U.S. Money Market Funds And The European Sovereign Debt Crisis

The financial press recently reported that the U.S. Securities and Exchange Commission ("SEC") is considering and may propose in the coming weeks new restrictions on U.S. money market funds ("money funds"), including capital requirements and a "liquidity fee" that would hold back a portion of a client's account for 30 days in the event of a redemption. These possible proposals would be in addition to the extensive reform of U.S. money fund regulation that occurred in early 2010.

Notwithstanding these potential proposals for reform, the ability of money funds to have operated successfully through the volatile European markets in 2011 calls into question the need for additional regulatory measures. In June 2011, when news intensified regarding a potential Greek sovereign default, regulators and policymakers immediately identified money funds as being prone to risks due to their exposure to European banks that could be impacted by the events in Greece.1 However, to date, money funds have successfully weathered the market fluctuations in Europe. Investment advisers and directors of money funds have responded by intensifying their fund oversight, adjusting their funds' exposure to European banks and making public information regarding fund holdings of securities issued by European banks, in order to quell any concerns.

This article, based upon a DechertOnPoint, examines how the rules governing money funds, as amended in 2010, operated to protect funds throughout the challenging market environment in Europe in 2011. It also offers suggestions as to areas on which boards and management may wish to focus in the future.

For further information regarding financial developments related to the eurozone crisis, please refer to the DechertOnPoints listed below (and future client alerts on our website):

U.S. Money Market Funds and the European Sovereign Debt Crisis, available at http://www. dechert.com/US_Money_Market_Funds_and_the_ European_Sovereign_Debt_Crisis_02-14-2012/. The Eurozone Crisis: Risk Planning for Asset Managers, available at http://www.dechert.com/ The_Eurozone_Crisis_Risk_Planning_for_Asset_ Managers_03-19-2012/ . Risk Management by U.S. Mutual Funds Facing European Sovereign Debt Risk, available at "http:// www.dechert.com/Risk_Management_by_US_ Mutual_Funds_Facing_European_Sovereign_Debt_ Risk_03-19-2012/" Overview of Money Funds and Regulatory Structure

Unlike other funds registered under the Investment Company Act of 1940, as amended (the "1940 Act"), a money fund seeks to maintain a stable net asset value ("NAV") of $1.00 per share, by complying with Rule 2a-7 under the 1940 Act.2 Rule 2a-7 and related rules governing money funds impose strict requirements on money funds that seek to maintain a stable NAV, including robust requirements relating to:

the oversight of a money fund by its board; the portfolio quality, diversification, maturity and liquidity of the money fund (the "Risk-Limiting Provisions"); and the disclosure of money fund portfolio holdings. Board Oversight

Initial Board Findings and Adoption of Procedures

Before a money fund may use the amortized cost method to offer fund shares at a stable $1.00 NAV per share, the fund's board must initially determine in good faith that it is in the best interests of the fund and its shareholders to maintain a stable NAV per share and that the fund will only continue to do so as long as the board believes that the stable NAV per share fairly reflects the fund's market-based NAV.

Boards overseeing money funds also must adopt procedures reasonably designed, taking into account current market conditions and the fund's investment objectives, to stabilize the fund's NAV per share, as computed for the purpose of distribution, redemption and repurchase, at a single value (i.e., $1.00) ("Procedures"). These Procedures must include "shadow pricing" provisions that monitor any deviation between the current NAV per share calculated using available market...

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