Wednesday, October 8, 2008

SEC No-Action Letter on Money Market Funds Guarantee Program

The SEC staff issued a no-action letter to the Investment Company Institute assuring that the Commission would not recommend enforcement action under Section 18(f) of the 1940 Act in instances when eligible money market funds participate in the Treasury's Guarantee Program for Money Market Mutual Funds, and execute the appropriate agreement with the Treasury with regard to the Guarantee Program's requirements.

Section 18(f) of the Investment Company Act provides that a mutual fund may not issue any class of senior security or sell any such security of which it is the issuer unless certain conditions are met. Section 18(g) defines “senior security” broadly to include any stock of a class having priority over any other class as to distribution of assets or payment of dividends.  In the absence of this no-action relief, it could be argued that, because certain shares of a money market fund participating in the Guarantee Program will be covered, while others will not, the covered shares are "senior securities" within the meaning of the Section 18(g) definition of the term.   

The full text of the no-action letter is available here: