Even with the Government shutdown, Comments continue to be posted on the SEC's Money Market Fund Reform Proposal. While we'll never be able to cover them all, we continue digging into our pile of reading.... The latest featured comment letter is from Dechert LLP; we excerpt selected sections from this posting. They write, "We applaud the Commission for the obvious care and thoughtfulness that went into the preparation of the comprehensive Proposing Release. Although we strongly support the Commission's goal of improving and strengthening the regulation of money funds, we offer these comments to address certain areas where we believe the Commission either should provide more guidance to industry participants or should modify or reconsider its approach."

Dechert says, "The Commission requested comment on whether money funds that invest primarily in municipal securities ("municipal money funds") should be exempted from the floating NAV requirement of Alternative 1 and on the accuracy of the premise that municipal funds would be able to qualify for the retail exemption. We understand that, for many municipal money funds, a $1 million daily redemption limit would be unworkable. In addition, given the lack of evidence of potential systemic harm from municipal money funds, as well as the fact that those funds did not experience problematic redemption levels during the 2008 financial crisis, we urge the Commission to provide a separate exemption from the floating NAV requirement for municipal money funds."

The letter also comments, "We urge the Commission to consider the effect of the Proposing Release on unregistered money funds that currently conform to the requirements of Rule 12d1-1. These unregistered money funds serve as valuable cash management vehicles for many registered investment companies. Through Rule 12d1-1, the Commission has provided registered investment companies with the ability to invest in unregistered money funds that comply with Rule 2a-7. However, some aspects of the proposed amendments to Rule 2a-7 are ill-suited for these unregistered money funds. Accordingly, we ask that the Commission specify in the final rule that certain provisions of the amended rule are not applicable to unregistered money funds that serve as cash management vehicles for registered investment companies."

Dechert explains, "The Proposing Release states that money funds that have both institutional and retail share classes (or both institutional and retail shareholders in a single class of shares) would need to reorganize into separate money funds -- a retail money fund and an institutional money fund -- in order to rely on the retail money fund exemption under Alternative 1. The Proposing Release further discusses the costs associated with such a reorganization, including the costs that would be necessary to prepare appropriate organizational documents and costs incurred by the fund's board of directors to approve such documents. However, the Proposing Release does not discuss the potential costs of obtaining shareholder approval to the extent that a money fund's charter documents and/or applicable state law would require shareholder approval to effect a reorganization."

They continue, "The Proposing Release acknowledges a concern that a money fund with a floating NAV may not be considered to be a "cash equivalent" for accounting purposes. The Commission stated, however, that it believes that generally floating NAV money funds will still qualify as cash equivalents. Notwithstanding this statement, however, we are concerned that this may not be the case given the possible variation in value that could result from the imposition of a floating NAV, and the resulting possibility that money funds could be re-categorized as "investments" rather than "cash equivalents" for accounting purposes. In the event that the Commission decides to adopt Alternative 1, the Commission or the FASB should issue guidance establishing that a floating NAV money fund would be classified as a cash equivalent. In addition, the Commission should make it clear that a money fund that has a floating NAV would continue to be considered a "cash item" for purposes of the definition of "investment company" in Section 3(a)(1)(C) of the 1940 Act, which excludes cash items from an issuer's total assets in measuring whether the issuer has more than 40% of its total assets in "investment securities" as defined in Section 3(a)(2). The Commission Staff has long accepted the view that money fund shares should be considered to be "cash items." Failure to continue this treatment would result in money fund shares being considered to be "investment securities.""

Dechert also comments, "Both proposed Alternatives may conflict with current money fund organizational documents by requiring that limitations be placed on redemptions. Under Alternative 1, in order to qualify as a retail money fund, a fund would be required to limit daily redemptions to no more than $1 million a day for any shareholder. Under Alternative 2, the Board would have the right to suspend redemptions. Currently, money fund organizational documents may not provide for such limitations. In fact, a money fund's governing documents may contemplate that a shareholder has an absolute right to redeem any or all shares of the fund that he or she holds. The Proposing Release does not address this potential conflict. In the absence of clarity from the Commission, the organizational documents would have to be amended, which would be time consuming and costly, potentially requiring shareholder approval. We suggest that the Commission consider and address these issues and costs before adopting the Alternatives."

They also say, "If the Commission moves forward with the proposed amendments to Form N-MFP and the filing requirements for that form, we strongly suggest that the period of time between the end of the month and the due date for the filing be lengthened to allow additional time for the accuracy of the information included in the filing to be verified. The proposals would both increase the amount of information required to be included on Form N-MFP and make the Form N-MFP information publicly available immediately upon filing. Based on our experience, we believe that the current 60-day delay has served to allow money funds to conduct a more thorough review of their Form N-MFP filings to confirm their accuracy and file any amendments to correct data before it is made available to the public. Without the 60-day delay in publication, there would be a greater likelihood of human error, resulting in inaccurate data being included in public information."

Dechert tells us, "In addition to the elimination of the 60-day delay, the Commission proposed structural, reporting and clarifying changes to Form N-MFP. The proposed reporting requirements would include: (i) weekly reporting of NAV; (ii) new information with respect to each portfolio holding; (iii) disclosure about the amount of cash the money fund holds; (iv) the fund's daily and weekly liquid assets; (v) whether a portfolio security is considered a daily or weekly liquid asset; (vi) whether any person paid for or waived all or part of the fund's operating expenses or management fees; and (vii) the total percentage of shares outstanding held by the 20 largest shareholders of record. Given the amount and type of new information that would be required to be provided, we believe that the five business day period for filing after the month end is too short. We suggest that this period be lengthened to allow money funds additional time to ensure the accuracy of their filings, particularly if the information filed will be publicly available upon filing."

Finally, Dechert adds, "In the Proposing Release, the Commission asked whether money funds should be required to make Form N-MFP filings on a weekly basis. We strongly oppose requiring money funds to make Form N-MFP filings weekly or more frequently than monthly. The preparation of Form N-MFP filings requires a considerable effort each month by money fund sponsors and service providers to collect, format and verify the accuracy of potentially thousands of portfolio positions for multiple funds. Increasing the frequency of these filings would multiply this burden, increasing fund costs for minimal benefit. We also note the potential for human error discussed above would be multiplied if more frequent filings are required."

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