Friday, January 2, 2009

Fed Authorizes Bank Purchase of Assets from Affiliated Money Market Fund

The Federal Reserve Bank recently published a letter granting an exemption from Section 23A of the Federal Reserve Act and Regulation W to allow a bank to purchase specified assets from affiliated money market mutual funds.  In the letter, the Fed stated that it granted the relief because it believed that "the purchases of assets would result in increased liquidity for the Funds and their investors and would have a stabilizing impact on money market mutual funds and short-term bank and corporate funding markets."

In order to qualify for this exemption, however, the Fed imposed a number of conditions:

  • the bank may only purchase assets from SEC-registered open-end funds operating pursuant to SEC Rule 2a-7;

  • the bank's purchase must be limited to the amount necessary to cover net redemptions to the funds (up to a specified percentage of the bank's capital and surplus);

  • the assets to be purchased must be rated by an NRSRO at A-1/P-1 or the credit equivalent;

  • the bank must purchase the assets at fair market value as determined by a third party pricing service;

  • the bank must be reimbursed for any losses sustained by the bank in connection with the program; and

  • the exemption will expire on March 31, 2009.

A redacted version of the Federal Reserve Bank letter is available at: