SEC Division of Investment Management staff letter: Investment Company Institute

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

DIVISION OF

INVESTMENT MANAGEMENT
. May 26, 1995

Paul Schott Stevens, Esq.
AfJ re -1 ()
Investment Company Institute
Genera Counsel
SEON ~L)

1401 H Street, N.W. RULE
Washigton, D.C. 20005

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Dea Mr. Stevens:
As you know, Rule 15c6-1 under the Securities Exchange Act of 1934, which wil become effective ealy next month, establishes three business days ("T+3") as the stadad settlement period for securities trdes effected by a broker or deaer. II The Investment Company Institute has requested the views of the Division of Investment Management regarding the implications of the T+3 stadad in determing whether a security held by a mutual fund should be deemed to be liquid for purposes of the Commission's restrctions on mutual funds' holdigs of ilquid securities. In paricular, the Institute has asked whether the Division would deem a security with a demand feature that does not entitle the holder to receive the pricipal amount of the underlying security withi three days to be an ilquid

security. We understand that a signicant amount of money market fund assets consists of securities with a seven day demand feature.
Section 22(e) of the Investment Company Act of 1940 provides, with cert

exceptions, that no registered investment company may postpone the date of payment upon redemption of a redeemable security for more than seven days afer the security is tendered for redemption. The Commission has stated that mutual funds should liit their holdings of ilquid securities to ensure that they can satisfy al redemption requests withi the seven day period. 2/ The Commission considers a security to be ilquid if it canot be disposed of withi seven days in the ordinar course of business at approxiately the price at which the

fund has valued it. 'JI The usual liit on a fund's holdings of ilquid assets is 15 % of its

net assets. M The 15 % liit does not apply to money market funds; those funds are liited 1/ Rule 15c6-1 generally provides that "a broker or dealer shall not effect or enter into a contract for the purchase or sale of a security (other than an exempted security, government security, municipal security, commercial paper, baners' acceptances, or commercial bils) that provides for payment of funds and delivery of securities later than the third business day after the date of the contract unless otherwise expressly agreed to by the paries at the time of the transaction." Securities Exchange Act Release No. 33023 (Oct. 6, 1993). 2/ Investment Company Act Release No. 14983 (Mar. 12, 1986) (adopting amendments to Rule

2a-7 under the Investment Company Act of 1940).
J./ /d. See also Securities Act Release No. 6862 (Apr. 23, 1990) (adopting Rule 144A under

the Securities Act of 1933) (discussing the definition of "liquid" and citing Release No. 14983). 1/ Investment Company Act Release No. 18612 (Mar. 12, 1992) (revising Guides to Form N￾1A).

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...y..
Paul Schott Stevens, Esq.

May 26, 1995

to holding no more than 10% of their net assets in ilquid securities. J.I The Commission has noted that, given the nature of money market funds, the difculties that could arse in

conjunction with holding ilquid securities may be even greater for those funds than for other types of open-end funds. fi/ Because Rule 15c6-1 applies to brokers and deaers, and does not apply directly to funds, it is the view of the Division that the implementation of T+3 does not change the stadad for determing liquidity, which is based on the requirements of Section 22(e). We note, however, that as a practica matter, many funds wil have to meet redemption requests withi three days because a broker or deaer wil be involved in the redemption process.

M3.y of these funds hold portfolio securities that do not settle withi three days. In light of the T + 3 stadad, such funds should assess the mix of their portolio holdings to determine

whether, under nonial circumstaces, they wil be able to faciltate compliance with the T+3 stadad by brokers and deaers. Factors that should be considered include the percentage of the portfolio that would settle in three days or less, the level of cash reserves, and the avaiabilty of lies of credit or interfnd lending facilties. The Division wil monitor the industry's experience with T+3, and if necessar, wil

revisit this issue in the future. I hope this letter is responsive to your inquires. Please call me at (202) 942-0660 if you have further questions. Sinccrcly, f1 ~W.~ ~Ck W. Murphy )

Associate Director and
Chief Counsel

'il Investment Company Institute (pub. avaiL. Dec. 9, 1992).

fJ/ See Investment Company Act Release No. 14983, supra note 2.