing certain assets
in money market funds unless they have a stable net asset value per
share. See ICI Report, supra note 6, at 109. One survey also
reported that 55% of institutional cash managers would substantially
decrease their investments in money market funds if the funds had a
floating value. See id. at 110 (citing a January 2009 survey by
Treasury Strategies, Inc.).
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    However, a stable $1.00 net asset value per share also creates
certain risks for a money market fund and its investors. These risks
are a consequence of the amortized cost method of valuation and the
resulting insensitivity of the $1.00 net asset value per share to
market valuation changes. It may create an incentive for investors to
redeem their shares when a fund's market-based net asset value per
share falls between $0.995 and $1.00 because they will obtain $1.00 in
exchange for their right to fund assets worth less than $1.00 per
share. Regardless of the motivation underlying the redemptions, the
unrealized losses attributable to redeeming shareholders are now borne
by the remaining money market fund shareholders.
    Further, particularly in times of market turbulence and
illiquidity, regardless of the motivation behind the redemptions,
redemptions at $1.00 in a money market fund whose market-based net
asset value is below $1.00 can further depress the fund's market-based
net asset value, exacerbating the impact on remaining shareholders. It
can create a level of unfairness in permitting the remaining fund
shareholders to pay for the liquidity needs and unrealized losses of
redeeming fund shareholders. Because there is a limited window where
only so many shareholders can redeem at $1.00 in a fund with a
portfolio under threat (because of holding distressed securities or
facing significant shareholder redemptions) before the board of the
fund must consider whether to re-price the fund's shares or take other
action, there can be an incentive to be the first shareholder to place
a redemption request upon any hint of stress at a money market fund.
Generalized market dislocations or illiquidity can create this stress
on a number of money market funds simultaneously, leading to runs on
money market funds similar to those we witnessed in September 2008.
Even further, a run may result in fire sales of securities, placing
pressure on market prices and transmitting problems that may be
originally associated with a single money market fund to other money
market funds. Finally, larger, institutional money market fund
investors, especially those with fiduciary responsibilities for
managing their clients' assets, are more likely to recognize negative
events potentially affecting the money market fund and to be in a
position to quickly redeem shares of the money market fund and thus
protect their money market investments and those of their clients,
leaving other smaller, more passive money market investors to bear
their losses.
    When we determined to permit money market funds to use amortized
cost valuation in 1983, money market funds held only about $180 billion
in assets \301\ and played a minor role in the short-term credit
markets. Their principal benefit was to provide retail investors with a
cash investment alternative to bank deposits, which at the time paid
fixed rates substantially below short-term money market rates. Since
that time, money market funds have grown tremendously and have
developed into an industry driven in large part by institutional
investors, who hold approximately 67 percent of the over $3.7 trillion
in money market fund assets.\302\ As noted earlier, with the ability of
institutional investors today to make hourly redemption requests to
money market funds, these investors have the ability to move
substantial amounts of money in and out of money market funds (or
between money market funds), with potentially detrimental effects on
the funds, their remaining shareholders, and the marketplace.
---------------------------------------------------------------------------

    \301\ See ICI Report, supra note 6, at 1.
    \302\ See ICI Mutual Fund Historical Data, supra note 47 (data
for week ended June 10, 2009).
---------------------------------------------------------------------------

    The influx of institutional investments in money market funds, the
increased transparency of fund holdings, and the speed with which large
shareholders can buy and redeem shares may have increased the
possibility that the value of some fund investors' shares will be
diluted as a result of the fund's use of the amortized cost valuation
method.\303\ When short-term interest rates decrease, the fund's
portfolio holdings (with their now above-market yields) become more
valuable. Institutional investors may pay $1.00 per share to purchase
fund shares whose market value is, for example, $1.002 per share. Such
institutional inflows would be invested by the fund in securities
offering the new, reduced market yields, diluting the yield advantage
that existing fund shareholders would otherwise enjoy. These
institutional investors, in effect, are able to earn a yield through a
money market fund above the market rate they could earn on a direct
investment. They achieve this yield advantage by capturing a portion of
the benefit from declining interest rates that otherwise would benefit
existing money market fund investors.\304\ Similarly, when interest
rates increase, institutional investors could sell shares of money
market funds, obtaining $1.00 per share for a fund that all things
being equal likely will be worth less, e.g., $0.997 per share.\305\ If
instead the institutional investor sells commercial paper in the market
under the same conditions, it could only sell such securities at a
discount.
---------------------------------------------------------------------------

    \303\ We have considered the impact of dilution in money market
funds using the amortized cost method of valuation in the past. See,
e.g., 1982 Proposing Release, supra note 25, at n.6 and accompanying
text.
    \304\ This benefit would otherwise be paid out to money market
fund shareholders in the form of greater dividend payments from the
increased yield.
    \305\ See S&P 2007 Ratings Criteria, supra note 139, at 27.
Standard and Poor's gives the example of an investor holding $1
million in 90-day U.S. Treasury bills yielding 5%. If interest rates
increased 150 basis points, the value of the investment would drop
by approximately $3700 and the investor's yield would remain at 5%.
Compare this to an investor holding one million shares of a money
market fund holding exclusively Treasury bills yielding 5% (setting
aside fund expenses). If interest rates rose 150 basis points, the
investor could sell the fund investment for $1.00 per share and not
experience any loss. The investor could then purchase 90-day
Treasury bills yielding 6.5%, instantaneously increasing its return
by 1.5%. If the fund is forced to sell these securities to meet
redemption requests, the $3700 unrealized loss would be borne by the
fund and its remaining shareholders.
---------------------------------------------------------------------------

    In stable markets and with small shareholdings, amortized cost
pricing at most results in shareholders who purchase or redeem shares
receiving slightly more or less (in shares or in redemption proceeds)
than they otherwise would if the fund's net asset value were to
fluctuate according to market-based pricing. Net redemptions generally
are funded by cash on hand. Any deviation between the market-based net
asset value per share of the fund and its amortized cost value is small
enough to have an immaterial effect on the fund, and no effect on
investors. It could be compared to a rounding convention in a billing
system.
    In a market under significant stress and with institutions holding
billions of dollars of money market fund shares, however, a real
arbitrage opportunity can arise, and a race or threat of a potential
race for redemptions may become a real possibility. For example, during
last fall's market turbulence, as credit spreads on many money market
fund portfolio securities widened and the market value of these
securities fell, we understand that the market-based net asset value of
some money market funds dropped low enough that redemptions by a few
large shareholders in the fund at $1.00 per share alone could have
caused the fund to break the buck.
    We recognize that a floating net asset value would not necessarily
eliminate the incentive to redeem shares during a liquidity crisis--
shareholders still

would have an incentive to redeem before the portfolio quality
deteriorated further from the fund selling securities into an illiquid
market to meet redemption demands. But a floating net asset value may
lessen the impact of any portfolio deterioration by eliminating the
ability of shareholders to redeem their shares for more than the
current market value per share of the fund's portfolio. It also might
better align investors' expectations of risk with the actual risks
posed by money market fund investments. We expect that, at least under
stable market conditions, the other risk-limiting conditions of rule
2a-7 would tend to promote a relatively stable net asset value per
share even if we eliminated the ability of money market funds to rely
on the amortized cost method of valuation.
    We request comment on the possibility of eliminating the ability of
money market funds to use the amortized cost method of valuation. Would
such a change render money market funds a more stable investment
vehicle? Would it lessen systemic risk by making money market funds
less susceptible to runs? Would it make the risks inherent in money
market funds more transparent? Many money market funds' stable net
asset value was supported voluntarily by fund affiliates over the last
two years, and shareholders may not have understood that this support
was provided on a voluntary basis and may not be provided in the
future.
    On the other hand, would such a change make money market funds more
susceptible to runs because investors might respond quickly to small
changes in net asset value? As discussed above, a stable net asset
value per share creates certain administrative, tax, and cash
management conveniences for fund investors. Accordingly, would
prohibiting the use of the amortized cost method of valuation in money
market funds encourage investors to shift assets from money market
funds to unregulated offshore funds, bank accounts, or other
investments? Would it result in some institutional money market funds
deregistering with the Commission (in reliance on section 3(c)(7) of
the Act) in order to continue to maintain a stable net asset value? Is
this a result with which the Commission should be concerned?
    What impact would this have on investors' cash management
activities? What impact might such a change have on the short-term
credit markets and issuers of short-term debt securities? How would
money market funds whose share prices were based on market-based net
asset values differ from current short-term bond funds? Should any rule
amendment eliminating the ability of money market funds to rely on the
amortized cost method of valuation to create a stable net asset value
be limited to institutional money market funds? As discussed above,
institutional money market funds are at greater risk of instability,
runs and the dilutive effect of large redemptions.

B. In-Kind Redemptions

    As noted above, one of our concerns relates to the ability of large
institutional shareholders to rapidly redeem substantial amounts of
fund assets, which can pose a threat to the stable net asset value of
the fund and can advantage one group of shareholders over another by
requiring remaining shareholders to pay for the liquidity needs of
large redeeming shareholders.\306\ While the liquidity requirements we
are proposing today may ameliorate pressures created by redeeming
shareholders, during severe market dislocations even more steps may be
necessary to help ensure the stability of a stable net asset value
money market fund. Accordingly, if we retain a stable net asset value
for money market funds, we are interested in exploring other methods of
reducing the risks and unfairness posed by significant sudden
redemptions.
---------------------------------------------------------------------------

    \306\ This situation to some extent could be analogized to the
situation that can be created by market timing in which selling
shareholders receive benefits to the detriment of remaining mutual
fund shareholders.
---------------------------------------------------------------------------

    One possible way of addressing these issues would be to require
that funds satisfy redemption requests in excess of a certain size
through in-kind redemptions.\307\ Money market funds currently are
permitted to and many money market funds disclose in their prospectuses
that they may satisfy redemption requests through in-kind
redemptions.\308\ In the wake of last fall's redemption pressures on
money market funds, however, only one announced that it would do
so.\309\ In-kind redemptions would lessen the impact of large
redemptions on remaining money market fund shareholders and would
require the redeeming investor to bear part of the cost of its
liquidity needs. If shareholders did not immediately sell these
securities, requiring in-kind redemptions in such circumstances may
mitigate the impact of large redemptions on short-term credit markets
by reducing the likelihood of large fire sales of short-term securities
into the market. Finally, it also may encourage large investors to
diversify their money market fund holdings among a variety of funds,
perhaps lessening the risk that any individual fund would be threatened
by a few redemptions.\310\ If proposed, we would expect to set a
threshold for requiring in-kind redemptions sufficiently high that we
could reasonably assume that such an investor would be in the position
to assume ownership of such securities.
---------------------------------------------------------------------------

    \307\ An in-kind redemption occurs when a shareholder's
redemption request to a fund is satisfied by distributing to that
shareholder portfolio assets of that fund instead of cash.
    \308\ See section 2(a)(32) of the Act (defining a redeemable
security as a security where the holder ``is entitled * * * to
receive approximately his proportionate share of the issuer's
current net assets, or the cash equivalent thereof'' (italics
added)). See also rule 18f-1, which provides an exemption from
certain prohibitions of section 18(f)(1) of the Act with regard to
redemptions in kind and in cash.
    \309\ On September 19, 2008, the American Beacon Money Market
Portfolio announced it would honor redemption requests exceeding
$250,000 in a 90-day period through pro rata payments of cash and
``in-kind'' distributions of securities held by the fund, to prevent
redemptions from ``forcing'' the sale of fund assets. See American
Beacon Funds, Prospectus Supplement for BBH ComSet Class,
Institutional Class, Cash Management Class, and PlanAhead Class
(Sept. 30, 2008), available at http://www.sec.gov/Archives/edgar/
data/809593/000080959308000045/sep3008_prosuppbeacon.txt.
    \310\ Large investors that did not wish to receive in-kind
redemptions could avoid this risk by spreading their investments
among several money market funds such that no single money market
fund investment was large enough to possibly trigger the in-kind
redemption requirement.
---------------------------------------------------------------------------

    We request comment on requiring money market funds to satisfy
redemption requests in excess of a certain size through in-kind
redemptions. What would be the advantages and disadvantages of this
approach? What type of threshold redemption request should trigger this
requirement? Should there be a different threshold for third-party
shareholders versus affiliated shareholders of a money market fund?
Should there be other restrictions on affiliate redemptions (e.g.,
prioritizing non-affiliate redemptions over affiliate redemption
requests that are submitted on the same day)? How should the fund
determine the value of the securities to be distributed as a result of
such a redemption request? The securities' amortized cost value? The
securities' fair value, as determined based on current market
quotations or, if no such quotations are readily available, as
determined in good faith by the fund's board of directors? Would these
shareholders be able to assume ownership of such securities?
    We note that a board of directors alternatively could cause a money
market fund to impose a redemption fee under rule 22c-2 to impose some
of the fund's costs from shareholders' liquidity

needs on the redeeming shareholders.\311\ What would be the advantages
and disadvantages of this alternative approach to addressing our
concerns regarding significant shareholder redemptions?
---------------------------------------------------------------------------

    \311\ The redemption fee cannot exceed two percent of the value
of the shares redeemed.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act Analysis

    Certain provisions of the proposed amendments to rules 2a-7 and
30b1-5 and proposed new rules 22e-3 and 30b1-6 and Form N-MFP under the
Investment Company Act contain ``collections of information'' within
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\312\ The
titles for the existing collections of information are: (1) ``Rule 2a-7
under the Investment Company Act of 1940, Money market funds'' (OMB
Control No. 3235-0268); (2) ``Rule 30b1-5 under the Investment Company
Act of 1940, Quarterly filing of schedule of portfolio holdings of
registered management investment companies'' (OMB Control No. 3235-
0577); and (3) ``Form N-Q under the Investment Company Act of 1940,
Quarterly Schedule of Portfolio Holdings of Registered Management
Investment Company'' (OMB Control No. 3235-0578). The titles for the
new collections of information are: (1) ``Rule 22e-3 under the
Investment Company Act of 1940, Exemption for liquidation of money
market funds;'' (2) ``Rule 30b1-6 under the Investment Company Act of
1940, Monthly report for money market funds;'' and (3) ``Form N-MFP
under the Investment Company Act of 1940, Portfolio Holdings of Money
Market Funds.'' The Commission is submitting these collections of
information to the Office of Management and Budget (``OMB'') for review
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. Our proposed
amendments and new rules are designed to make money market funds more
resilient to risks in the short-term debt markets, and to provide
greater protections for investors in a money market fund that is unable
to maintain a stable net asset value per share. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number.
---------------------------------------------------------------------------

    \312\ 44 U.S.C. 3501-3521.
---------------------------------------------------------------------------

A. Rule 2a-7

    Rule 2a-7 under the Investment Company Act exempts money market
funds from the Act's valuation requirements, permitting money market
funds to maintain stable share pricing, subject to certain risk-
limiting conditions. As discussed above, we are proposing to amend rule
2a-7 in several respects. Our proposal would amend the rule by:
Revising portfolio quality and maturity requirements; introducing
liquidity requirements; requiring money market fund boards to adopt
procedures providing for periodic stress testing of the fund's
portfolio; requiring funds to disclose monthly on their websites
information on portfolio securities; and finally, requiring money
market fund boards to determine, at least once each calendar year, that
the fund has the capability to redeem and issue its securities at
prices other than the fund's stable net asset value per share.\313\
Three of the proposed amendments would create new collection of
information requirements. The respondents to these collections of
information would be money market funds or their advisers, as noted
below.
---------------------------------------------------------------------------

    \313\ See supra Section II.A-G.
---------------------------------------------------------------------------

1. Stress Testing
    The proposed amendments would require money market fund boards to
adopt written procedures that provide for the periodic testing of the
fund's ability to maintain a stable net asset value per share based on
certain hypothetical events.\314\ These procedures also would have to
provide for a report of the testing results to be submitted to the
board of directors at its next regularly scheduled meeting, and an
assessment by the fund's adviser of the fund's ability to withstand the
events (and concurrent occurrences of those events) that are reasonably
likely to occur within the following year.\315\ Compliance with this
proposed disclosure requirement would be mandatory for any fund that
holds itself out as a money market fund in reliance on rule 2a-7. The
information when provided to the Commission in connection with staff
examinations or investigations would be kept confidential to the extent
permitted by law.
---------------------------------------------------------------------------

    \314\ Proposed rule 2a-7(c)(8)(ii)(D). These events would
include, but would not be limited to, a change in short-term
interest rates, an increase in shareholder redemptions, a downgrade
of or default on portfolio securities, and the widening or narrowing
of spreads between yields on an appropriate benchmark the fund has
selected for overnight interest rates and commercial paper and other
types of securities held by the fund.
    \315\ Proposed rule 2a-7(c)(8)(ii)(D)(2), (3). The report to the
board would include the dates on which the testing was performed and
the magnitude of each hypothetical event that would cause the
deviation of the money market fund's net asset value calculated
using available market quotations (or appropriate substitutes that
reflect current market conditions) from its net asset value per
share calculated using amortized cost to exceed \1/2\ of 1 percent.
---------------------------------------------------------------------------

    We anticipate that stress testing would give fund advisers a better
understanding of the effect of potential market events and shareholder
redemptions on their funds' ability to maintain a stable net asset
value, the fund's exposure to that risk, and actions the adviser may
need to take to mitigate the possibility of the fund breaking the buck.
    Commission staff believes that in light of the events of last fall
most, if not all, money market funds currently conduct some stress
testing of their portfolios as a matter of routine fund management and
business practice.\316\ These procedures likely vary depending on the
fund's investments. For example, a prime money market fund that is
offered to institutional investors may test for hypothetical events
such as potential downgrades or defaults in portfolio securities while
a U.S. Treasury money market fund may not. Some funds that currently
conduct testing may be required to include additional hypothetical
events under our proposed amendments. These funds likely provide
regular reports of the test results to senior management. We expect,
however, that most funds do not have written procedures documenting the
stress testing, do not report the results of testing to their boards of
directors, and do not provide an assessment from the fund's adviser
regarding the fund's ability to withstand the hypothetical events
reasonably likely to occur in the next year.
---------------------------------------------------------------------------

    \316\ The estimates of hour burdens and costs provided in the
PRA and cost benefit analyses are based on staff discussions with
representatives of money market funds and on the experience of
Commission staff. We expect that the board of directors would be the
same for all the money market funds in a complex, and thus could
adopt the stress test procedures for all money market funds in the
complex at the same meeting.
---------------------------------------------------------------------------

    Commission staff believes that the stress testing procedures are or
would be developed for all the money market funds in a fund complex by
the fund adviser, and would address appropriate variations for
individual money market funds within the complex. Staff estimates that
it would take a fund adviser an average of 21 hours for a portfolio
risk analyst initially to draft procedures documenting the complex's
stress testing, and 3 hours for the board of directors to consider and
adopt the written procedures. We estimate that 171 fund complexes with
money market funds are subject to rule 2a-7. We therefore estimate that
the total burden to draft these procedures initially would

be 4104 hours.\317\ Amortized over a three-year period, this would
result in an average annual burden of 8 hours for an individual fund
complex and a total of 1368 hours for all fund complexes.\318\ Staff
estimates that a risk analyst also may spend an average of 6 hours per
year revising the written procedures to reflect changes in the type or
nature of hypothetical events appropriate to stress tests and the board
would spend 1 hour to consider and adopt the revisions, for a total
annual burden of 1197 hours.\319\ Commission staff estimates further
that it would take an average of 10 hours of portfolio management time
to draft each report to the board of directors, 2 hours of an
administrative assistant's time to compile and copy the report and 15
hours of the fund adviser's time to provide an assessment of the funds'
ability to withstand reasonably likely hypothetical events in the
coming year. The report must be provided at the next scheduled board
meeting, and we estimate that the report would cover all money market
funds in a complex. We also believe that the fund adviser would provide
an assessment each time it provided a report. Finally, we assume that
funds would conduct stress tests no less than monthly. With an average
of 6 board meetings each year, we estimate that the annual burden would
be 162 hours for an individual fund complex with a total annual burden
for all fund complexes of 27,702 hours.\320\
---------------------------------------------------------------------------

    \317\ This estimate is based on the following calculation: (21
hours + 3 hours) x 171 fund complexes = 4104 hours.
    \318\ These estimates are based on the following calculations:
(21 + 3) / 3 = 8 hours; 8 x 171 fund complexes = 1368 hours. PRA
submissions for approval are made every three years. To estimate an
annual burden for a collection of information that occurs one time,
the total burden is amortized over the three year period.
    \319\ This estimate is based on the following calculation: (6
hours (analyst) + 1 hour (board)) x 171 fund complexes = 1197 hours.
    \320\ These estimates are based on the following calculations:
(10 hours + 2 hours + 15 hours) x 6 meetings = 162 hours; 162 hours
x 171 fund complexes = 27,702 hours.
---------------------------------------------------------------------------

    The proposed amendment would require the fund to retain records of
the reports on stress tests and the assessments for at least 6 years
(the first two in an easily accessible place).\321\ The retention of
these records would be necessary to allow the staff during examinations
of funds to determine whether a fund is in compliance with the stress
test requirements. We estimate that the burden would be 10 minutes per
fund complex per meeting to retain these records for a total annual
burden of 171 hours for all fund complexes.\322\
---------------------------------------------------------------------------

    \321\ Proposed rule 2a-7(c)(11)(vii).
    \322\ This estimate is based on the following calculation:
0.1667 hours x 6 meetings x 171 fund complexes = 171 hours.
---------------------------------------------------------------------------

    Thus, we estimate that for the three years following adoption, the
average annual burden resulting from the stress testing requirements
would be 178 hours for each fund complex with a total of 30,438 hours
for all fund complexes.\323\
---------------------------------------------------------------------------

    \323\ These estimates are based on the following calculations: 8
hours (draft procedures) + 7 hours (revise procedures) + 72 hours (6
reports) + 90 hours (assessments) + 1 hour (record retention) = 178
hours; 1368 hours (draft procedures) + 1197 hours (revise
procedures) + 12,312 hours (6 reports) + 15,390 (6 assessments) +
171 hours (record retention) = 30,438 hours.
---------------------------------------------------------------------------

    We request comment on these estimates of hourly burdens. Would
funds develop stress tests on a complex-wide basis for money market
funds? Would the adviser prepare one report regarding stress tests for
all the money market funds in a complex, or prepare a separate report
for each money market fund?
2. Public Web site Posting
    The proposed amendments would require money market funds to post
monthly portfolio information on their Web sites.\324\ We believe that
greater transparency of fund portfolios may allow investors to exert
influence on risk-taking by fund advisers, and thus reduce the
likelihood that a fund will break the buck. Information will be posted
on a public Web site, and compliance with this requirement would be
mandatory for any fund that holds itself out as a money market fund in
reliance on rule 2a-7. We estimate that there are approximately 750
money market funds that would be affected by this proposal. We
understand, based on interviews with industry representatives, that
most money market funds already post portfolio information on their
webpages at least quarterly.\325\ To be conservative, the staff
estimates that 20 percent of money market funds, or 150 funds, do not
currently post this information at least quarterly, and therefore would
need to develop a webpage to comply with the proposed rule. We estimate
that a money market fund would spend approximately 24 hours of internal
money market fund staff time initially to develop the webpage. We
further estimate that a money market fund would spend approximately 4
hours of professional time to maintain and update the relevant webpage
with the required information on a monthly basis. Based on an estimate
of 750 money market funds posting their portfolio holdings on their
webpages, including 150 funds incurring start-up costs to develop a
webpage, we estimate that, in the aggregate, the proposed amendment
would result in a total of 37,200 average burden hours for all money
market funds for each of the first three years.\326\
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    \324\ Proposed rule 2a-7(c)(12).
    \325\ Certain of the required information is currently
maintained by money market funds for regulatory reasons, such as in
connection with accounting, tax and disclosure requirements. We
understand that the remaining information is retained by funds in
the ordinary course of business. Accordingly, for the purposes of
our analysis, we do not ascribe any time to producing the required
information.
    \326\ The estimate is based on the following calculations. The
staff estimates that 150 funds would require a total of 3600 hours
initially to develop a webpage (150 funds x 24 hours per fund = 3600
hours). In addition, each of the 750 funds would require 48 hours
per year to update and maintain the webpage, for a total of 36,000
hours per year (4 hours per month x 12 months = 48 hours per year;
48 hours per year x 750 funds = 36,000). The average annual hour
burden for each of the first three years would thus equal 37,200
hours ([3600 + (36,000 x 3)] / 3).
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3. Reporting of Rule 17a-9 Transactions
    We are proposing to amend rule 2a-7 to require a money market fund
to promptly notify the Commission by electronic mail of the purchase of
a money market fund's portfolio security by an affiliated person in
reliance on the rule and to explain the reasons for such purchase.\327\
The proposed reporting requirement is designed to assist Commission
staff in monitoring money market funds' affiliated transactions that
otherwise would be prohibited. The new collection of information would
be mandatory for money market funds that rely on rule 2a-7 and that
rely on rule 17a-9 for an affiliated person to purchase a money market
fund's portfolio security. Information submitted to the Commission
related to a rule 17a-9 transaction would not be kept
confidential.\328\
---------------------------------------------------------------------------

    \327\ See proposed rule 2a-7(c)(7)(iii).
    \328\ Commission rules provide, however, for a procedure under
which persons submitting notices under the proposed amendment would
be able to request that the information not be disclosed under a
Freedom of Information Act request. See 17 CFR 200.83.
---------------------------------------------------------------------------

    We estimate that fund complexes will provide one notice for all
money market funds in a particular fund complex holding a distressed
security purchased in a transaction under rule 17a-9. As noted above,
Commission staff estimates that there are 171 fund complexes with money
market funds subject to rule 2a-7. Of these fund complexes, Commission
staff estimates that an average of 25 per year would be required to
provide notice to the Commission of a rule 17a-9 transaction, with the
total annual response per fund

complex, on average, requiring 1 hour of an in-house attorney's time.
Given these estimates, the total annual burden of this proposed
amendment to rule 2a-7 for all money market funds would be
approximately 25 hours.\329\
---------------------------------------------------------------------------

    \329\ The estimate is based on the following calculation: (25
fund complexes x 1 hour) = 25 hours.
---------------------------------------------------------------------------

4. Total Burden
    The currently approved burden for rule 2a-7 is 1,348,000 hours. In
a recent renewal submission to OMB, we estimated the collection of
information burden for the rule is 310,983 hours. The additional burden
hours associated with the proposed amendments to rule 2a-7 would
increase the renewal estimate to 378,646 hours annually.\330\
---------------------------------------------------------------------------

    \330\ This estimate is based on the following calculation:
310,983 (estimated in 2a-7 renewal submission) + 30,438 (stress
testing) + 37,200 (website posting) + 25 hours (reporting 17a-9
transactions) = 378,646 hours.
---------------------------------------------------------------------------

B. Rule 22e-3

    Proposed rule 22e-3 would permit a money market fund to suspend
redemptions and postpone the payment of proceeds pending board-approved
liquidation proceedings, provided that the fund notifies the Commission
by electronic mail of its decision to do so.\331\ The proposed rule is
intended to reduce the vulnerability of investors to the harmful
effects of a run on a fund, and minimize the potential for disruption
to the securities markets. The proposed notification requirement is a
collection of information under the PRA, and is designed to assist
Commission staff in monitoring a money market fund's suspension of
redemptions, which would otherwise be prohibited. Only money market
funds that break the buck and begin board-approved liquidation
proceedings would be able to rely on the rule. The respondents to this
information collection therefore would be money market funds that break
the buck and elect to rely on the exemption afforded by the rule.
Compliance with the notification requirements of rule 22e-3 would be
necessary for money market funds that seek to rely on rule 22e-3 to
suspend redemptions and postpone payment of proceeds pending a
liquidation, and would not be kept confidential.
---------------------------------------------------------------------------

    \331\ See proposed rule 22e-3(c).
---------------------------------------------------------------------------

    We estimate that, on average, one money market fund would break the
buck and liquidate every six years.\332\ Staff estimates that a fund
providing the required electronic mail notice under proposed rule 22e-3
would spend approximately 1 hour of an in-house attorney's time to
prepare and submit the notice. Given these estimates, the total annual
burden of proposed rule 22e-3 for all money market funds would be
approximately 10 minutes.\333\
---------------------------------------------------------------------------

    \332\ As discussed above, since the adoption of rule 2a-7 in
1983, only two money market funds have broken the buck.
    \333\ These estimates are based on the following calculations:
(1 hour / 6 years) = 10 minutes per year.
---------------------------------------------------------------------------

C. Monthly Reporting of Portfolio Holdings

1. Rule 30b1-6 and Form N-MFP
    Proposed rule 30b1-6 would require money market funds to file an
electronic monthly report on proposed Form N-MFP within two business
days after the end of each month. The proposed rule is intended to
improve transparency of information about money market funds' portfolio
holdings and facilitate oversight of money market funds. The
information required by the proposed form would be data-tagged in XML
format and filed through EDGAR. The respondents to rule 30b1-6 would be
investment companies that are regulated as money market funds under
rule 2a-7. Compliance with proposed rule 30b1-6 would be mandatory for
any fund that holds itself out as a money market fund in reliance on
rule 2a-7. Responses to the disclosure requirements would not be kept
confidential.
    We estimate that 750 money market funds would be required by rule
30b1-6 to file, on a monthly basis, a complete Form N-MFP disclosing
certain information regarding the fund and its portfolio holdings. For
purposes of this PRA analysis, the burden associated with the
requirements of proposed rule 30b1-6 has been included in the
collection of information requirements of proposed Form N-MFP.
    Based on our experience with other interactive data filings, we
estimate that money market funds would require an average of
approximately 40 burden hours to compile, tag and electronically file
the required portfolio holdings information for the first time and an
average of approximately 8 burden hours in subsequent filings.\334\
Based on these estimates, we estimate the average annual burden over a
three-year period would be 107 hours per money market fund.\335\ Based
on an estimate of 750 money market funds submitting Form N-MFP in
interactive data format, each incurring 107 hours per year on average,
we estimate that, in the aggregate, Form N-MFP would result in 80,250
burden hours, on average, for all money market funds for each of the
first three years.
---------------------------------------------------------------------------

    \334\ We understand that the required information is currently
maintained by money market funds pursuant to other regulatory
requirements or in the ordinary course of business. Accordingly, for
the purposes of our analysis, we do not ascribe any time to
producing the required information.
    \335\ The staff estimates that a fund would make 36 filings in
three years. The first filing would require 40 hours and subsequent
filings would require 8 hours each, for an average annual burden of
107 hours (1 filing x 40 hours = 40 hours; 35 filings x 8 hours =
280 hours; 40 hours + 280 hours = 320 hours; 320 hours / 3 years =
107 hours). Thereafter, filers generally would not incur the start-
up burdens applicable to the first filing.
---------------------------------------------------------------------------

2. Rule 30b1-5 and Form N-Q
    Our proposed amendments to rule 30b1-5 would exempt money market
funds from the requirement to file a schedule of investments pursuant
to Item 1 of Form N-Q. The proposed amendment is intended to eliminate
unnecessarily duplicative disclosure requirements. The proposed
amendment would only affect investment companies that are regulated as
money market funds under rule 2a-7.
    We estimate that 750 money market funds would be affected by the
proposed amendment to rule 30b1-5. For the purposes of this PRA
analysis, the decrease in burden hours resulting from the proposed
amendment is reflected in the collection of information requirements
for Form N-Q.
    We estimate that money market funds would require an average of
approximately 4 hours to prepare the schedule of investments required
pursuant to Item 1 of Form N-Q. Based on these estimates, we estimate
that the average annual burden avoided would be 8 hours per fund.\336\
Based on an estimate of 750 money market funds filing Form N-Q, each
incurring 8 burden hours per year on average, we estimate that, in the
aggregate, our proposed exemption would result in a decrease of 6000
burden hours associated with Form N-Q.\337\
---------------------------------------------------------------------------

    \336\ Funds are required to file a quarterly report on Form N-Q
after the close of the first and third quarters of each fiscal year.
    \337\ The estimate is based on the following calculation: 750
money market funds x 8 hours per money market fund = 6000 hours.
---------------------------------------------------------------------------

D. Request for Comments

    We request comment on whether these estimates are reasonable.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
in order to: (i) Evaluate whether the proposed collections of
information are necessary for the proper performance of the functions
of the Commission, including whether the information will have
practical utility; (ii) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collections of information;
(iii)

determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; and (iv) determine whether
there are ways to minimize the burden of the collections of information
on those who are to respond, including through the use of automated
collection techniques or other forms of information technology.
    Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the
Office of Management and Budget, Attention Desk Officer for the
Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Room 10102, New Executive Office Building,
Washington, DC 20503, and should send a copy to Elizabeth Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-11-09. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication of this Release; therefore a
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days after publication of this Release. Requests
for materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. S7-
11-09, and be submitted to the Securities and Exchange Commission,
Office of Investor Education and Advocacy, 100 F Street, NE.,
Washington, DC 20549-0213.

V. Cost Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by
its rules. We have identified certain costs and benefits of the
proposed amendments and new rules, and we request comment on all
aspects of this cost benefit analysis, including identification and
assessment of any costs and benefits not discussed in this analysis. We
seek comment and data on the value of the benefits identified. We also
welcome comments on the accuracy of the cost estimates in each section
of this analysis, and request that commenters provide data that may be
relevant to these cost estimates. In addition, we seek estimates and
views regarding these costs and benefits for particular covered
institutions, including small institutions, as well as any other costs
or benefits that may result from the adoption of these proposed
amendments and new rules.

A. Rule 2a-7

1. Second Tier Securities, Portfolio Maturity and Liquidity
Requirements
    We are proposing several changes to the risk-limiting conditions of
rule 2a-7. While we believe that these changes would impart substantial
benefits to money market funds, we recognize that they also may impose
certain costs.
    First, we would limit money market fund investments to first tier
securities, i.e., securities receiving the highest short-term debt
ratings from the requisite NRSROs or securities that the fund's board
of directors or its delegate determines are of comparable quality.\338\
We also are proposing to limit money market funds to acquiring long-
term securities that have received long-term ratings in the highest two
ratings categories.\339\
---------------------------------------------------------------------------

    \338\ See proposed rule 2a-7(a)(11)(iii); proposed rule 2a-
7(a)(11)(iv); proposed rule 2a-7(c)(3).
    \339\ See proposed rule 2a-7(a)(11)(iv)(A).
---------------------------------------------------------------------------

    Second, we are proposing certain changes to rule 2a-7's portfolio
maturity limits. We are proposing to reduce the maximum weighted
average maturity of a money market fund permitted by rule 2a-7 from 90
days to 60 days.\340\ We also are proposing a new maturity limitation
based on the ``weighted average life'' of fund securities that would
limit the portion of a fund's portfolio that could be held in longer
term floating- or variable-rate securities. This restriction would
require a fund to calculate the weighted average maturity of its
portfolio without regard to interest rate reset dates. The weighted
average life of a fund's portfolio would be limited to 120 days.\341\
Finally, we are proposing to delete a provision in rule 2a-7 that
permits money market funds not relying on the amortized cost method of
valuation to acquire Government securities with a remaining maturity of
up to 762 calendar days. Under the amended rule, money market funds
could not acquire any security with a remaining maturity of more than
397 days, subject to the maturity shortening provisions for floating-
and variable-rate securities and securities with a Demand Feature.\342\
---------------------------------------------------------------------------

    \340\ See proposed rule 2a-7(c)(2)(ii).
    \341\ See proposed rule 2a-7(c)(2)(iii).
    \342\ See proposed rule 2a-7(c)(2)(i); rule 2a-7(d)(1)-(5).
---------------------------------------------------------------------------

    Third, we are proposing new liquidity requirements on money market
funds. Under the proposed amendments, money market funds would be
prohibited from acquiring securities unless, at the time acquired, they
are liquid, i.e., securities that can be sold or disposed of in the
ordinary course of business within seven days at approximately the
value ascribed to it by the money market fund.\343\ We also propose to
limit taxable retail money market funds and taxable institutional money
market funds to acquiring Daily Liquid Assets unless five percent of a
retail fund's and 10 percent of an institutional fund's assets are
Daily Liquid Assets.\344\
---------------------------------------------------------------------------

    \343\ See proposed rule 2a-7(c)(5)(i).
    \344\ See proposed rule 2a-7(c)(5)(iii). This restriction would
not apply to tax exempt money market funds.
---------------------------------------------------------------------------

    In addition, our proposed amendments to rule 2a-7 would impose
weekly liquidity requirements on money market funds. Specifically,
retail and institutional money market funds would not be permitted to
acquire any securities other than weekly liquid assets if, after the
acquisition, (i) the retail fund would hold less than 15 percent of its
total assets in weekly liquid assets and (ii) the institutional fund
would hold less than 30 percent of its total assets in weekly liquid
assets.\345\ Finally, we are proposing to require that a money market
fund at all times hold daily and weekly liquid assets sufficient to
meet reasonably foreseeable redemptions in light of its obligations
under section 22(e) of the Act and any commitments the fund has made to
shareholders.\346\
---------------------------------------------------------------------------

    \345\ See proposed rule 2a-7(c)(5)(iv).
    \346\ See proposed rule 2a-7(c)(5)(ii).
---------------------------------------------------------------------------

    Our proposed amendments would rely on a money market fund's board
of directors to determine, no less frequently than once each calendar
year, whether the money market fund is intended to be offered to
institutional investors or has the characteristics of a fund that is
intended to be offered to institutional investors, based on the: (i)
Nature of the record owners of fund shares; (ii) minimum amount
required to be invested to establish an account; and (iii) historical
cash flows resulting, or expected cash flows that would result, from
purchases and redemptions.\347\
---------------------------------------------------------------------------

    \347\ See proposed rule 2a-7(a)(18) (defining ``Institutional
Fund'').
---------------------------------------------------------------------------

a. Benefits
    We believe that the proposed amendments to rule 2a-7's risk-
limiting conditions would be likely to produce broad benefits for money
market fund investors. First, they should reduce money market funds'
exposure to certain credit, interest rate, and spread risks. For
example, precluding money market funds from investing in second tier
securities would decrease money market funds' exposure to credit risk.
Reducing the maximum weighted average maturity of money market

funds' portfolios would further decrease their interest rate
sensitivity, as well as reduce their exposure to credit risk.
Introducing the weighted average life limitation on money market funds'
portfolios would limit credit spread risk and interest rate spread risk
to funds from longer term floating- or variable-rate securities.
    We expect that the proposed amendments also would bolster the
ability of money market funds to maintain a stable net asset value
during times when the level of shareholder redemption demand is high.
Fund portfolios with a lower weighted average maturity that include a
limited amount of longer term floating- or variable-rate securities
would turn over more quickly and the fund would be better able to
increase its holdings of highly liquid securities in the face of
illiquid markets than funds that satisfy current maturity requirements.
The proposed liquidity requirements are designed to increase a money
market fund's ability to withstand illiquid markets by ensuring that
the fund acquires only liquid securities and that a certain percent of
its assets are held in daily and weekly liquid assets. These
requirements also should decrease the likelihood that a fund would have
to realize losses from selling portfolio securities into an illiquid
market to satisfy redemption requests. Because the proposed amendments
would require a fund to have a contractual right to receive cash for
the daily and weekly liquid assets, rather than the current standard,
which assumes that a fund would be able to find a buyer for its
securities within seven days, we believe that the proposed required
liquidity requirements would allow money market fund advisers to more
easily adjust the funds' portfolios to increase liquidity when needed.
    We believe that a reduction of these credit, interest rate, spread,
and liquidity risks would better enable money market funds to weather
market turbulence and maintain a stable net asset value per share. The
proposed amendments are designed to reduce the risk that a money market
fund will break the buck and therefore prevent losses to fund
investors. To the extent that money market funds are more stable, they
also would reduce systemic risk to the capital markets and provide a
more stable source of financing for issuers of short-term credit
instruments, thus promoting capital formation. If money market funds
become more stable investments as a result of the proposed rule
amendments, they may attract further investment, increasing their role
as a source of capital formation.
b. Costs
    We recognize that there are potential costs that would result if we
adopted our proposed changes regarding second tier securities,
portfolio maturity, and liquidity. Second tier securities, less liquid
securities, and longer term credit instruments typically pay a higher
interest rate and, therefore, the proposed amendments may decrease
money market funds' yields.
    Precluding ownership of second tier securities also may deprive
money market funds of some benefits of reduced risk through
diversification. We invite comment on whether the benefits of reducing
credit risk through precluding purchases of second tier securities
justifies the costs of the lost diversification benefits that second
tier securities may provide.
    If, as a result of the proposed amendments, there is a smaller set
of Eligible Securities for a money market fund to choose from, that may
increase the cost of those securities if their supply is limited. In
particular, to the extent that the proposed liquidity requirements
increase demand for highly liquid securities that is not countered by
increased supply, the cost of those securities may rise as well.
Increased costs of portfolio securities will have a negative impact on
money market fund yield. Finally, to the extent that actual investor
redemptions are significantly lower than our proposed liquidity
requirements, money market funds may achieve lower yields as a result
of complying with these liquidity requirements.
    Although the impact on individual funds would vary significantly,
we estimate that the proposed changes to rule 2a-7's requirements
regarding portfolio quality, portfolio maturity, and liquidity would
decrease the yield that a money market fund is able to achieve in the
range of 2 to 4 basis points. We understand that the majority of money
market funds are already in compliance with these proposed requirements
due either to their own risk-limiting actions or to their voluntary
compliance with the recommendations contained in the ICI Report.
Accordingly, we expect that the decrease in yield from these changes to
rule 2a-7's risk-limiting conditions would have a relatively minor
impact on current money market fund yields.
    However, this decreased yield may limit the range of choices that
individual money market fund investors currently have to select their
desired level of investment risk. This might cause some investors to
shift their assets to, among other places, offshore or other enhanced
cash funds unregulated by rule 2a-7 that are able to offer a higher
yield. Alternatively, some investors may choose to shift their assets
to bank deposits. When markets come under stress, investors may be more
likely to withdraw their money from these offshore or private funds due
to their perceived higher risk \348\ and substantial redemptions from
those funds and accompanying sales of their portfolio securities could
increase systemic risk to short-term credit markets, which would impact
money market funds. In addition, the proposed stricter portfolio
quality, maturity, and liquidity requirements may result in some money
market funds having fewer issuers from which to select securities if
some issuers only offer second tier securities, less liquid securities
or a larger percentage of longer term securities.
---------------------------------------------------------------------------

    \348\ During the recent financial crisis, investors redeemed
substantial amounts of assets from ultra-short bond funds and
certain offshore money market funds. See ICI Report, supra note 6,
at 106-07.
---------------------------------------------------------------------------

    Our proposed portfolio quality, maturity, and liquidity
restrictions also may impact issuers. Issuers may experience increased
financing costs to the extent that they are unable to find alternative
purchasers of their second tier securities, less liquid securities,
longer term securities, or floating- and variable-rate securities at
previous market rates. As noted earlier in the release, we do not
believe that money market funds currently hold a significant amount of
second tier securities, or securities that are illiquid at
acquisition.\349\ Thus, we expect that the proposed amendment's impact
on issuers of these securities would be minimal. If the proposed
amendments result in companies or governments issuing shorter maturity
securities, those issuers may be exposed to an increased risk of
insufficient demand for their securities and adverse credit market
conditions because they must roll over their short-term financing more
frequently. We note that this impact could be mitigated if money market
funds sufficiently staggered or ``laddered'' the maturity of the
securities in their portfolios. The markets for longer term or
floating- and variable-rate securities may become less liquid if the
proposed rule amendments cause issuance of these instruments to
decline. We generally expect that issuers of floating- or variable-rate
securities would respond to the proposed amendments by issuing a
greater

proportion of their securities with shorter final maturities.
---------------------------------------------------------------------------

    \349\ See supra note 101 and accompanying and following text,
and Section II.C.1.
---------------------------------------------------------------------------

    Our proposed requirement that fund boards distinguish between
retail and institutional money market funds would require boards to
make a determination based on an understanding of the investors in the
fund and their behavior. Our proposed liquidity requirements also would
require money market funds to ``know their customers,'' including their
expected redemption behavior. We expect that most money market funds
already have methods to understand their customers and their redemption
needs because ``knowing your customer'' is already a best practice. As
a result, we also do not expect that these requirements would impose
any material costs on funds.
    We do not believe that eliminating the provision in rule 2a-7 that
allowed money market funds relying solely on the penny-rounding method
of pricing to hold Government securities with remaining maturities of
up to 762 days would have a material impact on money market funds,
investors, or issuers of longer term Government securities because we
believe that substantially all money market funds rely on the amortized
cost method of valuation, and not exclusively on the penny-rounding
method of pricing, and thus are not eligible to rely on this exception.
    We request comment on these costs and benefits. Would money market
fund investors benefit from the proposed portfolio quality, maturity
and liquidity requirements? Would money market funds experience a
significant yield and diversification impact from the proposed changes
to rule 2a-7's second tier security, portfolio maturity, and liquidity
requirements? We note that the highest rated money market funds
currently must have a weighted average maturity of 60 days or less, the
average weighted average maturity for taxable money market funds as of
June 16, 2009 was 53 days, and very few money market funds hold second
tier securities.\350\ What other impacts would these changes have on
money market funds? What effect would such changes have on the short-
term credit market and issuers of longer term or debt instruments held
to satisfy the daily or weekly liquidity requirements? How would the
proposed amendments impact issuers of, and the market for, longer term
variable- or floating-rate debt securities? We encourage commenters to
provide empirical data to support their analysis.
---------------------------------------------------------------------------

    \350\ See supra text accompanying note 101, note 145 and
accompanying text, and note 147.
---------------------------------------------------------------------------

2. Use of NRSROs
    As discussed above, we are considering an approach that would
require a money market fund's board of directors to designate NRSROs
whose credit ratings the fund would use in determining the eligibility
of portfolio securities under rule 2a-7 and that the board would
annually determine issue credit ratings that are sufficiently reliable
for that use. As we also noted above, we proposed eliminating
references to NRSROs in rule 2a-7 last year.\351\ For a discussion of
the costs and benefits of that proposal, please see Section VI of the
NRSRO References Release.\352\ Are there additional factors we should
consider since that release was published?
---------------------------------------------------------------------------

    \351\ See NRSRO References Proposal, supra note 105.
    \352\ See id.
---------------------------------------------------------------------------

    We request comment on the approach we are considering. We
specifically request comment regarding the standard we are considering
for the board's annual determination, i.e., that the designated NRSROs
issue ratings that are sufficiently reliable for use in determining the
eligibility of portfolio securities. Is this standard appropriate, and
if not, what would be a more appropriate standard? We expect that in
making their initial designation and their annual determination, fund
boards would review a presentation by the fund's adviser regarding the
relative strength of relevant NRSROs' ratings and ratings criteria.
What kind of guidance, if any, should the Commission provide with
respect to such a standard?
    According to the ICI Report, a requirement that funds designate
three or more NRSROs to use in determining the eligibility of portfolio
securities could encourage competition among NRSROs to achieve
designation by money market funds.\353\ We anticipate that the approach
we are considering, which would require fund boards annually to
determine that the designated NRSROs issue credit ratings sufficiently
reliable to use in determining the eligibility of portfolio securities,
may promote competition among NRSROs to produce the most reliable
ratings in order to obtain designation by money market funds. In
addition to the potential for competition among existing NRSROs, the
proposed amendment might encourage new NRSROs that issue ratings
specifically for money market fund instruments to enter the market. As
we noted above, however, the staff believes it is reasonable to assume
that the three NRSROs that issued almost 99 percent of all outstanding
ratings across all categories that were issued by the 10 registered
NRSROs as of June 2008, also issued well over 90 percent of all
outstanding ratings of short term debt.\354\ If fund boards were
required to designate a minimum of three NRSROs and all money market
fund boards chose to designate these three NRSROs, the requirement
could result in decreased competition among NRSROs. We request comment
on the impact that the approach we are considering, particularly the
minimum number of NRSROs, might have on competition among NRSROs. We
also request comment on the impact, if any, of this approach with
respect to the efficiency of fund managers. Finally, we request comment
on any potential benefits this approach might have with respect to
money market funds or NRSROs.
---------------------------------------------------------------------------

    \353\ See ICI Report, supra note 6, at 82.
    \354\ See supra note 116 and accompanying text.
---------------------------------------------------------------------------

    We recognize that there could be costs associated with the approach
we are considering. Staff estimates that the costs of this approach
would include: Initial costs for the board to designate NRSROs, as well
as an annual cost to determine that designated NRSROs continue to issue
ratings that are sufficiently reliable for use in determining the
eligibility of portfolio securities. We expect that fund advisers
currently evaluate the strength of NRSRO ratings and ratings criteria
as part of the analysis they perform (under delegated authority from
the board) in determining the eligibility of portfolio securities, and
that this evaluation includes consideration of whether an NRSRO's
rating is sufficient for that use. Accordingly, we anticipate that fund
advisers would not incur additional time to perform an evaluation that
would be the basis for their recommendations to the board when it makes
its initial designation and annual determination, but the adviser would
incur costs to draft those recommendations in a presentation or report
for board review.
    Under the current rule, if a money market fund invests in unrated
or second tier securities, the adviser must monitor all NRSROs in case
an unrated or second tier security has received a rating from any NRSRO
below the second highest short-term rating category.\355\ Because fund
advisers currently monitor NRSROs, we do not expect that limiting the
number of NRSROs that a fund would have to monitor to a number
designated by the fund board would result in increased

costs to fund advisers to monitor NRSROs.
---------------------------------------------------------------------------

    \355\ See rule 2a-7(c)(6)(i)(A)(2).
---------------------------------------------------------------------------

    We request comment on our analysis of the potential costs and
benefits of a requirement to designate NRSROs. Do funds currently
evaluate NRSRO ratings for reliability? Would there be benefits to
funds and their advisers if the board designates three or more NRSROs?
Would fund advisers benefit from having fewer NRSROs to monitor? Would
fund advisers incur significant costs to make presentations to the
board recommending which NRSROs to designate? What would be involved,
including specific costs, for fund management to evaluate whether an
NRSRO ``issues credit ratings that are sufficiently reliable'' for the
fund's determination of whether a security is an eligible security?
Would funds incur costs if we required them to disclose designated
NRSROs in the statement of additional information?
    We do not anticipate that the designation of NRSROs would have an
adverse impact on capital formation. We request comment on whether
requiring fund boards to designate NRSROs would have an impact on
capital formation.
3. Stress Testing
    We are proposing to require that money market fund boards of
directors adopt written procedures that provide for the periodic stress
testing of each money market fund's portfolio.\356\ The procedures
would require testing of the fund's ability to maintain a stable net
asset value per share based upon certain hypothetical events.\357\ The
procedures also would have to provide for a report to be delivered to
the fund's board of directors at its next regularly scheduled meeting
on the results of the testing and an assessment by the fund's adviser
of the fund's ability to withstand the events (and concurrent
occurrences of those events) that are reasonably likely to occur within
the following year.\358\
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    \356\ Proposed rule 2a-7(c)(8)(ii)(D).
    \357\ The proposed provision includes as hypothetical events a
change in short-term interest rates, an increase in shareholder
redemptions, a downgrade of or default on a portfolio security, and
widening or narrowing of spreads between yields on a benchmark
selected by the fund and securities held by the fund. See proposed
rule 2a-7(c)(8)(ii)(D)(1).
    \358\ Proposed rule 2a-7(c)(8)(ii)(D)(2), (3). The report must
include dates on which the testing was performed and the magnitude
of each hypothetical event that would cause the deviation of the
money market fund's net asset value calculated using available
market quotations (or appropriate substitutes that reflect current
market conditions) from its net asset value per share, calculated
using amortized cost, to exceed \1/2\ of 1%.
---------------------------------------------------------------------------

    We anticipate that stress testing would give fund advisers a better
understanding of the effect of potential market events and shareholder
redemptions on their funds' ability to maintain a stable net asset
value, the fund's exposure to the risk that it would break the buck,
and actions the adviser may need to take to mitigate the possibility of
the fund breaking the buck. We believe that many funds currently
conduct stress testing as a matter of routine fund management and
business practice. We anticipate, however, that funds that do not
currently perform stress testing and funds that may revise their
procedures in light of the proposed rule amendments would give their
managers a tool to better manage those risks. For fund boards of
directors that do not currently receive stress test results, we believe
that the regular reports and assessments would provide money market
fund boards a better understanding of the risks to which the fund is
exposed.
    We understand that today rigorous stress testing is a best practice
followed by many money market funds.\359\ We understand that the fund
complexes that conduct stress tests include smaller complexes that
offer money market funds externally managed by advisers experienced in
this area of management.\360\ Accordingly, staff estimates that as a
result of the proposed amendments to adopt stress testing procedures,
(i) funds that currently conduct rigorous stress testing, including
tests for hypothetical events listed in the proposed amendment (and
concurrent occurrences of those events) would incur some cost to
evaluate whether their current test procedures would comply with the
proposed rule amendment, but would be likely to incur relatively few
costs to revise those procedures or continue the stress testing they
currently perform, (ii) funds that conduct less rigorous stress
testing, or that do not test for all the hypothetical events listed in
the proposed rule amendment, would incur somewhat greater expenses to
revise those procedures in light of the proposed amendments and
maintain the revised testing, and (iii) funds that do not conduct
stress testing would incur costs to develop and adopt stress test
procedures and conduct stress tests. As noted above, we believe that
there is a range in the extent and rigor of stress testing currently
performed by money market funds. We also expect that stress test
procedures are or would be developed by the adviser to a fund complex
for all money market funds in the complex while specific stress tests
are performed for each individual money market fund. We estimate that a
fund complex that currently does not conduct stress testing would
require approximately 1 month for 2 risk management analysts and 2
systems analysts to develop stress test procedures at a cost of
approximately $155,000, 21 hours for a risk management analyst to draft
the procedures, and 3 hours of board of directors' time to adopt the
procedures for a total of approximately $173,000.\361\ Costs for fund
complexes that would have to revise or fine-tune their stress test
procedures would be less. For purposes of this cost benefit analysis,
we estimate that these funds would incur half the costs of development,
for a total of approximately $95,000.\362\ Funds that would not have to
change their test procedures would incur approximately $20,000 to
determine compliance with the proposed amendment, and to draft and
adopt the procedures.\363\ We also would anticipate that if there is a
demand to develop stress testing procedures, third parties may develop
programs that funds could purchase for less than our estimated cost to
develop the programs themselves.
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    \359\ As noted above, the ratings agencies stress test the
portfolios of money market funds they rate. In addition, the Irish
Financial Services Authority requires stress testing of money market
funds domiciled in Ireland, and the Institutional Money Market Funds
Association provides guidance for its members in stress testing
money market fund portfolios. See supra notes 214-215 and
accompanying text.
    \360\ These complexes do not, however, meet the definition of
``small entities'' under the Investment Company Act for purposes of
the Regulatory Flexibility Act of 1980. 5 U.S.C. 603(a). See infra
note 417.
    \361\ This estimate is based on the following calculations:
$275/hour x 280 hours (2 senior risk management specialists) +
($244/hour x 320 hours (2 senior systems analysts) = $155,080; $275/
hour (1 senior risk management specialist) x 21 hours = $5775;
$4000/hour x 3 hours = $12,000; $155,080 + $5775 + $12,000 =
$172,855.
    \362\ This estimate is based on the following calculation:
(155,080 x 0.5) (revise procedures) + $5775 (draft procedures) +
$12,000 (board approval) = $93,315.
    \363\ This estimate is based on the following calculation: $275/
hour (senior risk management specialist) x 8 hours = $2200; $2200 +
$5775 + $12,000 = $19,975.
---------------------------------------------------------------------------

    As with the development of stress test procedures, the costs funds
would incur each year as a result of the proposed amendments to update
test procedures, conduct stress tests and provide reports on the tests
and assessments to the board of directors would vary. Funds that
currently conduct stress tests already incur costs to perform the
tests. In addition, some of those funds may currently provide reports
to senior management (if not the board) of their

test results. We assume, however, that few, if any, fund advisers
provide a regular assessment to the board of the fund's ability to
withstand the events reasonably likely to occur in the following year.
For that reason, we estimate that all fund complexes would incur costs
of $3000 to provide a written report on the test results to the board,
$4000 to provide an assessment to the board and $10 to retain records
of the reports and assessments for a total annual cost to a fund
complex of approximately $42,000.\364\ We estimate that a portion of
funds would incur additional costs each year to perform stress tests
and update their procedures each year, up to a maximum of approximately
$113,000.\365\
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    \364\ This estimate is based on the following calculation:
Report: $275/hour x 10 hours (senior risk management specialist) +
$62 x 2 hours (administrative assistant) = $2874; Assessment: $275/
hour x 15 hours (senior risk management specialist) = $4125; Record
retention: $62/hour x 0.1667 hours (administrative assistant) =
$10.33; ($2874 + $4125 + $10) x 6 (board meetings per year) =
$42,054.
    \365\ This estimate is based on the following calculations:
Tests: $275/hour x 15 hours (senior risk management specialist) +
$244/hour x 20 hours (senior systems analyst) = $9,005; $9,005 x 12
(monthly testing) = $108,060; Update procedures: $275/hour x 5 hours
(senior risk management specialist) + $4000/hour x 1 hour = $5375;
$108,060 + $5375 = $113,435.
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    For purposes of this cost benefit analysis, Commission staff has
estimated that 25 percent of fund complexes (or 43 complexes) would
have to develop stress test procedures, 50 percent (or 85) would have
stress test procedures, but have to revise those procedures, and 25
percent of complexes (or 43 complexes) would review the procedures
without having to change them. Based on these estimates, staff further
estimates that the total one time costs for fund complexes to develop
or refine existing stress test procedures would be approximately $19
million.\366\ In addition, staff estimates that the annual costs to all
funds to conduct stress tests, update test procedures, provide reports
and assessments to fund boards and retain records of the reports and
assessments would be approximately $17 million.\367\
---------------------------------------------------------------------------

    \366\ This estimate is based on the following calculation: (43 x
$173,000) + (85 x $95,000) + (43 x $20,000) + (171 x $5775) + (171 x
$12,000) = $19,413,525.
    \367\ This estimate is based on the following calculation: (43 x
$113,000) + (85 x $113,000 x 0.5) + (171 x $42,054 (reports and
assessments)) = $16,852,734.
---------------------------------------------------------------------------

    We request comment on our estimates. We are particularly interested
in comments regarding how many funds currently conduct stress testing,
the extent and nature of that testing, including whether the procedures
can be adopted on a complex wide basis, and the costs to develop
rigorous stress testing procedures. For those money market funds that
have stress test procedures, how significantly would they have to
change those procedures in light of the proposed rule amendment? What
costs would they incur, including specific costs for personnel that
would be involved in changes?
4. Repurchase Agreements
    We are proposing to modify the conditions under which a money
market fund may treat the acquisition of a repurchase agreement
collateralized fully to be an acquisition of the repurchase agreement's
collateral for purposes of rule 2a-7's diversification
requirement.\368\ Money market funds would be able to adopt this
``look-through'' treatment only with respect to repurchase agreements
collateralized by cash items or Government securities \369\ and as to
which the board of directors or its delegate has evaluated the
creditworthiness of the counterparty.\370\
---------------------------------------------------------------------------

    \368\ See rule 2a-7(c)(4)(ii)(A). The rule 5b-3(c)(1) definition
of collateralized fully, which is cross-referenced by rule 2a-
7(a)(5), sets forth the related conditions. Under the current
definition, a money market fund may look through repurchase
agreements collateralized with cash items, Government securities,
securities with the highest rating or unrated securities of
comparable credit quality.
    \369\ Proposed rule 2a-7(a)(5).
    \370\ Proposed rule 2a-7(c)(4)(ii)(A).
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    We believe that the proposed changes would limit money market
funds' exposure to credit risk. Collateral other than cash items and
Government securities might not adequately protect money market funds
because the funds may be unable to liquidate the collateral without
incurring a loss if the counterparty defaults. The creditworthiness
evaluation, moreover, would make it less likely that a money market
fund enters into repurchase agreements with counterparties that will
default and be exposed to risks related to the collateral. As discussed
above, we believe that the reduction of credit risk would better enable
money market funds to weather market turbulence and maintain a stable
net asset value per share.
    We recognize that these proposed changes could result in costs to
money market funds. The limitation on money market funds' ability to
invest in repurchase agreements collateralized with securities other
than cash items and Government securities may result in lower yields
for money market funds to the extent that other investment
opportunities do not provide the same returns as those agreements. The
limitation also could lead to an increase in the counterparties' short-
term financing costs. Counterparties may have to substitute such
repurchase agreements with other sources of financing linked to the
same type of collateral. If counterparties limited their own
investments in securities that are no longer permissible collateral,
the issuers of such securities could also be indirectly affected by our
proposed change. The restrictions on repurchase agreements held by
money market funds might potentially affect the functioning of these
important markets. We invite comment on what effects, if any, these
restrictions might have on the markets for repurchase agreements.
    The creditworthiness evaluation would also impose additional costs.
A credit risk evaluation, however, is required with respect to other
portfolio securities and to repurchase agreements for which money
market funds do not adopt a look-through treatment.\371\ We understand,
moreover, that many money market fund complexes already perform a
creditworthiness evaluation for all repurchase agreement
counterparties. Accordingly, we believe that the additional cost
imposed on money market funds, if any, would be minimal.
---------------------------------------------------------------------------

    \371\ See rule 2a-7(c)(3)(i).
---------------------------------------------------------------------------

    We request comment on any potential costs and benefits. Would the
proposed amendments significantly reduce the risk that money market
funds incur losses upon the default of their repurchase agreement
counterparties? What effect would the limitation on permissible
collateral have on counterparties' ability to obtain short-term
financing? How would the proposed change impact issuers of securities
that would no longer be permissible collateral? Would the required
creditworthiness evaluation impose any material cost on money market
funds? We encourage commenters to provide empirical data to support
their analysis.
5. Public Web site Posting
    The proposed amendments to rule 2a-7 would require money market
funds to post monthly portfolio information on their Web sites.\372\
The rule is intended to provide shareholders with timely information
about the securities held by the money market fund.
---------------------------------------------------------------------------

    \372\ Proposed rule 2a-7(c)(12).
---------------------------------------------------------------------------

    We anticipate that the proposal to require funds to post monthly
portfolio information on their Web sites would benefit investors by
providing them a better understanding of their own risk exposure and
thus enabling them to make better informed investment decisions. The
proposed rule may thus

instill more discipline into portfolio management and reduce the
likelihood of a money market fund breaking the buck. Finally, any
increased costs to money market funds from monthly reporting may be
offset to a degree by the proposal to exclude them from current
requirements to file quarterly portfolio holdings information on Form
N-Q. For the purposes of the PRA analysis, we estimate that money
market funds would realize, in the aggregate, a decrease of 6,000
burden hours, or $470,880, from this exclusion.\373\
---------------------------------------------------------------------------

    \373\ This estimate is based on our experience with other
filings and an estimated hourly wage rate of $78.48 (6000 hours x
$78.48 = $470,880).
---------------------------------------------------------------------------

    The proposed website posting requirement would also impose certain
costs on funds. We estimate that, for the purposes of the PRA, money
market funds would be required to spend 24 hours of internal money
market fund staff time initially to develop a webpage, at a cost of
$4944 per fund.\374\ We also estimate that all money market funds would
be required to spend 4 hours of professional time to maintain and
update the webpage each month, at a total annual cost of $9888 per
fund.\375\ We believe, however, that our estimates may overstate the
actual costs that would be incurred to comply with the website posting
requirement because many funds currently post their portfolio holdings
on a monthly, or more frequent, basis.\376\ For purposes of this cost
benefit analysis, Commission staff estimates that 20 percent of money
market portfolios (150 portfolios) do not currently post portfolio
holdings information on their websites. Based on these estimates, we
estimate that the total initial costs for the proposed website
disclosure would be $741,600.\377\ In addition, we estimate that the
annual costs for all money market funds to maintain and update their
webpages would be $7.4 million.\378\
---------------------------------------------------------------------------

    \374\ The staff estimates that a webmaster at a money market
fund would require 24 hours (at $206 per hour) to develop and review
the webpage (24 hours x $206 = $4944).
    \375\ The staff estimates that a webmaster would require 4 hours
(at $206 per hour) to maintain and update the relevant webpages on a
monthly basis (4 hours x $206 x 12 months = $9888).
    \376\ See supra note 325 and accompanying text.
    \377\ This calculation is based on the following estimate:
($4944 x 150 portfolios) = $741,600.
    \378\ This calculation is based on the following estimate:
($9888 x 750 portfolios) = $7,416,000.
---------------------------------------------------------------------------

    In addition, monthly website disclosure may impose other costs on
funds and their shareholders. For example, more frequent disclosure of
portfolio holdings may arguably expand the opportunities for
professional traders to exploit this information by engaging in
predatory trading practices, such as front-running. However, given the
short-term nature of money market fund investments and the restricted
universe of eligible portfolio securities, we believe that the risk of
trading ahead is severely curtailed in the context of money market
funds.\379\ For similar reasons, we believe that the potential for
``free riding'' on a money market fund's investment strategies, i.e.,
obtaining for free the benefits of fund research and investment
strategies, is minimal. Given that shares of money market funds are
ordinarily purchased and redeemed at the stable price per share, we
believe that there would be relatively few opportunities for profitable
arbitrage. Thus, we estimate that the costs of predatory trading
practices under this proposal would be minimal. We request comment on
the analysis above, and on any other potential costs and benefits of
the proposed website disclosure requirement.
---------------------------------------------------------------------------

    \379\ See ICI Report, supra note 6, at 93.
---------------------------------------------------------------------------

6. Processing of Transactions
    Our proposal would require that a money market fund's board
determine in good faith, on an annual basis, that the fund (or its
transfer agent) has the capacity to redeem and sell securities at
prices that do not correspond to the fund's stable net asset value per
share.\380\ As discussed above, the aftermath of 2008 market events
revealed that some funds had not implemented systems to calculate
redemptions at prices other than the funds' stable net asset value per
share.\381\ Because of this failure, transactions were processed
manually, which extended the time that investors had to wait for the
proceeds from their redeemed shares.
---------------------------------------------------------------------------

    \380\ Proposed rule 2a-7(c)(1).
    \381\ See supra note 262 and accompanying text.
---------------------------------------------------------------------------

    As noted in Section II.G above, money market funds may be required
to process transactions at a price other than the fund's stable share
price and pay the proceeds of redemptions within seven days (or a
shorter time that the fund has represented). We believe that funds that
do not have the operational capacity to price shares at other than the
stable share price risk being unable to meet their obligations under
the Act. We expect that the proposed amendments would help eliminate
the risk that money market funds would not be able to meet these
obligations in the event the fund breaks a buck. Shareholders would
benefit from the proposed amendments because they would be more likely
to receive the proceeds from their investments in the event of a
liquidation.
    Because funds are obligated to redeem at other than stable net
asset value per share, there should be no new cost associated with the
requirement for the funds (or their transfer agents) to have the
systems that can meet these requirements. To the extent that funds and
transfer agents have to change their systems, however, these changes
will likely entail costs. If a fund complex were to require one month
of a senior systems analyst's time in assuring that the required
systems are in place, the total cost for the fund complex would be
$39,040.\382\ Based on this estimate we estimate that, if one-third of
the fund complexes are not currently able to redeem at prices other
than stable net asset value, the total cost to all money market funds
would be $2,225,280.\383\ We also anticipate that the board's
determination would result in costs. We anticipate that the board's
determination would be based on a review at a regularly scheduled board
meeting of the fund adviser's or the transfer agent's certification
that the operational systems have the requisite capacity. Commission
staff estimates that this review would take about 15 minutes of board
time at a cost of $1000.\384\ Based on this estimate we estimate that
the total cost to all money market funds of board determinations would
be $171,000.\385\ We request comment on the analysis above, and on any
other potential costs and benefits of this proposed rule amendment.
---------------------------------------------------------------------------

    \382\ This estimate is based on the following calculation: $244/
hour x 160 hours (senior systems analyst) = $39,040.
    \383\ This is based on the following calculation: (171 (fund
complexes) / 3) x $39,040 = $2,225,280.
    \384\ This is based on the following calculation: $4000/hour
(board time) x 0.25 hours = $1000.
    \385\ This is based on the following calculation: $1000 x 171
(fund complexes) = $171,000.
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B. Rule 17a-9

    The Commission is proposing to amend rule 17a-9 to expand the
circumstances under which affiliated persons can purchase money market
fund portfolio securities. Under the proposed amendment, a money market
fund could sell a portfolio security that has defaulted (other than an
immaterial default unrelated to the financial condition of the issuer)
to an affiliated person for the greater of the security's amortized
cost value or market value (plus accrued and unpaid interest), even
though the security continued to be an eligible security.\386\
---------------------------------------------------------------------------

    \386\ See proposed rule 17a-9(a).
---------------------------------------------------------------------------

    The proposed amendment essentially would codify past Commission
staff no-

action letters \387\ and should benefit investors by enabling money
market funds to dispose of troubled securities (e.g., securities
depressed in value as a result of market conditions) from their
portfolios quickly without any loss to fund shareholders. It also would
benefit money market funds by eliminating the cost and delay of
requesting no-action assurances in these scenarios and the uncertainty
whether such assurances will be granted.\388\ We do not believe that
there are any costs associated with this amendment, but we request
comment on this analysis.
---------------------------------------------------------------------------

    \387\ See supra Section II.H.1.
    \388\ Commission staff estimates that the costs to obtain staff
no-action assurances range from $50,000 to $100,000.
---------------------------------------------------------------------------

    In addition, we are proposing to permit affiliated persons to
purchase other portfolio securities from an affiliated money market
fund, for any reason, provided that such person would be required to
promptly remit to the fund any profit it realizes from the later sale
of the security.\389\ Our staff provided temporary no-action assurances
last fall to certain funds facing extraordinary levels of redemption
requests for affiliated persons of such funds to purchase eligible
securities from the funds at the greater of amortized cost or market
value (plus accrued and unpaid interest).\390\ In these circumstances,
money market funds may need to obtain cash quickly to avoid selling
securities into the market at fire sale prices to meet shareholder
redemption requests, to the detriment of remaining shareholders. The
staff also provided no-action assurances to money market funds last
fall for affiliated persons of the fund to purchase at the greater of
amortized cost or market value (plus accrued and unpaid interest)
certain distressed securities that were depressed in value due to
market conditions potentially threatening the stable share price of the
fund, but that remained eligible securities and had not defaulted.\391\
Money market funds and their shareholders would benefit if affiliated
persons were able to purchase securities from the fund at the greater
of amortized cost or market value (plus accrued and unpaid interest) in
such circumstances without the time, expense, and uncertainty of
applying to Commission staff for no-action assurances.
---------------------------------------------------------------------------

    \389\ See proposed rule 17a-9(b)(2).
    \390\ Many of the no-action letters can be found on our website.
See http://www.sec.gov/divisions/investment/im-noaction.shtml#money.
    \391\ Id.
---------------------------------------------------------------------------

    Affiliated persons purchasing such securities would have costs in
creating and implementing a system for tracking the purchased
securities and remitting to the money market fund any profit ultimately
received as a result. We estimate that creating such a system on
average would require 5 hours of a senior programmer's time, at a cost
of $1460 for each of the 171 fund complexes with money market funds and
a total cost of $249,660.\392\ After the initial creation of this
system, we expect that the time spent noting in this system that a
security was purchased under rule 17a-9 would require a negligible
amount of compliance personnel's time. Based on our experience, we do
not anticipate that there would be many instances, if any, in which an
affiliated person would be required to repay profits in excess of the
purchase price paid to the fund. However, if there is a payment, it
would be made to the fund. If the payment is sufficiently large, we
believe that funds are likely to include it with the next distribution
to shareholders, which would not result in any additional costs to the
fund. We request comment on this analysis. Are our cost estimates
accurate? Are there other costs in allowing an affiliated person of a
money market fund to purchase portfolio securities from the fund? Are
there incentives that might encourage an affiliated person to purchase
securities that are not distressed in any way? If so, would such
purchases result in any cost to the fund and its investors?
---------------------------------------------------------------------------

    \392\ This estimate is based on the following calculation: $292/
hour x 5 hours x 171 fund complexes = $249,660.
---------------------------------------------------------------------------

    The Commission also is proposing a related amendment to rule 2a-7,
which would require that funds report all transactions under rule 17a-9
to the Commission. We believe that this reporting requirement would
benefit fund investors by allowing the Commission to monitor the
purchases for possible abuses and conflicts of interest on the part of
the affiliates. It also would allow the Commission to observe what
types of securities are distressed and which money market funds are
holding distressed securities or are subject to significant redemption
pressures. This information would better enable the Commission to
monitor emerging risks at money market funds. For purposes of the
Paperwork Reduction Act analysis, we estimate this amendment would
impose relatively small reporting costs on money market funds of $7625
per year.\393\ We request comment on whether these cost estimates are
reasonable. We also request comment on our analysis of the costs and
benefits of this proposed rule amendment.
---------------------------------------------------------------------------

    \393\ This estimate is based on the following calculations: 25
(notices) + $305/hour (attorney) x 1 hour = $7625. See supra note
329 and accompanying text.
---------------------------------------------------------------------------

C. Rule 22e-3

    Proposed rule 22e-3 would permit money market funds that break the
buck to suspend redemptions and postpone payment of proceeds pending
board-approved liquidations. The rule would thus facilitate orderly
liquidations, which would protect value for fund shareholders and
minimize disruption to financial markets. The rule would also enable
funds to avoid the expense and delay of obtaining an exemptive order
from the Commission, which we estimate would otherwise cost about
$75,000,\394\ and would provide legal certainty to funds that wish to
suspend redemptions during a liquidation in the interest of fairness to
all shareholders.
---------------------------------------------------------------------------

    \394\ See Exchange Traded Funds, Investment Company Act Release
No. 28913 (Mar. 11, 2008) [73 FR 14618 (Mar. 18, 2008)] at n.301
(estimating a cost range between $75,000 and $350,000 to submit an
application for relief to operate an ETF). We assume that the costs
associated with an application for exemptive relief from section
22(e) would be on the low end of this range because section 22(e)
exemptive applications are often less involved than ETF exemptive
applications.
---------------------------------------------------------------------------

    Proposed rule 22e-3 would impose certain minimal costs on funds
relying on the rule by requiring them to provide prior notice to the
Commission of their decision to suspend redemptions in connection with
a liquidation. We estimate that, for the purposes of the PRA, the
annual burden of the notification requirement would be 10 minutes for a
cost of $51.\395\ The proposed rule may also impose costs on
shareholders who seek to redeem their shares, but are unable to do so.
In those circumstances, shareholders might have to borrow funds from
another source, and thereby incur interest charges and other
transactional fees. We believe the potential costs associated with
proposed rule 22e-3 would be minimal, however, because the proposed
rule would provide a limited exemption that is only triggered in the
event of a fund breaking the buck and liquidating. We request comment
on this analysis, and on any other potential costs and benefits of
proposed rule 22e-3.
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    \395\ This estimate is based on the following calculation: $305/
hour x 1 / 6 hour = $51.
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D. Rule 30b1-6 and Form N-MFP: Monthly Reporting of Portfolio Holdings

    Proposed rule 30b1-6 and Form N-MFP would require money market
funds to file with the Commission interactive data-formatted portfolio
holdings information on a monthly basis. We expect that the proposed
rule would

improve the efficiency and effectiveness of the Commission's oversight
of money market funds by enabling Commission staff to manage and
analyze money market fund portfolio information more quickly and at a
lower cost than is currently possible. The interactive data would also
facilitate the flow of information between money market funds and other
users of this information, such as information services, academics, and
investors. As the development of software products to analyze the data
continues to grow, we expect these benefits would increase.
    Money market funds may also realize cost savings from the proposed
rule. Currently, money market funds provide portfolio holdings
information in a variety of formats to different third-parties, such as
information services and NRSROs. The proposed rule may encourage the
industry to adopt a standardized format, thereby reducing the burdens
on money market funds of having to produce this information in multiple
formats. In addition, money market funds may also benefit from cost
savings to the extent that we exempt them from filing certain
information required to be disclosed in existing quarterly portfolio
holdings reports.
    The proposed reporting requirement would also impose certain costs.
We estimate that, for the purposes of the PRA, these filing
requirements (including collecting, tagging, and electronically filing
the report) would impose 128 burden hours at a cost of $35,968 \396\
per money market fund for the first year, and 96 burden hours at a cost
of $26,976 \397\ per money market fund in subsequent years.\398\
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    \396\ This estimate is based on the following calculation: $281/
hour x 128 hours (senior database administrator) = $35,968.
    \397\ This estimate is based on the following calculation: $281/
hour x 96 hours (senior database administrator) = $26,976.
    \398\ We understand that some money market funds may outsource
all or a portion of these responsibilities to a filing agent,
software consultant, or other third-party service provider. We
believe, however, that a fund would engage third-party service
providers only if the external costs were comparable, or less than,
the estimated internal costs of compiling, tagging, and filing the
Form N-MFP.
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    For the reasons outlined in the discussion on the monthly website
posting requirement, we estimate that there would be minimal additional
costs incurred in connection with the proposed reporting requirement.
We request comment on our estimates, including whether our assumptions
about the costs and benefits are correct. We also request comment on
other potential costs and benefits of the proposed reporting
requirement.

E. Request for Comments

    The Commission requests comment on the potential costs and benefits
of the proposed rules and rule amendments. We also request comment on
the potential costs and benefits of any alternatives suggested by
commenters. We encourage commenters to identify, discuss, analyze, and
supply relevant data regarding any additional costs and benefits. For
purposes of the Small Business Regulatory Enforcement Act of 1996,\399\
the Commission also requests information regarding the potential annual
effect of the proposals on the U.S. economy. Commenters are requested
to provide empirical data to support their views.
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    \399\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996).
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VI. Competition, Efficiency and Capital Formation

    Section 2(c) of the Investment Company Act requires the Commission,
when engaging in rulemaking that requires it to consider or determine
whether an action is consistent with the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.\400\
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    \400\ 15 U.S.C. 80a-2(c).
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A. Rule 2a-7

1. Second Tier Securities, Portfolio Maturity, and Liquidity Limits
    We are proposing several amendments to rule 2a-7 to tighten the
risk-limiting conditions of the rule. We are proposing to limit money
market fund investments to only first tier securities, i.e., securities
receiving the highest short-term ratings from the requisite NRSROs or
unrated securities that the fund's board of directors or its delegate
determines are of comparable quality.\401\ We also are proposing to
limit money market funds to acquiring long-term securities that have
received long-term ratings in the highest two ratings categories.\402\
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    \401\ See proposed rule 2a-7(a)(11)(iii); proposed rule 2a-
7(a)(11)(iv).
    \402\ See proposed rule 2a-7(a)(11)(iv)(A).
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    The proposed amendments would reduce the maximum weighted average
maturity of a money market fund permitted by rule 2a-7 from 90 days to
60 days.\403\ They also would impose a new maturity limitation based on
the weighted average ``life'' of fund securities that would limit the
portion of a fund's portfolio that could be held in longer term
floating- or variable-rate securities.\404\ We are proposing to delete
a provision in rule 2a-7 that permits money market funds not relying on
the amortized cost method of valuation to acquire Government securities
with a remaining maturity of up to 762 calendar days.
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    \403\ See proposed rule 2a-7(c)(2)(ii).
    \404\ See proposed rule 2a-7(c)(2)(iii).
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    Finally, we are proposing new liquidity requirements on money
market funds. Under the proposed amendments, money market funds would
be prohibited from acquiring illiquid securities\405\ and money market
funds would be required to comply with certain minimum daily and weekly
liquidity requirements.\406\ The amended rule also would require that a
money market fund at all times hold highly liquid securities sufficient
to meet reasonably foreseeable redemptions in light of its obligations
under section 22(e) of the Act and any commitments the fund has made to
shareholders.\407\
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    \405\ See proposed rule 2a-7(c)(5)(i).
    \406\ See proposed rule 2a-7(c)(5).
    \407\ See proposed rule 2a-7(c)(5)(ii).
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    We believe that these changes would reduce money market funds'
sensitivity to interest rate, credit, and liquidity risks. These
changes also would limit the credit spread risk and interest rate
spread risk produced by longer term securities. A reduction of these
risks would better enable money market funds to weather market
turbulence and maintain a stable net asset value per share. We believe
that the changes would reduce the risk that a money market fund will
break the buck and therefore prevent losses to fund investors. To the
extent that money market funds are more stable, the changes also would
reduce systemic risk to the capital markets and ensure a stable source
of financing for issuers of short-term credit instruments. We believe
that these effects would encourage capital formation by encouraging
investment in money market funds, thereby allowing them to expand as a
source of short-term financing in the capital markets.
    These changes also may reduce maturities of short-term credit
securities that issuers offer, which may increase financing costs for
these issuers who might have to go back more frequently to the market
for financing. To the extent that some issuers are unwilling or unable
to issue securities that match money market fund demand given these
proposed restrictions, the amendments could have a negative impact on
capital formation.
    If the proposed amendments reduce yields that money market funds
are able to offer, some investors may move their money to, among other
places, offshore unregulated money market funds that do not follow rule
2a-7's strictures and

thus are able to offer a higher yield. Beyond the competitive impact,
such a change could increase systemic risks to short-term credit
markets and capital formation by increasing investment in less stable
short-term instruments.
    Precluding ownership of second tier securities also may have
anticompetitive effects on some relatively small money market funds
that may compete with larger funds on the basis of yield. The proposed
elimination of the ability of money market funds to invest in second
tier securities may affect the capital raising ability and strategies
of the issuers of second tier securities or otherwise affect their
financing arrangements, and may affect the flexibility of investing
options for funds. As noted above, however, second tier securities
represent only a very small percentage of money market fund portfolios
today, which suggests that our proposed amendments would not have a
material effect on capital formation. We solicit specific comment on
whether the proposed amendments regarding second tier securities would
promote efficiency, competition and capital formation.
2. Stress Testing
    We are proposing to amend rule 2a-7 to require the board of
directors of each money market fund to adopt procedures providing for
periodic stress testing of the money market fund's portfolio, reporting
the results of the testing to fund boards, and providing an assessment
to the board.\408\ We believe that stress testing could increase the
efficiency of money market funds by enhancing their risk management and
thus making it more likely that the fund will be better prepared for
potential stress on the fund due to market events or shareholder
behavior. Money market funds may become more stable as a result of the
risk management benefits provided by stress testing, allowing them to
expand and attract further investment. If so, this result will promote
capital formation. We do not believe that stress testing would have an
adverse impact on competition or capital formation. What effect would
the proposed requirement have on competition, efficiency and capital
formation?
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    \408\ Proposed rule 2a-7(c)(8)(ii)(D).
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3. Repurchase Agreements
    We are proposing to allow money market funds to treat the
acquisition of a repurchase agreement to be an acquisition of the
collateral for purposes of rule 2a-7's diversification requirement only
if the repurchase agreement is collateralized by cash items or
Government securities \409\ and after the board of directors or its
delegate has evaluated the creditworthiness of the counterparty.\410\
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    \409\ Proposed rule 2a-7(a)(5).
    \410\ Proposed rule 2a-7(c)(4)(ii)(A).
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    We believe that these changes would limit money market funds'
exposure to credit risk. The reduction of credit risk would increase
money market funds' ability to maintain a stable net asset value per
share, thereby preventing losses to fund investors, reducing systemic
risk to the capital markets and ensuring a stable source of financing
for issuers of short-term credit instruments. More stable money market
funds may attract greater investments, thus promoting capital formation
and providing a greater source of short-term financing in the capital
markets.
    The limitation on money market funds' ability to invest in
repurchase agreements collateralized with securities other than cash
items and Government securities may result in an increase in the short-
term financing costs of the counterparties in such agreements, thereby
reducing their willingness to invest in those securities. As a result,
issuers of such securities could also be indirectly affected by our
proposed change, which therefore could have a negative impact on
capital formation. We request comment on what effect the proposed
amendments would have on competition, efficiency, and capital
formation.
4. Public Web Site Disclosure
    We are proposing to require money market funds to disclose certain
portfolio holdings information on their Web sites on a monthly
basis.\411\ The proposed rule amendment would provide greater
transparency of the fund's investments for current and prospective
shareholders, and may thus promote more efficient allocation of
investments by investors. We believe the proposed rule amendment may
also improve competition, as better-informed investors may prompt funds
managers to provide better services and products. We do not anticipate
that funds would be disadvantaged, with respect to competition, because
so many already have chosen to provide the information more frequently
than monthly. In addition, the investments selected by money market
funds are less likely than, for example, equity funds, to be
investments from which competing funds would obtain benefit by
scrutinizing on a monthly basis. The proposed rule may also promote
capital formation by making portfolio holdings information readily
accessible to investors, who may thus be more inclined to allocate
their investments in a particular fund or in money market funds instead
of an alternative product. Alternatively, the proposed rule could have
the reverse effect if the portfolio holdings information makes
investors less confident regarding the risks associated with money
market funds, including the risk that market participants may use the
information obtained through the disclosures to the detriment of the
fund and its investors, such as by trading along with the fund or ahead
of the fund by anticipating future transactions based on past
transactions. We request comment on what effect this proposed rule
would have on competition, efficiency, and capital formation.
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    \411\ See supra Section II.F.1.
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5. Processing of Transactions
    We are proposing to require that each money market fund's board
determine, at least once each calendar year, that the fund has the
capability to redeem and sell its securities at prices other than the
fund's stable net asset value per share.\412\ This amendment would
require money funds to have the operational capacity if they break the
buck to continue to process investor transactions in an orderly manner.
This amendment would increase efficiency at money market funds that
break the buck by increasing the speed and minimizing the operational
difficulties in satisfying shareholder redemption requests in such
circumstances. It may also reduce investors' concerns that redemption
would be unduly delayed if a money market fund were to break the buck.
We do not believe that this amendment would have a material impact on