Today's Wall Street Journal writes "SEC Aims to Rein In The Role of Ratings", which states that the SEC will propose rules eliminating the need for ratings on money market securities. Currently, Rule 2a-7 of the Investment Company Act of 1940, the quality, maturity and diversity regulations governing money market funds, require at least two NRSROs (nationally recognized statistical ratings organizations) to rate securities in their top two categories in order to be money fund eligible.
The WSJ says, "The most significant portion of the rules, to be proposed Wednesday, would make it possible for U.S. money-market funds to invest in short-term debt without regard to ratings put on those securities by firms such as Moody's Investors Service and Standard & Poor's, people familiar with the matter said. Currently, SEC rules generally require that money-market funds purchase only short-term debt with high investment-grade ratings. The new rule would put more discretion in the hands of money managers to determine whether the debt is investment grade."
While it remains to be seen what kind of response the proposal gets, it's clear that some changes, particularly those involving ratings agencies, are in store. The SEC said on June 16 in its Proposed Rules for Nationally Recognized Statistical Rating Organizations, "And third, two weeks from today, the Commission intends to propose rule amendments that would be intended to reduce undue reliance in the Commission's rules on NRSRO ratings."
The SEC's 2003 Concept Release: Ratings Agencies and the Use of Credit Ratings under the Federal Securities Laws" included among proposed alternatives (which were never adopted), "Rule 2a-7 under the Investment Company Act of 1940 ... limits money market funds to investing in 'high quality' securities. The rule contains minimum quality standards based on an objective test - ratings issued by NRSROs - and on a subjective test - the credit analysis performed by the adviser to the money market fund. The Commission could eliminate the objective test from Rule 2a-7, and rely solely on the subjective test."
The SEC will be holding an open meeting on Wednesday to discuss.
