SEC Staff Provides Responses to Questions Concerning New Disclosure Requirements Adopted as part of Recent Money Market Fund Rule Amendments
The Staff of the SEC’s Division of Investment Management published responses to various questions relating to Rule 30b1-7 under the Investment Company Act of 1940, as amended (the “1940 Act”), and new Form N-MFP. Rule 30b1-7 generally requires a money market fund to file a report of its portfolio holdings on Form N-MFP each month, with the portfolio holdings information becoming publicly available sixty days after the end of the month to which the report relates. Rule 30b1-7 and Form N-MFP were adopted by the SEC in conjunction with the recent amendments to Rule 2a-7 under the 1940 Act and other rules relating to money market funds, which were discussed in the March 5, 2010 and June 1, 2010 Alerts. Below is a summary of the Staff’s responses (with references to the relevant Items of Form N MFP, as applicable). The compliance date for the requirements relating to Form N MFP is December 7, 2010.
SCOPE OF RULE 30b1-7
Any fund subject to Rule 2a-7 (that is, a registered investment company that holds itself out as a money market fund) must file a Form N-MFP each month, even if the fund does not maintain a stable share price using the amortized cost method or penny rounding method.
DISCLOSURE OF MARKET-BASED QUOTATIONS OF PORTFOLIO SECURITIES (ITEMS 18, 25, 45 AND 46)
Form N-MFP Items 45 and 46 require a money market fund to provide a market-based quotation for each of its securities as of the last business day of each month. In contrast, Items 18 and 25 require a money market fund to provide a market-based quotation for each of its securities as of the date on which the fund’s shadow price was calculated.
MULTI-CLASS MONEY MARKET FUNDS (ITEM 25)
A multi-class money market fund may use the same market-based (or “shadow”) net asset value for each class, provided that the fund’s dividend and accounting policies assure that there will be no deviation between the market-based net asset values of the fund’s share classes.
PORTFOLIO HOLDINGS INVESTMENT CATEGORIES (ITEM 31)
A fund may only use the sixteen investment categories specified in Form N-MFP Item 31 to describe each of the fund’s portfolio holding, and may not use other categories.
VALUE OF CAPITAL SUPPORT AGREEMENTS (ITEMS 26 THROUGH 46)
A capital support agreement that does not relate to a specific portfolio security should itself be identified as a portfolio security held by the fund and given a value, if any, as of the date of valuation. A capital support agreement, the value of which will be determined only at the time as a loss is determined (e.g., an agreement to bring the fund’s market-based net asset value per share to at least $0.995), will have a value (a) only if, at the time of such determination, the conditions for a capital support payment exist and (b) in an amount equal to the amount payable at the time of such determination (otherwise it will have no value).
SEVEN-DAY GROSS YIELD (ITEM 17)
A tax-exempt money market fund that holds taxable paper, and a state tax-exempt money market fund that holds out-of-state paper, should not adjust the fund’s gross yield to reflect federal or state-level taxes, respectively, that would be imposed on the taxable or out-of-state paper, as the case may be.
UNIQUE IDENTIFIERS (ITEM 29)
If a portfolio security has not been issued a CUSIP, the fund may use a “dummy,” or other internally assigned, unique identifier.
REPURCHASE AGREEMENTS (ITEM 32)
A fund that holds a repurchase agreement must respond to Item 32a through 32f (which describe, among other things, the value of the collateral), even if the fund is not treating the acquisition of the repurchase agreement as the acquisition of its underlying collateral for purposes of Rule 2a-7’s diversification requirements.
DESIGNATED NRSRO CREDIT RATINGS (ITEMS 34, 37 AND 38)
A fund that treats a security, demand feature or guarantee as a rated security even though for the rating of the security, demand feature or guarantee, the fund is relying on the rating of another class of securities of the issuer (and thus, the fund considers the security, demand feature or guarantee as comparable in priority and security to the other class of securities), is required to disclose the rating of the comparable class of securities.
DEMAND FEATURES AND GUARANTEES (ITEMS 37 AND 38)
A fund that is not relying on a demand feature or guarantee for the purpose of determining the quality, maturity, or liquidity of a security, is not required to respond to Items 37 or 38 with respect to that demand feature or guarantee.
PERCENTAGE OF NET ASSETS INVESTED IN A SPECIFIC SECURITY (ITEM 42)
A fund that uses the amortized cost method of valuation should base the percentage of the fund’s net assets invested in a particular security on the amortized cost to the fund of that security.
Portfolio Holdings (Items 26 through 46) – A feeder fund should disclose as its portfolio holdings the shares of the master fund it holds, not the portfolio holdings of the master fund.
- Weighted Average Maturity/Weighted Average Maturity Life Calculations (Items 11 and 12) and Determinations of Maturity Date (Item 35) and Final Legal Maturity (Item 36) – A feeder fund should calculate its weighted average maturity and weighted average maturity life in accordance with Rule 2a-7(d)(8), and thus should generally treat the maturity date of each share of the master fund as the date when the master fund is required to make payment on redemption of such share by the feeder fund. In addition, the final maturity date of each share of the master fund should be the same as the maturity date of such share.
- Shadow Price of Master Fund Shares (Items 18 and 25) and Current Market Value (Items 45 and 46) – A feeder fund should determine and report the market value of the master fund shares it held as of the date required, which means that if the master fund redeems its shares at $1.00 per share and the feeder fund reasonably believes on that date that the master fund’s shadow price is not less than $0.995 per share, the feeder fund should assign a current market value to each master fund share equal to $1.00.
- Security Enhancements (Items 37, 38 and 39) – A feeder fund should not report any enhancement (e.g., demand feature or guarantee) with respect to its master fund holdings.
- Principal Amount (Item 40) – A feeder fund should report the principal amount of its master fund holdings as of the reporting date.
- Current Amortized Cost (Item 41) – A feeder fund that uses the amortized cost method of valuation should provide the amortized cost of the master fund shares it held as of the reporting date. A feeder fund that does not use the amortized cost method should respond “N/A” to Item 41.
MONEY MARKET FUND NOT REGISTERED UNDER THE 1933 ACT
A 1940 Act registered money market fund that is not registered under the Securities Act of 1933 (the “1933 Act”) and whose shares are offered only in private placements in reliance on Rule 506 of Regulation D under, or Section 4(2) of, the 1933 Act, will not be deemed to violate Rule 506 or Section 4(2), notwithstanding that its Form N-MFP filings are publicly available sixty days after the end of the month to which those filings relate, provided that the fund (a) limits the information provided in its Form N-MFP filings to only that information required by the form and (b) does not otherwise use its Form N-MFP filings to condition the market for an offering of its securities.
TECHNICAL SPECIFICATIONS FOR FORM N-MFP
The technical specifications for Form N-MFP will be available in mid to late summer 2010.