An SEC proposal to eliminate all five remaining references to credit ratings from Investment Company Act Rule 2a-7 would be a mistake that has the potential to harm the money market fund industry and its investors, in the view of the Mutual Fund Directors Forum. In a letter to the SEC, the forum said that the reference to credit ratings in the current rule has served a beneficial purpose by limiting the ability of money market funds to reach for yield by investing in less credit-worthy, higher-yielding securities. While recognizing that Section 939A requires the Commission to remove any reference to or requirement of reliance on credit ratings from its regulations, and that because of the mandate the SEC has lost significant flexibility in determining independently what role, if any, credit ratings should play in delimiting the range of securities that are potentially eligible for inclusion in money market fund portfolios, the forum believes that removing these particular references to credit ratings is bad policy. The Mutual Fund Directors Forum is an independent organization that serves the independent directors of U.S. mutual funds. The Forum grew out of the Mutual Fund Directors Education Council, a group convened in 1999 in response to the call for improved fund governance by then SEC Chairman Arthur Levitt. Former SEC senior official Susan Wyderko is the Executive Director of the Forum. The forum of independent directors also advanced the argument that because Section 939A refers to reliance on credit ratings, and Rule 2a-7 does not mandate reliance on credit ratings but rather uses credit ratings to circumscribe the outside boundary of potentially eligible securities, the Commission is not, in fact, required to eliminate this particular reference to credit ratings. Moreover, since the amended Rule 2a-7 will now necessarily place the responsibility of assessing the credit quality of money market securities on each individual board, the rule will have the effect of introducing more variation into money fund practice rather than establishing the "uniform standards of credit-worthiness" Shat section 939A sets as a goal. But the forum understands that. given the pressure that has been brought to bear on the Commission through the enactment of Section 939A and otherwise, the Commission may well be reluctant to embrace this possibility. The forum urged the SEC to adopt a final rule allowing boards and advisers to continue to use credit ratings as part of their own processes to the extent that they find those ratings to be credible and useful in their own process. A failure to do so could lead to the implication that the elimination of the reference to credit ratings in the rule itself is somehow intended to ban their use in the portfolio management process entirely. Funds will need to be wary, as they currently are required to be, of relying exclusively on credit ratings in determining whether a particular security presents minimal credit risks. Nonetheless, credit ratings can play a critical role in either supplementing the analytic process or, to the extent that any individual fund's board and adviser find appropriate, continuing to serve as a delimiting factor that conclusively eliminates less-highly rated securities from consideration for inclusion in money market fund portfolios. The final rule release should not, even inadvertently, cast doubt on the appropriateness of this very beneficial use of credit ratings.
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