DONOHUE RECOMMENDS ELIMINATION OF CREDIT RATINGS FOR MONEY MARKET FUND SECURITIES
In his presentation to the SEC Open Meeting, Buddy Donohue, Director of the Division of Investment Management, recommended that the SEC re-write the money market fund rules to eliminate reliance on credit ratings. Rather than require money market fund to purchase securities in one of the two highest rating categories, the SEC should require funds to determine that a security presents minimal credit risk and is a First Tier or Second Tier security. Also, the fund should hold securities that are sufficiently liquid to meet redemption requests and limit illiquid securities to no more than 10% of the fund.
OUR TAKE: Certainly, the recent credit crisis has highlighted the limitations of relying on credit ratings. However, the staff’s proposal, which relies on subjective criteria, will make it more difficult to ensure rule compliance especially after a negative event.