WASHINGTON -- The Securities and Exchange Commission announced yesterday that it is excusing tax-exempt money market funds from a new standard that requires a fund's board of directors to approve the purchase of any bond that is unrated or rated by only one nationally recognized rating agency.
The new requirement was part of a set of amendments to the agency's money market Rule 2a-7 that the commission approved last year. The amendments set tough new diversification and quality requirements for managers of money market fund portfolios. The ratification standard is one of the few rules in the package that applied to tax-exempt funds.
Since the publication of the amendments, the commission was advised that the ratification requirement would impose a significant burden on tax-exempt funds because a large number of the instruments in which they invest are rated by only one nationally recognized rating organization.
As a result, the commission asked for comments April 8 on whether tax-exempt funds should be exempted from the standard.
"The commission received seven comments on the proposal," the agency said in a notice released yesterday. All who commented supported the proposal to drop the ratification requirement for single-rated securities, but two said the standard should be retained for unrated securities, the SEC said.
Despite the two comments, the agency opted to remove the ratification requirement for both single-rated and unrated securities.
Keeping the requirement "would involve tax-exempt found boards in daily portfolio management activities far more than was anticipated or would be practical," the agency said.
Rule 2a-7 will continue to require boards of tax-exempt funds to maintain sufficient oversight of investment advisers to whom they have delegated portfolio management responsibilities, the SEC said.
Meanwhile, the SEC is studying whether to apply some of the tough new diversification and quality standards in Rule 2a-7 to tax-exempt funds.
"I look for something to come out in the next five or seven months," Edward Pittman, counsel to Securities and Exchange Commissioner Richard Roberts, said last week. "There seems to be some industry support for increasing controls for these types of investors," he said, referring to a letter the Investment Company Institute sent to the SEC earlier this year.
"If we place restrictions on the types of investments that you can make, it may limit the demand for your securities in the future," warned Mr. Pittman, who was a panelist at a conference sponsored by three Michigan entities, the state treasurer's office, the Municipal Bond Authority, and the State Hospital Finance Authority.