Last week, the Investment Company Institute wrote to the SEC requesting that the agency relax for short-term floating rate securities the newly implemented rules regarding money market funds' weighted average maturity. Specifically, the ICI requested an exemption from Rule 2a-7(c)(2)(iii) under the Investment Company Act of 1940 allowing money market mutual funds to treat short-term floating rate securities with a demand feature the same as short-term variable rate securities for purposes of determining portfolio maturity. Under the newly adopted rules governing weighted average maturity ("WAM"), money market funds are required to use the stated maturity date of the security, with exceptions for specific types of securities, including variable rate securities and floating rate securities. Under these exceptions, a security that otherwise would have an impermissibly long maturity may be treated as having a permissible maturity, and a security that has a permissible maturity may be treated as having an even shorter maturity for purposes of the WAM.
Absent the requested relief, however, short-term floating rate securities with a demand feature did not fit neatly into the maturity exceptions provided in Rule 2a-7(c)(2)(iii). According to the ICI's letter:
floating rate securities subject to Demand Features with stated maturities in excess of 397 days are treated as having "a maturity equal to the period remaining until the principal amount can be recovered through demand" because that period must be one day or longer. Correlatively, floating rate securities with stated maturities of 397 days or less are treated as having "a maturity of one day" because the period remaining until the principal amount can be recovered through demand cannot be earlier than one day.
The ICI argued that, "although the maturity shortening provisions for floating rate and variable rate securities are worded differently, the Commission intended for these provisions to work in parallel with the same results for floating and variable rate securities." As a result, they argue that money funds should be allowed under the new rules to treat floating-rate securities with a demand feature similarly to variable rate securities, and count them for WAM purposes as maturing as of the next date when the investor can take their money after exercising the demand feature.
The SEC obviously found the ICI's argument persuasive, and issued a one-paragraph notice granting the requested relief:
Based on the analysis set forth in your letter of August 10, 2010, we agree that for purposes of calculating a money market fund's weighted average portfolio maturity under rule 2a 7(c)(2)(iii) under the Investment Company Act of 1940, a money market fund may treat a short-term floating rate security that is subject to an unconditional demand feature as having a maturity equal to the period remaining until the principal can be recovered through demand.
The full text of the ICI's letter is available at: http://www.sec.gov/divisions/investment/noaction/2010/ici081010-incoming.pdf
The SEC order granting exemptive relief is available at: http://www.sec.gov/divisions/investment/noaction/2010/ici081010.htm