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No Action Relief for Money Funds on Use of Credit Rating Agencies


On August 19, 2010, the SEC staff issued a letter to the Investment Company Institute relieving fund boards from the recently adopted SEC rule requiring them to designate four or more NRSROS whose ratings the fund would use to determine eligible securities for money funds.  This requirement, part of the SEC’s recent money fund rules, was cast in doubt by the more recently enacted Dodd-Frank legislation, which directed the SEC to eliminate references to or reliance upon credit ratings.  The legislation requires the SEC to create an alternative standard of creditworthiness and the SEC has not yet done so.  In the interim, funds and boards are to continue determining and monitoring eligible securities in the same way as before the SEC’s money market rules were adopted this spring.

According to the letter:

The Commission required money fund boards to designate NRSROs, among other reasons, in order to shift to the board the responsibility for deciding whihc NRSROs the board would use in determining whether a security is an eligible security for purposes of rule 2a-7.  In light of the requirements in section 939A of the [Dodd-Frank] Act, we agree that such a shift would not be a useful exercise pending the Commission review.  Accordingly, the Division of Investment Management would not recommend that the Commission institute an enforcement action under section 2(a)(41) of the Investment Company Act and rules 2a-4 and 22c-1 thereunder if a money market fund board does not desgnate NRSROs and does not make related disclosures in its statement of additional information before the Commission has completed the review of rule 2a-7 required by the Act and ha made modifications to the rule.  Until the Commision determines to modify rule 2a-7 in accordance with section 939A of the Act, money market funds relying on this letter must continue to comply with the obligations for determining and monitoring eligible securities set forth in rule 2a-7 as in effect before March 5, 2010 (other than the limitation on holding unrated asset back securities rescinded by the 2010 rulemaking). 

 The full text of the SEC staff's August 19, 2010 letter to the ICI is available here.