We learned from Stradley Ronan's Joan Ohlbaum Swirsky that the SEC posted a "no-action" letter in response to a recent "Request for Interpretation" on floating rate securities and WAL calculations from the ICI. The letter says, "The Investment Company Institute requests that the staff of the Division of Investment Management concur with our interpretation that money market funds may treat short-term floating rate securities as short-term variable rate securities for purposes of determining portfolio maturity under Rule 2a-7(c)(2)(iii) under the Investment Company Act of 1940."

Swirsky tells us, "The letter clears up an ambiguity regarding the calculation of maturity of a short term floating rate security, for purposes of weighted average life ('WAL').... Rule 2a-7 includes 'maturity shortening' provisions, that permit a fund to deem the maturity of a variable or floating rate security to be 'shortened' to the next interest readjustment date or the next date that principal can be recovered on demand ('demand date'), in accordance with certain rules. The maturity shortening provision relating to a short term floater states that the maturity is one day. This treatment is based on the interest rate readjustments of a floater, which can be as frequent as daily."

She continues, "The interest readjustment dates on a variable rate security, as opposed to floater, do not occur daily. So, if the security has a demand feature, the demand date may be sooner than the next interest readjustment, depending on the terms of the security. The maturity shortening provision relating to a short term variable rate security states that the maturity is the shorter of the period remaining until the next interest readjustment date or until the next demand date. This differs from the provision for a short term floater, which does not on its face permit shortening maturity to the next demand date -- but, instead, flatly deems the maturity to be one day, based on daily interest readjustments."

Swirsky explains, "When calculating WAM, reference to the next demand date would be irrelevant for a short term floater, since the maturity of a short term floater is considered to be daily. But, when calculating WAL, reliance on an interest rate readjustment date (including daily rate readjustments) is forbidden. So, if the floater has a demand feature, permission to shorten to the next demand date becomes important. In this letter, the SEC staff, in essence, confirms that the maturity of a short term floater that has a demand feature can be 'shortened' to its next demand date when calculating WAL, even though that the maturity shortening provision relating to short term floaters does not refer to the demand date. The relief states that it only permits shortening to the next demand date for an unconditional demand feature, not a conditional demand feature."

Finally, she adds, "The letter to the SEC includes a useful footnote remarking that an adjustable rate Government Security (whose maturity can be shortened under the maturity shortening provision for Government Securities) can also have its maturity shortened under the other maturity shortening provisions in Rule 2a-7. The maturity shortening provision for Government Securities, like the maturity shortening provision for short term floaters, also does not reference shortening to the next demand date. This footnote supports that the maturity of the Government Security can be determined under the other maturity shortening provisions, that do allow shortening to the next demand date."

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