SEC Proposes to Remove Credit Ratings References from Money Market Fund Rule

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In order to implement Sections 939 and 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Securities and Exchange Commission (the “SEC”) has proposed amendments to several rules and forms under the Investment Company Act of 1940 (the “Investment Company Act”) and the Securities Act of 1933 (the “Securities Act”) in order to remove key references to credit ratings. Arguably the most important of these proposed amendments is the removal of references to credit ratings in Rule 2a-7 under the Investment Company Act, which sets minimum quality standards for money market fund investments.

The removal of references to credit ratings in Rule 2a-7 affects several provisions of the rule, including (i) the determination of whether a security is an eligible security, (ii) the determination of whether a security is a first tier or second tier security and (iii) requirements for monitoring securities for ratings downgrades and other credit events.

Under the current rule, a money market fund may invest only in securities that are (i) determined by its board or its delegate (typically the fund’s investment adviser) to present minimal credit risks (which determination must be based on factors pertaining to credit quality in addition to any credit ratings) and (ii) “eligible securities.” Eligible securities are generally securities that have received credit ratings from certain ratings agencies in one of the two highest short-term rating categories, and are divided into first tier securities and second tier securities based largely on such ratings.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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