Last week, the Securities & Exchange Commission issued a "no-action" letter on the College Retirement Equities Fund's Money Market Account, which says the SEC would not "take any enforcement action ... if the College Retirement Equities Fund (CREF) ... values the securities in its Money Market Account portfolio using the amortized cost method under rule 2a-7 ... if the Money Market Account operates in accordance with rule 2a-7 but does not maintain a stable price per share at a single value." The enormous CREF MMA is a variable annuity and not a traditional "money market mutual fund".

The no-action letter, posted in a new "Money Market Portfolio Valuation" section, says to TIAA-CREF Counsel Dechert, "You state that CREF issues variable annuity certificates that are funded by eight portfolios, one of which is the Money Market Account. You state that the Money Market Account is, and holds itself out as, a money market fund within the definition of rule 2a-7(b) and that the Money Market Account complies with the risk limiting requirements of rule 2a-7(c)(2), (c)(3), and (c)(4) and all other applicable requirements of the rule. Unlike most money market funds, the Money Market Account does not make distributions of income, and therefore does not maintain a stable net asset value. In addition, unlike most money market funds, the Money Market Account does not use the amortized cost method to price its portfolio securities with a remaining maturity of more than 60 days."

The SEC's response continues, "CREF has determined that it would be in the best interests of the Account and CREF participants investing in the Account to begin using the amortized cost method to value all of the MMA's portfolio securities. CREF is concerned, however, because it believes that two provisions of rule 2a-7 could be read to limit use of the amortized cost method to money market funds that maintain a constant price per share at a single value. First, rule-2a 7(c)(1) states that a money market fund may use the amortized cost method, if the board of directors determines, in good faith, that it is in the best interests of the fund and its shareholders to maintain a stable net asset value per share or stable price per share, by virtue of the amortized cost method, and that the fund will continue to use such method only so long as the board believes that it fairly reflects the market-based net asset value per share. Second, rule 2a 7(c)(7)(i) provides that the fund's board shall establish written procedures reasonably designed, taking into account current market conditions and the fund's investment objectives, to stabilize the money market fund's net asset value per share at a single value."

The letter says, "You state that there is no fundamental policy reason that the use of the amortized cost method by a money market fund should be tied to maintenance of a single value per share. You represent that before implementing the amortized cost method, CREF's board of directors ... instead will have determined that it is in the best interests of the Account and its beneficial owners for the Account to provide additional stability in the Account's price per share by using the amortized cost method and complying with the requirements of rule 2a-7, except that the Account would not maintain a stable net asset value at a single value. You also state that CREF's board of directors will adopt written procedures reasonably designed to provide stability in the Account's price per share. The procedures will include all of those required by rule 2a-7(c)(7) for funds using the amortized cost method other than procedures designed to enable the Account to maintain a stable net asset value at a single value. In addition, CREF's prospectus will make clear that the Account does not maintain a constant value per share, and that the value will fluctuate. You maintain that by complying with all of the requirements of rule 2a-7 other than maintaining a stable share price, CREF will provide investors in the Account with all of the protections against dilution that rule 2a-7 provides for money market funds that maintain a constant share price."

Finally, the SEC "no-action" letter concludes, "Based on the facts and representations contained above and in your letter, we will not recommend enforcement action to the Securities and Exchange Commission against the Account under section 2(a)(41) of the Act and rules 2a-4 and 22c-1 thereunder if the Account uses the amortized cost method to value all of its portfolio securities. Because our position is based on the facts and representations above and in your letter, you should note that any different facts or representations may require a different conclusion. This response expresses our views on enforcement action only and does not express any legal conclusions on the issues presented."

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