Draft 2a-7 Supporting Statement

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

JUSTIFICATION
1.

Necessity for the Information Collection

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 under the Investment
Company Act of 1940 (“Investment Company Act”) 1 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. 2
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. 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 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 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. Money market funds are also
required to disclose certain events on Form N-CR.
In addition, money market fund boards must adopt written procedures that
provide for periodic testing (and reporting to the board) of the fund’s ability to

1

15 U.S.C. 80a-1 et seq.

2

17 CFR 270.2a-7.

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maintain a stable net asset value per share based on certain hypothetical events.
Funds must also post monthly portfolio information on their websites and 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 Investment Company Act and explain the reasons
for such purchase.
Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection
Act requires each federal agency, including the Commission, to “review any
regulation issued by such agency that requires the use of an assessment of the creditworthiness of a security or money market instrument and any references to or
requirements in such regulations regarding credit ratings.” 3 That section further
provides that each such agency shall “modify any such regulations identified by the
review … to remove any reference to or requirement of reliance on credit ratings and
to substitute in such regulations such standard of credit-worthiness as each respective
agency shall determine as appropriate for such regulations.” 4
We are removing references to credit ratings in rule 2a-7, which affect five
elements of the rule: (i) determination of whether a security is an eligible security;
(ii) determination of whether a security is a first-tier security; (iii) credit quality
standards for securities with a conditional demand feature; (iv) requirements for
monitoring securities for ratings downgrades and other credit events; and (v) stress
testing.
2.

Purpose and Use of the Information Collection

Certain of the provisions of the proposed rule contain “collection of information”
requirements within the meaning on the Paperwork Reduction Act of 1995
(“Paperwork Reduction Act”), 5 and the Commission is submitting the collection of
information to the Office of Management and Budget (“OMB”) for review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. 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

3

Pub. Law 111-203, Sec. 939A(a)(1)–(2).

4

Pub. Law 111-203, Sec. 939A(b).

5

44 U.S.C. 3501 et seq.

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information necessary to make adequate credit reviews of securities in their portfolios.
The reporting requirements of rule 2a-7 are intended to assist the Commission in
overseeing money market funds, reducing the likelihood that a fund is unable to
maintain a stable net asset value (where a fund seeks to maintain a stable net asset
value), mitigating funds’ susceptibility to heavy redemptions in times of stress, and
increasing the transparency of risk in money market funds.
3.

Consideration Given to Information Technology

The Commission’s Electronic Data Gathering, Analysis, and Retrieval System
(“EDGAR”) automates the filing, processing, and dissemination of full disclosure
filings. This automation has increased the speed, accuracy, and availability of
information, generating benefits to investors and financial markets. 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. Under rule 2a-7, Form N-CR is
required to be filed electronically on EDGAR. In addition to electronic filing or the
exhibit to Form N-SAR or on Form N-CR, 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.
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 a rule or form. The recordkeeping, reporting, and website
posting requirements in rule 2a-7 are 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. The burden of the
conditions on smaller funds may be proportionally greater than for larger funds. 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. The
Commission believes that imposing different requirements on smaller money market
funds would not be consistent with investor protection. The Commission reviews all

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rules periodically, as required by the Regulatory Flexibility Act, to identify methods
to minimize recordkeeping or reporting requirements affecting small businesses.
With respect to the final amendments, pursuant to 5 U.S.C. section 605(b), the
Commission certified that the amendments to rule 2a-7 will not have a significant
impact on a substantial number of small entities.
6.

Consequences of Not Conducting Collection

Rule 2a-7 requires the fund’s board to adopt (i) written procedures designed to
stabilize the fund’s net asset value (where applicable); (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.
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. We believe
that this monthly frequency allows current and prospective investors in the fund to
have timely information about the fund without excessively burdening money
market funds. Money market funds voluntarily provide this information on their
websites more frequently than monthly.
Rule 2a-7 also requires daily website updates for the fund’s daily and weekly
liquid assets, the fund’s net inflows or outflows, and the fund’s daily current net asset
value per share. The website disclosures provide current and prospective investors
with timely information about the fund without excessively burdening money market
funds.
7.

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

Rule 2a-7 requires money market funds to retain certain 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 net
asset value (where applicable), records of the reports to the board on stress tests and

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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 the Commission inspection staff to determine
compliance with rule 2a-7. Rule 2a-7 also requires funds to post portfolio
information monthly and requires funds to post certain portfolio information daily.
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 and the staff of the Division of Investment Management
participate in an ongoing dialogue with representatives of the investment company
industry through public conferences, meetings, and information exchanges. These
various forums provide the Commission and staff with a means of ascertaining and
acting upon the paperwork burdens confronting the industry. The Commission
requested public comment on the information collection requirements in rule 2a-7
before it submitted this request for revision and approval to OMB. The Commission
received no comments in response to its request.
9.

Payment or Gift

No payment or gift to respondents was provided.
10.

Assurance of Confidentiality

Information received pursuant to this collection of information will be kept
private to the extent permitted by law.
11.

Sensitive Questions

No questions of a sensitive nature are involved. The information collection does
not include personally identifiable information.
12.

Burden of Information Collection

The following estimates of average burden hours and costs are made solely for
purposes of the Paperwork Reduction Act and are not derived from a comprehensive
or even representative survey or study of the cost of Commission rules and forms. A
fund must comply with the requirements of rule 2a-7 in order to hold itself out to
investors as a money market fund or the equivalent of a money market fund in
reliance on the rule. The collection of information is mandatory for money market

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funds that rely on rule 2a-7, and responses to the information collections will not be
kept confidential.
a.

Eligible Security Determinations for Money Market Fund Portfolio
Securities, Including Securities That Are Subject to a Conditional
Demand Feature

Rule 2a-7 limits a money market fund’s portfolio investments to “eligible
securities,” which are currently defined as securities that have received credit ratings
from a requisite nationally recognized statistical rating organization (“NRSRO”) in
one of the two highest short-term rating categories, or comparable unrated securities.
The rule also restricts money market fund investments to securities that the fund’s
board, or its delegate, determines present minimal credit risks, and requires a fund to
adopt policies and procedures regarding minimal credit risk determinations. 6 The
amendments to rule 2a-7 remove any reference to, or requirement of reliance on,
credit ratings in rule 2a-7 and modify the credit quality standard to be used in
determining the eligibility of a money market fund’s portfolio securities, including
securities that are subject to a conditional demand feature. Specifically, the
amendments eliminate the previous requirement that an eligible security be rated in
one of the two highest short-term rating categories by an NRSRO or be of
comparable quality, and combine the current “first tier” and “second tier” credit risk
categories into a single standard, which will be included as part of rule 2a-7’s
definition of eligible security. A security will be an eligible security only if the money
market fund’s board of directors (or its delegate) determines that it presents minimal
credit risks, which determination will involve consideration of specified credit
analysis factors that are listed in the rule. 7 The amendments also require that, with
respect to a security (or its guarantee) subject to a conditional demand feature, the
underlying security (or its guarantee) must meet the same minimal credit risks
standard. 8
Money market funds are required to have written policies and procedures
regarding minimal credit risk determinations. 9 Thus, each money market fund
complex will incur one-time costs to comply with these amendments. Specifically,

6

See rules 2a-7(d)(2)(i); 2a-7(j)(1); 38a-1.

7

Rule 2a-7(a)(11); see also Investment Company Act Release No. 31828 (Sept. 16, 2015)
(“Adopting Release”), at section II.A.

8

Rule 2a-7(d)(2)(iii)(C); see also Adopting Release, supra note 7, at section II.B.

9

See rule 2a-7(j)(1).

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each fund complex will incur costs to review the amended provisions of rule 2a-7 and,
as it determines appropriate in light of the amendments, revise its policies and
procedures to incorporate the amended credit quality standards to be used in
determining the eligibility of a money market fund’s portfolio securities. We
anticipate that many funds are likely to retain their investment policies as currently
required under rule 2a-7, which incorporate NRSRO ratings and which will be
permitted under the rule amendments. 10 Some funds, on the other hand, may choose
to revise their investment policies to remove references to NRSRO ratings and to
incorporate the standards provided in the rule. Even if funds choose to eliminate
references to ratings in their investment policies, funds’ investment policies may not
change substantially, as funds have already been required to assess credit quality
apart from ratings as part of their minimal credit risk determinations. Based on staff
observations in examinations and prior staff guidance, we believe that most money
market fund managers currently take the codified credit analysis factors into account,
as appropriate, when they determine that a portfolio security presents minimal credit
risks.
While we cannot predict with precision the extent to which funds may revise
their policies and procedures for determining minimal credit risk, we estimate that
each money market fund complex on average will incur a one-time burden of 9
hours, 11 at an estimated cost of $2,838, 12 to review and revise, as appropriate, its

10

See Adopting Release, supra note 7, at section V.A.

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We estimate that the lower range of the one-time hour burden for a money market fund
complex to review and revise, as appropriate, its policies and procedures for determining
minimal credit risk would be 6 hours (4 hours by a compliance manager and 2 hours by
an attorney). We estimate that the upper range of the one-time hour burden for a money
market fund complex to review and revise, as appropriate, its policies and procedures for
determining minimal credit risk would be 12 hours (8 hours by a compliance manager
and 4 hours by an attorney). For purposes of our estimates for this analysis, we have
taken the mid-point of this range, 9 hours (6 hours by a compliance manager and 3 hours
by an attorney). (6 hours + 12 hours) ÷ 2 = 9 hours.

12

The Commission’s estimate concerning the wage rates is based on salary information for
the securities industry compiled by the Securities Industry and Financial Markets
Association. The estimated wage figures are based on published rates for compliance
managers and attorneys, modified to account for an 1,800-hour work-year and multiplied
by 5.35 to account for bonuses, firm size, employee benefits, and overhead, yielding
effective hourly rates of $283 and $380, respectively. See Securities Industry and
Financial Markets Association, Report on Management & Professional Earnings in the
Securities Industry 2013. (6 hours × $283 per hour for a compliance manager) + (3 hours
× $380 per hour for an attorney) = $2,838.

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policies and procedures. Using an estimate of 103 money market fund complexes, 13
we estimate that money market funds would incur, in aggregate, a total one-time
burden of 927 hours, 14 at an estimated cost of $292,314, 15 to comply with the
amended provisions of rule 2a-7 modifying the credit quality standard to be used in
determining the eligibility of a fund’s portfolio securities. Amortizing these hourly
burdens over three years results in an average annual increased burden for all money
market fund complexes of 309 hours, 16 at a cost of $97,438. 17 We do not believe that
funds would newly implement or change any annual review of policies and
procedures that they currently perform as a result of the adopted amendments.
b.

Monitoring Minimal Credit Risks

Rule 2a-7 required a money market fund board (or its delegate) to promptly
reassess whether a security that has been downgraded by an NRSRO continues to
present minimal credit risks. As discussed above, the amendments to rule 2a-7
eliminated the use of credit ratings in the rule’s downgrade and default provisions.
Rule 2a-7 instead now requires a money market fund to adopt written procedures
requiring the fund adviser, or any person to whom the fund’s board of directors has
delegated portfolio management responsibilities, to provide ongoing review of each
portfolio security to determine that the issuer continues to present minimal credit
risks. 18 To comply with these amendments, a fund complex will incur one-time costs
to review the amended provisions of rule 2a-7 and adopt policies and procedures
providing for ongoing review to determine whether a money market fund’s portfolio
securities continue to present minimal credit risks. Money market funds were not
previously required to maintain policies and procedures that specifically address
ongoing minimal credit risk monitoring. Although we understand, based on staff
experience, that most money market funds currently monitor portfolio securities for
minimal credit risk on an ongoing basis, we are assuming that all money market fund

13

Based on data from Form N-MFP and iMoneyNet as of April 30, 2015.

14

9 hours per money market fund complex × 103 money market fund complexes = 927
hours.

15

$2,838 per money market fund complex × 103 money market fund
complexes = $292,314.

16

927 hours ÷ 3 years = 309 hours per year.

17

$292,314 ÷ 3 years = $97,438 per year.

18

Rule 2a-7(g)(3); see also Adopting Release, supra note 7, at section II.C.

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complexes would need to adopt new written policies and procedures to provide for
this ongoing review in order to comply with the amended provisions of rule 2a-7.
We estimate that each money market fund complex on average would incur a
one-time burden of 5 hours, 19 at a cost of $3,619, 20 to adopt policies and procedures
for ongoing review of minimal credit risks. Using an estimate of 103 money market
fund complexes, 21 we estimate that money market funds will incur, in aggregate, a
total one-time burden of 515 hours, 22 at a cost of $372,757, 23 to comply with the
amended provisions of rule 2a-7. Amortizing these hourly and cost burdens over

19

These hour estimates assume that the process of adopting written policies and procedures
will consist primarily of transcribing and reviewing any existing policies and procedures
that funds currently use when monitoring minimal credit risk on an ongoing basis.
Because we cannot predict the extent to which funds may need to develop these policies
and procedures to comply with the amended provisions of rule 2a-7, or may need to
transcribe and review any existing policies and procedures, we have taken, as an
estimated average burden, the mid-point of a range of hour estimates discussed below in
the following paragraph for purposes of our PRA analysis.
We estimate that the lower range of the one-time hour burden for a money market fund
complex to adopt policies and procedures for ongoing review to determine whether a
money market fund’s portfolio securities continue to present minimal credit risks would
be 3.5 hours (2 hours by a compliance manager and 1 hour by an attorney to develop
and review policies and procedures or transcribe and review pre-existing policies and
procedures + 0.5 hours for the fund’s board to adopt the policies and procedures). We
estimate that the upper range of the one-time hour burden for a money market fund
complex to adopt such policies and procedures would be 6.5 hours (4 hours by a
compliance manager and 2 hours by an attorney to develop and review policies and
procedures or transcribe and review pre-existing policies and procedures + 0.5 hours for
the fund’s board to adopt the policies and procedures). The mid-point of the lower range
estimate and the upper range estimate is 5 hours.

20

(3 hours × $283 per hour for a compliance manager) + (1.5 hours × $380 per hour for an
attorney) + (0.5 hours × $4,400 per hour for a board of 8 directors) = $3,619. We
previously estimated in 2009 that the average cost of board of director time was $4,000
per hour for the board as a whole, based on information received from funds and their
counsel. Adjusting for inflation, we estimate that the current average cost of board of
director time is approximately $4,400 per hour.

21

Based on data from Form N-MFP and iMoneyNet as of April 30, 2015.

22

5 hours per money market fund complex × 103 money market fund complexes = 515
hours.

23

$3,619 per money market fund complex × 103 money market fund
complexes = $372,757.

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three years results in an average annual increased burden for all money market fund
complexes of 172 hours 24 at a cost of $124,252. 25
c.

Stress Testing

Rule 2a-7 has required money market funds to adopt written stress testing
procedures and to perform stress tests according to these procedures on a periodic
basis. The amendments to rule 2a-7 replace the reference to ratings downgrades in
the rule’s stress testing provisions with a hypothetical event that is designed to have a
similar impact on a money market fund’s portfolio. 26 The amendment is designed to
retain a similar standard for stress testing as under previous rule 2a-7. Specifically,
while rule 2a-7 already required a fund to stress test its portfolio based on certain
hypothetical events, including a downgrade of portfolio securities, the amendments
require a fund to stress test for an event indicating or evidencing credit deterioration
in a portfolio security, and will include a downgrade or default as examples of that
type of event. As discussed below, we recognize that a money market fund could use
its current policies and procedures to comply with the amendment, and could
continue to use credit quality evaluations prepared by outside sources, including
NRSRO downgrades, in stress tests. Because the rule currently requires testing for a
downgrade as a hypothetical event, we do not believe that funds will take any
additional time to review and revise their policies and procedures with respect to the
continued use of downgrades in stress testing. Accordingly, we do not expect the
amendments will significantly change current collection of information burden
estimates for rule 2a-7.
d.

Total Burden for Rule 2a-7

The current approved collection of information for rule 2a-7 is 632,244 annual
aggregate hours. The aggregate additional burden hours associated with the adopted
amendments to rule 2a-7 increase the burden estimate to 632,725 hours annually for
all funds. 27

24

515 hours ÷ 3 years = 172 hours per year.

25

$372,757 ÷ 3 years = $124,252 per year.

26

Rule 2a-7(g)(8)(i)(B); see Adopting Release, supra note 7, at section II.D.

27

632,244 hours currently approved hours + 309 hours for eligible security determinations
for money market fund portfolio securities, including securities that are subject to a
conditional demand feature + 172 hours for monitoring minimal credit risks = 632,725
hours.

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13.

Cost to Respondents

Cost burden is the cost of goods and services purchased in connection with
complying with the collection of information requirements of rule 2a-7. The cost
burden does not include the cost of the hour burden discussed in Item 12 above.
The current approved collection of information for rule 2a-7 is $92,900,000 in
external costs. There will be no external costs associated with complying with the
amended requirements of rule 2a-7. Because we estimate no external costs associated
with complying with the amended rule 2a-7 requirements, the annual costs
associated with the rule 2a-7 collection of information requirements will remain
$92,900,000.
14.

Costs to Federal Government

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

Changes in Burden

The total annual hour burden of 632,725 hours represents an increase of 481
hours over the previous burden estimate of 632,244 hours. The change in burden
hours is due to the Commission’s estimates of the one-time time burdens that will
result from our amendments. The currently approved cost burden did not change as
a result of our amendments.
16.

Information Collection Planned for Statistical Purposes

The results of any information collected will not be published.
17.

Approval to Omit OMB Expiration Date

The Commission is not seeking approval to not display the expiration date for
OMB approval.
18.

Exceptions to Certification for Paperwork Reduction Act Submissions

The Commission is not seeking an exception to the certification statement.
B.

COLLECTIONS OF INFORMATION EMPLOYING
STATISTICAL METHODS
The collection of information will not employ statistical methods.

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