U.S. Securities & Exchange Commission Director of the Division of Trading and Markets Erik Sirri testified before the House Committee on Financial Services on "Municipal Bond Market Turmoil" yesterday and included a number of comments on money market mutual funds." Sirri's money fund-related comments, available in full here, include: "The Commission staff is closely monitoring the potential effects of the developments in the municipal auction-rate securities markets on mutual funds, including money market funds.... Tax-exempt money market funds, with $465 billion under management, are key investors in municipal securities and part of the $3.3 trillion money market fund industry. Money Market funds typically have as their investment objective the generation of income and the preservation of capital. To help meet this objective, they are required by rule 2a-7 under the Investment Company Act to limit the securities in which they invest to high-quality, short-term instruments that the funds' advisers determine involve 'minimal credit risks'."

He continues, "As much as 30% of the municipal securities currently held by tax-exempt money market funds is supported by bond insurance.... Some of the securities may be eligible for investment by money market funds because of the insurance that monoline insurers provide.... The Commission staff recognizes that a significant downgrade in a monoline insurer's rating could result in the securities becoming ineligible under rule 2a-7 for investment by money market funds."

Sirri says, "The credit ratings only create a 'floor' below which the funds may not invest, however, and consitute one among several risk-limiting conditions of rule 2a-7. Since its adoption in 1982, rule 2a-7 has continued to serve the purposes that the Commission intended. It is notable that, despite the current liquidity crisis, money market funds and their sponsors have not asked the Commission for any changes to the risk-limiting conditions of rule 2a-7, including the credit rating floor."

Again, the full comments are available here.

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