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Commenters Seek Modification to SEC's Interim Final Temporary Rule for Funds

The Investment Company Institute supports the SEC's interim final temporary rule which permits participating money market funds to take full advantage of the Treasury Department's temporary guarantee program, but has asked the SEC to adopt a similar final exemptive rule upon the expiration of the temporary rule for all money market funds that are preparing to liquidate. ICI explained that redemption requests can outpace a fund's ability to sell its portfolio instruments and the SEC's ability to grant a timely exemptive order. The public interest is not well served by requiring individual applications for exemptive relief, according to ICI.

The Treasury Department's program guarantees the share price of participating money market funds that seek to maintain a stable net asset value of $1 per share, or some other fixed amount, subject to certain conditions and limitations. Upon the liquidation of a participating money market fund, Treasury will guarantee that shareholders receive the stable price for each share owned as of September 19, 2008.

A money market fund that experiences a "guarantee event" (breaks a buck), is required to begin liquidating within five business days unless it invokes a cure provision. Fund boards must promptly suspend the redemption of outstanding shares in accordance with applicable SEC rules, orders and no-action letters. Funds must be liquidated within 30 days after a guarantee event unless Treasury agrees to a later date.

Section 22(e) of the Investment Company Act prohibits funds, including money market funds, from suspending the right of redemption or postponing the date of payment upon redemption for more than seven days absent an SEC exemptive order or under certain specified conditions. Rule 22a-3T permits money market funds that commence liquidation under the Treasury program to temporarily suspend redemptions and to postpone the payment of redemption proceeds. The rule is designed to facilitate orderly liquidations and prevent the sale of fund assets at "fire sale" prices.

The SEC noted that the liquidation of a money market fund under the Treasury program eliminates a source of advisory fees for the adviser and removes ulterior motives, such as the suspension of the right of redemption to prevent a reduction in management fees. ICI believes the same logic should apply to any money market fund that liquidates, regardless of the program. When the net asset value of a fund falls below $1 a share and a fund decides to liquidate, the redemption demands can be detrimental to the remaining shareholders, ICI explained.

ICI also noted that the SEC's temporary rule does not take into consideration a situation in which a money market fund begins to liquidate shortly before September 18, 2009 and the Treasury Department consents to a liquidation date that extends beyond October 18. ICI recommended that Rule 22e-3T be available to any participating money market fund that has delivered a notice to Treasury that it has experienced a guarantee event and will commence liquidation under the terms of the Treasury agreement.

The Coalition of Mutual Fund Investors, an Internet-based shareholder advocacy organization, wrote that the Treasury guarantee program does not address the unique issues of omnibus accounting. Many money market fund shares are sold through third-party financial intermediaries which consolidate their daily order flow into one omnibus order. The intermediary appears on the fund's books as the shareholder of record and may represent thousands of beneficial owners.

Treasury's guarantee program outlines procedures for the payment to shareholders of record, but investors that transact through an intermediary must rely on the intermediary to disburse their guaranteed payment. Investment advisers and funds are required to use their best efforts to ensure that beneficial owners within omnibus accounts receive their payments.

CMFI urged the SEC to consider requiring the use of Rule 22c-2 to provide transparency within the omnibus accounts for the purpose of making guaranteed payments after a liquidation event. The information sharing provisions of the rule can be used to look through the omnibus accounts to ensure that beneficial owners receive their payments in a timely and accurate manner. CMFI said this approach is better for investors than the best efforts requirement in the guarantee agreement and urged the SEC to add Rule 22c-2 as a condition to its interim temporary final rule.

Sutherland Asbill & Brennan LLP, on behalf of its client, the Committee of Annuity Insurers, urged the SEC to extend Rule 22e-3T to permit life insurance company separate accounts registered as investment companies to temporarily suspend certain types of redemption transactions under their outstanding variable annuity contracts or variable life insurance contracts when the transactions can only be carried out by redeeming shares of a money market fund that has suspended the redemption of shares under the rule.

The firm explained that the committee does not believe that the SEC intended to expose insurance companies and their registered separate accounts to potential violations of Section 22(e) of the Act. Variable annuity contracts are redeemable securities so the separate accounts through which they are issued are subject to Section 22(e). Insurance companies generally cannot suspend the right of variable annuity contract owners to surrender their contracts or withdraw the cash value. They also may not postpone the payment of the cash value to contract owners for more than seven days.

If the SEC extends Rule 22e-3T to insurance company separate accounts that are registered as unit investment trusts, they could postpone contract transactions until a money market fund is able to redeem its shares. The committee believes the extension of the rule is necessary and appropriate in the public interest and would be consist with the policy and provisions of the Investment Company Act.