At a recent Investment Company Institute conference, the SEC's Bob Plaze and Debevoise & Plimton's Ken Berman presented the topic, "Money Market Funds: Dealing With Distressed Securities." Their talk cited three types of events that would require action by advisors and boards: securities downgrades; defaults; and, excessive deviation from an NAV. A downgrade requires a "prompt reassessment by the board or adviser", and would apply "where a security ceases to be a First Tier security" and "where a fund's adviser becomes aware that any NRSRO [ratings agency] has rated a Second Tier Security below its second highest rating."

With a default, "The fund must dispose of a security as soon as practicable" if: "the security is in default, no longer presents minimal credit risks, or if there is an issuer event of insolvency". The two add, "Unless the fund board makes determination that disposal of the security would not be in the best interest of the fund."

According to Plaze and Berman, potential actions by the board or adviser include: "re-pricing shares ('breaking-the-buck'), withholding distributions (reducing yields), reducing fees (in a low interest rate period), or purchasing shares". A capital contribution, if not an affiliated transaction, or a "lift-out under Rule 17a-9" (if it's for cash and the security is no longer Eligible) are also potential actions. An SEC "no-action" letter would be required if the security remains an eligible security (a non-17a-9 lift-out), or for any other "support arrangement involving affiliates", such as an LOC from an affiliated bank, a capital support agreement, or a note swap.

Reporting of these events would take place "with specificity" in the next Form N-SAR (the semiannual report), and the Notes to Financial Statements should state the "nature and amount of payments by affiliates and how [they're] reflected". Finally, "Prompt notification [should be made] to the SEC in the event of the default of a security or an event of insolvency," and this notification should be made by telephone, fax or e-mail (to the Division of Investment Management), followed by first class mail," said Plaze and Berman.

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