US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds

Transcription

1 Financial Services Regulatory & Enforcement, Securitization Update April 7, 2010 US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds On January 27, 2010, the US Securities and Exchange Commission (SEC), by a 4-1 vote, adopted amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended (the 1940 Act ). 1 Rule 2a-7 (the Rule ) imposes quality, liquidity, and other requirements on any registered investment company that holds itself out to the public as a money market fund. Compliance with the amended Rule will be phased in over time as described further below. 2 The amendments to the Rule impose new or different requirements on money market funds ( Funds ) covering several different topics: (i) portfolio quality; (ii) portfolio maturity; (iii) portfolio liquidity; (iv) repurchase agreements; (v) disclosure of portfolio holdings; (vi) ability to process sales and redemptions at a net asset value per share other than $1.00; (vii) purchases of portfolio securities by a Fund s affiliated persons; and (viii) Fund liquidation. A checklist highlighting some of the major actions that Funds, their investment advisers, and their boards of directors are required to take is included as an appendix to this update. Additionally, because of the importance of Funds as purchasers of asset-backed commercial paper (ABCP) and other short-term asset-backed securities (ABS), this update also addresses the possible impacts of the amendments on these markets. Portfolio Quality Designation of NRSROs Compliance Date: December 31, 2010 As a new requirement under the Rule, a Fund s board of directors (Board) will be required to designate at least four nationally recognized statistical rating organizations (NRSROs) 3 for use by the Fund in determining eligibility and other quality issues under the Rule. 4 After initial designation, the Board must determine, at least once each calendar year, that the designated NRSROs issue credit ratings that are sufficiently reliable for use in determining whether a security is an Eligible Security as defined by the Rule. According to the Rule s Adopting Release, a Board may choose to designate an NRSRO only for specific types of issuers or securities. 5 For example, a Board may choose to designate three broad NRSROs that it will use for all issuances and issuers, and may also designate an NRSRO that it will only use for securities issued by insurance companies (and may ignore that NRSRO s ratings for all other types of securities). A Board may not delegate its determination to designate NRSROs under the Rule. 6 The SEC noted in the Adopting Release that while the ultimate responsibility to designate NRSROs falls on a Board, the Fund s investment adviser may be expected to evaluate NRSROs to aid in the Board s determination, and make recommendations to the Board based on (i) the adviser s examination of the NRSROs methodologies used in rating securities; and (ii) the NRSROs record with respect to the types of securities in which the Fund invests. 7 Funds must disclose their designated NRSROs in their statement of additional information, including any limits with respect to the Fund s use of such designation. Eligible Securities and Second Tier Securities Compliance Date: May 28, Under the Rule, Funds are subject to a general requirement that portfolio investments must be limited to US dollar-denominated securities that the Board determines present minimal credit risks (based

2 on factors pertaining to credit quality in addition to ratings assigned by a designated NRSRO) and that are, at the time of acquisition, Eligible Securities. 9 The Rule imposes additional restrictions on a Fund s ability to acquire Second Tier Securities, as defined in the Rule (e.g., Eligible Securities that have not received a short-term rating from the requisite designated NRSROs in their highest short-term ratings category, or their unrated equivalents). First, in the amended Rule, the SEC eliminated the previously existing differences in restrictions on Second Tier Securities between taxable Funds and tax exempt Funds. Second, as a new requirement, Funds are prohibited from acquiring a Second Tier Security that, at the time of acquisition, has a remaining maturity greater than 45 days. Third, immediately after acquisition, a Fund may not hold more than 3 percent of its total assets in Second Tier Securities, down from 5 percent under the current Rule. 10 Fourth, immediately after acquisition of a Second Tier Security, no more than 0.5 percent of a Fund s total assets may be invested in Second Tier Securities of the same issuer (a change from the current Rule, which allows for the greater of $1 million or 1 percent of total assets). Finally, for Second Tier Securities that are subject to guarantees and demand features (each as defined in the Rule), immediately after the acquisition, the Fund is prohibited from having more than 2.5 percent of its total assets in securities issued by, or subject to demand features or guarantees from, the provider of the demand feature or guarantee (down from 5 percent under the current Rule). The SEC noted in the Adopting Release that the designation of additional NRSROs (or the removal of the designation for an NRSRO) constitutes a credit event for all securities held by the Fund that are rated by the new and former designees, requiring the Board to consider the rating of the newly designated NRSRO (or preclude the consideration of a formerly designated NRSRO). 11 For example, the new designation of an NRSRO that has rated a previously unrated security held by the Fund outside of its two highest short term ratings categories may cause the security to cease to be an Eligible Security. Conversely, the removal of a designated NRSRO may require the Board (or its designee) to make a determination that certain securities rated by the formerly designated NRSRO are now the unrated equivalents of First or Second Tier Securities. These types of events may prompt reassessment of the security and possible disposal of the security by the Fund. Portfolio Maturity Compliance Date: June 30, 2010 Under the Rule s pre-existing maturity requirements, Funds (i) must maintain a dollar-weighted average portfolio maturity appropriate to [their] objective of maintaining a stable NAV or price per share; (ii) may not acquire any instrument with a remaining maturity of greater than 397 calendar days; 12 and (iii) must maintain a dollar-weighted average portfolio maturity (WAM) of 90 calendar days or less. The amended Rule changes this last requirement from 90 calendar days to 60. Under a new requirement, Funds must maintain a dollar-weighted average portfolio life (WAL) of 120 days or less. Unlike WAM, WAL must be calculated without reference to the exceptions in Rule 2a-7(d) regarding maturity reset provisions for interest rate readjustments (e.g., for floating-rate and variable-rate securities). For purposes of calculating WAM and WAL, cash is deemed to have a maturity of 1 day, and extendable notes that are extendable at the option of the issuer must use the maximum extended maturity date. 13 Portfolio maturity may affect a Fund s compliance with the Rule s new minimum daily and weekly liquidity requirements, which are discussed below. Portfolio Liquidity Compliance Date: May 28, 2010 Due in large part to the SEC s belief that illiquidity and, more specifically, the general inability of a Fund to quickly liquidate assets in the face of increasing investor redemptions, played a large role in the events that shook the Fund industry in the fall of 2008, the SEC is imposing new liquidity requirements on Funds. General Liquidity Requirement Under the amended Rule, Funds are now subject to a general requirement to hold securities that are sufficiently liquid to meet reasonably foreseeable shareholder redemptions in light of the Fund s 2 Mayer Brown US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds

3 obligations under Section 22(e) of the Act and any commitments the Fund has made to shareholders. 14 This may, depending upon a Fund s unique circumstances, require a Fund to maintain liquidity in excess of some of the specified requirements described in further detail below. 15 The SEC cautioned that it is incumbent upon the management of each fund and its board of directors to evaluate the fund s liquidity needs and protect the fund and its shareholders from the harm that can occur from failure to properly anticipate and provide for those needs. 16 A Fund may not consider its access to overdraft protection, lines of credit, and inter-fund borrowing arrangements in evaluating its liquidity needs. 17 In order to properly anticipate the Fund s liquidity needs, Funds must look to their shareholders and attempt to ascertain the shareholders needs. 18 For example, a Fund with a primarily retail shareholder base may need to be less concerned with large amounts of withdrawals than a Fund with a large institutional base; a Fund may notice that particular shareholders historically make large withdrawals at the end of the month to meet payroll demands or other recurring expenses. Thus, Funds are required to adopt know your customer policies and procedures designed to ensure appropriate efforts are taken to identify risk characteristics and liquidity needs of shareholders. 19 According to the SEC, these policies and procedures may call for more interaction with intermediaries that invest in a Fund using omnibus accounts; the Fund may need to periodically engage in dialogue with the intermediary to seek demographic and other information of the beneficial owners of the omnibus account. 20 The SEC also urged Boards to consider whether they may need to establish guidelines addressing the inherent conflict faced by many Fund advisers the tension between increasing assets in the Fund, and the need to manage the Fund to maintain a stable value. 21 Limit on Illiquid Securities The amended Rule also prohibits a Fund from acquiring an Illiquid Security, if immediately after acquisition the Fund would have invested more than 5 percent of its total assets in Illiquid Securities. 22 Illiquid Security is defined to mean a security that cannot be sold or disposed of by the Fund within 7 calendar days, at approximately the value ascribed to it by the Fund. 23 Importantly, the SEC noted in the Adopting Release that, because this determination of illiquidity is based on the value ascribed by the Fund, a Fund using the amortized cost method may treat as liquid a security that can be sold at approximately the market-based value used by the Fund in determining its shadow NAV. 24 Minimum Weekly and Daily Liquidity Requirements Under the amended Rule, all Funds are now prohibited from acquiring any security, other than a Weekly Liquid Asset, if immediately after acquisition less than 30 percent of its total assets are invested in Weekly Liquid Assets. Weekly Liquid Assets are defined under the Rule to include: (i) cash; (ii) direct obligations of the US Government; (iii) Government Securities that are issued at a discount to principal and have a remaining maturity of 60 days or less, and that are issued by a person controlled or supervised by and acting as an instrumentality of the US Government; and (iv) securities that will mature, or have a demand feature exercisable and payable, within 5 business days (as defined in the Rule). In addition, Funds are prohibited from acquiring any security (other than a Daily Liquid Asset ), if immediately after acquisition, less than 10 percent of its total assets are invested in Daily Liquid Assets. Daily Liquid Assets are defined under the Rule to include: (i) cash; (ii) direct obligations of the US Government; and (iii) securities that will mature, or have a demand feature exercisable and payable, within 1 business day. This daily liquid asset requirement does not apply to tax exempt Funds (as defined in the Rule). A new liquidity framework for banks proposed by the Basel Committee on Banking Supervision in December may create some tension with these new liquidity requirements for Funds. In essence, the proposed bank framework would push banks (on the supply/issuer side) toward longer maturities, while the new requirements under the Rule push Funds (on the demand/investor side) toward shorter maturities. 3 Mayer Brown US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds

4 More specifically, the new liquidity framework for banks would, among other things, require banks to maintain at least enough high-quality liquid assets to meet their net cash needs over a 30-day period under a specified acute stress scenario. Banks often provide liquidity back-stops for ABCP and other instruments (including traditional non-financial commercial paper) purchased by Funds, and obligations under those facilities count as net cash needs for purposes of this proposed test. As such, the proposed bank framework would incentivize banks to provide back-stops only for longer-term instruments in order to reduce their 30-day net cash needs, while Funds may be looking for shorter-term instruments under the amended Rule. Stress Tests For Funds that use the amortized cost or penny-rounding method, the Board is also now required to implement policies and procedures to provide for periodic stress testing by the Fund. Under the Rule, the stress tests would test the ability of the Fund to maintain a stable NAV in the face of certain hypothetical individual or concurrent external events, such as (i) increases in short-term interest rates; (ii) increases in shareholder redemptions; (iii) downgrades or defaults of portfolio securities; or (iv) widening or narrowing of spreads between yields on appropriate benchmarks selected by the Fund for overnight interest rates and commercial paper, and other types of securities held by the Fund. 26 The frequency for the stress tests must be at intervals as the Board determines appropriate and reasonable in light of the Fund s needs and of current market conditions. 27 For example, in periods of relative calm, a Board may require monthly stress tests, while in periods of greater volatility, or if the Fund s shadow NAV drops below $0.9975, a Board may require weekly stress tests. 28 No later than the next scheduled Board meeting after a stress test, the Board must receive a report on the results of the test. Under the Rule, this report must include: (i) date(s) on which the Fund was tested; (ii) the magnitude of each hypothetical stressor tested; and (iii) an assessment by the adviser of the Fund s ability to withstand events (including concurrent events) reasonably likely to occur within the following year. Importantly, the adviser s assessment is not to be based on the circumstances of the stress testing actually performed, but is to be based on the adviser s forecasting of reasonably likely events over the following year. 29 Under the Rule, Funds are required to retain the results of these stress tests for at least 6 years. Repurchase Agreements Compliance Date: May 28, 2010 Two changes were made to how Funds may treat repurchase agreements with respect to the Fund s diversification requirements. Under the current Rule, a Fund may look through the counterparty to the repurchase agreement and treat the underlying collateral of the repurchase agreement as its assets for diversification purposes, if the repurchase agreement is Collateralized Fully within the meaning of 1940 Act Rule 5b-3. Rule 5b-3 specifies that for a repurchase agreement to be collateralized fully, the repurchase agreement must, among other things, be collateralized by cash items, Government securities or highly-rated securities (or their unrated equivalents), in an amount at least equal to the resale price, as defined in Rule 5b-3. The amended Rule limits the acceptable collateral to cash items and Government securities if a Fund wishes to look through the counterparty for diversification purposes. In addition, under the amended Rule, the Board must evaluate the counterparty s creditworthiness. 30 The specific requirement to evaluate the creditworthiness of the counterparty was previously part of the Rule, but was removed in 2001 as part of a previous amendment. Currently and as amended, the Rule does not prohibit a Fund from entering into a repurchase agreement that is not Collateralized Fully, but merely restricts the ability of a Fund to look through to the collateral, and disregard the counterparty, for diversification purposes. Disclosure of Portfolio Holdings As part of the amendments to the Rule, the SEC is imposing two sets of disclosure requirements for Funds. The first requirement calls for monthly disclosure of all portfolio holdings on the Fund s web site for Funds utilizing the amoritized cost method or the penny-rounding method. The second requirement 4 Mayer Brown US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds

5 calls for monthly filings of portfolio holdings and additional information with the SEC for Funds holding themselves out to the public as money market funds, which will be made publicly available through EDGAR on a staggered schedule. Public Web Site Disclosure Compliance Date: First posting must be made on October 7, 2010 By no later than the fifth business day of each month, the Fund must post on its web site a schedule of investments, as of the last business day of the prior month (e.g., the schedule of investments posted on October 7, 2010, must be as of September 30, 2010). That schedule must include, among others, the following information for each security: Name of the issuer; Category of investment (e.g., Treasury Debt, Asset Backed Commercial Paper, etc.); CUSIP (if any); Principal amount; Maturity date; Final legal maturity (i.e., without benefit of the interest rate maturity reset provisions for floatingrate and variable-rate securities); Coupon or yield; and Amortized cost value. In addition, the posting must include, for each class of the Fund, the WAM and the WAL as of the last business day of the prior month. Lastly, the posting must include a link to the SEC s web site where the user may find the most recent 12 months of filings of the Fund s Form N-MFP (described in further detail below). Each posting must remain on the Fund s web site for at least six months. Form N-MFP Compliance Date: First filing must be made on December 7, Also no later than the fifth business day of each month, the Fund must file Form N-MFP with the SEC, as of the last business day of the prior month. Form N-MFP requires all of the information required to be posted on the Fund s web site (see discussion above), as well as additional information, notably including, among others: 7-day gross yield of each series (and 7-day net yield of each class); Most recent market-based shadow NAV of each series and each class, to the nearest hundredth of a cent; Gross and net shareholder flow of each class (subscriptions and redemptions); The designated NRSRO(s) on which the Board is relying with respect to each portfolio security, and the rating(s) assigned; The market-based value of each security; and Information regarding demand features and guarantees, if any, on each security. Forms N-MFP filed with the SEC will be made available to the public 60 days after the end of the month to which the information pertains (e.g., a Form N-MFP filed on December 7, 2010, will be as of November 30, 2010, and will be made available to the public on January 29, 2011). Processing Sales and Redemptions Compliance Date: October 31, 2011 Due in part to the apparent inability of some Funds to effectively process Fund share transactions after breaking the buck in the fall of 2008, the SEC is requiring that for all Funds that utilize the amortized cost method or penny-rounding method, that the Fund (or its transfer agent) have the capability to process sales and redemptions at a price based on current net asset values per share pursuant to Rule 22c-1 (i.e., at prices other than $1.00 per share). In the Adopting Release, the SEC noted that a Fund (or its transfer agent) should have the capability to process transactions in shares of a Fund to the tenth of a cent (e.g., $0.994), which will be a major change for most in the industry. Affiliate Purchases Amended Rule 17a-9 goes into effect on May 5, 2010 In addition to the amendments to the Rule, the SEC also amended 1940 Act Rule 17a-9, which currently provides an exemption from Section 17(a) of the 1940 Act to permit certain affiliated persons of a Fund to 5 Mayer Brown US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds

6 purchase portfolio securities held by the Fund under specified circumstances. Currently, Rule 17a-9 permits affiliated and other persons subject to Section 17(a) to purchase from a Fund portfolio securities that no longer meet the definition of Eligible Security under the Rule, provided that the purchase price is paid in cash and is equal to the greater of the amortized cost of the security or its market price (in each case, including accrued interest). The amended Rule expands this relief to securities that continue to qualify as Eligible Securities but that have materially defaulted. Amended Rule 17a-9 also allows persons subject to Section 17(a) to purchase any other type of portfolio security held by the Fund, subject to the same two pricing conditions described above, as well as a third condition: the purchasing party must promptly pay to the Fund any profit it receives in the event that it sells the purchased security for a higher price than the purchase price it paid to the Fund. These amendments essentially codify relief that the SEC previously provided through no-action letters. 32 In addition to a Fund s current obligation under the Rule 33 to promptly notify the SEC in the event of default of an issuer (or guarantor) of a portfolio security, Funds are also required to promptly notify the SEC in the event that a person subject to Section 17(a) relies on Rule 17a-9 to purchase a portfolio security from the Fund. 34 This notification must identify the security, its amortized cost, the sale price, and reasons for the purchase. Fund Liquidation Rule 22e-3 goes into effect on May 5, 2010 In order to prevent a run on a Fund from disadvantaging shareholders, the SEC has adopted 1940 Act Rule 22e Rule 22e-3 provides a limited exemption from Section 22(e) of the 1940 Act, which generally provides that registered investment companies may not suspend redemptions (or payments in satisfaction of redemptions) for more than 7 calendar days except under specified conditions. Notwithstanding Section 22(e), Rule 22e-3 permits a Fund 36 to suspend redemptions under the following circumstances: The Board, including a majority of the independent directors, determines pursuant to Rule 2a-7(c)(8) (ii)(c) that the extent of the deviation between the Fund s amortized cost per share and its current market-based net asset value per share may result in material dilution or other unfair results to shareholders; The Board, including a majority of the independent directors, irrevocably approves the liquidation of the Fund; and The Fund, prior to suspending redemptions, notifies the SEC of its decision to liquidate. The SEC retains the ability to rescind or modify the exemption provided by Rule 22e-3 through an order of the SEC. In the Adopting Release, the SEC indicated that it might take such action if it believes a Fund s plan of distribution was not in the best interests of shareholders. Impact on ABS Markets In the proposing release 37 for these amendments, the SEC discussed several points that related directly to Fund investments in ABCP and other short-term ABS, but only one change relating specifically to ABS was adopted. The Rule was amended to eliminate the requirement that any ABS purchased by a Fund be rated by at least one NRSRO. 38 With the elimination of this special treatment for ABS, ABS are now treated the same as any other security for purposes of eligibility. Nonetheless, given the continued reliance on NRSROs in the Rule and in the market, it is unlikely that this change will have a significant impact on Funds actual investment activities with ABS. The proposing release also discussed the possibility of amending the Rule to provide specific guidance to Boards on how to confirm that ABS represent minimal credit risks (an existing requirement for all Eligible Securities) and to address liquidity issues relating to ABS. While the amendments did not add any of these points to the Rule, the SEC did provide some additional guidance in the Adopting Release 39 and indicated that the SEC is considering further amendments in light of comments received. 40 Some other new requirements of the Rule, though not specifically aimed at ABS, may also directly or indirectly affect the ABS markets. Like any other Fund investment, ABS will have to be analyzed under the modified limit on Illiquid Securities and may experience changes in Fund demand levels driven by 6 Mayer Brown US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds

7 the Rule s new minimum daily and weekly liquidity requirements. The impact of the new calculation rule for determining the maturity of extendable notes for purposes of the WAM and WAL portfolio maturity requirements should be limited, given the virtual disappearance of extendable short-term notes from the ABS market in response to the market crisis. Forthcoming Proposals In addition to all of the changes made in these amendments to Rule 2a-7, the SEC has indicated that it and its staff are evaluating additional changes, and that proposals for further changes could soon be on the way. These proposals may include: (i) moving to a floating NAV; (ii) real-time disclosures of shadow NAV instead of disclosures of the same on a 60-day lag through new Form N-MFP; (iii) introducing a permanent liquidity facility for Funds; (iv) requiring in-kind redemptions under certain circumstances; and (v) additional guidance relating specifically to Fund investments in ABS. Endnotes Money Market Fund Reform, Investment Company Act Release No. 29,132 (Feb. 23, 2010) [75 FR (March 4, 2010)], available at ic-29132fr.pdf (the Adopting Release ). The effective date of the amendments is May 5, To comply with the rule, Funds (as defined herein) may amend their registration statements pursuant to Rule 485(b) under the Securities Act of In addition, to the extent that the amended Rule would require a Fund to amend policies that would otherwise require a shareholder vote, the SEC has stated that if the existing policy is less restrictive than the policies that would be required under the amended Rule, and the existing policies are not otherwise in conflict with the amended Rule, a Fund would not need to hold a shareholder vote to comply with the amended Rule. See Adopting Release at nn and accompanying text. Amended Rule 2a-7(a)(11). Nationally recognized statistical rating organization is defined in Section 3(a)(62) of the Securities Exchange Act of Well-known examples of NRSROs include Standard & Poor s, Moody s Investors Service, and Fitch Ratings, Ltd. No such designated NRSRO may be an affiliated person of the issuer of a security for which its rating is being relied upon, as that term is defined in Section 2(a)(3)(C) of the 1940 Act. Notably, Section 2(a)(3)(C) refers only to control relationships. Adopting Release at n. 107 and accompanying text The amendments to the Rule do not affect the ability of a Board to delegate certain responsibilities to a Fund s investment adviser or officers. A Board may not delegate its responsibility to make determinations regarding (i) designation of NRSROs; (ii) Rule 2a-7(c)(1) (board findings); (iii) Rule 2a-7(c)(7)(ii) (defaults and other events); (iv) Rule 2a-7(c)(8)(i) (required procedures for using the amortized cost method); (v) Rule 2a-7(c)(8)(ii)(A), (B) and (C) (regarding shadow pricing and deviation); (vi) Rule 2a-7(c)(9) (required procedures for using penny rounding method); and (vii) Rule 2a-7(c)(10)(v)(A) (stress testing). NRSROs are currently required to make certain reports about their ratings in Form NRSRO, and beginning in June 2010, also will be required to make publicly available ratings action histories for all credit ratings initially determined on or after June 26, Adopting Release at n. 111 (citing Amendments to Rules for Nationally Recognized Statistical Ratings Organizations, Exchange Act Release No. 61,050 (Nov. 23, 2009) [74 FR (Dec. 4, 2009)] at text following n.19 and compliance date). Notwithstanding the May 28, 2010, compliance date, a Fund whose Board has not yet designated any NRSROs may continue to consider the ratings of any NRSRO in determining whether a security is an Eligible Security. The definition of Eligible Securities has not changed under the amended Rule, except that Funds are now required to rely on the ratings of their designated NRSROs. For tax exempt Funds, this is a change from 5 percent limit on Conduit Securities (as that term is defined in the Rule) that are Second Tier Conduit Securities. See Adopting Release at n This requirement is substantially unchanged from the current Rule, except that under the current Rule, certain types of Funds using the penny-rounding method could acquire Government Securities with a remaining maturity of up to 762 days. This provision for penny-rounding Funds has been removed from the amended Rule. See Adopting Release at n Amended Rule 2a-7(c)(5). See Adopting Release 51. See Adopting Release 52. See Adopting Release at n See Adopting Release at n. 197 and accompanying text. See Adopting Release at n. 198 and accompanying text. The SEC views such policies as required under 1940 Act Rule 38a-1. See Adopting Release at n. 201 and accompanying text. See Adopting Release at n. 199 and accompanying text. This is a change from previous SEC guidance, which construed 1940 Act Section 22(e) to require a Fund to invest no more than 10 percent of its net assets in illiquid securities. See Adopting Release at n. 202 and accompanying text. The SEC staff position on limitations on illiquid securities for other types of investment companies remains at 15 percent of net assets. 7 Mayer Brown US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds

8 Amended Rule 2a-7(a)(19). This definition is in accord with prior regulatory definitions of illiquid securities. See Adopting Release at n The shadow NAV of a Fund using the amortized cost method is the market-based NAV. Currently, and as amended, Funds using the amortized cost method must have procedures in place to periodically compare their market-based shadow NAV to price per share based on amortized cost. See Basel Committee on Banking Supervision, Consultative Document International framework for liquidity risk measurement, standards and monitoring (December 2009), available at pdf?noframes=1. Comments are due April 16, Amended Rule 2a-7(10)(v). See Adopting Release at n. 262 and accompanying text. Id. See Adopting Release at n. 268 and accompanying text. See Adopting Release at n. 275 and accompanying text. However, the SEC extended the expiration date of temporary Rule 30b1-6T to December 1, 2010, which generally requires the reporting of similar information in the event that a Fund s market-based NAV drops to $ See, e.g., Mainstay VP Series Fund Mainstay VP Cash Management Portfolio, SEC No-Action Letter (Oct. 22, 2008). The clawback of any profits derived from the subsequent sale by the affiliate was not contemplated by the SEC no-action letters, but was a condition of certain relief provided by the Department of Labor to Funds whose affiliates had fiduciary relationships with ERISA plans that invested in the funds. See, e.g., Mellon Bank, N.A., Department of Labor Prohibited Transaction Exemption (September 25, 2008). Current Rule 2a-7(c)(6)(iii), substantively renumbered as amended Rule 2a-7(c)(7)(A). Amended Rule 2a-7(c)(7)(B). See Adopting Release 98. Rule 22e-3 also permits a registered investment company relying on 1940 Act Section 12(d)(1)(E) to suspend redemptions in reliance on this rule in the event that a Fund in which the Fund invests has suspended redemptions pursuant to the rule. Such a conduit fund would still be required to notify the SEC of its suspension. Money Market Fund Reform, Investment Company Act Release No (June 30, 2009) [74 FR (July 8, 2009)], available at ic-28807fr.pdf. See Adopting Release Adopting Release 37 ( as part of the minimal credit risk analysis that any money market fund must conduct before investing in an ABS, the board of directors (or its delegate) should: (i) analyze the underlying ABS assets to ensure that they are properly valued and provide adequate asset coverage for the cash flows required to fund the ABS under various market conditions; (ii) analyze the terms of any liquidity or other support provided by the sponsor of the ABS; and (iii) otherwise perform the legal, structural, and credit analyses required to determine that the particular ABS involves appropriate risks for the money market fund. ). Adopting Release at n If you have questions regarding these developments, Rule 2a-7 or money market funds in general, please contact the Mayer Brown lawyer with whom you normally communicate or any of the following lawyers. Leslie S. Cruz lcruz@mayerbrown.com Stephanie M. Monaco smonaco@mayerbrown.com Amy Ward Pershkow apershkow@mayerbrown.com For questions, relating to the impact of these developments on ABCP and other ABS, please contact the following lawyers. Carol A. Hitselberger chitselberger@mayerbrown.com Jason H. P. Kravitt jkravitt@mayerbrown.com Stuart M. Litwin slitwin@mayerbrown.com 8 Mayer Brown US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds

9 Appendix* Actions by Money Market Fund Boards: Implement policies and procedures for periodic stress testing; determine frequency of stress testing Implement policies and procedures designed to identify risk characteristics and other know your customer information of shareholders (including beneficial owners of omnibus accounts) to aid in assessing the Fund s liquidity needs (Compliance Date: May 28, 2010) New requirement to review repurchase agreement counterparties to allow look-through of repurchase agreements for diversity purposes (Compliance Date: May 28, 2010) Designate at least 4 NRSROs no later than December 31, 2010 Actions by Money Market Fund Investment Advisers: Research NRSROs and make recommendations to the Board to allow the Board to designate at least 4 NRSROs no later than December 31, 2010 Report to Board at next scheduled regular meeting (or earlier if necessary) on stress testing results New/Changing Money Market Fund Requirements: Once they are designated, Funds are required to look to designated NRSROs to determine the ratings of portfolio securities General requirement to maintain appropriate maturity 60-day WAM (Compliance Date: June 30, 2010) 120-day WAL (Compliance Date: June 30, 2010) General liquidity requirement to maintain appropriate liquidity (Effective May 28, 2010) Limit Illiquid Securities to 5% of Total Assets 30% of Total Assets in Weekly Liquid Assets 10% of Total Assets in Daily Liquid Assets (taxable Funds only) Second Tier Securities (Compliance Date: May 28, 2010) Second Tier Securities limited to 3% of Total Assets Funds may not acquire Second Tier Securities with remaining maturities greater than 45 days New diversification requirements (0.5% of Total Assets per issuer, 2.5% of Total Assets per guarantor or third-party demand feature provider) Perform stress testing as required by policies and procedures adopted by Board New collateral requirements to allow look-through of repurchase agreements for diversity purposes (Compliance Date: May 28, 2010) Disclosure Web site disclosure of portfolio holdings (First Posting: October 7, 2010) Form N-MFP (First Filing: December 7, 2010) Ability to process sales and redemptions at NAVs other than $1.00, and to process transactions in shares to the tenth of a cent (Compliance Date: October 31, 2011) * This checklist is intended only to assist in determining some of the new and changing requirements under the Rule, but does not display all of the requirements and is not intended to be used in lieu of proper legal advice taking into account the full scope of the Rule. 9 Mayer Brown US SEC Adopts Amendments to Rule 2a-7 Affecting Money Market Funds

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