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The SEC’s Proposed Revisions to Money Market Fund Rules

The Securities and Exchange Commission ("SEC'') has proposed amendments to the rules governing money market mutual funds (''money funds'') registered under the Investment Company Act of 1940 (the ''1940 Act'').
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The authors write: The Securities and Exchange Commission ("SEC") has proposed amendments to the rules governing money market mutual funds ("money funds") registered under the Investment Company Act of 1940 (the "1940 Act") see Money Market Fund Reform, Investment Company Act Release No. 28807 (June 30, 2009) at 2009 SEC LEXIS 2312. In response to the extreme turbulence in the money fund sector in 2007 and 2008, the amendments seek to reduce money funds' vulnerability to loss. Significantly, the SEC would permit a money fund that has "broken the buck" (i.e., priced its securities below a stable net asset value per share ("NAV"), typically $1.00), to suspend redemptions, thereby allowing the orderly liquidation of the fund's assets. The proposals also would increase money funds' reporting obligations. The SEC states that the proposed amendments are designed to make money funds more resilient to certain short-term market risks, and to provide greater investor protection if a fund is unable to maintain a stable NAV.

The proposals generally follow the recommendations made by the ICI Money Market Working Group and submitted to the SEC on March 17, 2009. Importantly, the proposals do not eliminate the stable $1.00 NAV for money funds. This was suggested as a possible option in the Obama Administration's White Paper on Financial Regulatory Reform, issued on June 17, 2009. In that White Paper, the President's Working Group on Financial Markets was tasked with addressing this issue, in a report scheduled to be issued in September 2009. The SEC's proposing release does note that the SEC has been working in coordination with the President's Working Group in the formulation of these proposed rules, but does not suggest whether the elimination of the $1.00 stable NAV has been taken off the table. The SEC says it expects to benefit from the comments it receives on this point before deciding whether to propose changes.

The SEC did not address the question of whether it supported a permanent federal insurance program for investors in money funds. On September 19, 2008, the Treasury Department instituted the Temporary Guarantee Program for Money Market Funds, a temporary program that would cover any losses for any assets in accounts in the fund as of September 19, 2008. This program is scheduled to expire on September 18, 2009. The SEC also did not address whether money funds should be required to maintain access to private emergency liquidity facilities, which the President's Working Group report is expected to address.
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