The SEC recently published its formal release (the “Adopting Release”) adopting significant amendments (the “Amendments”) to Rule 2a-7 and other rules under the Investment Company Act of 1940 (the “1940 Act”) that affect money market funds.  The SEC approved the Amendments at its January 27, 2010 open meeting.  This special edition of the Alert discusses the Amendments in detail.  It reviews the principal changes to the 1940 Act’s money market fund rules, and discusses the new obligations the Amendments impose on money market fund boards of directors as well as the new policies the Amendments require funds to adopt.  It also reviews the various compliance dates for the Amendments.

Summary of the Amendments

The Amendments reflect three categories of changes to the rules governing money market funds: (a) changes to Rule 2a-7’s risk limiting conditions governing a fund portfolio’s: (i) maturity, (ii) credit quality, (iii) diversification and (iv) liquidity, (b) changes relating to operational aspects of money market funds, and (c) new disclosure requirements. [Read more →]

The federal banking agencies (the “Agencies”) clarified the risk weights for claims on or guaranteed by the FDIC for purposes of banking organizations’ risk-based capital requirements. Direct claims on and claims unconditionally guaranteed by the FDIC (such as FDIC-insured deposits, prepaid assessments of deposit insurance premiums and debt guaranteed under the Temporary Liquidity Guarantee Program) may be assigned a zero percent risk weight. Recent loss-sharing agreements entered into by the FDIC, though, are considered conditional guarantees for risk-based capital purposes due to contractual conditions that acquirers must meet, and therefore are not eligible for a zero percent risk weight. Instead, the guaranteed portion of assets subject to such a loss-sharing agreement may be assigned a 20 percent risk weight. The Agencies also advised banking organizations to consult with their primary federal regulator to determine the appropriate risk-based capital treatment for specific loss-sharing agreements, as the specific terms of each agreement may vary.