Rule 2a-7: Legal and Research Issues for Tax-Exempt Money Market Funds
Stephen A. Keen Partner Reed Smith LLP
Leslie K. Ross Counsel Reed Smith LLP
Tax-exempt money market funds are unique. No other form of investment provides a combination of tax-exempt interest, stable yield and diversification with the liquidity of wire transfers, check writing and debit cards. Little wonder that the total assets of tax-exempt money market funds were approaching $400 billion at the beginning of 2007.
Tax-exempt money market funds are also unique in their reliance on structured investments. Unlike the taxable money market, with trillions of dollars of Treasury and agency bills, commercial paper, and bank instruments, only a small fraction of tax-exempt securities are issued with original maturities of one year or less. Moreover, the tax-exempt market is not as liquid or transparent as the taxable money market. These circumstances make it practically impossible to manage a tax-exempt money market fund without investing in long-term, adjustable-rate securities with liquidity features.
The unique nature of tax-exempt money market funds demands unique regulations. This has led the Securities and Exchange Commission (SEC) to incorporate special provisions for tax-exempt money market funds into Rule 2a-7,510 the principal regulation governing money market funds under the Investment Company Act of 1940 (ICA).511 The fact that the rule includes a definition of a tax-exempt fund exemplifies ...

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