Publications

Overview

On September 29, 2008, the U.S. Department of the Treasury announced details of its Temporary Guarantee Program for Money Market Funds ("the Program"). Under the Program, the Treasury will guarantee the share price of any eligible money market fund that applies for participation in the Program and pays the required fee. The Program covers retail and institutional funds, as well as taxable and tax-exempt money market funds.[i] Guarantee Agreements, a term sheet, instructions and other Program documents are posted on the Treasury's web site at http://www.treas.gov/offices/domestic-finance/key-initiatives/money-market-fund.shtml.

Coverage Provided by the Program

The Program provides that in the event that a fund's market-based net asset value per share falls below $0.995, the Treasury will pay, in immediately available funds, amounts necessary to ensure that shareholders receive $1.00 for each share held in a participating money market fund as of the close of business on September 19, 2008.[ii] If a guarantee is triggered, the fund must be liquidated within 29 days unless the market-based net asset value deficiency is cured within five business days.

Shareholder Coverage

The Program covers the shares of any shareholder of record on September 19, 2008. The number of shares covered is the lesser of:

• The number of shares of the fund owned on September 19, 2008; or
• The number of shares of the fund owned on the date on which the fund's market-based net asset value falls below $0.995.[iii]

Covered shareholders will receive $1.00 per covered share upon liquidation of the fund. Payments under the Program will be made to the fund, which will distribute the payments to eligible shareholders.

Participation in the Program

Eligible Funds

A money market fund is eligible to participate in the Program if:

• The fund is registered under the Investment Company Act of 1940 ('1940 Act') and the fund's shares are registered under the Securities Act of 1933;
• The fund has a policy of maintaining a stable net asset value of $1.00 per share and operates in compliance with Rule 2a-7 under the 1940 Act; and
• The fund's market-based net asset value per share on September 19, 2008 was at least $0.995.

Participation Fees

To participate in the Program, the Treasury requires that money market funds pay a fee based on net asset values as follows:

• Money market funds with a market-based net asset value per share greater than or equal to $0.9975 as of the close of business on September 19, 2008, will pay an up-front fee of 0.01 percent (1 basis point), based on the number of shares outstanding on that date.
• Money market funds with a market-based net asset value per share less than $0.9975 but greater than or equal to $0.995 as of the close of business on September 19, 2008, will pay an up-front fee of 0.015 percent (1.5 basis points), based on the number of shares outstanding on that date.
• Money market funds with a market-based net asset value below $0.995 as of the close of business on September 19, 2008, may not participate in the program.

Application Process

In order for a money market fund to participate in the Program, the following must be delivered to the Treasury by 11:59 p.m. Eastern Time (ET) on October 8, 2008:

• An executed Guarantee Agreement. Separate forms of the Guarantee Agreements are available for use by stand-alone money market funds and for series investment companies. The terms of the Guarantee Agreement are not negotiable. Annex A to the Guarantee Agreement must be completed in Excel in exactly the form presented.
• An Acknowledgement and Investment Adviser Undertaking executed by the fund's investment adviser.
• A signed Execution Notice.
• Program Participation Payment. This non-refundable fee should be made payable to the Treasury via Fedwire using the payment instructions contained in Exhibit B to the Guarantee Agreement.

These documents must be submitted to the Treasury by email. The email must contain a scanned copy of the manually executed documents in PDF format. Documents sent by mail, fax or other means will not be accepted.

Any documents received by the Treasury after 11:59 p.m. ET on October 8, 2008 will not be accepted, and the money market fund(s) identified in the Guarantee Agreement will not be eligible to participate in the Program.

Terms of the Guarantee Agreement

Conditions to Guarantee

Money market funds executing Guarantee Agreements with the Treasury must agree to a variety of conditions, including the following:

• The fund must comply in all respects with Rule 2a-7 at all times.
• The fund must report to the Treasury on or before 11:59 p.m. ET on the first business day that the fund's market-based net asset value per share falls below $0.995.
• The fund must begin liquidating no later than the fifth business day after the fund's market-based net asset value per share falls below $0.995 unless the deficiency is cured before the liquidation process begins.
• The fund must notify the Securities and Exchange Commission (SEC) and the Treasury promptly by email if the fund's market-based net asset value falls below $0.9975 and provide the SEC and the Treasury with a portfolio schedule on the next business day. Thereafter, the fund must provide to the SEC and the Treasury the same reports that it provides to its board of trustees concerning the extent of the deviation between the fund's NAV and its market-based net asset value until the fund's market-based net asset value is $0.9975 or greater.
• The fund must use its best efforts to obtain, renew or extend NAV Support Agreements as necessary or appropriate to facilitate the maintenance of the fund's $1.00 share price.[iv] The fund must first draw on NAV Support Agreements after the fund's market-based net asset value per share falls below $0.995 prior to drawing on the Program guarantee. The fund also must agree to certain restrictions on the amendment, termination or withdrawal of any NAV Support Agreements.

Exceptions

The Treasury is not obligated to make a guarantee payment if:

• The Treasury, in its sole discretion, believes that any representations or warranties in the Guarantee Agreement are incorrect.
• After the date of the execution of the Guarantee Agreement, the fund does not comply in all respects with Rule 2a-7 or ceases to maintain a stable share price, other than as a result of fund's market-based net asset value per share falling below $0.995.
• The fund has not paid the Program Participation Payment.
• The fund is a party to a merger and does not meet certain 'survival conditions' set forth in the Guarantee Agreement.

Duration of the Program

The program is temporary and will exist for an initial three-month period ending December 18, 2008. Following the initial three-month term, the Secretary of the Treasury may renew the program. However, the program will not extend beyond the close of business on September 18, 2009. In order to participate in the extended program, a fund must participate during the initial three-month term. Participation fees paid on or before October 8, 2008 cover only the initial three-month term. If the program is extended, an additional payment will be required from funds that continue to participate.

Board of Trustees Considerations

A fund's board of trustees, including a majority of the independent trustees, must determine that entering into the Program and the fund's fulfillment of its obligations thereunder are in the best interests of the fund and its shareholders. This determination does not does not need to be made at an in-person meeting; telephonic meetings and written consents are acceptable.

• In determining whether to participate in the Program, a board of trustees should consider a variety of factors, including the following:
• The extent of the fund's exposure to non-performing assets.
• The existence of a NAV Support Agreement or other guarantees from an affiliate to facilitate the maintenance of a stable $1.00 share value.
• The cost of the Program to the fund and whether the entire fund benefits when the shares of only a limited number of shareholders are covered.[v]
• It is critical that the board's determination of whether to participate in the Program be documented fully and completely in the board meeting minutes.

Endnotes

[i]               On September 22, 2008, the Internal Revenue Service issued Notice 2008-81, which confirmed that participation in the Program will not be treated as a federal guarantee that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.

[ii]               "Market-based net asset value" means a fund's net asset value calculated using available market quotations or an appropriate substitute as specified in procedures adopted by the fund in accordance with Rule 2a-7(c)(7), i.e., "shadow pricing."

[iii]               Coverage is lost if an account open on September 19, 2008 is closed after that date and then reopened. Fund exchanges also will result in a loss of coverage.

[iv]               Informal conversations with the Treasury indicated that a fund is not required to put in place a NAV Support Agreement if one does not already exist, but is encouraged to do so to avoid jeopardizing its continued participation in the Program.

[v]               The Investment Company Institute has announced that it is requesting no-action relief from the SEC to the effect that a fund's participation in the Program benefits all fund shareholders because it reduces volatility.

For More Information

Please contact Richard S. Heller, James P. Jalil, Donald S. Mendelsohn, JoAnn M. Strasser, or Michael V. Wible or any member of our Corporate Transactions & Securities practice group for more information.

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