We wrote in late June ("SEC Proposes 'Alternate Path' to Reduce Ratings Reliance in Rule 2a-7") about the SEC's "Proposed rules regarding references to ratings of Nationally Recognized Statistical Ratings Organizations". As we mentioned then, we didn't expect the proposal to go over well with fund companies, and the first substantial comment letter supports this contention. Vanguard is the first fund company to come out strongly against the Commission's proposal in its recently-posted comment letter.

The response by Vanguard Chairman & CEO John Brennan says, "The Vanguard Group strongly opposes the Commission's proposal to eliminate references to credit ratings in Rule 2a-7 -- a rule that has provided a strong regulatory framework for money market funds since its adoption 25 years ago. As a leading provider of money market funds dedicated to the best interests of shareholders, it is our view that the proposed elimination of NRSRO ratings would remove an important investor protection from Rule 2a-7, weaken investment standards, and, potentially, pose a risk to the long history of stability of the $3.5 trillion money market fund industry."

Vanguard's response also says, "NRSRO ratings provide an independently established baseline for money market fund investments and are a valuable assurance to investors that money market fund investments are not subject to unnecessary risks. Vanguard understands the urgency of the Commission's concern over the integrity of NRSRO ratings and the role that misplaced reliance on potentially flawed ratings may have played in recent credit market problems. And, we are very supportive of the Commission's efforts to address the root problems of flawed ratings and undue reliance on them in certain sectors of the financial markets."

But, Brennan adds, "We are concerned, however, that the Proposed Rule misses the mark with respect to money market funds. In fact, for money market fund investors, greater regulatory emphasis on Rule 2a-7's existing requirement of independent minimal credit risk analysis and a comprehensive examination program are better solutions to any concerns about undue reliance on credit ratings. Ratings -- even if occasionally imperfect -- protect investors by establishing a uniform, minimum credit quality for all money market funds. Removing that investor protection is akin to outlawing seat belts with the hope that drivers will be less likely to be injured if a defective belt fails in a crash."

Finally, Vanguard notes the SEC's past introduction and support of ratings in money funds. The company says, "Recent events do not suggest that the need for these safeguards has diminished; if anything, they suggest that an even more restricted universe for eligible money market fund securities is entirely appropriate in the best interests of shareholders. As a result, the Commission must continue to support a regulatory framework for money market funds that will protect investors from the loosening of credit standards."

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