As we first reported on March 4, a recent Securities and Exchange Commission proposal would remove the use of credit ratings from the rules governing money market funds. The SEC took this action in response to Section 939A of the Dodd-Frank Act, which requires all federal agencies to remove any reference to or requirement of reliance on credit ratings, substituting another standard of credit-worthiness the agency finds appropriate.
The SEC's proposed rule would remove the references to credit ratings, including with respect to the definition of eligible security; a determination of whether a security is a first tier security; requirements for monitoring securities with ratings downgrades and other credit events; and stress testing. The proposed changes are similar to the SEC's 2008 2a-7 proposal.
Under the proposed amendments, a security would be an eligible security for investment by money market funds only if the fund board (or its delegates) determine that it presents minimal credit risks. Fund boards would still be able to consider credit ratings in making these determinations, but the SEC states that it would "expect the fund advisers to understand the method for determining the rating and make an independent judgment of credit risks" and to consider the rating agency's track record. An eligible security would be a first tier security (regardless of the ratings it has received from any credit rating agency) if the fund's board (or its delegate) determines that the issuer (or in the case of a security subject to a guarantee, the guarantor) has the "highest capacity to meet its short-term financial obligations." An issuer of a first-tier security should have an "exceptionally strong ability to repay its short-term debt obligations and the lowest expectation of default."
The SEC has asked for comments on its rule proposal to be submitted before April 25, 2011. The Forum will be submitting a comment letter on behalf of its members.
The full text of the proposing release is available at: http://sec.gov/rules/proposed/2011/33-9193.pdf