The SEC recently adopted rule amendments removing credit rating references from Rule 2a-7 and Form N-MFP. Issuer diversification provisions in the rule were also amended to eliminate a current exclusion for securities subject to a guarantee issued by a non-controlled person.

Under the amended rule, the determination of whether a security is an "eligible security" will require a "single uniform minimal credit risk finding, based on the capacity of the issuer or guarantor of a security to meet its financial obligations." The amended rule codifies certain general credit analysis factors that the SEC expects fund boards (and their designees) to take into consideration when making a minimal credit risk determination. Those factors include:

  • the issuer's or guarantor's financial condition;
  • the issuer's or guarantor's sources of liquidity;
  • the issuer's or guarantor's ability to react to future market-wide and issuer- or guarantor-specific events, including the ability to repay debt in highly adverse situations; and
  • the strength of the issuer's or guarantor's industry within the economy and relative to economic trends, and the issuer's or guarantor's competitive position within its industry.

The SEC said that eliminating references to NRSRO ratings from Rule 2a-7 is not intended to change the current risk profile of money market funds, nor to change fund boards' evaluation of minimal credit risk. Nonetheless, the amendments remove the objective "floor" of an NRSRO rating from the evaluation. This arguably leaves fund boards in the position of determining minimal credit risk based on a more subjective set of factors. Fund boards should carefully consider necessary changes to their Rule 2a-7 policies and procedures to ensure that they are consistent not only with amended Rule 2a-7 but with the SEC's stated intent that the current risk profile of money market funds should not change.

For more information, see our recent client alert here.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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