FEDERICO ARENAS 1

We are amending rule 2a-7, as proposed, to require that each money market fund hold

securities that are sufficiently liquid to meet reasonably foreseeable shareholder redemptions in

light of its obligations under section 22(e) of the Act and any commitments the fund has made to

shareholders (the “general liquidity requirement”).190 _{Depending upon the volatility of its cash}

flows (particularly shareholder redemptions), this new provision may require a fund to maintain

greater liquidity than would be required by the daily and weekly minimum liquidity requirements

set forth in the rule and discussed below.

Most commenters who addressed this proposal supported the addition of a general

liquidity requirement.191 _{They agreed that funds should be required to assess appropriate levels}

of liquidity above the minimums set forth in the rule.192 _{Some commenters, however, expressed}

private liquidity insurance for money market funds); HighMark Capital Comment Letter (suggesting a private liquidity bank or that Treasury continue to provide emergency liquidity as possible solutions to address liquidity concerns); Vanguard Comment Letter (asserting that the proposed rule does not address liquidity risk arising from factors other than size of accounts, such as geographical concentration of the shareholders); Waddell & Reed Comment Letter

(recommending some type of permanent backstop be available to money market funds); Wells Fargo Comment Letter (suggesting the Federal Reserve set up a secured lending facility to serve as a lender of last resort).

189 _{See Proposing Release, supra note 2, at Section II.C.1-2.} 190 _{Amended rule 2a-7(c)(5).}

191 _{See, e.g., ICI Comment Letter; Northern Funds Indep. Trustees Comment Letter; Tamarack}

Funds Comment Letter.

concerns that the proposed requirement was too vague,193 _{or was unnecessary in light of the}

minimum daily and weekly liquidity requirements.194 _{We disagree. Funds will have different}

liquidity needs that we cannot sufficiently anticipate and codify in a rule beyond the minimums

we are adopting today.195 _{Therefore, we believe it is incumbent upon the management of each}

fund and its board of directors to evaluate the fund’s liquidity needs and to protect the fund and

its shareholders from the harm that can occur from failure to properly anticipate and provide for

those needs.

To comply with this general liquidity requirement, we would expect money market fund

managers to consider factors that could affect the fund’s liquidity needs, including characteristics

of a money market fund’s investors and their likely redemptions.196 _{For example, some}

shareholders may have regularly recurring liquidity needs, such as to meet monthly or more

frequent payroll requirements. Others may have liquidity needs that are associated with

particular annual events, such as holidays or tax payment deadlines. A fund also would need to

consider the extent to which it may require greater liquidity at certain times when investors’

liquidity needs may coincide. In addition, a volatile or more concentrated shareholder base

193 _{See, e.g., Charles Schwab Comment Letter; Dreyfus Comment Letter. We note, however, that}

similar general requirements in rule 2a-7 have not hampered fund managers. See, e.g., current rule 2a-7(c)(2) (requiring a money market fund to maintain a dollar-weighted average portfolio maturity appropriate to its objective of maintaining a stable net asset value per share or price per share). Thus, we do not share commenters’ concerns that the general liquidity standard could expose a money market fund to liability based on hindsight review of the fund’s subjective determinations and market events.

194 _{See, e.g., TDAM Comment Letter. Another commenter asserted that money market funds are}

already subject to this requirement under section 22(e) of the Act. See State Street Comment Letter. The general liquidity requirement, together with rule 2a-7’s specific obligations related to illiquid securities and daily and weekly liquid assets, identifies the liquidity obligations that are specific to money market funds.

195 _{For example, suggestions that we require each fund to maintain sufficient liquidity to meet}

redemptions by the largest shareholders seem inadequate because they assume that only those shareholders will redeem. See Stradley Ronon Comment Letter; SIFMA Comment Letter.

would require a fund to maintain greater liquidity than a stable shareholder base consisting of

thousands of retail investors.197

Thus, to comply with rule 2a-7, as amended, money market funds should adopt policies

and procedures designed to assure that appropriate efforts are undertaken to identify risk

characteristics of shareholders.198 _{In other words, fund boards should make sure that the adviser}

is monitoring and planning for “hot money.” In their consideration of these procedures and in

the oversight of their implementation, fund boards should appreciate that, in some cases, fund

managers’ interests in attracting additional fund assets may be in conflict with their overall duty

to manage the fund in a manner consistent with maintaining a stable net asset value.199 _{We urge}

directors to consider the need for establishing guidelines that address this conflict.

As some commenters noted, identification of these risks may be more challenging when

197 _{See Thrivent Comment Letter (suggesting that we approach portfolio liquidity on the basis of}

concentration among a fund’s shareholders). In determining the amount of liquidity available to meet the requirements of rule 2a-7, funds should not consider the fund’s ability to access overdraft protection, lines of credit, and inter-fund borrowing arrangements. See Federated Comment Letter (suggesting that we adopt the opposite approach). A fund that borrowed to satisfy redemptions would leverage its holdings, thus amplifying the risk of shareholder losses if the fund eventually broke the buck.

198 _{Upon adoption of these amendments, such policies and procedures are, we believe, required}

under rule 38a-1 under the Investment Company Act (the “compliance rule”). Although two commenters suggested that the requirement to adopt the policies and procedures should be incorporated in rule 2a-7, we do not see a reason to duplicate the requirements for policies and procedures encompassed in the compliance rule. See Dreyfus Comment Letter; Comment Letter of Fifth Third Asset Management, Inc. (Sept. 8, 2009) (“Fifth Third Comment Letter”). One commenter recommended that “know your customer” policies apply only to shareholders whose redemptions (in their entirety) would have a material impact on the fund’s ability to satisfy redemptions. Stradley Ronon Comment Letter. See also SIFMA Comment Letter. Another commenter argued that the relevant shareholder characteristics should be limited to clearly defined parameters such as historical net flows. See RidgeWorth Comment Letter. We are not identifying specific characteristics that should be addressed in a fund’s policies and procedures because we believe that money market funds are in a better position to do so. For example, concurrent redemptions of several shareholders may have a material effect on a fund’s ability to satisfy redemptions even if the shareholders’ individual redemptions alone would not have such an effect. Nor are we setting limits as to the scope of the policies and procedures because different money market funds may have different needs in this regard.

share ownership is less transparent because the shares are held in omnibus accounts.200 _Funds

may seek access to information about the investors who hold their interests through omnibus

accounts in addition to considering information about the omnibus accounts, including their

aggregate historical redemption patterns and the account recordholder’s ability to redeem the

entire account.201