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SEC No-Action Letter: Shadow Pricing for Money Market Funds

In response to an application by the Investment Company Institute, the SEC Staff has issued a no-action letter allowing money market funds to use "shadow pricing" temporarily for certain short-term, high-quality portfolio securities. The no-action letter allows money market funds to price, for a limited time, certain portfolio securities by reference to their amortized cost value rather than using available market quotations. The no-action position allows "shadow pricing" for these particular kinds of securities through Monday, January 12, 2009.

The SEC Staff's position is based on the ICI's representations that, under current market conditions, the markets for commercial paper and other short-term securities may not necessarily result in discovery of prices that reflect fair value and that pricing vendors are at times not able to provide meaningful prices.

Under this no-action letter, money market funds may use amortized cost to shadow price securities, if all of the following requirements are met, unless the particular circumstances (i.e., an impairment of creditworthiness) suggest that amortized cost is no longer appropriate:

  • The portfolio security has a remaining maturity of 60 days or less. The remaining maturity must be measured without regard to Rule 2a-7(d), which allows money market funds to deem portfolio securities to have shorter maturities under a variety of circumstances. (Many funds do rely on these provisions, so the inability to rely on them may reduce the usefulness of the letter.)
  • The portfolio security must be a First Tier Security as defined in Rule 2a-7(a)(12), which for most securities requires that it be rated in the highest short-term rating category for debt obligations.
  • The fund reasonably expects to hold the security to maturity.