(The news featured below is a selection from the news covered in SEC Today, which is distributed to subscribers of SEC Today.)

Consumer Groups Seek Additional Money Market Fund Disclosure

Fund Democracy joined five other organizations in a petition to the SEC seeking the adoption of a rule to require money market funds to provide nonpublic monthly filings about their portfolios to enable the SEC to monitor their exposure to risk. The organizations noted that the recent downturn in structured investment vehicles backed by mortgages has increased the risk that the funds' net asset value would "break the dollar" if the fund managers did not purchase assets from the funds to prevent the loss of principal (Petition No. 4-554, January 16, 2008).

The organizations acknowledged that money market funds are permitted to hold structured investment vehicles backed by mortgages as long as they satisfy the maturity, quality and diversification requirements of Investment Company Act rule 2a-7. The SEC has granted no-action letters in some cases to permit fund managers to repurchase their fund securities at par value to prevent the loss of principal. The organizations cited a no-action letter to SEI Liquid Asset Trust Prime Obligation Fund (December 3, 2007) and questioned the SEC's continuing reliance on managers' willingness to "bail out" their money market funds.

The organizations are not aware of any retail funds that have broken a dollar, but believe it is inevitable that a manager one day will decline to bail out its money market fund. The SEC should take steps to minimize the damage to investors' faith in these investments if a money market fund fails, according to the organizations. Money market funds have provided a valuable service to the financial markets, but there are too many cases where rule 2a-7 has failed to prevent the imminent loss of principal to continue to rely on private firm bailouts to protect them, in the organizations' view.

The organizations explained that monthly portfolio disclosure would enable the SEC to monitor portfolio pricing and the risk of loss of principal. By monitoring the portfolios, the SEC could prevent large scale liquidity and pricing problems before they have a systemic impact, according to the organizations.

The organizations noted that the SEC proposed a similar requirement in 1995 but did not adopt a final rule. Money market funds currently disclose their portfolios on a quarterly basis by providing the information required on Forms N-CSR and N-Q. The current circumstances affirm the need for this rule, in the organizations' view. They added that money market funds should provide more data that would enable the staff to evaluate their risk level, such as the percentage of an issue owned by a fund and its affiliates. The disclosure reforms could be implemented as part of the SEC's ongoing XBRL initiative, the organizations suggested, since XBRL would provide a functional format for the delivery and analysis of money market portfolio data.

The organizations believe that rule 2a-7 has provided a model for private funds and foreign governments that offer interests in cash management vehicles. The SEC must protect this industry by minimizing the likelihood of a loss of confidence in money market funds, in their view, and should do so by improving the portfolio reporting requirements.

Fund Democracy was joined in the petition by the Consumer Federation of America, Consumer Action, AFL-CIO, Financial Planning Association and the National Association of Personal Financial Advisors.