ICI Answers Questions on Money Market Funds

September 26, 2008 (PLANSPONSOR.com) - Following the U.S. Department of the Treasury's announcement on September 19 of an emergency, temporary guaranty program to protect shareholders of money market mutual funds from losses if their funds are unable to maintain a $1.00 net asset value, the Investment Company Institute (ICI) is addressing frequently asked questions about money market funds.

ICI explains that a money market fund “breaks a buck” when it does not maintain a $1.00 net asset value (NAV). It notes that to date, money market fund shareholders have lost only a few pennies on the dollar from money market funds that have “broke(n) the buck.” When a fund does this, shares are redeemed and investors are repaid at the fund’s NAV, calculated on the day they place their redemption order.

In some cases, ICI says, a fund will close to new investors and distribute its assets to investors in accordance with the distribution terms in its prospectus. A fund might do this to provide equitable treatment to all investors in the face of significant redemption pressure that might lead to a forced sale of the fund’s assets.

In its discussion, ICI notes that Rule 2a-7 under the Investment Company Act of 1940 includes several conditions intended to stabilize a fund’s share price at $1.00:

  • Credit Quality: Money market funds are required to hold high-quality securities. For taxable money market funds, at least 95% of a money market fund’s assets must be invested in securities that received the highest short-term rating from two NRSROs (unless only one NRSRO rates the security or issuer of debt); or securities of comparable quality. Not more than 5% of a money market fund’s investments may be in securities that received the second-highest short-term rating categories.
  • Diversification: Money market funds must maintain a diversified portfolio. This requirement limits a fund’s economic exposure to any single issuer. For instance, in general, money market funds may not invest more than 5% of assets in the securities of any single issuer (1%, if the issuer has received ratings in only the second highest short-term rating category), with the exception of securities issued by the federal government or its agencies.
  • Maturity: Money market funds must invest in securities that are considered “short-term.” In general, money market funds cannot acquire a portfolio security with a remaining maturity of greater than 397 days. In addition, a money market fund’s weighted average maturity (WAM)-an average of the maturities of all securities held in the portfolio, weighted by each security’s percentage of net assets-must not exceed 90 days.

ICI’s discussion, including links to other information about money market funds and information on the government’s temporary guaranty program, can be found here .