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Money Market Funds

Money market funds provide a low-cost, efficient cash management tool with a high degree of liquidity, stability in principal value, and a market-based yield. One defining feature of money market funds is that they seek to maintain a stable NAV, typically $1.00 per share. Money market funds usually do this by using the amortized cost method of valuing their portfolio securities. In addition to requiring boards to make the initial determination that the use of the amortized cost method is appropriate, Rule 2a-7 (the SEC rule governing money market funds), imposes on money market fund boards a number of specific responsibilities relating to oversight of the fund.

For example, the board must monitor deviations between the amortized cost price and the market-based price (also called the “shadow price”) of fund shares, and can suspend redemptions and liquidate the fund if the deviation could result in material dilution or other unfair results to investors. The board also must adopt procedures that provide for periodic stress testing of the fund’s ability to maintain a stable NAV based on certain hypothetical events. The rule requires a money market fund board to establish the frequency for shadow pricing a fund’s securities and to determine stress testing intervals based on its view as to what is appropriate and reasonable in light of current market conditions.

In 2013, the SEC proposed amendments which would impose additional responsibilities on money market fund boards. To date, the SEC has not taken action on these proposals.

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