Tuesday, July 7, 2009

Money Market Fund Proposals: New Duties for Directors

Directors overseeing money market mutual funds will want to pay close attention to the recent rule proposals on money market funds published last week by the SEC.  In addition to the existing responsibilities of directors of money market funds for oversight of fair valuation and portfolio quality, the release proposes rules that would require directors to determine whether the money market funds they oversee sell to "retail" or "institutional" investors.  This determination would be made necessary by other rules in the proposal requiring funds selling to institutional investors to have twice the liquidity of funds sold primarily to retail investors.
Our proposed amendments would require that a money market fund’s board determine, no less frequently than once each calendar year, whether the fund is an institutional money market fund for purposes of meeting the liquidity requirements. [citation omitted]  In particular, the fund’s board of directors would determine whether the money market fund is intended to be offered to institutional investors or has the characteristics of a fund that is intended to be offered to institutional investors, based on the: (i) nature of the record owners of fund shares; (ii) minimum amount required to be invested to establish an account; and (iii) historical cash flows, resulting or expected cash flows that would result, from purchases and redemptions. [citation omitted] The provision is designed to permit fund directors to evaluate the overall characteristics of the fund based on relevant factors. [citation omitted] 
Because, if adopted, a higher liquidity requirement for institutional funds might create incentives for money market funds to deem themselves "retail" funds in order to have greater strategic and competitive flexibility in their portfolios, the determination of whether a fund is a "retail" or "institutional" money market fund could be criticized or even subject to litigation.  The Commission's proposal to place the responsibility for this determination on money market fund directors is bound to be controversial given that the role of fund directors is one of oversight, and technical determinations are typically left to fund management with the board reviewing and approving management's procedures and the reasonableness of its considerations and conclusions. 

As noted in our recent letter to SEC Chairman, Mary L. Schapiro on potential money market reforms, the independent directors of mutual funds – and particularly the independent directors of money market funds – have a strong interest in the continuing debate over the possibilities for reforming the regulation of money market funds.  The Forum, as the voice of independent fund directors, intends to submit a comment letter to the SEC on its money market rule proposals, communicating fund directors' position on the proposals and providing feedback on the proper role of directors in the "institutional" versus "retail" money market fund determination. 

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