Rule 2a-7 Supporting Statement

SUPPORTING STATEMENT
for the Paperwork Reduction Act
Information Collection Submission
“Rule 2a-7”
A.

JUSTIFICATION
1.

Information Collection Necessity

Money market funds are open-end management investment companies that differ from
other open-end management investment companies in that they seek to maintain a stable price
per share, usually $1.00. Rule 2a-7 [17 CFR 270.2a-7] under the Investment Company Act of
1940 [15 U.S.C. 80a] (the “Act”) exempts money market funds from the valuation requirements
of the Act, and, subject to certain risk-limiting conditions, permits money market funds to use the
“amortized cost method” of asset valuation or the “penny-rounding method” of share pricing.
Rule 2a-7 also imposes certain recordkeeping and reporting obligations on money market
funds. The board of directors of a money market fund, in supervising the fund's operations, must
establish written procedures designed to stabilize the fund's net asset value (“NAV”). The board
must also adopt guidelines and procedures relating to certain responsibilities it delegates to the
fund's investment adviser. These procedures and guidelines typically address various aspects of
the fund's operations. The fund must maintain and preserve for six years a written copy of both
these procedures and guidelines. The fund also must maintain and preserve for six years a
written record of the board's considerations and actions taken in connection with the discharge of
its responsibilities, to be included in the board's minutes. In addition, the fund must maintain and
preserve for three years written records of certain credit risk analyses, evaluations with respect to
securities subject to demand features or guarantees, and determinations with respect to adjustable
rate securities and asset backed securities. If the board takes action with respect to defaulted
securities, events of insolvency, or deviations in share price, the fund must file with the

2
Commission an exhibit to Form N-SAR describing the nature and circumstances of the action. If
any portfolio security fails to meet certain eligibility standards under the rule, the fund also must
identify those securities in an exhibit to Form N-SAR. After certain events of default or
insolvency relating to a portfolio security, the fund must notify the Commission of the event and
the actions the fund intends to take in response to the situation.
The 2010 amendments to rule 2a-7 also added new collection of information
requirements. First, money market fund boards must adopt written procedures that provide for
periodic testing (and reporting to the board) of the fund’s ability to maintain a stable NAV per
share based on certain hypothetical events. Second, funds must post monthly portfolio
information on their websites. Third, funds must maintain records of creditworthiness
evaluations on counterparties to repurchase agreements that the fund intends to “look through”
for purposes of rule 2a-7’s diversification limitations. Finally, money market funds must
promptly notify the Commission of the purchase of any money market fund’s portfolio security
by an affiliated person in reliance on rule 17a-9 under the Act and explain the reasons for such
purchase.
2.

Information Collection Purpose

The recordkeeping requirements in rule 2a-7 are designed to enable Commission staff in
its examinations of money market funds to determine compliance with the rule, as well as to
ensure that money market funds have established procedures for collecting the information
necessary to make adequate credit reviews of securities in their portfolios. The reporting
requirements of rule 2a-7 are intended to assist Commission staff in overseeing money market
funds and reduce the likelihood that a fund is unable to maintain a stable NAV.

3

3.

Consideration Given to Information Technology

The Commission's Electronic Data Gathering, Analysis and Retrieval System
(“EDGAR”) is designed to automate the filing, processing and dissemination of full disclosure
filings. The system permits publicly-held companies to transmit their filings to the Commission
electronically. EDGAR has increased the speed, accuracy and availability of information,
generating benefits to investors and financial markets. All funds have been required to use
EDGAR for their disclosure filings since November 6, 1995. The exhibit to Form N-SAR
required to be filed with the Commission under rule 2a-7 when a money market fund's board
takes action with respect to defaults, insolvencies, or share price deviations or when a portfolio
security fails to meet certain standards may be filed electronically through EDGAR. In addition
to electronic filing of the exhibit to Form N-SAR, money market funds are required to post
monthly portfolio information on their websites, taking advantage of investors’ widespread use
of the Internet to obtain investment information. Funds are also required to notify the
Commission of transactions conducted pursuant to rule 17a-9 by e-mail.
4.

Duplication

The Commission periodically evaluates rule-based reporting and recordkeeping
requirements for duplication, and reevaluates them whenever it proposes a rule or form, or a
change in either. The recordkeeping, reporting, and website posting required by rule 2a-7 is not
duplicated elsewhere.
5.

Effect on Small Entities

The recordkeeping and reporting requirements of rule 2a-7 are the same for all money
market funds, including those that are small entities. A significant portion of the recordkeeping

4
burden involves organizing information that the funds already collect when initially purchasing
securities. In addition, when a money market fund analyzes a security, the analysis need not be
presented in any particular format. Money market funds therefore have a choice of methods for
maintaining these records that vary in technical sophistication and formality (e.g., handwritten
notes, computer disks, etc.).
6.

Consequences of Less Frequent Collection

As described in section 1, rule 2a-7 requires the fund’s board to adopt (i) written
procedures designed to stabilize the fund’s NAV; (ii) written guidelines regarding the delegation
of certain responsibilities; and (iii) written guidelines that provide for periodic stress testing. In
addition, rule 2a-7 requires the fund to notify the Commission if the board takes certain actions
or if certain events of default or insolvency occur, or there is a purchase of a fund’s portfolio
security by an affiliated person in reliance on rule 17a-9. None of these is a recurring obligation.
They are, however, essential to the Commission's ability to determine compliance with the rule.
The rule also requires money market funds to perform periodic analyses of portfolio
securities and reviews of the credit risks associated with those securities, as well as maintain
records of creditworthiness determinations specific to counterparties in repurchase agreements.
The frequency of these reviews is within a fund’s discretion. The reviews are necessary to
ensure that securities that remain in a fund’s portfolio continue to present minimal credit risks.
Finally, rule 2a-7 requires that money market funds post monthly portfolio information
on their websites within five business days after the end of each month. Prior to this amendment,
funds were only required to disclosure portfolio holdings quarterly, and even then may disclose
information as old as 70 days prior to the filing. We believe that this monthly frequency allows
current and prospective investors in the fund to have timely information about the fund without

5
excessively burdening money market funds. Money market funds voluntarily provide this
information on their websites even more frequently than monthly.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

Rule 2a-7 requires money market funds to retain certain written records for more than
three years. The fund must maintain and preserve for six years a written copy of the procedures
established by the board of directors designed to stabilize the fund's NAV, records of the reports
to the board on stress tests and records of determinations of credit quality of counterparties to
repurchase agreements, and a written record of the board's considerations and actions taken in
connection with the discharge of its responsibilities. The long-term retention of these records is
necessary to allow Commission inspection staff to determine compliance with rule 2a-7. Rule
2a-7 also requires funds to post portfolio information monthly. Given the short-term nature of
money market fund portfolio holdings, this increased frequency of information collection is
necessary to provide portfolio information that is meaningful to investors.
8.

Consultation Outside the Agency

The Commission requested public comment on the collection requirements in rule 2a-7
before it submitted this request for extension and approval to the Office of Management and
Budget. The Commission received no comments in response to its request.
The Commission and the staff of the Division of Investment Management also participate
in an ongoing dialogue with representatives of the investment company industry through public
conferences, meetings and informal exchanges. These various forums provide the Commission
and the staff with a means of ascertaining and acting upon paperwork burdens confronting the
industry.

6
9.

Payment or Gift

Not applicable.
10.

Confidentiality

Not applicable.
11.

Sensitive Questions

Not applicable.
12.

Time Burden Estimate

Commission staff estimates that there are 664 money market funds (136 fund
complexes), all of which are subject to rule 2a-7. 1 Commission staff further estimates that there
will be approximately 10 new money market funds established each year. Commission staff
estimates that rule 2a-7 contains the following collection of information requirements:
•

Record of credit risk analyses, and determinations regarding adjustable rate securities,
asset backed securities, securities subject to a demand feature or guarantee, and
counterparties to repurchase agreements.
85 responses annually for each fund to document these determinations, with the
total annual responses per fund, on average, requiring 680 burden hours of
professional (business analyst or portfolio manager) time. 2 Thus, to record credit
risk analyses and determinations regarding adjustable rate securities, asset backed
securities, securities subject to a demand feature or guarantee, and counterparties
to repurchase agreements, the staff estimates a total burden and cost of
approximately 451,520 hours and $118,298,240. 3

1

This estimate is based on Form N-MFP filings with the Commission for the month ended June
30, 2012.

2

Estimates of the number of responses prepared annually regarding these analyses are based on
conversations with individuals in the mutual fund industry. The actual number of responses
prepared may vary significantly depending on the type and number of portfolio securities held by
individual funds.

3

This estimate is based on the following calculations: 664 funds x 680 hours = 451,520 hours;
451,520 hours x $262 per hour = $118,298,240. The estimated hourly cost was based on the
weighted average annual salaries reported for an intermediate business analyst ($201 per hour)

7
•

Establishment of written procedures designed to stabilize NAV and guidelines and
procedures for board delegation of authority.
1 response annually for each of 10 new money market funds 4 to formulate and
establish written procedures and guidelines, with each response, on average,
requiring:
15.5 burden hours:

0.5 hour of the board of directors’ time;
7.2 hours professional legal time;
7.8 hours support staff time.

Thus the staff estimates a total burden and cost of approximately 155 hours and
$63,288 to adopt procedures designed to stabilize the fund’s NAV and guidelines
regarding the delegation of certain responsibilities to the fund’s adviser. 5
•

Board review of procedures and guidelines of any investment adviser or officers to whom
the fund’s board has delegated responsibility under rule 2a-7 and amendment of such
procedures and guidelines.
1 response annually for each of 166 money market funds to review and amend
written procedures and guidelines, with each response, on average, requiring:
5 burden hours:

1 hour of the board of directors’ time;
4 hours compliance and professional legal time. 6

Thus, the staff estimates a total burden and cost of approximately 830 hours and
$989,360 to review and amend written procedures and guidelines. 7

and senior portfolio manager ($322 per hour) in SIFMA’s Management & Professional Earnings
in the Securities Industry 2011 (Oct. 2011), modified by Commission staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits
and overhead.
4

This estimate is based on historical data provided in Lipper Inc.’s LANA database and
projections about the growth of the money market mutual fund industry going forward. The
actual number of new money market funds launched may vary significantly from our estimates
depending upon developments in market interest rates and the regulatory environment.

5

This estimate is based on the following calculations: 10 funds x 15.5 hours = 155 hours; 10 funds
x ((0.5 hours x $4500 per hour for board time) + (7.2 hours x $378 per hour for an attorney) +
(7.8 hours x $174 per hour for support staff)) = $63,288. In calculating costs for complying with
the information collection requirements of rule 2a-7, Commission staff estimates that a fund
board’s hourly rate is $4500 per hour (on average, a board has 9 directors and the fund pays each
director $500 per hour).

6

For purposes of this PRA we assumed that on average 25% (664 funds x .25 = 166 funds) of
money market funds would review and update their procedures on an annual basis.

8
•

Written record of board determinations and actions related to failure of a security to meet
certain eligibility standards or an event of default or insolvency. 8
2 responses annually for 20 funds to record the board of directors’ determinations
and actions in the board meeting minutes, with each response on average
requiring 0.5 burden hours of professional legal time.

•

Notice to Commission of an event of default or insolvency.
1 response annually for 20 funds to provide notice to the Commission of an event
of default or insolvency, with each response on average requiring 0.5 burden
hours of professional legal time. Thus, the staff estimates that each of the 20
money market funds that experience a change in certain eligibility standards for
portfolio securities or an event of default or insolvency relating to portfolio
securities spends a total of 1.5 hours of professional legal time documenting board
determinations (1 hour for 2 responses annually) and notifying the Commission
regarding the event (.5 hours for 1 response annually) for a total of 30 hours and
$11,340. 9

•

Establishment of written procedures to test periodically the ability of the fund to maintain
a stable NAV per share based on certain hypothetical events (“stress testing”).
1 response annually for each of 10 new money market funds to formulate and
establish written procedures and guidelines, with each response, on average,
requiring:

7

This estimate is based on the following calculations: 166 funds x 5 hours = 830 hours; 166 funds
x ((1 hour x $4500 per hour) + (4 hours x $365 per hour)) = $989,360.

8

A fund’s board of directors makes these determinations and takes action when a portfolio security
no longer meets eligibility requirements under the rule, or there has been an event of default or
insolvency. These events occur infrequently. Although we have assumed, based on N-SAR
filings through June 30, 2012, an average of approximately 2 occurrences for 20 funds each year,
this number may vary significantly in any particular year. A fund also must provide information
regarding these events in an exhibit to Form N-SAR. The burden hours and responses required
for filing these exhibits are included in the PRA submission for Form N-SAR. In the event of a
default or insolvency with respect to an issuer of a portfolio security, the fund also must notify the
Commission.

9

This estimate is based on the following calculations: 20 funds x ((2 responses x 0.5 hours) + (1
response x 0.5 hours)) = 30 hours; 20 funds x (1.5 hours x $378 for an attorney)) = $11,340.

9
22 burden hours:

3 hours of the board of directors’ time;
8 hours professional legal time;
11 hours risk management specialist time.

Thus the staff estimates a total burden and cost of approximately 220 hours and
$193,730 to adopt procedures to test periodically the ability of the fund to
maintain a stable NAV per share based on certain hypothetical events. 10
•

Review, revise, and approve written procedures to stress test a fund’s portfolio.
1 response annually for each of 136 money market fund complexes to review,
revise, and amend written procedures and guidelines, with each response, on
average, requiring:
12 burden hours:

1 hour of the board of directors’ time;
5 hours portfolio manager time;
3 hours risk management specialist time;
3 hours professional legal time.

Thus, the staff estimates a total burden and cost of approximately 1,632 hours and
$1,090,856 to review, revise, and amend written procedures and guidelines. 11
•

Reports to fund boards on the results of stress testing.
5 responses annually (including 1 response as a result of unanticipated changes in
market conditions or other events) for each of 136 fund complexes to report to
fund boards on the results of stress testing, with each response, on average,
requiring:
10 burden hours:

5 hours portfolio manager time;
2 hours compliance time;
2 hours professional legal time;
1 hour support staff time.

10

This estimate is based on the following calculations: 10 funds x 22 hours = 220 hours; 10 funds x
((3 hours x $4500 per hour for board time) + (8 hours x $378 per hour for an attorney) + (11
hours x $259 per hour for a risk management specialist)) = $193,730.

11

This estimate is based on the following calculations: 136 fund complexes x 12 hours = 1,632
hours; 136 fund complexes x ((1 hour x $4500 per hour) + (5 hours x $322 per hour for a
portfolio manager) + (3 hours x $259 per hour for a risk management specialist) + (3 hours x
$378 per hour for an attorney)) = $1,090,856.

10
Thus, the staff estimates a total burden and cost of approximately 6,800 hours and
$2,106,640 to report to fund boards on the results of stress testing. 12
•

Monthly posting of money market fund portfolio information on a fund’s website.
12 responses annually for each of 664 money market funds to maintain and
update the relevant webpage with required portfolio holdings information on a
monthly basis, with each response requiring on average 7 hours of webmaster
time. In addition, we estimate 1 response annually for each of 10 new money
market funds to initially develop a webpage, with each response requiring 24
hours of webmaster time.
Thus, the staff estimates a total burden and cost of approximately 56,016 hours
and $11,539,296 for all money market funds to initially develop and maintain and
update its website to post portfolio holdings information on a monthly basis. 13

•

Notice to the Commission of the purchase of a money market fund’s portfolio security by
certain affiliated persons in reliance on rule 17a-9.
1 response annually for each of 25 fund complexes to provide notice to the
Commission of a rule 17a-9 transaction, with each response on average requiring
1 burden hour of an in-house attorney’s time. Thus, the staff estimates that the

12

This estimate is based on the following calculations: 136 fund complexes x (5 responses x 10
hours) = 6,800 hours; 136 fund complexes x ((5 responses x 5 hours x $322 per hour for a
portfolio manager) + (5 responses x 2 hours x $279 per hour for a compliance manager) + (5
responses x 2 hours x $378 per hour for an attorney) + (5 responses x 1 hour x $174 per hour for
support staff)) = $2,106,640.

13

This estimate is based on the following calculations: (664 funds x (12 responses x 7 hours) + (10
new money market funds x (1 response x 24 hours) = 56,016 hours; (664 funds x (12 responses x
7 hours x $206 per hour for a webmaster)) + (10 new money market funds x (1 response x 24
hours x $206 per hour for a webmaster)) = $11,539,296.

11
total annual burden for funds required to notify the Commission of certain
affiliated transactions made in reliance on rule 17a-9 is approximately 25 hours
and $9,450. 14
Thus, the Commission estimates the total annual burden of the rule’s information
collection requirements are 65,505 responses 15 and 517,228 hours 16 at an annual cost of
$134,302,200. 17
These estimates are made solely for the purposes of the Paperwork Reduction Act
(“PRA”) and are not derived from a comprehensive or even representative survey or study of the
cost of Commission rules.
13.

Total Annual Cost Burden

Commission staff estimates that in addition to the costs described in section 12, money
market funds will incur costs to preserve records, as required under rule 2a-7. 18 These costs will
vary significantly for individual funds, depending on the amount of assets under fund

14

This estimate is based on the following calculations: 25 fund complexes x 1 hour = 25 hours; 25
hours x $378 (hourly rate for an attorney) = $9,450.

15

This estimate is based on the following calculation: (85 responses x 664 funds) + (1 response x
10 funds) + (1 response x 166 funds) + (2 responses x 20 funds) + (1 response x 20 funds) + (1
response x 10 funds) + (1 response x 136 funds) + (5 responses x 136 funds) + (12 responses x
664 funds) + (1 response x 10 funds) + (1 response x 25 funds) = 65,505 responses.

16

This estimate is based on the following calculation: 451,520 hours + 155 hours + 830 hours + 30
hours + 220 hours + 1,632 hours + 6,800 hours + 56,016 hours + 25 hours = 517,228 hours.

17

This estimate is based on the following calculation: $118,298,240+ $63,288 + $989,360 +
$11,340 + $193,730 + $1,090,856 +$2,106,640 + $11,539,236 + $9,450 = $134,302,200.

18

A significant portion of the recordkeeping burden involves organizing information that the funds
already collect when initially purchasing securities. In addition, when a money market fund
analyzes a security, the analysis need not be presented in any particular format. Money market
funds therefore have a choice of methods for maintaining these records that vary in technical
sophistication and formality (e.g. handwritten notes, computer disks, etc.). Accordingly, the cost
of preparing these documents may vary significantly among individual funds. The burden hours
associated with filing reports to the Commission as an exhibit to Form N-SAR are included in the
PRA burden estimate for that form.

12
management and whether the fund preserves its records in a storage facility in hard copy or has
developed and maintains a computer system to create and preserve compliance records. 19
Commission staff estimates that the amount an individual fund may spend ranges from $100 per
year to $300,000. Based on a cost of $0.0051295 per dollar of assets under management for
small funds, $0.0005041 per dollar assets under management for medium funds, and $0.0000009
per dollar of assets under management for large funds, the staff estimates compliance with the
record storage requirements of rule 2a-7 costs the fund industry approximately $57.3 million per
year. 20
Based on responses from individuals in the money market fund industry, the staff
estimates that some of the largest fund complexes have created computer programs for
maintaining and preserving compliance records for rule 2a-7. Based on a cost of $0.0000132 per
dollar of assets under management for large funds, the staff estimates that total annualized
capital/startup costs range from $0 for small funds to $35.6 million for all large funds. 21
Commission staff further estimates that, even absent the requirements of rule 2a-7, money
market funds would spend at least half of the amount for capital costs ($17.8 million) and for

19

The vast majority of assets under management in individual money market funds ranges from
approximately $6.1 million to approximately $1 billion.

20

The staff estimated the annual cost of preserving the required books and records by identifying
the annual costs incurred by several funds and then relating this total cost to the average net assets
of these funds during the year. With a total of $563.9 million under management in small funds,
$103.1 billion under management in medium funds and $2.7 trillion under management in large
funds, the costs of preservation were estimated as follows: ((0.0051295 x $563.9 million) +
(0.0005041 x $103.1 billion) + (0.0000009 x $2.7 trillion) = $57.30 million. For purposes of this
PRA submission, Commission staff used the following categories for fund sizes: (i) small–
money market funds with $50 million or less in assets under management; (ii) medium–money
market funds with more than $50 million up to and including $1 billion in assets under
management; and (iii) large–money market funds with more than $1 billion in assets under
management.

21

This estimate is based on the following calculation: $0.0000132 x $2.7 trillion in assets under
management for large funds = $35.64 million.

13
record preservation ($28.65 million) to establish and maintain these records and the systems for
preserving them as a part of sound business practices to ensure diversification and minimal credit
risk in a portfolio for a fund that seeks to maintain a stable price per share.
14.

Federal Government Cost

Rule 2a-7 does not impose any costs on the federal government.
15.

Changes in Burden

The estimated total annual burden is being increased from 395,779 hours to 517,228
hours. This net increase is attributable to a combination of factors, including a decrease in the
number of money market funds and fund complexes, and updated information from money
market funds regarding hourly burdens, including revised staff estimates of the burden hours
required to comply with rule 2a-7 as a result of new information received from surveyed fund
representatives. The estimated total annual cost is being decreased from $121.2 million to $92.9
million. This decrease is attributable to updated information from money market funds regarding
assets under management.
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit OMB Expiration Date

Not applicable. We are not requesting to omit the expiration date.
18.

Exceptions to Certification Statement

Not applicable.
B.

COLLECTIONS OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.