The Guide to Rule 2a-7 - Stradley Ronon Stevens & Young, LLP

The Guideto Rule 2a-7A Map Through the Maze for theMoney Market ProfessionalJoan Ohlbaum Swirsky, ESQ. | Stradley Ronon Stevens & Young, LLP

Text shown is excerpted fromStradley Ronon’s archival copyof the report of the 1939 hearingson the legislation that became theInvestment Company Act of 1940.Stradley Ronon name partner,Andrew B. Young, attended thehearings and the report bears hiscomments.

THE GUIDE TO RULE 2a-7:A Map Through the Mazefor the Money Market ProfessionalWith Practical ApplicationsBy Joan Ohlbaum Swirsky, Esq.Stradley Ronon Stevens & Young, LLP© Joan Ohlbaum Swirsky 2008A # 454265 v.1

TABLE OF CONTENTSPreliminary Points ...................................................................................................1Definitions ................................................................................................................1Introduction..................................................................................................................2What Is Rule 2a-7?....................................................................................................2Procedures ................................................................................................................4Mark to Market ........................................................................................................5Board Action upon Significant Deviation; Material Dilution or UnfairResults .................................................................................................................8Responsibilities of Fund Board and Delegation: Two Prerequisites toDelegation...........................................................................................................9What Securities May a Money Market Fund Purchase?.....................................11Structure of Rule 2a-7: Main Topics Covered in this Guide...............................12Portfolio Management: Quality, Diversification, Maturity for TaxExempt and Taxable Funds ..................................................................................15Taxable and Tax Exempt Funds.............................................................................15Quality Tests: Minimal Credit Risks; Eligible Security Rating Quality;Limit on Second Tier Securities............................................................................17Summary of Quality Tests.....................................................................................17First of Three Principal Quality Tests: Minimal Credit Risks ............................17Second of Three Principal Quality Tests: Eligible Security ..................................20Third of Three Principal Quality Tests: Limit on Aggregate Exposure toSecond Tier Securities.........................................................................................32Other Standards Governing the Quality of Portfolio Securities ........................33Diversification as to Issuer.......................................................................................37Basic 5 Percent Limit..............................................................................................37Additional More Restrictive Diversification Test for Second Tier Issuers: 1Percent in Any One Issuer...............................................................................39Exceptions to the 5 Percent Issuer Diversification Test and 1 PercentSecond Tier Issuer Diversification Tests ........................................................40Look-Throughs.......................................................................................................42Diversification As To Credit Supports...................................................................49Four Exceptions to Diversification Testing for Credit Supports........................51Four Special Situations in Credit Support Diversification Testing....................52- i -A # 454265 v.1

Miscellaneous: Relation of Rule 2a-7 Diversification to GeneralDiversification Section of 1940 Act (Sec. 5(b)(1)); Testing Exposures toMultiple Credit Supports.................................................................................54Maturity ......................................................................................................................57Typical Calculation of Maturity and Maturity Shortening Provisions .............58Related Issue: Price Stability for All Securities....................................................60Breaking the Dollar................................................................................................61Maturity Shortening Provisions for Variable Rate Securities and FloatingRate Securities ....................................................................................................62Maturity Shortening Provision for Repurchase Agreements.............................65Maturity Shortening Provision for Portfolio Lending Agreements ..................65Maturity Shortening Provision for Money Market Fund Shares.......................65Liquidity .....................................................................................................................67Changes In Credit Quality: Required Action on Certain NegativeEvents .....................................................................................................................68Recordkeeping ...........................................................................................................72Board Reporting.........................................................................................................74Appendix 1: Rule 2a-7 and Rule 5b-3 Under the Investment CompanyAct of 1940..............................................................................................................76Appendix 2: Glossary of Defined Terms................................................................95Appendix 3: Proposing, Adopting and Amending Releases for Rule 2a-7......109Appendix 4: Provisions Specifically Required to be Reflected in FundProcedures Under Rule 2a-7 ..............................................................................111- ii -A # 454265 v.1

Preliminary PointsThis guide should not be construed as legal advice or opinion or as a substitute forthe advice of counsel. It is a summary only, and is qualified in its entirety by Rule 2a-7(the “Rule”) under the Investment Company Act of 1940, as amended (“1940 Act”).While this guide includes interpretations of the Rule, there is no assurance that, if asked,the Securities and Exchange Commission (“SEC”) or its staff would agree with theseinterpretations. These materials are provided for educational and informationalpurposes for the use of clients and others who may be interested in the subject matter.Citations to paragraphs within the Rule are referred to only by the letteredparagraph, followed by the numbered subparagraph (for example, “(c)(6)” rather than“2a-7(c)(6)”).This guide refers to the various SEC releases proposing and adopting the Rule andany amendments that have been adopted. These releases are identified by date andreferred to as either “proposing” or “adopting” releases. A list of these releases and thecitations to them is included in Appendix 3.This guide also includes “Practice Points,” “Technical Points” and “Examples”interspersed throughout the text, expanding upon and providing additional informationabout specific aspects of the Rule. Practice Points are set off from the main text in shadedboxes with a solid border, Examples are set off in boxes with a double-line border, andTechnical Points are set off from the text by solid bold lines.DefinitionsOne challenging aspect to the Rule is the number and complexity of defined termsused in it. In this guide, capitalized terms are used with their meanings under the Ruleand terms specifically defined in the Rule are italicized. Defined terms are summarizedor explained with a minimum of “legalese” in the context of the substantive discussion.The full text of the Rule’s definitions are set forth in the copy of the Rule in Appendix 1,and also in the separate Glossary in Appendix 2, which contains additional commentarythat is not part of the Rule. Rule 5b-3 is also included in Appendix 1, as certain termsused in the Rule are defined in Rule 5b-3.1A # 454265 v.1

INTRODUCTIONWhat Is Rule 2a-7?The Rule permits a money market fund to maintain a stable price per share -generally $1.00 per share under typical industry practice, although the Rule allows afund to set any value at which to stabilize its shares. The stable $1.00 share value hascaused some shareholders to view the money market fund as a cash equivalent or as analternative to a bank deposit or checking account, even though a money market fund isnot federally insured. Money market funds have been exceedingly popular products.The Rule provides that money market funds may stabilize their share prices by usingthe Amortized Cost Method of valuation, the Penny-Rounding Method of pricing or both. Bycomplying with the Rule, and using these permitted valuation and pricing methods,money market funds have historically been able to maintain stable share values. TheRule sets forth conditions for use of these methods that are detailed and complex.Under the Amortized Cost Method, portfolio securities are valued by referring to theiracquisition cost, adjusted for amortization of premium or accretion of discount, andwithout adjustment for changes in credit quality of the issuer or changes in prevailinginterest rates that affect the value of the security. A fund not using the Amortized CostMethod must calculate its net asset value per share by valuing portfolio securities forwhich market quotations are readily available at market value and other securities andassets at fair value as determined in good faith by the board of directors or trustees ofthe fund (the “Board”). These requirements are set forth in Section 2(a)(41) of the 1940Act and Rules 2a-4 and 22c-1. (February 1, 1982, Proposing Release under the caption“Background” in that release.)Share price is determined under the Penny-Rounding Method by valuing securitieseither at market value, fair value or amortized cost, and rounding the per share net assetvalue to the nearest cent on a share price of $1.00. A fund not using the Penny-RoundingMethod is permitted to round per share net asset value to the extent not consideredmaterial. At the time Rule 2a-7 was proposed, the SEC said this would require roundingto the nearest one-tenth of a cent on a share price of $1.00. (February 1, 1982, ProposingRelease.) 1While as originally proposed, the Rule would have required a fund to choosebetween using the Amortized Cost Method and the Penny-Rounding Method (February 5,1983, Adopting Release, note 5), under the Rule as originally adopted and as currently in1 In addition to operating under the Rule, funds must take the additional action of declaring dividends daily in order tostabilize share value. If a fund does not do so, the income accrued each day would increase share value and share valuewould grow even though principal value is otherwise stable. (Some money funds have used the words “Daily DividendFund” as part of their name.)2A # 454265 v.1

effect, a fund may use both methods at the same time to stabilize fund share prices.Industry standard is for a money market fund to use the Amortized Cost Method and alsoround share price to the nearest penny using Penny-Rounding. 2 At this time it is rare fora money market fund to operate using Penny-Rounding only.One central requirement under the Rule for a fund using the Amortized Cost Method isthat the fund must compare its price per share calculated using the Amortized CostMethod to the price per share based on market prices (or appropriate substitutes asfurther discussed below under “Introduction – Mark to Market” on page 5). Thiscomparison must be done at intervals determined by the Board, and the Board isrequired to consider what action, if any, to take if the deviation between these two pricesexceeds ½ percent. One possible action would be to price the share at less (or more) thanits $1.00 amortized price (or other selected price). Using a price other than amortizedprice is commonly referred to as “breaking the dollar.” (c)(7)(ii) (See “Introduction –Mark to Market” on page 5 and “Maturity” on page 57 for more information onbreaking the dollar.)The Rule includes a number of conditions designed to reduce the likelihood that thenet asset value of the fund, as determined by the Amortized Cost Method, will deviatematerially from its net asset value based on market values. The Rule’s conditions limitpermissible investments to those that are expected to have a relatively low level ofvolatility and provide a greater assurance that the fund will be able to maintain a stablemarket price per share that fairly reflects the current amortized cost value per share. TheSEC has explained that fluctuations in the market price either up or down may run afoulof the Rule. (July 18, 1983, Adopting Release at note 2.)The SEC has described the types of risk that the Rule is intended to alleviate. “Thereare basically two types of risk which cause fluctuations in the value of money marketfund portfolio instruments: the market risk, which primarily results from fluctuations inthe prevailing interest rate, and the credit risk. In general, instruments with shorterperiods remaining until maturity have reduced market risks and thus tend to fluctuateless in value over time than instruments with longer periods remaining until maturity.Similarly, instruments which are of higher quality have lower credit risks and tend tofluctuate less in value over time than instruments which are of lower quality.” (July 1,1985, Proposing Release, note 25.) The Rule’s conditions and restrictions are intended tominimize both market and credit risk in the fund’s portfolio holdings.The Rule also eliminates currency risk (the risk that the value of holdings will beaffected by a change in the exchange rate of the home (U.S.) currency for the currency inwhich foreign assets are denominated), by requiring that all holdings must be United2 Commenters persuaded the SEC that unless allowed to use both, funds using the Amortized Cost Method would beneedlessly disadvantaged as compared to those using the Penny-Rounding Method. Typically, funds compute their sharevalue using the Amortized Cost Method and also round the share value to the nearest cent. (July 18, 1983, Adopting Release,note 5.)3A # 454265 v.1

States Dollar-Denominated. The Rule minimizes issuer concentration risk (the risk thatvalue of the portfolio will be jeopardized by a negative event affecting one issuer towhich the fund has disproportionate exposure) by imposing strict diversificationstandards. As a result of these standards, credit problems posed by any one issuershould have a limited effect on the portfolio as a whole.Funds that hold themselves out as or call themselves “money market funds” or asimilar name that “suggests that the fund is a money market fund or the equivalent” arerequired to meet the conditions and requirements of the Rule (except as set forth in thefootnote below), 3 whether or not they use the Amortized Cost Method or thePenny-Rounding Method. (b)(1), (2) and (3). Fund names that trigger the Rule are thosethat include “terms such as ‘cash,’ ‘liquid,’ ‘money,’ ‘ready assets’ or similar terms.”(b)(3)ProceduresThe Rule requires that a fund using the Amortized Cost Method must adopt writtenprocedures to stabilize fund share value.The Rule states: “In supervising the money market fund’s operations and delegatingspecial responsibilities involving portfolio management to the money market fund’sinvestment adviser, the money market fund’s board of directors, as a particularresponsibility within the overall duty of care owed to its shareholders, shall establish3 The portfolio management requirements of the Rule are triggered if a fund “hold[s] itself out” as a money market fundor includes the phrase “money market” or similar words in its name, whether the fund uses the Amortized Cost Method,the Penny-Rounding Method or both – or, in fact, if the fund uses neither such method (subject to limited exceptions). Thereare exceptions, whereby certain portfolio management requirements of the Rule do not apply to a money market fundthat does not use the Amortized Cost Method (that is, it uses only the Penny-Rounding Method or uses neither method):(1) the requirements specifically relating to marking to market, which apply only to a fund using the Amortized CostMethod (because marking to market is required for a fund using the Amortized Cost Method, but not a fund using only thePenny-Rounding Method or neither method),(2) a money market fund not using the Amortized Cost Method may acquire a Government Security with a remainingmaturity of up to 762 calendar days, while a money market fund using the Amortized Cost Method must apply the Rule’sgeneral maturity limit of 397 days to all securities, including Government Securities,(3) the general requirement that a Board adopt procedures under the Rule is stated differently for a fund using only thePenny-Rounding Method.Listed below are the requirements referred to in clause (1) above relating to marking to market that do not apply to amoney market fund using neither method or using only the Penny-Rounding Method. (More detail on these requirements isset forth under the three captions in this Guide that follow this section of the Guide.)(a) A fund must have written procedures for marking to market.(b) A fund must have written procedures requiring the Board to review the mark to market and requiring themaintenance of a record of the comparison and of the Board’s review.(c) The Board must promptly consider what action, if any, to take if the deviation between amortized cost value andmarket value of a fund share exceeds ½ percent.(d) The Board must take action as appropriate when there is material dilution or unfair result due to the deviationbetween market value and amortized cost value.4A # 454265 v.1

written procedures reasonably designed, taking into account current market conditionsand the money market fund’s investment objectives, to stabilize the money marketfund’s net asset value per share, as computed for the purpose of distribution,redemption and repurchase, at a single value.” 4 (c)(7)The procedures must be reasonably designed to achieve their purpose; the Board isnot a guarantor that the procedures will achieve this goal. Well-crafted fund procedurestypically require the fund’s adviser to implement the full panoply of requirements in theRule relating to the details of maturity, quality and diversification of the portfolio.Although the Board may institute procedures that address all aspects of the Rule, theRule specifically mandates procedures to implement only five provisions – a “mark tomarket” procedure (See Mark to Market, below) and four specified technical portfoliocompliance provisions (explained in Appendix 4).Mark to MarketThe Rule requires that funds using the Amortized Cost Method must periodicallycompare the amortized cost value of a share to the market-based value of a share,known as “mark to market.” Specifically, the Rule requires that funds have writtenprocedures that provide “that the extent of deviation, if any, of the current net assetvalue per share calculated using available market quotations (or an appropriatesubstitute that reflects current market conditions) from the money market fund’samortized cost price per share, shall be calculated at such intervals as the board ofdirectors determines appropriate and reasonable in light of current market conditions . . .”(c)(7) Mark-to-market procedures must also provide that the fund maintain a record ofthe determination of the deviation and the Board’s review of the deviation. (c)(7)(ii)(1) Interval. The Rule requires that fund procedures provide for “the periodic reviewby the board of directors of the amount of the deviation . . .” (c)(7)(ii)(A)(2), but the Ruledoes not set forth the frequency of the review. The SEC has said: “During periods ofhigh market volatility, this requirement may necessitate that the deviation between suchmarket-based value and price be monitored on a daily basis. During periods of lowervolatility, it may be reasonable to monitor such deviation less frequently. The reviewsshould be frequent enough so that the board may become aware of changes in the4 For a money market fund using the Penny-Rounding Method, the Rule does not include a parallel general statementrelating to procedures. Instead the Rule includes the general requirement that the Board must undertake “as a particularresponsibility within the overall duty of care owed to its shareholders, to assure to the extent reasonably practicable,taking into account current market conditions affecting the money market fund’s investment objectives, that the moneymarket fund’s price per share as computed for the purpose of distribution, redemption and repurchase, rounded to thenearest one percent, will not deviate from the single price established by the board of directors.” (c)(8)5A # 454265 v.1

market-based per share net asset value before they become material.” (February 5, 1982,Proposing Release, above note 36.)Typically funds calculate the deviation either daily or weekly. Some fund proceduresprovide that the deviation will be calculated weekly, but upon the occurrence of anymaterial change in interest rates or other event that could change significantly currentmarket values, the investment adviser or fund valuation agent may institute dailydetermination of the deviation. Fund procedures may also allow the investment adviser,fund valuation agent or fund Board to revert to weekly calculations upon determiningthat the material change in interest rates or other event has been fully reflected in themarketplace.(2) Methods; Matrix Pricing. The Rule requires that the Board periodically reviewthe methods used to calculate the deviation. In determining market-based net assetvalue per share, all securities for which market quotations (or appropriate substitutesthat reflect current market conditions) are readily available must be valued at marketvalue. Either actual quotations or estimates of market value obtained by a methodapproved by the Board may be used.One frequently used substitute for market quotations is matrix pricing. Matrix pricesare derived from yields and other key investment characteristics relating to classes ofsecurities obtained from reputable sources (typically a pricing service). The SEC has saidthat any pricing system based on such data for selected securities must be based upon“market quotations for sufficient numbers and types of instruments to be arepresentative sample of each class of security held in the portfolio, both in terms of thetypes of instruments as well as the differing quality of the instruments.” (February 2,1982, Proposing Release, below note 36.)In matrix pricing, the price of a security is determined by reference to prices ofsimilar securities with characteristics that are considered to provide a “matrix” of datapoints. The Investment Company Institute 5 explained in its February 1997 report on“Valuation and Liquidity Issues for Mutual Funds” (the “ICI Report”), “Matrix pricingsystems classify a large sample of debt securities according to key investmentcharacteristics . . . “ that may include:· type of issuer· interest rates· maturities· ratings5 The Investment Company Institute did not participate in the preparation of this publication. The views expressed in thispublication are those of the author, not of the Investment Company Institute.6A # 454265 v.1

The ICI Report explains that pricing services generate prices daily based on actualtrades, dealer quotations and other information considered relevant by the pricingservice.Further, “prices for securities that are not in the sample are derived from the pricesobtained for sample securities that share the same or similar investment characteristics.”The accuracy of the prices obtained through matrix pricing depends on the similarity ofthe securities being priced and the reference securities in the matrix. “That comparison,in turn, is partly a function of a subjective judgment as to which securities in the matrixare most similar to the security being priced and partly a function of the extent to whichany of the matrix securities can be considered a substitute for the priced security.” (ICIReport at page 17.)The ICI explains that for certain types of securities, “such as municipal securities ofthe same types of issuers in the same region with the same ratings, yield, maturity andother characteristics, the correlation between the matrix securities and the securitiesbeing priced may be very high. But for others the correlation may be lower. Thus, forexample, while some CMOs [collateralized mortgage obligation] may have the samegeneric pool characteristics, actual prepayment experience will differ from pool to pool;moreover, details of the CMO structure may differ among similar CMOs. Differencessuch as these can limit the comparability of particular securities and limit the accuracy ofmatrix pricing.” (ICI Report at page 17.)Although a fund may retain an outside service to provide matrix prices for itsportfolio instruments, the fund may not delegate to that service the ultimateresponsibility to check the accuracy of its system. The fund must periodically review theaccuracy of the system based on yield data. In practice, the fund’s valuation agent (suchas its fund accountant), may be the first line of defense in oversight of the pricingservice. In its amortized cost procedures, the Board may include a requirement that if atany time it comes to the attention of the fund’s valuation agent that the matrix pricingsystem used by the pricing service is not producing prices that are equivalent to marketvalues, the valuation agent must adjust prices to reflect fair market values accuratelyand report to the Board on such adjustment. (February 5, 1982, Proposing Release, note36.)In determining the market-based value of the portfolio for purposes of computingthe extent of deviation from amortized cost, all portfolio instruments, regardless of theirlength of maturity, should be valued based on market factors and not their amortizedcost value. Prior to adopting the Rule, the SEC had taken the position that it would notobject to a Board determining, in good faith, that it was appropriate to value securitieswith less than 60 days remaining until maturity at amortized cost, unless the particularcircumstances dictated otherwise. But the SEC has said that such position does not affectthe monitoring procedures under the Rule. When marking to market even a very shorttermsecurity, market value should be used if available, absent unusual considerations.(February 5, 1982, Proposing Release, note 36.)7A # 454265 v.1

Portfolio securities for which market quotations (or appropriate substitutes thatreflect current market conditions) are not readily available are valued at their fair value,under the supervision of the Board. (1940 Act Section 2(a)(41) and the ICI Report atSection IIB1.) The Board itself is ultimately responsible for overseeing fair valuation,even though certain day-to-day functions relating to fair value are performed by fundservice providers.Board Action upon Significant Deviation; Material Dilution or Unfair Results(1) Deviation Exceeds ½ Percent. The Rule requires that the Board consider whataction, if any, to take if the deviation between market value and amortized cost exceeds½ of 1 percent. No particular action, and, in fact, no action at all, is specifically mandatedby the Rule. The Rule states: “In the event such deviation from the money market fund’samortized cost price per share exceeds ½ of 1 percent, the board of directors shallpromptly consider what action, if any, should be initiated by the board of directors.”(c)(7)(ii)(B) and (e) Some funds include in their procedures specific protocols to befollowed upon lesser deviations than ½ of 1 percent (for example, notification of officersupon ¼ of 1 percent deviation, call of a board meeting upon ¾ of 1 percent deviation),so that fund officers or the Board has the opportunity to take measures before thedeviation approaches the point where the fund is in danger of “breaking the dollar.”(2) Material Dilution or Unfair Result. The Rule provides that the Board must takesuch action as it deems appropriate to avoid material dilution or other unfair results.Specifically, the rule states: “Where the board of directors believes the extent of anydeviation from the money market fund’s amortized cost price per share may result inmaterial dilution or other unfair results to investors or existing shareholders, it shallcause the fund to take such action as it deems appropriate to eliminate or reduce to theextent reasonably practicable such dilution or unfair results.” (c)(7)(ii)(C) The Rulerequires action where the unfair result may occur; an unfair result need not be a certaintyin order to trigger Board action.Although the Rule requires no specific action under either of the foregoingcircumstances, the SEC has indicated that some action is likely to be necessary: “. . . it isunlikely that a board of directors could, in conformance with the provisions of the rule,make a finding that no action was necessary when the deviation reached [the level of ½of 1 percent]. Moreover a board may find that the possibility of material dilution existswhen the deviation is less than ½ of 1 percent. In such an event, the board would also beobligated to take corrective action.” (February 5, 1982, Proposing Release, note 39.)Dilution or unfair result could occur because of market fluctuations either above orbelow Amortized Cost Value. If the net asset value of a fund determined based on marketvalues were to drop significantly below the net asset value determined by the amortizedcost method, investors who redeemed their investment would receive more than theirpro rata share of the fund’s assets, diluting the interests of existing shareholders, and8A # 454265 v.1

purchasing investors would pay too much for their shares. Conversely, if the net assetvalue of a fund determined based on market values were to rise significantly above thenet asset value determined by the amortized cost method, investors who redeemed theirinvestment would receive less than their pro rata share of the fund’s assets andpurchasing investors would pay too little for their shares, diluting existing shareholders.(3) What Board Action? When the SEC adopted the Rule, it did not propose tocodify examples of actions the Board could take upon material deviations, to avoid anyimplication that other actions would be inappropriate. In the initial proposing release forthe Rule, the SEC listed possible actions the Board could take when unfair results mayoccur due to material deviations: “adjusting dividends; selling portfolio instrumentsprior to maturity to realize capital gains or losses or to shorten the average portfoliomaturity of the money market fund; or redeeming shares in kind . . . if the board wereever to determine that the deviation was such that it could no longer conclude that theamortized cost price fairly reflected the value of each shareholder’s interest in the fund,because of the possibility of dilution or other unfair results, it would have to discontinueuse of the amortized cost method of valuation and calculate its price per share inaccordance with the provisions of the [1940 Act] and rules thereunder.” (February 5,1982, Proposing Release, notes 40 and 41.) This latter action might result in reducing theshare price to less than $1.00, breaking the dollar.Responsibilities of Fund Board and Delegation: Two Prerequisitesto DelegationThe Rule refers throughout to determinations to be made by a fund or its Board.However, all determinations under the Rule, other than the eight listed at the end of thissection, may be delegated by the Board to the investment adviser or officers of the fund,provided two conditions are satisfied. (e)First, the Board must “establish and periodically review written guidelines(including guidelines for determining whether securities present minimal credit risks asrequired in paragraph (c)(3) of [the Rule]) and procedures under which the delegatemakes such determinations.” (e)(1) To satisfy this requirement, Boards typically includein their written procedures guidelines for an adviser to follow in making the minimalcredit risks determination and other determinations. (See “Quality Tests: Minimal CreditRisks; Eligible Security Rating Quality; Limit on Second Tier Securities – First of ThreeBasic Quality Tests: Minimal Credit Risks” on page 17.) Typically the Board reviewsthese procedures annually.Second, the Board must “take any measures reasonably necessary . . . to assure thatthe guidelines and procedures are being followed.” These measures are to be taken“through periodic reviews of fund investments and the delegate’s procedures inconnection with investment decisions and prompt review of the adviser’s actions in theevent of the default of a security or Event of Insolvency with respect to the issuer of the9A # 454265 v.1

security or any Guarantee to which it is subject that requires notification of theCommission under paragraph (c)(6)(iii) of [the Rule].” (e)(2) To satisfy this delegationrequirement, fund Boards typically receive reports from the investment adviser onportfolio holdings and on actions taken under the Rule.This guide refers from time to time to actions to be taken by the Board “or itsdelegate.” This phrase is used where the Rule refers to action to be taken by the Board,but which it may delegate.Assuming that the Board establishes guidelines and oversees their implementation,the only determinations under the Rule that reside solely with the Board and may not bedelegated are those listed below. Items (2) through (5) are explained above under“Introduction – Procedures” on page 4, “Introduction – Mark to Market” on page 5 and“Introduction – Board Action upon Significant Deviation; Material Dilution or UnfairResults” on page 8.(1) Board Determination (c)(1). The Board must “determine, in good faith,that it is in the best interests of the fund and its shareholders to maintain a stablenet asset value per share or stable price per share, by virtue of either theAmortized Cost Method or the Penny-Rounding Method.” The “money market fundwill continue to use such method only so long as the board of directors believesthat it fairly reflects the market-based net asset value per share.” (c)(1)(2) General required procedures under (c)(7)(i). The Rule requires the Boardto establish written procedures reasonably designed to stabilize net asset valueper share of the fund.(3) Shadow pricing (c)(7)(ii)(A). The Rule requires that the fund’s writtenprocedures provide for calculation of the deviation between amortized cost andmarket value of a fund share at such intervals as the Board determines.(4) Prompt consideration of deviation (c)(7)(ii)(B). The Board must promptlyconsider what action, if any, should be initiated in the event the deviationbetween amortized cost price and market value of a share exceeds ½ percent.(5) Material dilution or unfair results (c)(7)(ii)(C). If the Board believes theextent of any deviation from market value of the money market fund’s amortizedcost value may result in material dilution or other unfair result, the Board mustcause the fund to take such action as it deems appropriate to eliminate or reduceto the extent reasonably practicable such dilution or unfair results.(6) Securities Subject to Second Tier Demand Features (c)(6)(i)(C). The Rulerequires, in summary, that if, after a ratings downgrade, more than 5 percent ofTotal Assets are issued by or subject to Demand Features from a single institutionand those securities and Demand Features are Second Tier Securities, the fund must10A # 454265 v.1

educe such investments to no more than 5 percent of Total Assets by exercisingthe Demand Features, unless the Board finds that this would not be in the bestinterests of the fund. If the Board so finds, it may determine that the fund willretain such investments.(7) Defaults and other events (c)(6)(ii). The Rule requires, in summary, thatupon certain defaults or Events of Insolvency of a portfolio security, or if aportfolio security no longer presents minimal credit risks or is no longer anEligible Security, the fund must dispose of the security, unless the Boarddetermines that disposal would not be in the best interests of the fund.(8) Required procedures: Penny-Rounding Method (c)(8). The Board isrequired, in summary, to “undertake . . . to assure . . . to the extent reasonablypracticable . . .” that the fund’s price per share computed for purposes of sharetransactions, rounded to the nearest 1 percent will not deviate from the singleprice established by the Board.What Securities May a Money Market Fund Purchase?The Rule does not specify what securities a fund may purchase. Rather than settingforth the types of securities that a fund operating under the Rule may purchase, 6 theRule sets forth restrictions and requirements for each investment and for the portfolio,relating to quality, diversification and maturity. A fund may purchase an investment if itsatisfies these requirements and restrictions, does not cause the fund’s portfolio toviolate any other provision of the Rule and is also consistent with the fund’s maintaininga stable net asset value.The Rule’s approach allows for some surprising results. For example, the SEC hasissued advice that permits money market funds to purchase certain types of preferredstock. (No-action letter, dated May 10, 2002, to Merrill Lynch Investment Managers.)Although traditional debt securities are more likely to satisfy the Rule’srequirements, the Rule does not specifically limit purchases to those types ofinvestments. The Rule is marvelously flexible and allows for investment in new types ofinstruments that may be introduced in the marketplace.But with this flexibility comes one of the most difficult aspects of money marketfund compliance – the challenge of analyzing each potential investment, to confirm notonly that the investment itself complies, but also that it does not cause the fund’sportfolio as a whole to violate the Rule.6 Rule 2a-7 was drafted based on exemptive applications that had been filed by funds seeking SEC relief to operate asmoney market funds before the Rule existed. These applications routinely set forth the specific types of instruments inwhich the fund seeking the exemption could invest. When adopting the Rule, the SEC provided more flexibility andspecifically rejected the approach of listing permitted types of instruments. (July 18, 1983, Proposing Release, note 8.)11A # 454265 v.1

The Rule’s standards are listed in outline form below, and each is described in detailin this guide.Structure of Rule 2a-7: Main Topics Covered in this Guide(1) Qualitya. Each security must pose minimal credit risk.b. Each security must be an Eligible Security, based on ratings in the top twocategories by the Requisite NRSROs (nationally recognized statisticalrating organization, or rating agency) or a determination that an UnratedSecurity is of comparable quality to rated securities.Special rules for securities subject to Guarantees.Special rules for securities subject to Conditional Demand Features.Other special rules for Eligible Securities.Rules for eligibility of a security with a new external creditsupport.Rules for eligibility of a security that was long-term atissuance, but which is acquired when its remainingmaturity is short-term.c. Second Tier Securities are limited to 5 percent of Total Assets (for TaxExempt Funds this test applies only to Conduit Securities). (Second TierSecurities generally are those rated in the second highest rating categoryby NRSROs.)d. Miscellaneous Additional Quality Standards.Each security must be United States Dollar-Denominated.Each Asset Backed Security must be rated, with exceptions includedfor municipal asset backed securities.Each Guarantee, in general, must be rated.Any Guarantee or Demand Feature must provide prompt notice ofsubstitution.e. There is a special rule relating to Guarantees and Demand Features notrelied upon.(2) Diversification as to Issuera. Fund generally is limited to 5 percent in an issuer.12A # 454265 v.1

Taxable and national Tax-Exempt Funds have an exception referredto as a “three-day safe harbor” that permits an investment in oneissuer in excess of this limit for a period of up to three BusinessDays.Single State Fund have an exception referred to as a “25 percentbasket” that permits investments exceeding this limit for up to 25percent of assets.b. Second Tier Issuer TestFund generally is limited to 1 percent (or $1 million if greater) in asecond tier issuer (for a Tax Exempt Fund, this test only applies tosecond tier Conduit Securities).i. Exceptions to issuer diversification testing for:ii.U.S. Government Securities.Securities with a Guarantee Issued by a Non-ControlledPerson.Shares of other money market funds.Special diversification treatment for the following types ofsecurities, referred to as “look-through” treatment:Refunded Securities.Repurchase Agreements.Conduit Securities.Asset Backed Securities.(3) Diversification as to Credit EnhancementsGenerally, 10 percent limit in any one credit enhancement provider with 25 percent“basket” for first tier Demand Features and Guarantees Issued by a Non-ControlledPersoni. Exception for Demand Features and Guarantees not relied upon.ii.iii.Other exceptions to credit enhancement diversification testing:Issuer-provided Guarantee.Issuer-provided Demand Feature.U.S. Government Securities.Special diversification rules for:Fractional Demand Features and Guarantees.Layered Demand Features and Guarantees.13A # 454265 v.1

Miscellaneous Points regarding DiversificationA fund that satisfies Rule 2a-7 diversification satisfies Section5(b)(1) diversification requirements.Testing multiple exposures (where a security has more than onecredit support) – The SEC has provided guidance on how to test without“double-counting” exposure.(4) Maturitya. Each investment must be appropriate to maintaining a stable NAV (NetAsset Value).b. Maturity of each security may not exceed 397 days.Subject to provisions that permit a fund to treat a security ashaving a maturity shorter than its nominal maturity (referred to as“maturity shortening provisions”).c. Average weighted maturity of the portfolio may not exceed 90 days.d. Price stability required for each variable rate security; consistency withstable NAV required for each security.e. Maturity shortening provisions.(5) Liquidity (not in Rule 2a-7, but important to money funds)(6) OtherRequired Actions upon Certain Negative EventsDefault events.Downgrade events.Reduction in holdings if, after downgrade, Second Tier Securitiescomprise more than 5 percent of Total Assets.SEC notification – Default or Event of Insolvency comprising ½percent or more of Total Assets.Form N-SAR reporting.RecordkeepingBoard Reporting14A # 454265 v.1

PORTFOLIO MANAGEMENT:Quality, Diversification, Maturity for Tax Exempt and Taxable FundsThe following sections of this guide describe the portfolio management requirementsunder the Rule that relate to quality, diversification and maturity.Taxable and Tax Exempt FundsWith respect to these portfolio management requirements, the Rule treats taxablefunds and Tax Exempt Funds differently in only two ways, and treats Single State Fundsdifferently from other funds in one way. A Single State Fund is a Tax Exempt Fund that, insummary, seeks to maximize the amount of its distributed income that is exempt fromthe taxes of a particular state as well as from regular federal income tax.(1) Second Tier Quality Test. This test, in general, limits second tier holdings to nomore than 5 percent of Total Assets. For a Tax Exempt Fund, the test applies only ConduitSecurities (very generally, municipal securities whose payment is ultimately backed by anon-municipal issuer), whereas it applies to all securities for taxable funds. (See “QualityTests: Minimal Credit Risks; Eligible Security Rating Quality; Limit on Second TierSecurities – Third of Three Basic Quality Tests: Limit on Aggregate Exposure to SecondTier Securities” on page 32.)(2) General Issuer Diversification Test. This test, in general, prohibits all funds fromholding in excess of 5 percent of Total Assets from any one issuer. There is a 25 percent“basket” for Single State Funds. This means that with respect to 25 percent of Total Assets,the 5 percent limit does not apply to a Single State Fund. Only First Tier Securities may beincluded in the basket, meaning that only Single State Funds may acquire First TierSecurities of one or more issuers in excess of 5 percent, up to 25 percent of Total Assets.For Tax Exempt Funds, other than Single State Funds, and for taxable funds, there is adifferent, more limited type of 25 percent basket for First Tier Securities. This basket,known as the “three day safe harbor,” allows funds to hold First Tier Securities of only asingle issuer in excess of 5 percent, up to 25 percent of Total Assets, but for only threeBusiness Days at a time. (See “Diversification as to Issuer” on page 37.) The fund mustthereafter reduce holdings of the issuer to less than 5 percent of Total Assets. (Note thatthe second tier tests above and below are different for taxable and Tax Exempt Funds. Butthis general issuer diversification test is the same for taxable and Tax Exempt Funds, otherthan Tax Exempt Funds that are Single State Funds.)(3) Second Tier Issuer Diversification Test. This test limits exposure to any onesecond tier issuer to 1 percent of Total Assets. For a Tax Exempt Fund, this test appliesonly to Conduit Securities.15A # 454265 v.1

While the Rule otherwise applies the same standards to both taxable funds and TaxExempt Funds, certain provisions of the Rule may be more frequently relevant for onetype of fund than another. For example, if Tax Exempt Funds more often than taxablefunds invest in securities with Demand Features, the provisions of the Rule relating toDemand Features may be more often relevant to Tax Exempt Funds. Nevertheless, with thethree noted exceptions, compliance systems for both types of funds can be addressed inlike manner.16A # 454265 v.1

QUALITY TESTS:Minimal Credit Risks; Eligible Security Rating Quality;Limit on Second Tier SecuritiesSummary of Quality TestsThe Rule imposes two separate principal tests of quality on each portfolio security –the minimal credit risks standard and the Eligible Security ratings test. The Rule alsoimposes a limit on aggregate exposure to Second Tier Securities.Whether a security poses minimal credit risks requires a judgment based on reviewof factors relating to credit quality.The Eligible Security ratings test requires an objective review of applicable ratingswhere a security has been assigned a rating by at least one NRSRO. For an UnratedSecurity, the Rule requires a determination that the security is of comparable quality to arated security that has the requisite ratings.The Rule includes additional requirements to determine the eligible status ofsecurities with a Guarantee or a Demand Feature. Further, additional criteria apply forspecified types of securities to be considered Eligible Securities. These securities includeAsset Backed Securities (which are subject to rating requirement), securities with aGuarantee (which are subject to a rating requirement and a requirement that theyprovide notice of substitution) and securities subject to a Demand Feature (which aresubject to a requirement that they provide notice of substitution).In addition to the foregoing quality tests, the Rule requires that each security beUnited States Dollar-Denominated.First of Three Principal Quality Tests: Minimal Credit RisksThe Rule states that a money market fund “shall limit its portfolio investments tothose . . . securities that the fund’s board of directors determines present minimal creditrisks (which determination must be based on factors pertaining to credit quality inaddition to any ratings assigned to such securities by an NRSRO) . . .” (c)(3)(i)The Rule does not provide a definition of the minimal credit risk standard thatsecurities must satisfy, but rather explains it by reference to what would not satisfy thestandard. Ratings assigned by an NRSRO alone are not enough to satisfy the fund’sobligation to determine that a security presents minimal credit. The determination mustbe based on factors other than any NRSRO rating. (c)(3)(i)17A # 454265 v.1

The SEC has explained why this additional determination is necessary. “Therequirement that a security have a high quality rating provides protection by ensuringinput into the quality determination by an outside source. However, the mere fact thatan instrument has or would receive a high quality rating may not be sufficient to ensure[that a stable price per share is maintained]. The Commission believes that theinstrument must be evaluated for the credit risk that it presents to the particular fund atthat time in light of the risks attendant to the use of amortized cost valuation or pennyrounding.Moreover, the board may look at some aspects when evaluating the risk of aninvestment that would not be considered by the rating service.” (See July 18, 1983Adopting Release, as quoted in letter from Kathryn McGrath, Director of the SECDivision of Investment Management, dated December 6, 1989 addressed to Matthew P.Fink, General Counsel of the Investment Company Institute (the “1989 McGrathLetter”).)Practice Point – Minimal Credit Risks: The SEC staff has on occasionprovided guidance as to the factors that may form the basis fordetermining that a security presents a minimal credit risk. According tothe 1989 McGrath Letter and an additional letter dated May 8, 1990 (the“1990 McGrath Letter”) addressed to investment company registrants, theDirector of the SEC Division of Investment Management listed certain ofthese factors that Boards should consider, if relevant. Neither letterrequires the consideration of any particular factors. In the 1989 McGrathLetter, McGrath listed the following “kinds of factors” as relevant for theBoard to “take into account, as appropriate” in making its minimal creditrisk determination:▪ “macro-economic factors which might affect the issuer’s or guarantor’scurrent and future credit quality;▪ the strength of the issuer’s or guarantor’s industry within the economy andrelative to economic trends;▪ the issuer’s or guarantor’s market position within its industry;▪ cash flow adequacy;▪ the level and nature of earnings;▪ financial leverage;▪ asset protection;▪ the quality of the issuer’s or guarantor’s accounting practices andmanagement;▪ the likelihood and nature of event risks, etc.”18A # 454265 v.1

McGrath’s letter states that a Board should consider the “kinds of factorslisted in . . . [the incoming letter from Matthew Fink of the InvestmentCompany Institute] . . .” That incoming letter listed, in addition to theforegoing factors, the following additional factors:▪ “the effect of any significant ownership positions;▪ the degree of financial flexibility of the issuer or guarantor to cope withunexpected challenges and to take advantage of opportunities, . . . ;▪ the likelihood of a sudden change of credit quality from external (e.g., hostiletakeovers, litigation) and internal (e.g., financial restructuring, acquisitions)sources.”With respect to tax exempt securities, Matthew Fink’s incoming lettersaid the Board should consider issues such as the following “additionalfactors:”▪ “sources of repayment,▪ autonomy in raising taxes and revenue,▪ reliance on outside revenue sources and▪ strength and stability of the supporting economy.”In the 1990 McGrath Letter, McGrath added “. . . in our view, a board ofdirectors can only make this determination [of minimal credit risk] basedupon an analysis of the issuer’s capacity to repay its short-term debt.Examples of elements of such an analysis include:▪ cash flow analysis;▪ an assessment of the issuer’s ability to react to future events, including areview of the issuer’s competitive position, cost structure and capitalintensiveness;▪ an assessment of the issuer’s liquidity, including bank lines of credit andalternative sources of liquidity to support its commercial paper; and▪ a ‘worst case scenario’ evaluation of the issuer’s ability to repay its short-termdebt from cash sources or asset liquidations in the event that the issuer’s backupcredit facilities are unavailable.“19A # 454265 v.1

McGrath went on to say that the Board should take into consideration:▪ “the length to maturity of the security; and▪ the percentage of the fund’s portfolio represented by securities of that issuer.”She noted that “such determinations must be recorded in the books andrecords of the fund in accordance with Rule 2a-7 and section 31 of theInvestment Company Act.”Note that the foregoing are referred to as “examples” of factors toconsider, rather than as required factors in each case.Practice Point – Credit Files and Services: In routine examinations ofmoney market funds, the SEC staff sometimes reviews the adequacy ofwritten records that evidence the fund’s minimal credit riskdetermination for each holding. The SEC has not provided guidance onwhat records should be maintained in credit files but has provided noactionassurance that an investment adviser may rely on reports ofoutside credit services to create credit analyses, provided that the adviseralso performs its own independent credit analysis. An adviser may notrely solely on an outside credit service. (See Red Flag Research, Inc., noactionletter dated May 10, 1994.) Credit files should include evidence ofthe adviser’s independent analysis of an issuer. Some funds include intheir credit files a checklist of factors considered for each holding.Second of Three Principal Quality Tests: Eligible SecurityThe fund must limit its portfolio investments to securities that, at the time ofAcquisition, are Eligible Securities. While the minimal credit risks standard is based upona weighing of various factors, the Eligible Security requirement is an objectiverequirement based on NRSRO ratings – for securities that have ratings. To be an EligibleSecurity, each security must:(1) have a remaining maturity of 397 calendar days or less; and(2) satisfy specified ratings criteria. If the security is an Unrated Security, theBoard or its delegate must determine that the security is of comparablequality to a security meeting the requirements for a Rated Security. (c)(3)(i)The limitation on maturity in clause (1) is discussed separately under “Maturity” onpage 57. The ratings criteria and several additional eligibility requirements applicable tospecific types of securities follow.20A # 454265 v.1

Two Types of Eligible Securities: First Tier and Second TierAn Eligible Security may be either a First Tier Security or a Second Tier Security.First Tier Security is, in summary, any Eligible Security that is rated in the highestshort-term category by the Requisite NRSROs (explained below) or an Unrated Security ofcomparable quality to a First Tier rated security, as determined by the Board or itsdelegate. Any Government Security or security issued by a registered investmentcompany that is a money market fund is defined as a First Tier Security under the Rule.(a)(12)Practice Point – Money Market Fund and Government Securities –Eased Recordkeeping: As noted under “Recordingkeeping” on page 72, afund must keep a record of the NRSRO ratings (if any) used to determinethe status of a security as Eligible Security, First Tier Security or Second TierSecurity. Because money market fund and Government Securities aredefined as First Tier Securities, a fund need not keep a record of thedetermination of ratings quality for these securities. (c)(10)(iii)Requisite NRSROsThe ratings criteria for an Eligible Security require that the Requisite NRSROs haverated the security in one of the two highest short-term rating categories (within whichthere may be sub-categories or gradations indicating relative standing).The Requisite NRSROs means:“(1) Any two NRSROs that have issued a rating with respect to a security or classof debt obligations of an issuer; or(2) If only one NRSRO has issued a rating with respect to such security or class ofdebt obligations of an issuer at the time the fund Acquires the security, that NRSRO.”(a)(21)21A # 454265 v.1

Technical Point – Eligible Security: In brief summary, there are fourways a security can satisfy the ratings requirement of the definition ofEligible Security.It is rated in the same top two category by any two NRSROs.It is rated in the top two rating categories by at least two NRSROs, but notwo NRSROs assign the same category. Assign the lower of the ratings.It is rated by one NRSRO only, in one of the top two categories.It is an Unrated Security determined by the Board or its delegate to be ofcomparable quality to securities satisfying one of the foregoing criteria.Example – Ratings: Applying these standards, if two NRSROs rate asecurity at the time of Acquisition and their ratings are in differentcategories, the lower of the two ratings applies. In other words, splitratedsecurities without two ratings in the higher category are assignedthe lower rating.Example – Ratings: If three NRSROs rate a security at the time ofAcquisition and at least two assign the highest rating category and thethird NRSRO assigns the second highest, the two NRSROs that are inagreement constitute the Requisite NRSROs despite the existence of theadditional lower rating.Example – Ratings: A security with two first tier ratings and a third tierrating could be considered a First Tier Security because the two first tierratings constitute ratings by the Requisite NRSROs. But the fund/adviserwould wish to document carefully any conclusion that the security is firsttier, as the Rule includes a separate provision requiring the Board or itsdelegate to reassess the minimal credit risks status of a security if itreceives a rating below second tier. A fund/adviser might prefer, as aninternal policy matter, not to consider the security to be a First TierSecurity.How to Apply the Eligible Quality Test for Specific Types of SecuritiesThe Rule imposes additional requirements for determining Eligible Status forspecific types of securities.22A # 454265 v.1

Determining Eligible Status for a Security with a GuaranteeA security with a Guarantee may be categorized as a First Tier Security or an EligibleSecurity based solely on the rating assigned to the Guarantee (or to the Guarantor withrespect to securities that are similar in priority or security). If the Guarantee is an EligibleSecurity or a First Tier Security, the Board or its delegate may determine that the securityit supports is an Eligible Security or a First Tier Security. (c)(3)(iii)A preliminary step in determining whether a security with a Guarantee is an EligibleSecurity is to determine that the security has a Guarantee as defined by the Rule. AGuarantee means “an unconditional obligation of a person other than the issuer of thesecurity to undertake to pay, upon presentment by the holder of the Guarantee (ifrequired), the principal amount of the underlying security plus accrued interest whendue or upon default, or, in the case of an Unconditional Demand Feature, an obligation thatentitles the holder to receive upon exercise the approximate amortized cost of theunderlying security or securities, plus accrued interest, if any. A Guarantee includes aletter of credit, financial guaranty (bond) insurance, and an Unconditional Demand Feature(other than an Unconditional Demand Feature provided by the issuer of the security.)”(a)(15)A Demand Feature, in summary, is a feature that permits the holder of a security toreceive principal and interest upon demand, within a specified period.Practice Point – A Guarantee must be Unconditional: From time to time,features that bear the title “guarantee” are offered to support a security,but the support is not unconditional. For example, the holder of thesecurity may be entitled to draw on the “guarantee” only after pursuingother remedies. Or, the documentation sets forth circumstances uponwhich the “guarantee” is unavailable. Careful review of a purported“guarantee” is necessary to confirm that it satisfies the definition underthe Rule, which requires that the Guarantee be unconditional.Practice Point – Reliance on Guarantee is Permissive: While the Boardmay rely on the quality of a Guarantee to determine that a security is anEligible Security, it is not required to do so. The Board or its delegate maycategorize the ratings quality of the security without regard to the qualityof the Guarantee – that is, determine that the fund is not relying on theGuarantee for this purpose. If a fund is not relying on the Guarantee for anypurpose under the Rule, the Board or its delegate may document thisdetermination and dispense with compliance testing of the Guaranteeunder the Rule. Dispensing with testing may be useful if the fund wouldbe overexposed to the guarantor under the credit support diversification23A # 454265 v.1

test (described under “Diversification As To Credit Supports – FourExceptions to Diversification Testing for Credit Supports“ on page 51).Practice Point – What Is Non-Reliance? Dispensing with testing ispermissible only if the Guarantee truly is not necessary for any purposeunder the Rule. The security without the Guarantee must be of adequatecredit quality and maturity, and the Guarantee must not be necessary forliquidity, as in the case where the Guarantee is an Unconditional DemandFeature.An Unconditional Demand Feature (which is a type of Guarantee) may beused to “shorten” the maturity of a security, thereby renderingpermissible a security that otherwise would have an impermissibly longmaturity. If a Guarantee is being relied upon for any purpose under theRule, it must be tested under the credit support diversification test. (See“Four Exceptions to Diversification Testing for Credit Supports“ on page51.) (The Rule also permits a fund to determine that it is not relying on aDemand Feature that is not a Guarantee for any purpose under the Rule,and to dispense with testing the Demand Feature as described at the end ofthis chapter.)Technical Point – Any Guarantee: Any Guarantee, whether or not Issuedby a Non-Controlled Person, allows a security to be determined to be firsttier or eligible on the basis of the Guarantee. In a different section of theRule relating to diversification (discussed later in this Guide), a Guaranteeby a Non-Controlled Person is required. A Guarantee Issued by a Non-Controlled Person, not a Guarantee issued by a controlled person of theissuer, is necessary to allow a fund to dispense with issuer diversificationtesting of the security. (See “Diversification as to Issuer“ on page 37.)Technical Point – Issuer - Provided UCDF: An Unconditional DemandFeature provided by the issuer of a security is not considered to be aGuarantee, and any Rule provisions that apply to a Guarantee do not applyto an Unconditional Demand Feature provided by an issuer. For example,such a “guarantee” need not be rated nor provide notice of substitution(as required for other Guarantees as described below). Since theUnconditional Demand Feature provided by the issuer is not a Guarantee, itdoes not call into play any of the Rule provisions summarized below thatapply to Guarantees.24A # 454265 v.1

Practice Point – Provisions that Apply to Guarantees and DemandFeatures: There are four Rule 2a-7 provisions that apply to a Guarantee orDemand Feature. Each of these provisions is discussed separately underthe applicable section in this Guide, but for ease of reference, theprovisions that are called into play by a Guarantee or Demand Feature arelisted below.(1) Helpful provision: The Guarantee (including an UnconditionalDemand Feature) may serve as the basis for determining eligible or firsttier quality of the security it supports. The Conditional Demand Featuremust be tested for eligible status, in addition to testing the securitywithout giving effect to the Conditional Demand Feature. (See “QualityTests: Minimal Credit Risks; Eligible Security Rating Quality; Limit onSecond Tier Securities – Second of Three Principal Quality Tests: EligibleSecurity“ on page 20.)(2) Helpful provision: A Guarantee Issued by a Non-Controlled Personfrees a security from issuer diversification testing. (See “Diversification asto Issuer – Exceptions to the 5 Percent Issuer Diversification Test and 1Percent Second Tier Issuer Diversification Tests” on page 40.)(3) Restrictive provision: The Guarantee or Demand Feature must betested under the credit support diversification rules. (See “DiversificationAs To Credit Supports” on page 49.)(4) Restrictive provision: The Guarantee or Demand Feature must meeteligibility requirements for Guarantees or Demand Features. Specifically, aGuarantee must be rated, subject to certain exceptions. And for either aGuarantee or a Demand Feature, an institution must have undertakenpromptly to notify the holder of the security in the event the DemandFeature or Guarantee is substituted with another Demand Feature orGuarantee (if such substitution is permissible under the terms of theDemand Feature or Guarantee). (See “Quality Tests: Minimal Credit Risks;Eligible Security Rating Quality; Limit on Second Tier Securities – How toApply the Eligible Quality Test for Specific Types of Securities – OtherStandards Governing the Quality of Portfolio Securities” on page 33.)25A # 454265 v.1

Determining Eligible Status for a Security with a Conditional Demand FeatureA Demand Feature, in general summary, permits the holder of a security to receiveprincipal and interest upon demand, within a specified period. A Conditional DemandFeature is only available under certain conditions, and under other specified conditions,it is no longer exercisable.A security with a Conditional Demand Feature must satisfy a multi-part test to beconsidered an Eligible Security or a First Tier Security. Two of the tests relate to ratings,and an additional test relates to the nature of the conditions upon which the ConditionalDemand Feature will cease to be exercisable.Ratings for a security with a Conditional Demand Feature to be determined to bean Eligible Security. In summary, a security that is subject to a Conditional DemandFeature is an Eligible Security only if both (1) the Conditional Demand Feature itself is anEligible Security or First Tier Security, as the case may be, and (2) the security whichunderlies the Conditional Demand Feature (or any Guarantee of such security) has ratingswithin the top two tiers from the Requisite NRSROs (or is determined to be comparableto a security with such ratings by the Board or its delegate). (c)(3)(iv)This two-part test must be satisfied for any security with a Conditional Demand Feature(unless the Conditional Demand Feature is not relied upon for any purpose as explainedunder “Diversification As To Credit Supports – Four Exceptions to DiversificationTesting for Credit Supports“ on page 51.). This differs from the permissive provision fora Guarantee described above, which permits a fund to test the ratings quality of theGuarantee rather than the quality of the underlying security.Technical Point – Reason for Two Level Test for Security with aConditional Demand Feature: A security with a Conditional DemandFeature must be tested for eligible quality at both the level of the securitywithout the feature, and at the level of the Demand Feature providerbecause a Conditional Demand Feature, by definition, is available onlyunder certain conditions. Its conditional nature creates the risk that theDemand Feature may become unavailable. It is therefore necessary that thesecurity without the Demand Feature meet the requisite credit standards inthe event that the Demand Feature becomes unavailable.When testing eligibility of quality of the security underlying the Demand Feature (onepart of the two part test), the eligibility is more flexible in one respect than the ratingseligibility test that applies to securities generally. While the Rule generally requiresreliance on short-term ratings quality, the ratings used to determine eligible status of asecurity underlying a Demand Feature may be either short-term or long-term, inrecognition of the fact that a security that has a Demand Feature may be a short-term orlong-term security. A money market fund may not purchase a long-term security unless26A # 454265 v.1

the security satisfies the “maturity shortening provisions” of the Rule, which allow afund to treat a security as having a maturity shorter than its nominal maturity if, amongother alternatives, the security has a Demand Feature. As a result, securities underlyingDemand Features may be nominally long-term. (See “Maturity – Maturity ShorteningProvisions for Variable Rate Securities and Floating Rate Securities“ on page 62.)Technical Point – Long-Term Ratings: There are only two provisions ofthe Rule that relate to long-term ratings. The foregoing is one of them.The other provision relates to the eligibility of a short-term remainingportion of a security that was originally long-term. The fund must reviewthe long-term as well as the short-term quality of this “stub” security. (See“Short-Term Remaining Portion of a Security That Had Been Long-Term“on page 31.)The modified eligibility test for a security without giving effect to its Demand Featurealso allows flexibility in that it is sufficient if either the underlying security or anyGuarantee of such security meets the eligibility requirement. This flexibility is consistentwith the provision described above that permits a security to be deemed to be an Eligibleor First Tier Security on the basis of its Guarantee alone.Example – Eligible Quality Testing for Security with a ConditionalDemand Feature: Under certain circumstances, the two-part quality testfor a security with a Conditional Demand Feature permits a fund to treat asa First Tier Security a security that, without its Demand Feature, would beonly second tier quality. Consider a security that would be of Second TierSecurity quality if it did not have a Demand Feature, but which has aDemand Feature that is First Tier Security quality. The Board or its delegatemust determine whether the security underlying the Demand Feature iseither first or second tier quality. As described above, the quality of thesecurity underlying a Demand Feature may be based on either long- orshort-term ratings, or on a comparability determination by the Board orits delegate. Once the underlying security meets that test, the quality ofthe security is determined by the quality of the Conditional DemandFeature. The Rule states that the “security that is subject to a ConditionalDemand Feature . . . may be determined to be an Eligible Security or a FirstTier Security only if the Conditional Demand Feature is an Eligible Security orFirst Tier Security, as the case may be . . .”But, changing the facts slightly, if the security, without giving effectto the Demand Feature, is third tier quality, the first part of thequality test is failed, and even a first tier quality Demand Featurewill not transform the security an Eligible Security.27A # 454265 v.1

Example – Effect on Quality of Guarantee:Third tier quality security (without giving effect to Conditional DemandFeature)Guarantee is second tier quality.Result: Can be determined to be a Second Tier Security. Anunderlying security can be below eligible quality, but the Guaranteecan determine the quality.Example – Effect of Conditional Demand Feature on an underlyingsecurity that is eligible quality:Second tier quality security (without giving effect to Conditional DemandFeature)Conditional Demand Feature is first tier quality.Result: First Tier Security. Once the underlying security passes muster aseligible quality, the Conditional Demand Feature determines the quality,unless the Conditional Demand Feature is not being relied upon for anypurpose.Example – Effect of Conditional Demand Feature on underlying securitythat is below eligible quality:Third tier quality security (without giving effect to Conditional DemandFeature)Conditional Demand Feature is first tier quality.Result: Not eligible. Even a top quality Conditional Demand Feature cannotsave a security that is below eligible quality.Conditions for a Security with a Conditional Demand Feature to be determined tobe an Eligible Security. While Conditional Demand Features, by their nature, are availableonly under certain conditions, the Rule includes provisions that help ensure that theConditional Demand Feature will become unavailable rarely and that the Board or itsdelegate is able to monitor for events that may signal that the Conditional Demand Featurewill soon become unavailable. If the Board or its delegate is able to monitor impendingunavailability, the fund is able to exercise the Conditional Demand Feature before it28A # 454265 v.1

ecomes unavailable and dispose of the security before being left with a holding thatmay be of inadequate quality, maturity or liquidity in the absence of the ConditionalDemand Feature. The applicable provisions of the Rule require, in summary, that at thetime of Acquisition of the Underlying Security, the Board or its delegate determines thatthere is minimal risk that the circumstances that would result in the Conditional DemandFeature not being exercisable will occur; and either1. The conditions limiting exercise either can be monitored readily by the fund, orrelate to the taxability, under federal, state or local law, of the interest payments on thesecurity; or2. The terms of the Conditional Demand Feature require that the fund will receivenotice of the occurrence of the condition and the opportunity to exercise the DemandFeature in accordance with its terms. (c)(3)(iv)(B)The requirement for conditions that can be readily monitored does raise someuncertainty. The SEC has not set forth a list of conditions that are permissible. However,in a proposed version of amendments to the Rule, the SEC suggested the following aspermissible conditions (in summary):(1) Default in payment of principal or interest on the underlying security(2) Bankruptcy, insolvency or receivership of the issuer or a guarantor of theunderlying security(3) Downgrading of the underlying security or a guarantor by more than two fullrating categories(4) For a tax-exempt security, a determination by the IRS of taxability with respect tothe interest on the securityThe SEC said in the release proposing the foregoing: “Other than the fourthcondition (which appears to be customary and can often be addressed throughappropriate legal opinions), these conditions relate directly to credit quality and otherfactors that may be monitored if the fund or other third parties have continuing access tofinancial data concerning the issuer.” (December 17, 1993, Proposing Release.) Theseproposed permissible conditions are not enumerated in the final version of theamendments. In fact no permissible conditions are listed. The SEC declined to include alist of permissible conditions in the final Rule, not because the proposed conditions weredetermined to be unmonitorable, but because the SEC acquiesced to commenters whoargued that the list was too limiting. (March 21, 1996, Adopting Release, notes 99-101.)That these conditions were included in an SEC proposal may suggest that, if asked, theSEC staff would take the view that these conditions are readily monitorable. In fact,many tender option bonds marketed to money market funds have been structured to29A # 454265 v.1

include just those conditions, and no others. Ultimately, however, it is up to the Board orits delegate to determine whether conditions are readily monitorable.Unrated SecuritiesUnder the Rule, a security that is not rated by an NRSRO is not necessarily an“Unrated Security.” Such a security may be considered a rated security by reference to arating assigned to its issuer or guarantor (“reference ratings”). Specifically, in summary,a security without a rating is deemed to have the same rating that its issuer has receivedfrom an NRSRO with respect to a class of debt obligations (or any debt obligation withinthat class) that is comparable in priority and security with the security at issue. Inaddition, if the Guarantee of a security (which security, itself, has no short-term rating)has received a short-term rating from an NRSRO, or the guarantor has received such arating with respect to a class of debt obligations (or any debt obligation within that class)that is comparable in priority and security with the Guarantee, the rating of the Guaranteeor guarantor applies to the security. (a)(19)Practice Point – Unrated Security: The foregoing provision means thatthe adviser cannot make a determination that the security that has a“reference rating” is comparable to an Eligible Security, as the adviser maydo for a truly “Unrated Security.” The fund adviser is bound by thereference rating, as the security is not truly an “Unrated Security” withinthe definition in the Rule.New External Credit SupportIn contrast to the foregoing provision that treats a security that appears to be unratedas rated, there is one case in which a security that actually does have a rating from anNRSRO is considered an Unrated Security. If a security is subject to an external creditsupport that was not in effect when the security was assigned its rating, the security isconsidered an Unrated Security, unless the security has a short-term rating reflecting theexistence of the credit support agreement, or the credit support agreement itself hasreceived a short-term rating. (a)(28) The fund is required to make a determination thatthe security is comparable to an Eligible Security and may not rely on the rating. The Rulegives as an example of an external credit support “an arrangement by which the securityhas become a Refunded Security.” A Refunded Security is supported by escrowed U.S.Government Securities.Changes in Credit QualityAlthough the Eligible Security ratings are measured at Acquisition only, the fund mustmonitor these criteria on an ongoing basis, because the Rule requires specific actionsupon the loss of Eligible Security status or a determination that a security no longer30A # 454265 v.1

presents minimal credit risks. (See Changes in Credit Quality – Required Action onCertain Negative Events” on page 68).Short-Term Remaining Portion of a Security That Had Been Long-TermIn the case of a stub security (the short-term 7 remaining portion of a security that hadoriginally been issued as a long-term security), the security normally would not, itself,have a short-term rating, as it was issued as long-term. Under the standardssummarized above, it would be viewed as rated in accordance with its reference rating,if any (that is, the issuer’s short-term debt rating for comparable securities or such ratingof its Guarantee or guarantor). If there are no reference ratings, the security is an UnratedSecurity and the Board or its delegate must determine whether the security is an EligibleSecurity, either first or second tier.The Rule requires that an additional standard be applied to a stub security – areview of the security’s long-term rating(s). A security that at the time of issuance had aremaining maturity of more than 397 calendar days but that has a remaining maturity of397 calendar days or less and is an Unrated Security is not eligible if it has received along-term rating from any NRSRO below third tier, unless the security has received along-term rating from the Requisite NRSROs in one of the three highest rating categories.(a)(10)Technical Point – Third Tier: This provision relating to stub periodsecurities is the only provision of Rule 2a-7 that permits ratings in the topthree tiers, rather than the top two tiers.7 Short-term means having a maturity of 397 calendar days or less, and long-term means having a maturity of more than397 calendar days.31A # 454265 v.1

Example – Short-Term Remaining Portion: A short-term remainingportion of a security that was originally long-term that is truly an UnratedSecurity (that is, it has no short-term ratings nor reference ratings). Thesecurity has the following ratings:Rating Agency 1: long-term rating fourth tierRating Agency 2: long-term rating second tierRating Agency 3: long-term rating second tierThe adviser may determine that the short-term rating is comparable tothat of a Second Tier Security under the Rule. While the fourth tier ratingsounds quite low by the Rule’s standards, this is a Second Tier Security.The fourth tier long-term rating would be impermissible, but it is“overridden” by the two permissible ratings, because at least twoNRSROs that agree with each other constitute Requisite NRSROs underthe Rule. The result would be the same if Rating agency 2 had assigned afirst tier rating.Technical Point – Long-Term Ratings: There are only two provisions ofthe Rule that require review of long-term ratings. The foregoing is one ofthem. The other provision relates to the eligibility of a security with aConditional Demand Feature. The security that has the Demand Feature maysatisfy the eligibility requirement by having qualifying ratings that areeither short-term or long-term. (See “Quality Tests: Minimal Credit Risks;Eligible Security Rating Quality; Limit on Second Tier Securities – How toApply the Eligible Quality Test for Specific Types of Securities –Determining Eligible Status for a Security with a Conditional DemandFeature” on page 26.)Third of Three Principal Quality Tests: Limit on Aggregate Exposure to SecondTier SecuritiesImmediately after the Acquisition of any Second Tier Security, a fund that is not a TaxExempt Fund cannot invest more than 5 percent of its Total Assets in securities that areSecond Tier Securities. In effect, upon each Acquisition of a Second Tier Security, the Rulerequires the fund to aggregate that Second Tier Security with all its existing holdings ofSecond Tier Securities, and confirm that the total does not exceed 5 percent of Total Assets.32A # 454265 v.1

For a Tax Exempt Fund, this test applies only to Second Tier Conduit Securities(municipal securities whose payment is ultimately backed by a non-municipal issuer). Ifa Tax Exempt Fund purchases a non-Conduit Security, that security is not subjected to the5 percent limit on aggregate exposure to Second Tier Securities. Similarly, under thesecond tier issuer diversification requirement discussed in the diversification sectionbelow, the only holdings of Tax Exempt Funds that are tested are Second Tier ConduitSecurities. (See “Diversification as to Issuer – Additional More Restrictive DiversificationTest for Second Tier Issuers: 1 Percent in Any One Issuer“ on page 39.)When the SEC originally adopted the 5 percent Second Tier Securities test and the 1percent second tier issuer diversification tests in 1991, these tests were not applicable toTax Exempt Funds at all. The SEC was concerned that applying these tests could requireTax Exempt Funds to substantially restructure their portfolios, and, perhaps lose some oftheir tax advantages. Since the 1991 amendments, the SEC said they had “closelyexamined the characteristics of short-term tax exempt securities, the markets in whichthey trade, and tax exempt fund portfolios . . .” and determined that application of thesetests to Conduit Securities held by Tax Exempt Funds would not be overly disruptive.(December 17, 1992, Proposing Release, notes 17 through 19.) The SEC determined toapply these tests to Conduit Securities for Tax Exempt Funds because the staff consideredthe risk of default for Conduit Securities to be significantly higher than for traditionalstate or municipal securities.Other Standards Governing the Quality of Portfolio SecuritiesIn addition to the foregoing general credit quality standards – minimal credit risks,Eligible Security and limit on Second Tier Securities – the Rule requires that each securitybe United States Dollar Denominated. The Rule also imposes several additional qualityrequirements for specific types of securities.(1) United States Dollar - Denominated. Each security must be United States Dollar-Denominated, which means that principal and interest must be paid in U.S. dollars andthe interest rate may not vary with foreign currencies, rates or indices. (a)(27) and(c)(3)(i) The SEC has said, for example, that an interest rate of Swiss franc LIBOR isunacceptable, as is a rate based on the consumer price index of another nation.(December 17, 1993, Proposing Release, note 180.)(2) Asset Backed Security – Rating. In addition to meeting other eligibilityrequirements, an Asset Backed Security must be rated to be an Eligible Security.(a)(10)(ii)(B) (An Asset Backed Security, in summary, is a security whose principal andinterest are paid from payments on financial assets underlying the Asset BackedSecurity.) Unlike with other Unrated Securities, the Board or delegate cannot determinethat an unrated Asset Backed Security is of comparable quality to an Eligible Security. Thefund cannot purchase an unrated Asset Backed Security. The only exception to the ratingrequirement – and it is an important exception for Single State Funds and national Tax33A # 454265 v.1

Exempt Funds – is an unrated Asset Backed Security all of whose Qualifying Assets consistof obligations of Municipal Issuers (states or territories of the United States or politicalsubdivisions or public instrumentalities thereof). (Qualifying Assets are, generally, thefinancial assets underlying the Asset Backed Security.)The SEC imposed this rating requirement because it felt that credit analysis of anAsset Backed Security backed by a large pool of financial assets (such as credit cardreceivables) requires an actuarial analysis that differs from an adviser’s typical creditrisk analysis methods. On the other hand, the SEC thought that credit analysis for anAsset Backed Security backed by one or several municipal securities was no different fromanalysis of a security issued directly by a municipality and that an independent opinionprovided by an NRSRO was therefore not necessary. (December 2, 1997, AdoptingRelease, note 52.)(3) Security Subject to a Guarantee – Rating. The Rule imposes an additionaleligibility requirement relating to a Guarantee. A Guarantee, or the guarantor with respectto a class of debt obligations or any debt obligation within that class which arecomparable in priority and security to the Guarantee, must be rated by an NRSRO,subject to three exceptions. Note that any rating, not necessarily a short-term rating, issufficient. (a)(10)(iii)(A) The SEC concluded that even a long-term rating would satisfythe “primary objective of the Rating Requirement, which is to ensure input into theminimal credit risk determination by an outside source.” (December 10, 1996, ProposingRelease, note 22.) A long-term rating also may be particularly relevant in certaincircumstances. For example, a rating representing the long-term credit-worthiness of aGuarantor may be significant to a fund holding a long-term security subject both to aConditional Demand Feature that is relied upon to shorten the maturity of the underlyingsecurity and a Guarantee that is relied upon for a quality determination. (See December10, 1996, Proposing Release, notes 22 and 23.)Exceptions to Rating Requirement for Guarantee. There are three exceptions to therating requirement for a Guarantee. (a)(10(iii)(A) A Guarantee is not required to be ratedunder the circumstances summarized below.(a) Guarantee by a Control Entity. A Guarantee provided by a person controlled by,controlling or under common control with the issuer (a “control entity”) need not berated. When adopting this exception, the SEC pointed out that a control entity “may notbe in the business of lending its credit, and such a [rating] requirement may beburdensome and result in a diminished supply of high quality Eligible Securities . . .”(December 2, 1997, Adopting Release, note 23.) The SEC discussed one particular type ofGuarantee by a control entity - an issuer-provided Unconditional Demand Feature. The SECnoted that this type of Guarantee is exempt from the rating requirement. The SECpointed out that this exception is consistent with the provision that permits a fund todisregard issuer-provided Demand Features in determining compliance with the Rule’scredit support diversification requirement. (See “Diversification As To Credit Supports“on page 49.). The SEC views a security with an issuer-provided Demand Feature as the34A # 454265 v.1

“functional equivalent of short-term securities that are ‘rolled over’ periodically,” ratherthan as a security with a Demand Feature. (December 10, 1996, Proposing Release, note24.)The Rule does impose an exception to this exception to the rating requirement for aGuarantee. A rating is required for a Guarantee by a control entity if the Guarantee isprovided by a sponsor of a Special Purpose Entity. (The “Special Purpose Entity” is theentity issuing the Asset Backed Security. See “Diversification as to Issuer – Look-Throughs” on page 42 with respect to Asset Backed Securities.) The SEC noted that asponsor may “control” the issuer of the Asset Backed Security if the sponsor owns aresidual equity interest in the Special Purpose Entity. If so, the sponsor is subject to therating as if it were a non-control entity. (December 2, 1997, Adopting Release, note 64.)The Rule’s treatment of a sponsor of an Asset Backed Security as a non-control entity isconsistent with treatment of a sponsor as a non-control entity in another context. Thecredit support diversification provision permits a fund to exceed 10 percent exposure toany one Guarantee or Demand Feature provider, so long as, among other things, theGuarantee or Demand Feature provider is a non-control entity of the issuer of the security.The Rule permits a Guarantee or Demand Feature provided by a sponsor of an Asset BackedSecurity to be treated as being provided by a non-control entity so that it can be includedin the 25 percent basket for credit supports exceeding 10 percent of Total Assets. (See“Diversification As To Credit Supports” on page 49.)(b) Repurchase Agreement. If the security subject to the Guarantee is a repurchaseagreement that is Collateralized Fully (see “Diversification as to Issuer – Look-Throughs”on page 42), the Guarantee need not be rated. (The definition of “Collateralized Fully”imposes restrictions that are intended to ensure that the collateral for the repurchaseagreement is adequate and will be available upon default by the repurchase agreementcounterparty.) The SEC noted that term repurchase agreements may be protected byunconditional puts to government securities dealers that typically are not rated. (A putis a right to demand payment of principal and interest.) “Since a repo that is‘Collateralized Fully’ already has significant protection from the risk of a counterparty’sdefault or insolvency [because it satisfies the definition of ‘Collateralized Fully’], requiringputs (or guarantees) of such repos to be rated would add little additional protection, andcould cause funds to forgo a beneficial method of liquidity enhancement.” (December 2,1997, Adopting Release, note 24.)(c) U.S. Government Security. If the Guarantee is a U.S. Government Security, it neednot be rated. A Government Security is presumed to be a First Tier Security, under thedefinition of First Tier Security. (a)(12)(iv)(4) Security Subject to a Guarantee or Demand Feature – Notice of Substitution.The Rule requires that the provider of the Demand Feature or Guarantee, or anotherinstitution, undertake promptly to notify the holder of the security in the event the35A # 454265 v.1

Demand Feature or Guarantee is substituted with another Demand Feature or Guarantee (ifsuch substitution is permissible under the Demand Feature or Guarantee). (a)(10)(iii)(B)(5) Guarantees and Demand Features Not Relied Upon: An Exception to theForegoing Additional Quality Requirements. A Guarantee or Demand Feature may bedisregarded for all purposes of the Rule if it is not being relied upon to satisfy quality ormaturity standards, or for liquidity. The fund must maintain a record of thisdetermination. (c)(5) Two results of this provision are that a Guarantee not relied uponneed not be rated, and a Guarantee or Demand Feature not relied upon need not providenotice of substitution.36A # 454265 v.1

Basic 5 Percent LimitDIVERSIFICATION AS TO ISSUERThe Rule requires that a fund hold a portfolio of securities that is diversified as toissuer, as summarized below.For a taxable or national Tax Exempt Fund, no more than 5 percent of Total Assetsmay be invested in any one issuer, provided that a fund may invest up to 25 percent ofTotal Assets in First Tier Securities of a single issuer for a period of up to three BusinessDays after Acquisition. A fund may invest in securities of only one issuer under thisproviso at any one time. (c)(4)(i)(A) This 25 percent exception is referred to as the “threeday safe harbor.”For a Single State Fund, the limit of 5 percent of Total Assets in any one issuer appliesonly with respect to 75 percent of Total Assets. The remaining 25 percent of the portfoliois often referred to as the “25 percent basket.” Within that basket, the fund may holdpositions that exceed 5 percent of Total Assets, so long as the securities are First TierSecurities. No Second Tier Security may exceed 5 percent of Total Assets. (c)(4)(i)(B)The issuer diversification tests apply at the time of Acquisition of a security.Practice Point – Measure at Acquisition: A decrease in portfolio size dueto redemptions may result in a holding constituting a larger percentage ofa portfolio than it constituted upon Acquisition. The diversification testsare applied at Acquisition, so a reduction in portfolio size alone will notcause a fund to run afoul of the diversification tests. The SEC hasexplained the effect of the application of the issuer diversification testsand the 5 percent quality test at Acquisition. “Compliance with the fivepercent diversification test, the five percent quality test and the onepercent diversification test would be measured at the time a fundpurchases a security, and thus a fund would not be requiredsubsequently to dispose of a security because of a change in thepercentage of fund assets the security represents or in the fund’s overallinvestment in securities not having the highest NRSRO rating. In theevent a security that had the highest quality rating (e.g., Prime-1) at thetime it was acquired is subsequently downgraded but is still eligiblequality (e.g., Prime-2), the money market fund would not be required todispose of the security if more than one percent of fund assets consistedof securities issued or guaranteed by the issuer of the down-gradedsecurity or more than five percent of fund assets were invested insecurities not having the highest NRSRO rating. However, the board (or37A # 454265 v.1

its delegate) would be required to reassess promptly whether the securitypresents minimal credit risks as required by [proposed paragraph(c)(5)(i)]. The money market fund could not subsequently acquire anyadditional securities of that issuer if, after purchase, it would exceed theone percent diversification test unless such securities had beensubsequently upgraded.” (July 17, 1990, Proposing Release.) “Forpurposes of Rule 2a-7, a fund acquires a security when an issuer reissuesor ‘rolls over’ a debt instrument. Therefore at the time of rollover, thefund must be in compliance with the diversification requirements of therule. Similarly, it could not acquire any additional securities that did nothave the highest NRSRO rating if, after purchase, the fund’s investmentin all such securities would exceed five percent of its total assets.” (July17, 1990, Proposing Release, note 36.)Technical Point – Compare to 5(b)(1): The issuer diversification testunder the Rule is similar to the diversification requirement imposed onall investment companies that are “diversified” for purposes of Sec.5(b)(1) of the Investment Company Act. For taxable and national TaxExempt Funds the difference is that the test applies to 100 percent of assets,not only 75 percent of assets, and a three day safe harbor is provided. Fora Single State Fund the difference is that the 25 percent basket may be usedonly for First Tier Securities. Another difference is the timing of themeasurement of Total Assets for purposes of applying the tests. (See“Miscellaneous – Relation of 2a-7 Diversification to General DiversificationSection of 1940 Act” (Sec. 5(b)(1)); Testing Exposures to Multiple CreditSupports on page 54.))Technical Point – Consider Tax Diversification: A fund must complywith an asset diversification requirement for federal income tax purposesin addition to 1940 Act diversification requirements. There are differencesin the application of the tests for purposes of the Rule and taxrequirements. For example, the tax test is generally applied quarterly,rather than at Acquisition.Technical Point: The three day safe harbor that is available for fundsother than Single State Funds is available only for one issuer at a time. The25 percent basket for Single State Funds is not limited to one issuer at atime.38A # 454265 v.1

Additional More Restrictive Diversification Test for Second Tier Issuers: 1 Percent inAny One IssuerThe Rule imposes an additional, stricter issuer diversification test for second tierissuers that is summarized below.For a taxable fund, the fund may not invest more than 1 percent of Total Assets (or $1million, if greater) in Second Tier Securities of a particular issuer. (c)(4)(i)(C)(1)For a Tax Exempt Fund, the 1 percent restriction applies only to Second Tier ConduitSecurities. If the Second Tier Security is not a Conduit Security, the fund need not apply thistest. (c)(4)(i)(C)(2) While the fund may exceed 1 percent in Second Tier Securities that arenon-Conduit Securities, for a national Tax Exempt Fund any such holding cannot exceed 5percent of Total Assets, because the three day safe harbor for positions exceeding 5percent of Total Assets is reserved for First Tier Securities and, in addition, securities ofonly one issuer at a time can be held under the safe harbor provision. For a Single StateFund, any such holding also cannot exceed 5 percent of Total Assets, because the 25percent basket is reserved for First Tier Securities.A Conduit Security is, in summary, a security issued through a state or territory of theUnited States, or any political subdivision or public instrumentality thereof, whosepayment is ultimately backed by a non-municipal issuer.Technical Point – Conduits Only Are Tested for Tax Exempt Fund:Recall the limit to 5 percent of Total Assets on aggregate exposure toSecond Tier Securities (discussed under “Quality Tests: Minimal CreditRisks; Eligible Security Rating Quality; Limit on Second Tier Securities –Third of Three Basic Quality Tests: Limit on Aggregate Exposure toSecond Tier Securities” on page 32). That test, like this 1 percent per issuertest, also applies only to Conduit Securities in the case of a Tax ExemptFund. See the discussion under “Quality Tests: Minimal Credit Risks;Eligible Security Rating Quality; Limit on Second Tier Securities – Third ofThree Basic Quality Tests: Limit on Aggregate Exposure to Second TierSecurities” on page 32 relating to the SEC’s determination to apply thesesecond tier tests only to Conduit Securities for Tax Exempt Funds.39A # 454265 v.1

Technical Point – Compare the Two Second Tier Tests: Both this 1percent second tier issuer diversification test and the 5 percent second tierquality test limit second tier investments. (See “Quality Tests: MinimalCredit Risks; Eligible Security Rating Quality; Limit on Second TierSecurities – Third of Three Basic Quality Tests: Limit on AggregateExposure to Second Tier Securities” on page 32.) But there is an importantdifference between the two tests. This diversification test applies on anissuer-by-issuer basis, rather than applying to all Second Tier Securities inthe portfolio in the aggregate as does the second tier quality test.Example – Interaction of Two Second Tier Tests: The following exampleshows the maximum second tier exposure permitted for a taxable fund (1percent in each of five second tier issuers, for a total of 5 percent in SecondTier Securities). It also illustrates how a Tax Exempt Fund can maximizeexposure to second tier Conduit Securities (if each of these securities wereConduit Securities).Second Tier Issuer A 1 percent of Total AssetsSecond Tier Issuer BSecond Tier Issuer C1 percent of Total Assets1 percent of Total AssetsSecond Tier Issuer D 1 percent of Total AssetsSecond Tier Issuer E1 percent of Total Assets5 percent of Total AssetsExceptions to the 5 Percent Issuer Diversification Test and 1 Percent SecondTier Issuer Diversification TestsThe exceptions summarized below apply to the 5 percent issuer diversification testand the 1 percent second tier issuer diversification test.Government Securities. The issuer diversification tests do not apply to U.S.Government Securities. As a result of this exception, a fund may be 100 percent investedin securities of the U.S. government and its agencies and instrumentalities, and satisfythe issuer diversification test. (c)(4)(i)40A # 454265 v.1

Securities with a Guarantee Issued by Non-Controlled Person. The issuerdiversification tests do not apply to a security subject to a Guarantee Issued by a Non-Controlled Person. (c)(4)(i) (If a fund relies on a Guarantee Issued by a Non-Controlled Personto dispense with issuer diversification, the fund may not make a non-reliancedetermination with respect to the Guarantee as set forth under the caption “FourExceptions to Credit Support Diversification” on page 51.)Technical Point – Guarantee Issued by a Non-Controlled Person: AGuarantee Issued by a Non-Controlled Person is required in order to free afund from issuer diversification testing of the security. A security with aGuarantee issued by a control person must still be tested. This contrastswith the quality test that allows a security to be determined to be first tieror eligible on the basis of any Guarantee, whether or not the Guarantee isIssued by a Non-Controlled Person. (See “Quality Tests: Minimal CreditRisks; Eligible Security Rating Quality; Limit on Second Tier Securities –Second of Three Basic Quality Tests: Eligible Security” on page 20.)Technical Point – Guarantee of Entire Security: The SEC has stated thatthe exception for guaranteed securities is available only to a security theentire value of which is subject to a Guarantee by a Non-Controlled Person.(SEC Q&A, dated May 9, 1996, from Associate Director and ChiefCounsel of the SEC Division of Investment Management, Jack Murphy, toAmy Lancellotta of the Investment Company Institute.)Shares of Other Money Market Funds. A money market fund that Acquires sharesissued by another money market fund in an amount that would otherwise be prohibitedunder the issuer diversification requirements of the Rule will nonetheless be deemed tocomply with the Rule if the fund’s Board (or its delegate) reasonably believes that thefund in which it is invested is itself in compliance with the Rule. (c)(4)(ii)(E) The SECexplained how the Board may form this reasonable belief. “The board of directors of thefund is not required to monitor every investment decision made by the underlying fund.Rather, the board could review the underlying fund’s procedures and obtain regularreports concerning the underlying fund’s compliance with the rule.” (March 21, 1996,Adopting Release.) “In addition, the investment objectives and policies of the two fundsshould not be inconsistent.” (March 21, 1996, Adopting Release, note 172.)41A # 454265 v.1

Technical Point – Don’t Look Through the Money Fund: The Rule doesnot require the Acquiring fund to aggregate direct holdings in issuers withthe portfolio holdings of acquired money market funds for the purposesof diversification. Also, a taxable or national Tax Exempt Fund could takeadvantage of the three day safe harbor (see “Diversification as to Issuer“on page 37) and a Single State Fund could use its 25 percent basket (see“Diversification as to Issuer“ on page 37) to invest up to 25 percent ofTotal Assets in the securities of a single money market fund without theboard making the “reasonable belief” finding, even though, in both cases,the investment would exceed 5 percent of Total Assets. (December 2, 1997,Adopting Release, note 79.)Technical Point – Sec. 12(d) Still Applies: The Rule does not provide anexemption from the limitations in Section 12(d) and the rules thereunderunder the Investment Company Act on ownership of shares of otherinvestment companies. As a consequence, even if a holding of anothermoney market fund is permissible under the Rule, the fund mustnevertheless test such holding under Section 12(d).Look-ThroughsThe Rule includes several provisions that allow a fund to identify the issuer, forissuer diversification purposes, as an entity different from what might otherwise beexpected. Under these provisions, the fund may “look-through” the entity that appearsto be the issuer and treats an underlying entity as the issuer. These look-throughs easecompliance for Refunded Securities, and, in some cases, ease compliance for RepurchaseAgreements and Asset Backed Securities by loosening the limit on holdings of a particularissuer. Although the limit may be looser, monitoring for compliance is moreburdensome for Asset Backed Securities and for Conduit Securities. With the exception ofthe look-through for Conduit Securities, which is mandatory, all look-throughs areoptional under the Rule.Refunded Securities. A Refunded Security is a debt security secured by escrowed U.S.Government Securities. (The definition of “Refunded Security” is included in Rule5b-3(c)(4), rather than in Rule 2a-7.) A fund may look through a Refunded Security to theescrowed securities to determine the issuer for purposes of the issuer diversification test,provided the Refunded Security meets certain conditions. There is also no diversificationtesting required for U.S. Government Securities, so if the look-through requirements aresatisfied, the fund can avoid diversification testing for Refunded Securities as well.One of the conditions for this look-through is that, at the time the securities aredeposited in escrow, an independent public accountant certifies that the depositedsecurities will satisfy scheduled payments on the Refunded Securities. This certification is42A # 454265 v.1

not required, however, if the escrowed securities are rated in the highest category by anNRSRO. (c)(4)(ii)(B) and Rule 5b-3(c)(4)The definition of Refunded Security includes a number of additional requirements fora fund to be permitted to look-through to the U.S. Government Securities as the issuer fordiversification purposes, and careful review of the definition is necessary for a fund thatintends to rely on this look-through. The escrowed securities may not be redeemableprior to maturity, and other securities may not be substituted for them (unless thesubstituted securities are U.S. Government Securities).Repurchase Agreements. The Acquisition of a Repurchase Agreement may bedeemed to be the Acquisition of the security collateralizing the Repurchase Agreement,provided the repurchase obligation is “Collateralized Fully.” 8 (A Repurchase Agreement,generally, is an agreement to buy securities and sell them back to the seller for an agreedpremium, frequently overnight or other very short term.) The definition of CollateralizedFully is intended to help assure that the collateral will be available to the fund in theevent of a default by the entity selling securities to a fund under a RepurchaseAgreement (the “counterparty”), and will be sufficient to maintain the value of theRepurchase Agreement.This look-through provision can provide significant flexibility to a money marketfund. For example, if a fund is 100 percent invested in Repurchase Agreements with onecounterparty, each of which is Collateralized Fully by U.S. Government Securities, that 100percent exposure is permissible for diversification purposes, because U.S. GovernmentSecurities are not tested for issuer diversification. (c)(4)(ii)(A)8 Collateralized Fully means that:“(i) The value of the securities collateralizing the repurchase agreement (reduced by the transaction costs (includingloss of interest) that the investment company reasonably could expect to incur if the seller defaults) is, and during theentire term of the repurchase agreement remains, at least equal to the Resale Price provided in the agreement;(ii) The investment company has perfected its security interest in the collateral.(iii) The collateral is maintained in an account of the investment company with its custodian or a third party thatqualifies as a custodian under the [Investment Company] Act.(iv) The collateral consists entirely of:Cash items;Government Securities;Securities that at the time the repurchase agreement is entered into are rated in the highest rating category by theRequisite NRSROs; orUnrated Securities that are of comparable quality to securities that are rated in the highest rating category by theRequisite NRSROs, as determined by the investment company’s board of directors or its delegate; and(v) Upon an Event of Insolvency with respect to the seller, the repurchase agreement would qualify under a provisionof applicable insolvency law providing an exclusion from any automatic stay of creditors’ rights against the seller.”Resale Price means: “the acquisition price paid to the seller of the securities plus the accrued resale premium on suchacquisition price. The accrued resale premium is the amount specified in the repurchase agreement or the dailyamortization of the difference between the acquisition price and the resale price specified in the repurchase agreement.”43A # 454265 v.1

One aspect of the definition of “Collateralized Fully” that has resulted in someuncertainty is the requirement in clause (v) that “Upon an Event of Insolvency withrespect to the seller, the repurchase agreement would qualify under a provision ofapplicable insolvency law providing an exclusion from any automatic stay of creditors’rights against the seller.” The SEC noted that if the Repurchase Agreement does notqualify, “…a fund could encounter significant liquidity problems if a large percentage ofits assets were invested in a repo with a bankrupt counterparty. The ‘look-through’provisions of the rule may be inappropriate in these circumstances because the creditrisks assumed by the fund would be directly tied to the counterparty rather than theissuers of the underlying collateral.” (December 17, 1993, Proposing Release, note 172.)Bankruptcy counsel can advise regarding the types of Repurchase Agreements thatqualify for the exception from the automatic stay. The 2005 amendments to theBankruptcy Code, and more recent amendments enacted in late 2006, substantiallyexpanded and attempted to clarify the types of agreements that qualify.The fund must also comply with an asset diversification requirement for federalincome tax purposes, in addition to 1940 Act diversification requirements. At this time,the Internal Revenue Service permits a fund to look through a Repurchase Agreementby treating the Repurchase Agreement as issued by the U.S. government for assetdiversification, testing if the obligation of the seller to repurchase the securities from theFund is Collateralized Fully with securities that qualify as U.S. Government Securities forpurposes of Section 851(b)(3) of the Internal Revenue Code.The definition of “Collateralized Fully” and “Resale Price” are included in Rule 5b-3,rather than in Rule 2a-7.Practice Point – Repos Not Collateralized Fully: A fund may choose toenter into a Repurchase Agreement that is NOT Collateralized Fully – forexample, a repo whose collateral does not meet the strictures of the Rule.If the repo is not Collateralized Fully, the fund may not look through theRepurchase Agreement to the issuer of the underlying collateral as theissuer of the repo, but must consider the Repurchase Agreementcounterparty to be the issuer.Conduit Securities. A Conduit Security is a security issued by a municipal entity butwhich has a credit source that is non-municipal. Whereas other “look-throughs” areoptional, the Rule provides that a Conduit Security is deemed issued by the entityultimately responsible for payments of interest and principal on the security rather theMunicipal Issuer. (c)(4)(ii)(C) The effect of the provision requiring a look-through to thenon-municipal issuer is to deter a fund from treating a security as having the credit ofthe municipality involved when, in fact, the payment stream is generated by a privateentity.44A # 454265 v.1

Practice Point – Look-Throughs: Whereas the look-through for RefundedSecurities and, frequently, the look-through for Repurchase Agreements,may provide flexibility in portfolio management by allowing a security tobe treated as a Government Security not subject to diversification testing,the Conduit Security look-through requires a look-through to an entitythat may be of lesser credit quality than the municipality – the nominalissuer of the security. The SEC stated that the “credit risks of these[Conduit] Securities are significantly higher than those of traditional stateand municipal securities.” (December 17, 1993, Proposing Release, note50.)Asset Backed Securities. In summary, an Asset Backed Security is issued by a SpecialPurpose Entity (typically a trust) that holds securities whose interest and principal are thesource for payment of the interest and principal payments on the Asset Backed Security.For diversification purposes, the issuer of the Asset Backed Security – the trust – would bethe issuer, except in the case where the Asset Backed Security has any underlyingobligations that constitute 10 percent or more of the principal amount of the QualifyingAssets of the Asset Backed Security (“Ten Percent Obligor(s)”). Then the Rule deems eachsuch obligor to issue the portion of the Asset Backed Security its obligations represent.(c)(4)(ii)(D)Technical Point – Swaps Underlying ABS: The SEC noted that certainAsset Backed Securities may consist of Qualifying Assets whose cash flowhas been “swapped” to (or exchanged with) a financial institution (swapcounterparty) that ultimately acts as the primary source of payment tofunds holding the Asset Backed Security. After considering the treatment ofswaps and other similar agreements under the Rule, and specificallywhether the swap counterparty should be treated as the issuer of theAsset Backed Security for diversification purposes, the SEC determined notto amend the Rule to address specifically swaps or similar arrangements.“Swaps and similar arrangements that fall within the rule’s definition of aguarantee or demand feature, however, should be treated as such forpurposes of guarantee and demand feature diversification . . . A fund’sadviser, however should seek to ensure that investments by the fund insecurities subject to swap arrangements are consistent with Rule 2a-7’soverriding policy of limiting funds to investments that are consistent withmaintaining a stable net asset value and do not expose the fundexcessively to credit risks posed by swap counterparties.” (December 2,1997, Adopting Release, note 71.)Asset Backed Securities with Underlying Assets That Include Asset BackedSecurities (Secondary ABS). The Rule refers to an Asset Backed Security held by a fund asa Primary ABS. If a Ten Percent Obligor of a Primary ABS is itself a Special Purpose Entity45A # 454265 v.1

issuing Asset Backed Securities – a Secondary ABS – any Ten Percent Obligor of suchSecondary ABS is deemed to be the issuer of the portion of the Primary ABS that suchTen Percent Obligor represents. In other words, the fund not only looks through to TenPercent Obligors of a Primary ABS, but must also look through to Ten Percent Obligors ofthose Ten Percent Obligors. Fortunately for compliance personnel, the obligation to lookthrough ends at the Secondary ABS. There is no look-through to underlying obligors oftertiary ABSs. (c)(4)(ii)(D)(1)(ii)A Further Complication for Asset Backed Securities. Complicating matters evenfurther, for any Ten Percent Obligor deemed to be an issuer, the fund must satisfy thecredit support diversification tests, as explained in “Diversification As To CreditSupports“ on page 49, with respect to any Demand Feature or Guarantee on the TenPercent Obligor’s obligation. (c)(4)(ii)(D)(3)For both Primary and Secondary ABS, the Rule requires a fund to adopt writtenprocedures mandating periodic determinations of the number of Ten Percent Obligorsdeemed to be issuers. (c)(10)(v)The best way to understand this look-through requirement is to review anillustration provided by the SEC in the December 2, 1997, Adopting Release.Example – ABS Look-ThroughThe SEC explained: “For issuer diversification purposes, the fund hasinvested as follows:46A # 454265 v.1

1.75% of fund assets in Obligor A ([25% X 10%]-[30% X 25% X 10%]). Theportion indirectly invested in Obligor C through Obligor A (.75%) isnetted against the portion indirectly invested in Obligor A (2.5%).4% of fund assets in Obligor B ([50% X 10%]-[20% X 50% X 10%]). Theportion indirectly invested in Obligor C through Obligor B (1%) is nettedagainst the portion indirectly invested in Obligor B (5%).5.75% of fund assets in Obligor C ([30% X 25% X 10%]+[20% X 50% X10%])+4%. The portion indirectly invested in Obligor C (1.75%) (i.e., .75%through Obligor B) is added to the amount.”Practice Point – ABS Complications: As the example illustrates, lookingthrough an Asset Backed Security may ease diversification restrictionsbecause the fund may deem the security to be issued by multiple issuers,avoiding over-exposure to any one issuer. But looking through creates thecompliance burden of identifying the Ten Percent Obligors of SecondaryABSs. Under the Rule there are three ways that a fund can avoidcompliance burden, however.Practice Point – Avoiding Periodic Monitoring for Ten Percent Obligors:There are three methods to avoid periodic monitoring for Ten PercentObligors.Periodic determination of the number of Ten Percent Obligors is notrequired if the Board or its delegate determines at the time of Acquisitionof a security that the security will never or is unlikely to have Ten PercentObligors. (c)(9)(iv) The SEC has said that this determination may be basedon a structural analysis of the Asset Backed Security or representations inthe security’s offering material or governing documents. (December 2,1997, Adopting Release, note 70.)Just like any other security with a Guarantee Issued by a Non-ControlledPerson, an Asset Backed Security with such a Guarantee is not tested forissuer diversification. Consequently, a fund may avoid compliancemonitoring by investing only in Asset Backed Securities with a GuaranteeIssued by a Non-Controlled Person. Note that the definition of GuaranteeIssued by a Non-Controlled Person includes a sponsor of a Special PurposeEntity with respect to an Asset Backed Security. (a)(16)(ii) As aconsequence, an Asset Backed Security guaranteed by its sponsor is notsubject to issuer diversification testing.47A # 454265 v.1

The Rule also provides a very limited exception to the requirement toconsider a Ten Percent Obligor of an Asset Backed Security to be an issuer.The exception applies to a specific type of Ten Percent Obligor of an AssetBacked Security – a Restricted Special Purpose Entity. A Restricted SpecialPurpose Entity is a Special Purpose Entity that itself issues Asset BackedSecurities, and the securities it issues are held only by one other SpecialPurpose Entity – a company that controls, is controlled by or is undercommon control with the Restricted Special Purpose Entity and is not itselfa Special Purpose Entity issuing Asset Backed Securities.The SEC has explained that the requirement to identify Ten PercentObligors assures that a fund will aggregate any holdings of an issuer helddirectly with those of the same issuer held through an Asset BackedSecurity and that there is little or no risk that a fund could inadvertentlyinvest both in the Restricted Special Purpose Entity directly in addition toinvesting in it through the investment in the Primary ABS. No purpose isserved by identifying the Restricted Special Purpose Entity as an issuer. TheSEC provided the example of a company that provides financing forautomobile purchasers, where the company establishes a Restricted SpecialPurpose Entity to securitize the automobile loans. The Restricted SpecialPurpose Entity will only sell Asset Backed Securities to another SpecialPurpose Entity that issues Asset Backed Securities to money market funds orother investors. No diversification risk would appear to be posed to fundsin this instance because funds cannot directly or indirectly invest in theRestricted Special Purpose Entity (a Secondary ABS) other than through thepurchase of Asset Backed Securities from a particular Primary ABS issuer.(December 2, 1997, Adopting Release, note 57.) (c)(4)(ii)(D)(2) If a fundinvests in Asset Backed Securities whose Ten Percent Obligors are RestrictedSpecial Purpose Entities, the fund need not count those Ten Percent Obligorsas issuers for diversification purposes.48A # 454265 v.1

DIVERSIFICATION AS TO CREDIT SUPPORTSIn addition to the issuer diversification test, the Rule imposes a separatediversification test for credit support providers. The test applies only to credit supportsthat fall within the definition of Guarantee or Demand Feature in the Rule. A Guaranteeincludes, among other things, a letter of credit and financial guaranty (bond) insurance.The Guarantee and Demand Feature diversification test is referred to here as the CreditSupport Diversification Test. (c)(4)(iii)Each Demand Feature or Guarantee acquired is tested upon its Acquisition. Positionsthat satisfied the Rule upon Acquisition that subsequently exceed the permitted limit dueto fluctuations in portfolio size do not violate the Rule. The fund would not be permittedto add to the position while it exceeds the limit. There are exceptions to the CreditSupport Diversification Test.Practice Point – Identify Credit Supports: If a feature does not fit withinthe definition of Guarantee or Demand Feature, the Rule does not requirethat the feature be tested as to Credit Support Diversification. The firststep in applying the Credit Support Diversification test is to determinewhether the feature is, in fact, a Guarantee or Demand Feature. Sometimesthe answer is clear, and other times it is not. For example, some creditsupports that bear the word “guarantee” in their title do not clearly meetthe requirement that they be “unconditional.” They include requirementsthat the holder of the guaranteed security take certain actions prior todrawing on the “guarantee.”Even if the feature does not fall within the definition, the investmentadviser may consider whether to apply the test to the feature as a selfimposedtest. The investment adviser may conclude this would beprudent if over-exposure to the feature’s provider could expose the fundto excessive risk.Practice Point – Two Separate Diversification Tests: Avoid confusingthe issuer diversification test and Credit Support Diversification Test. Thetests should be applied to each security completely separately.49A # 454265 v.1

Practice Point – Compliance Effects for a Credit Support: In addition torequiring Credit Support Diversification Testing, a security with aDemand Feature or Guarantee triggers additional provisions of the Rule.See “Quality Tests: Minimal Credit Risks; Eligible Security Rating Quality;Limit on Second Tier Securities – How to Apply the Eligible Quality Testfor Specific Types of Securities” on page 22.Ten Percent Limit. Demand Features and Guarantees are subject to a limit of 10percent of Total Assets from any one provider. (c)(4)(iii)Technical Point – Count Direct Holdings of Guarantor: The CreditSupport Diversification Test applies to securities issued by the particularprovider as well as securities subject to a Demand Feature or Guarantee bythe provider. Upon Acquisition of a security subject to a Demand Feature orGuarantee, the fund must calculate its aggregate exposure to that creditsupport provider as both the provider of the credit support beingAcquired and as an issuer of any security held in the portfolio. (c)(4)(iii)The Rule does not require the reverse, however. The issuer diversificationtest does not require that upon Acquisition of securities of an issuer, thefund aggregate its total exposure to that issuer directly as issuer plusexposure to that same entity as a credit support. This can result in theanomalous effect that the order of purchasing two instruments – oneissued by an entity and one supported by the same entity – can affectwhether or not the purchase complies with the Rule. For example, if thefund owns a security issued by “A” comprising 5 percent of assets andthen Acquires a security guaranteed by “A” comprising 6 percent ofassets, the fund must aggregate those holdings upon the Acquisition of thesecurity guaranteed by “A.” The Acquisition results in 11 percentexposure under the Credit Support Diversification Test, exceeding the 10percent limit. If, however, the fund owns the security guaranteed by “A”and then Acquires the security issued by “A,” the fund need not aggregatethe holdings. The percentage exposure to “A” under the issuerdiversification test upon the Acquisition is 5 percent, rather than 11percent. 9Twenty-Five Percent Basket. The Rule allows a 25 percent basket. With respect to 25percent of Total Assets, holdings of a Demand Feature or Guarantee provider may exceedthe 10 percent limit, provided that the basket is limited to (1) first tier providers that are(2) Non-Control Entities of the issuer of the security. (c)(4)(iii)(A), (B) and (C) See thedefinition of Guarantee Issued by a Non-Controlled Person and Demand Feature Issued by aNon-Controlled Person in the Glossary in Appendix 2.9 The SEC staff has not commented publicly on this anomaly.50A # 454265 v.1

Technical Point – Multiple Uses of Basket: Like the 25 percent basket fora Single State Fund that is available under the issuer diversification test,this 25 percent basket for Credit Support Diversification Testing can beused for exposure to more than one entity. (Recall that for funds otherthan Single State Funds, the three day safe harbor is available only for asingle issuer at any one time.) Like the 25 percent basket and the three daysafe harbor under the issuer diversification test, the 25 percent basket forthe Credit Support Diversification Test is available only for First TierSecurities.Credit Support Diversification for Asset Backed Securities. The SEC has pointedout that in some cases, a sponsor of an Asset Backed Security may control the issuer of anAsset Backed Security because the sponsor owns a residual equity interest in the issuer.The Rule permits a Guarantee or Demand Feature provided by a sponsor of an Asset BackedSecurity to be treated as being provided by a non-control entity of the issuer so that it canbe included in the 25 percent basket for credit supports exceeding 10 percent of TotalAssets. (See “Diversification as to Issuer – Look-Throughs” on page 42, relating to issuerdiversification for Asset Backed Securities.) The SEC provided this flexibility because itconcluded that a sponsor-provided credit support did not pose the type of credit riskthat the 10 percent maximum was intended to limit. Excluding from the 25 percentbasket any credit support by a control entity was intended to minimize a fund’sexposure to the credit risk of a single economic enterprise and limit the aggregateexposure to the risks of related active businesses. But permitting a fund to invest morethan 10 percent of Total Assets in an Asset Backed Security subject to a Demand Feature orGuarantee issued by a sponsor would not have this effect, because the Special PurposeEntity, unlike an active enterprise, is a limited purpose vehicle created solely for thepurpose of issuing fixed income securities based on the cash flow of the qualifyingassets. Therefore the SEC permitted funds to treat a Demand Feature or a Guarantee fromthe sponsor of an Asset Backed Security as a Demand Feature or Guarantee Issued by a Non-Controlled Person for this purpose. (December 2, 1997, Adopting Release, note 66.)Second Tier Guarantees and Demand Features. Second tier Guarantees and DemandFeatures are limited to no more than 5 percent of Total Assets. (c)(4)(iii)(B)Four Exceptions to Diversification Testing for Credit SupportsThe Rule provides four exceptions to Credit Support Diversification Testing.(1) When Is a Guarantee Not a Guarantee? Issuer-Provided Guarantees,including issuer-provided Unconditional Demand Features, are not consideredto be Guarantees. (a)(15) As a result, these need not be tested under the CreditSupport Diversification Test. (This exception is easy to overlook, as this provisionis included in the definition section of the Rule rather than in the diversificationsection.)51A # 454265 v.1

(2) When Is a Demand Feature Not Subject to the Credit SupportDiversification Test? Issuer-Provided Demand Feature. A Demand Featureprovided by an issuer is not subject to the Credit Support Diversification Test.(c)(4)(iii) (It is still within the definition of a Demand Feature, unlike an issuerprovidedGuarantee, which is not within the definition of Guarantee. Thus, it canstill be used to shorten maturity.)(3) Exception from Credit Support Diversification Test – and from All Rule2a-7 Tests: Guarantee or Demand Feature Not Relied Upon. A Guarantee orDemand Feature may be disregarded for all purposes of the Rule if it is not beingrelied upon to satisfy quality or maturity standards or for liquidity. The fundmust maintain a record of this determination. (c)(5)Practice Point – Non-Reliance: “Not relying” may have a differentmeaning under the Rule than a money market professional may have inmind. For example, a money market professional may believe that a fundis “not relying” on a particular credit support, because the issuer couldeasily replace the credit support. Although the particular credit supportmay not be critical to the issuer of the security in that sense, the fundnevertheless may be relying on the credit support in a Rule 2a-7 sense –for example, to shorten the maturity of the security it enhances.Practice Point – Changing Reliance/Non-Reliance: Rule 2a-7 permits afund to change its decision to rely or not rely on a Demand Feature orGuarantee during the period that a fund holds a security. For example, if aDemand Feature on a security is not relied upon for credit quality orliquidity but is relied upon to shorten maturity, the fund “relies” on thecredit support. (See “Maturity – Maturity Shortening Provisions forVariable Rate Securities and Floating Rate Securities” on page 62.) But ifthe security becomes short term while a fund holds the security (and thefund continues not to rely on the Demand Feature for credit quality orliquidity), the fund no longer needs to rely on the credit support for anypurpose. The fund must maintain a record of this determination and anychange in the determination. (March 21, 1996, Adopting Release, note 82.)(4) Additional Exception from the Credit Support Diversification Test –U.S. Government Securities. A U.S. government Guarantee is not subject to theCredit Support Diversification Test. (c)(4)(iii)Four Special Situations in Credit Support Diversification TestingThe Rule provides four special situations for Credit SupportDiversification Testing.52A # 454265 v.1

(1) Fractional Demand Features or Guarantees. If a Demand Feature or Guaranteeprovider guarantees a specified portion of a security, it is deemed to guarantee only thatspecified portion. The SEC has provided the following example: “For example, if twobanks issued puts on the same VRDN [Variable Rate Demand Note] and each agreed toabsorb fifty percent of the losses, then each would be deemed to guarantee no more thanfifty percent of the VRDN under the rule’s put diversification standards.” (March 21,1996, Adopting Release, note 77.) (c)(4)(iv)(A)(2) Layered Demand Features and Guarantees. If a security is subject to DemandFeatures or Guarantees from multiple institutions “that have not limited the extent of theirobligations” to a specified portion of the value of the security, each institution is deemedto provide a Demand Feature or Guarantee with respect to the entire principal amount ofthe security, and each must be tested separately under the Credit SupportDiversification test. (c)(4)(iv)(B)(3) First Loss Guarantors. A guarantor may Guarantee all losses up to a specifiedpercentage of the assets underlying an Asset Backed Security (e.g., 10 percent of the assetsof a pool). The SEC has explained that these “first losses” may be all the losses that arelikely to occur on the security. “Because the loss coverage is usually a multiple of thelikely losses to be experienced, the possibility of the losses exceeding the coveragegenerally is considered to be remote. Because a first loss guarantee exposes theguarantor to essentially the same risk as a guarantor of the entire value of the security,the Commission proposed that a first loss guarantor be treated as guarantor of the entireprincipal amount of the security for purposes of the put diversification standards.”(March 21, 1996, Adopting Release, notes 143 and 144.) However, in commentaryaccompanying the December 2, 1997, Adopting Release, the SEC stated that a first lossguarantor is not required to be treated as a Guarantee of an entire instrument, but rather,the Rule permits such a Guarantee to be treated as a fractional Guarantee. The SEC didnot, however, provide specific guidance as to how to calculate the appropriate fraction.Also, although it ultimately took this less restrictive view, the SEC cautioned advisers toavoid overly risky exposure to first loss guarantors. “The Commission continues tobelieve that investment in an [Asset Backed Security] subject to a first loss guarantee canpotentially result in a fund being overexposed to the credit risk of the first loss guarantor. . . Advisers should . . . carefully consider potential exposure to the credit risks of a firstloss guarantor when evaluating whether investment in an [Asset Backed Security] isconsistent with the fund’s objective of maintaining a stable net asset value.” (December2, 1997, Adopting Release, notes 67 and 68.)(4) Overcollateralization. A sponsor of an Asset Backed Security may provideadditional credit risk protection by structuring an offering such that the value of thequalifying assets in the pool exceeds the amount of the Asset Backed Security offering.The SEC has suggested as an example a $1 billion Asset Backed Security offeringcollateralized by an asset pool of $1.1 billion. The $100 million of “overcollateralization”may be applied to cover any first losses incurred before drawing upon a third partyGuarantee or other credit enhancement. The SEC has said that although the53A # 454265 v.1

overcollateralization may be relevant in determining whether the Asset Backed Securitypresents minimal credit risks, this type of seller-provided credit enhancement is not aDemand Feature nor Guarantee. (December 2, 1997, Adopting Release, note 68.)Miscellaneous: Relation of Rule 2a-7 Diversification to General DiversificationSection of 1940 Act (Sec. 5(b)(1)); Testing Exposures to Multiple Credit SupportsA money market fund that complies with Rule 2a-7 is deemed to comply with thegeneral diversification section of the 1940 Act that applies to all diversified funds.Technical Point – Section 5(b)(1) v. Rule 2a-7: While Section 5(b)(1) ofthe Investment Company Act imposes a separate diversification test on“diversified” funds, a fund that satisfies the diversification requirementsof Rule 2a-7 is deemed to satisfy the requirements of Section 5(b)(1).(c)(4)(v) The SEC has explained why this safe harbor was expresslyadopted, even though the Rule’s diversification requirements generallyare stricter than the Act’s diversification requirements: “Although Rule2a-7’s diversification requirements are more strict, under certaincircumstances a money fund may be in compliance with Rule 2a-7, butnot in compliance with section 5(b)(1).” (March 21, 1996, AdoptingRelease.) “One difference that may cause this to occur is the timing of themeasurement of diversification. Compliance with section 5(b)(1) of the1940 Act is measured at the time of a purchase based on the value of thefund’s total assets as of the end of the preceding fiscal quarter. See rule5b-1 . . . For purposes of Rule 2a-7, both the fund’s total assets (as definedin the rule) and compliance with the rule’s diversification requirementsare measured at the time a purchase is made. See paragraph (c)(4)(i) ofRule 2a-7, as amended.” (March 21, 1996, Adopting Release, note 126.)54A # 454265 v.1

Some securities cause a fund to have exposures to multiple credit supports. Eachmust be tested under the Rule.Example – Testing Multiple Exposures: Money fund professionals mayfind it challenging to correctly test multiple exposures to credit supportswithout “double counting” exposure. The best way to understand thecorrect approach is to review an example. The SEC provided such anexample in its appendix to the December 2, 1997, Adopting Release.“With respect to securities subject to multiple demand features orguarantees upon which a fund is relying, a fund must first analyze eachcredit enhancement provider individually to determine whethersecurities issued by or subject to demand features or guarantees from thesame provider exceed ten percent of total assets. If so, then thosesecurities are placed in the twenty-five percent basket. Once placed in thebasket, however, the value of each security is counted only once forpurposes of calculating the amount of the twenty-five percent basketavailable for additional investments.”Facts posed by the SEC:9 percent of Total Assets in Security AGuaranteed by a letter of credit (LOC) issued by ABCConditional Demand Feature issued by XYZ5 percent of Total Assets in Security BGuaranteed by an LOC issued by ABC5 percent of Total Assets in Security CConditional Demand Feature by XYZAssume the fund holds no other securities subject to guarantees ordemand features provided by ABC or XYZ and that no other entity hasguaranteed or issued Conditional Demand Features with respect to morethan 10 percent of the fund’s assets.55A # 454265 v.1

SEC’s analysis:14 percent of the fund’s Total Assets (Securities A and B) are subject toGuarantees or Demand Features from ABC.14 percent of the fund’s Total Assets (Securities A and C) are subject toGuarantees or Demand Features from XYZ.The fund must include Securities A, B and C in its 25 percent basket. Theamount of investments in the 25 percent basket is calculated to be 19percent of the fund’s Total Assets (9 percent + 5 percent + 5 percent). Thisrepresents the aggregate value of all of the fund’s securities subject toGuarantees and Demand Features issued by ABC and XYZ. The answer isnot 28 percent. Do not add up the exposures in excess of 10 percent. Addup the securities only one time each.56A # 454265 v.1

MATURITYRule 2a-7 includes three basic tests of maturity. One test is a subjective standard thatrequires judgment on the part of a Board (or its delegate), and the other two areobjective standards.The subjective standard requires that a money market fund “maintain a dollarweightedaverage portfolio maturity appropriate to its objective of maintaining a stablenet asset value per share or price per share.”The first of the objective tests applies individually to each portfolio security andprohibits a fund from Acquiring any instrument with a remaining maturity of greaterthan 397 calendar days. The second objective test limits dollar weighted averageportfolio maturity to no greater than 90 days. These two tests set minimum standards. Ifthe fund needs to impose shorter maturities on individual securities or on the dollarweightedaverage portfolio maturity so that maturity is “appropriate to” maintaining astable net asset value, the fund must do so. (c)(2)Subjective Test. The SEC has explained the “appropriate” portfolio maturity asfollows: “This provision imposes an obligation on the directors of the fund to ascertainthat the fund is maintaining an average portfolio maturity that, given the then currentmarket conditions, will permit it to maintain a stable price or net asset value per share.During periods of higher volatility in the market, the board of directors should be awareof the greater difficulty in maintaining a stable price or net asset value per share andshould take steps to ensure that they are providing adequate oversight to the moneymarket fund.” (July 18, 1983, Adopting Release, note 25.) The maintenance of anappropriate portfolio maturity is a delegable duty, and as a practical matter, the adviserwill be responsible for compliance on a day-to-day basis. (e)First Objective Test: Individual Holdings. The Rule forbids a money market fundfrom Acquiring any instrument with a remaining maturity of greater than 397 calendardays. There is a narrow exception permitting a longer-term holding for a money marketfund not using the Amortized Cost Method (i.e., a fund using only the Penny-RoundingMethod (See “Introduction – What Is Rule 2a-7?” on page 2), where the fund may Acquirea Government Security with a remaining maturity of up to 762 calendar days.The Rule originally permitted a fund to Acquire securities with maturity of up to oneyear, with an exception permitting maturity up to 375 days for an instrument issued as a“one year” instrument, designed to accommodate certain government agency securitiesthat had this characteristic. The permissible maturity was extended to 397 calendar days“to accommodate funds purchasing annual tender bonds and securities on a whenissuedor delayed delivery basis. These securities often are not delivered for a period ofup to one month after the purchaser has made a commitment to purchase them. Since57A # 454265 v.1

the purchaser must ‘book’ the security on the day it agrees to purchase it, the maturityperiod begins on that day.” (February 20, 1991, Adopting Release, notes 53 and 57.)Second Objective Test: Average Portfolio Maturity. Rule 2a-7 forbids a moneymarket fund from maintaining a dollar-weighted average portfolio maturity exceeding90 days, reduced from 120 days by amendment to the Rule as originally adopted.Typical Calculation of Maturity and Maturity Shortening ProvisionsGenerally, under the Rule the maturity of a portfolio security is “deemed to be theperiod remaining (calculated from the trade date or such other date on which the fund’sinterest in the security is subject to market action) until the date on which, in accordancewith the terms of the security, the principal amount must unconditionally be paid, or inthe case of a security called for redemption, the date on which the redemption paymentmust be made.” (d) The SEC has explained that “for securities purchased under normalsettlement procedures, the length of maturity would be calculated starting on the tradedate. For instruments such as ‘when issued’ or ‘delayed delivery’ securities, if thecommitment to purchase is based upon either a set price or yield, then the maturity willbe calculated based upon the commitment date.” (February 20, 1991, Adopting Release,note 56.)The Rule includes exceptions to this general approach for specific types of securities,referred to as the “maturity shortening provisions.” Under these exceptions, a securitythat otherwise would have an impermissible maturity may be treated as having apermissible maturity, and a security that has a permissible maturity may be treated ashaving yet a shorter maturity for purposes of the weighted average portfolio maturitylimit. Five of the maturity shortening provisions relate to types of Variable Rate Securitiesand Floating Rate Securities. The Rule also has three separate provisions relating torepurchase agreements, portfolio lending agreements and money market fund shares.Variable and Floating Rate Securities – Their Adjustable Nature. Variable RateSecurities and Floating Rate Securities do not have a fixed interest rate over their entirelives, but rather undergo periodic interest rate adjustments. These adjustments may helpstabilize the value of these securities by causing the rate to move in tandem withprevailing market rates from time to time during the term of the security. A Variable RateSecurity provides for establishment of a new interest rate on set dates. The definition ofVariable Rate Security in the Rule states as examples that the rate may be adjusted on thefirst day of a month or calendar quarter.A Floating Rate Security provides for adjustment of its interest rate whenever aspecified interest rate changes. The SEC has explained that the specified referenceinterest rate is changed as market conditions change, rather than upon some periodicbasis. (July 11, 1983, Adopting Release, notes 14 and 19.) In effect, the rate on a FloatingRate Security varies as often as every day, if that is how often the reference interest rate58A # 454265 v.1

changes. This variable or floating interest rate is expected to cause these securities tohave a value more stable than would be expected for a non-Variable Rate or non-FloatingRate Security with the same nominal maturity.Variable and Floating Rate Securities – Demand Feature Required to ShortenMaturity. If a Variable Rate Security or Floating Rate Security has a nominal maturityexceeding 397 days, it must have a Demand Feature that permits the holder to dispose ofthe security and presumably avoid the effect of interest rate fluctuations that may resultfrom changes in interest rates during the longer nominal term of the security. If asecurity is not a Variable Rate or Floating Rate Security, a Demand Feature may not be usedto shorten maturity.While the SEC has said that, in theory, the existence of a Demand Feature alone, withno variable or floating rate feature, “should be sufficient to enable a fund to maintain astable net asset value per share because the holder could receive the principal amount ofthe instrument in a short period of time regardless of market and creditworthinesschanges[,]” the SEC has required a variable or floating rate feature as a condition for useof the maturity shortening provisions. The SEC concluded that it had insufficientevidence that funds will exercise the Demand Feature whenever interest rates increase orthe creditworthiness of the issuer is reduced and that there is a market for demandinstruments without the variable or floating rate feature. (March 12, 1986, AdoptingRelease, note 17.)Required Judgment as to Stability of Variable and Floating Rate Securities. Thedefinitions of Variable Rate Security and Floating Rate Security each include therequirement that “upon each adjustment” (for a Variable Rate Security) or “at any time”(for a Floating Rate Security) “until the final maturity of the instrument or the periodremaining until the principal amount can be recovered through demand, [the security]can reasonably be expected to have a market value that approximates its amortizedcost.” (a)(13) and (a)(29) This requirement means that the maturity shorteningprovisions may not be used unless the Board or its delegate actually has this expectation.It is not sufficient that the interest rate readjustment mechanism operates daily or atsome other intervals and that the security has a Demand Feature.59A # 454265 v.1

Practice Point – Adjustable Rate Securities Purchased at a Premium:The SEC has said, “Adjustable rate securities may be priced at a premiumto par value when the security pays interest above market rates. A fundmay treat the security as an adjustable rate security for purposes of Rule2a-7’s maturity provisions if the fund reasonably expects that uponreadjustment of the interest rate, the market value of the security willapproximate its amortized cost. The premium generally would beamortized over the life of the security. It is critical that the fund carefullyconsider all factors involved in the valuation of the security, particularlythe likelihood of prepayment before the premium is fully amortized. Anaccelerated return of principal will require the fund to write off thepremium before it is amortized, and could result in a significant deviationbetween the amortized cost and market value of the security.” (March 21,1996, Adopting Release, note 160.)Related Issue: Price Stability for All SecuritiesThis requirement of price stability for adjustable rate securities on their interestadjustment dates is an explicit application of a requirement that applies implicitly toeach investment by a money market fund. Barry Barbash, the then-Director of the SECDivision of Investment Management, stated: “In analyzing whether a particularadjustable rate security is appropriate for a money market fund, an adviser mustdetermine not only that holding the security is not specifically prohibited by the rule,but also that the security meets the general rule applicable to all investments by a moneymarket fund: that investment in the security is consistent with maintaining a stable netasset value. In short, that a particular security is not expressly prohibited by Rule 2a-7does not mean that the security is necessarily an appropriate investment for a moneymarket fund.” (Barry Barbash letter, dated June 30, 1994, to Paul Schott Stevens, GeneralCounsel of the Investment Company Institute.)The importance of this requirement became apparent during the mid-1990s, whenthe SEC determined, in hindsight, that certain adjustable rate instruments were notsufficiently stable for a money market fund, including the following that werespecifically cited:· “Securities whose interest rate reset provisions are based on a formula thatmagnifies changes in interest rates, such as ‘inverse floaters’ and ‘leveragedfloaters’;· Securities whose interest rate reset provisions are tied to long-term interest ratesso that a change in the slope of the yield curve could result in the value of theinstrument falling below par, such as ‘CMT floaters’;60A # 454265 v.1

· Securities on which interest is not paid above a certain level, such as ‘cappedfloaters,’ or that cease to pay any interest when a certain level is reached, such as‘range floaters’;· Securities whose interest rate reset provisions are tied to more than one index sothat a change in the relationship between these indexes may result in the value ofthe instrument falling below par, such as ‘dual index floaters’; and· Securities whose interest rate reset provisions are tied to an index that materiallylags short-term interest rates, such as ‘COFI floaters.’”“These securities share the common characteristic that, at the time of issuance,changes in interest rates or other conditions that can reasonably be foreseen to occurduring their term will result in their market value not returning to par at the time of aninterest rate adjustment.” (Barry Barbash letter, dated June 30, 1994, to Paul SchottStevens, General Counsel of the Investment Company Institute, citing December 17,1993, Proposing Release.)The SEC’s warning was issued in the wake of significant declines in value of theseinstruments, which prompted a number of fund sponsors to make cash contributions toor purchase instruments from money market funds or to purchase shares of the funds tostabilize their share value. Some of these transactions, which would have otherwiseviolated affiliated transaction prohibitions, were permitted by the SEC under no-actionletters. (Letter dated June 17, 1994, from Arthur Levitt, Chairman of the SEC, to MatthewP. Fink, President, Investment Company Institute.)Also in the wake of these events, the SEC adopted Rule 17a-9, which eased therequirements for an affiliate to purchase from a money market fund a security that is nolonger eligible.Breaking the DollarA discussion of the interest rate risk posed by certain derivatives is an appropriateplace to mention the one time that a money market fund has “broken the dollar.” A fundmay break a dollar when its market value deviates from its amortized cost value. Inaddition, when a fund sells a security at a loss, the fund may encounter an issue separatefrom the issue of deviation between market value and amortized cost value. That is,after the sale, the value per share of the fund may decline below $1.00, even though themarket value of the remaining securities in the portfolio approximates their amortizedcost. A fund may consider monitoring this difference following the sale of a security at aloss. Consider the following simple example. A fund that originally had an amortizedcost value and market value of $100, and which has 100 shares outstanding, sells for$9.00 a holding that had been purchased for $10.00, and so incurs a loss of $1.00. Thefund has $99.00 of assets, but still has 100 shares outstanding. A deviation from the61A # 454265 v.1

dollar share price is acceptable under the Rule so long as rounding to the nearest onepercent of net asset value will result in a share price equal to the stabilized value.(Derivatives are securities whose value depends upon the values of underlying assets,interest rates, currency exchange rates or indexes.) Interest rate fluctuations onderivative securities negatively affected a money fund’s share value and resulted in thepayment of $0.961 on the dollar to shareholders of the Community Bankers MutualFund in 1994. Shareholders of this fund were institutions rather than individualinvestors. Perhaps allowing a money market fund to break the dollar would have beenless appealing for a fund held by individuals. Yet, even in this instance, the result wasnot good. The adviser, Prospect Hill Advisers Inc., dissolved in the wake of the event.There have been other instances in which fund price stability has been threatened byunstable derivative values. But in each other instance, fund affiliates have protected thefund share value by methods such as those noted in the preceding section.In addition to interest rate fluctuations, credit quality declines have threatenedmoney market fund share stability on occasion. This occurred, for example, during early2001, when certain California utilities defaulted on money market instruments; duringlate 1994, when Orange County, California, declared bankruptcy; during 1989 and 1990,when Integrated Resources Inc. and Mortgage and Realty Trust defaulted on theirmoney market instruments; and during 1990, when MNC Financial Corp. commercialpaper was downgraded below high quality, resulting in a significant decline in itsmarket price. (March 21, 1996, Adopting Release, note 12.) During 2007 and 2008, thevalue of certain structured investment vehicle securities declined due to credit andliquidity concerns. In these instances also, fund affiliates have protected share value byvarious methods and maintained a stable price for fund share transactions. Additionalthreats to stable value also occurred during 2008 when the value of certain securitiesissued by Bear Stearns companies declined due to credit concerns.Maturity Shortening Provisions for Variable Rate Securities and Floating RateSecuritiesProper application of the Rule’s maturity shortening provisions will help ensure thata fund will achieve price stability. These provisions apply only to Variable Rate Securitiesand Floating Rate Securities that can be reasonably expected to have a market value thatwill approximate amortized cost at each interest adjustment date.(1) A short-term Variable Rate Security is deemed to have a maturity equal to theearlier of the period remaining until the next readjustment of the interest rate or theperiod remaining until the principal amount can be recovered through demand. (d)(2)(2) A short-term Floating Rate Security is deemed to have a maturity of one day. (d)(4)This provision is, effectively, the same as the foregoing provision applicable to shorttermVariable Rate Securities, since the shorter of the period until the next interest62A # 454265 v.1

eadjustment or the period until principal can be recovered through demand for a shorttermFloating Rate Security is always one day, because the interest rate on a Floating RateSecurity is, in effect, adjusted daily. The rate readjusts whenever a specified referencerate readjusts, which could occur as often as daily. (d)(4)(3) A long-term Variable Rate Security is deemed to have a maturity equal to thelonger of the period remaining until the next readjustment of the interest rate or theperiod remaining until the principal amount can be recovered through demand. (d)(3)(4) A long-term Floating Rate Security is deemed to have a maturity equal to theperiod remaining until the principal amount can be recovered through demand. (d)(5)This provision is, effectively, the same as the foregoing provision applicable to long-termVariable Rate Securities, since the longer of the period until the next interest rateadjustment or the period until principal can be recovered through demand for a longtermFloating Rate Security is always the period until principal can be recovered throughdemand, because the interest rate on a Floating Rate Security is, in effect, adjusted daily.The rate readjusts whenever a specified reference rate readjusts, which could occur asoften as daily.(5) “A Government Security that is a Variable Rate Security where the variable rate ofinterest is readjusted no less frequently than every 762 calendar days [is] deemed tohave a maturity equal to the period remaining until the next readjustment of the interestrate.” Further, “[a] Government Security which is a Floating Rate Security [is] deemed tohave a remaining maturity of one day.” (d)(1) In contrast to a non-Government Security, aGovernment Security that is long-term does not need a Demand Feature for maturityshortening, as long as the interest rate readjusts at least every 762 days. Any fund usingthe Amortized Cost Method is limited to securities maturing within 397 days (whether thisis their nominal maturity or their maturity “shortened” under these provisions). Asnoted above under “First Objective Test – Individual Holdings” on page 57, only a fundnot using the Amortized Cost Method may Acquire a security maturing in more than 397days.63A # 454265 v.1

Example – Maturity Shortening Provisions:(1) Variable Rate Security scheduled to be paid in less than 397 days.Readjustments every 15 days.Principal can be recovered through demand that can be made on anybusiness day, on seven days’ notice.Maturity: Since it is a short-term Variable Rate Security, use rule (1) above.Maturity is earlier if the period remaining until the next readjustment ofthe interest rate or the period remaining until the principal amount can berecovered through demand. Seven days will be shorter than the perioduntil the next readjustment – and will be the maturity – until within sevendays prior to the next readjustment date, at which time the maturity willbe the period until the readjustment.After demand is made, the maturity will be seven days, shortened by oneday with each passing day (except that if a readjustment will occur withinthe seven-day period, the next readjustment will be used, if shorter.)(2) Variable Rate Security scheduled to be paid in 397 days or more.Readjusts weekly.Principal can be recovered through demand made three days prior toeach readjustment date.Maturity: Since this is a long-term Variable Rate Security, use rule (3)above. Maturity is the longer of the period remaining until the nextreadjustment of the interest rate or the period remaining until theprincipal amount can be recovered through demand. During the fourdays prior to the date demand can be made for payment in a particularweek, the period until the readjustment date and the period until the dateupon which principal can be recovered through demand are the same,and that date is the maturity. After the third day prior to the readjustmentdate for the current week, the period until payment can be recovered thenext week is longer than the period until the next readjustment, and thatperiod constitutes the maturity.64A # 454265 v.1

Maturity Shortening Provision for Repurchase Agreements“A repurchase agreement [is] deemed to have a maturity equal to the periodremaining until the date on which the repurchase of the underlying securities isscheduled to occur, or, where the agreement is subject to demand, the notice periodapplicable to a demand for the repurchase of the securities.” (d)(6)Maturity Shortening Provision for Portfolio Lending Agreements“A portfolio lending agreement [is deemed to have] a maturity equal to the periodremaining until the date on which the loaned securities are scheduled to be returned, orwhere the agreement is subject to demand, the notice period applicable to a demand forthe return of the loaned securities.” (d)(7)Maturity Shortening Provision for Money Market Fund Shares“An investment in a money market fund shall be treated as having a maturity equalto the period of time within which the Acquired money market fund is required to makepayment upon redemption, unless the Acquired money market fund has agreed inwriting to provide redemption proceeds to the investing money market fund within ashorter time period in which case the maturity of such investment shall be deemed to bethe shorter period.” (d)(8)65A # 454265 v.1

Practice Point – Enforcement Orders Relating to Maturity: At least onefund has run afoul of the portfolio maturity calculation. In May 2006, theSEC fined a fund administrator $125,000, fined the portfolio manager$15,000 and charged an audit firm audit partner with improperprofessional conduct, each in connection with an incorrect maturitycalculation for a money market fund. The fund incorrectly used the date abond was callable as the maturity date. There was no unconditionalobligation of the issuer to pay on the callable date. The true maturity ofthe bond rendered it not an Eligible Security under Rule 2a-7. Theinvestment adviser reimbursed the fund involved approximately $0.5million for the sale of the ineligible security at a loss. (In the Matter ofJames T. McCurdy, CPA, Respondent, Administrative Proceeding FileNo. 3-12322, Securities Exchange Act of 1934 Release No. 54945;Accounting and Auditing Enforcement Release No. 2525,2006 SEC Lexis2921, dated December 15, 2006; In the Matter of David A. Rodriguez,CPA, Respondent, Administrative Proceeding File No. 3-12325, SecuritiesExchange Act of 1934, Release No. 53944; Accounting and AuditingEnforcement Release No. 2437, 2006 SEC LEXIS 1305, June 6, 2006; In theMatter of James T. McCurdy, Administrative Proceeding File No. 3-12321,Securities Exchange Act of 1934, Release No. 53936, Accounting andAuditing Enforcement, Release No. 2436, 2006 Sec Lexis 1299, June 2,2006; In the Matter of Unified Fund Services, Inc. and Michael E. Durham,Respondents, Administrative Proceeding File No. 3-12286, SecuritiesExchange Act of 1934, Release No. 53762; Investment Company Act of1940, Release No. 27312; Accounting and Auditing Enforcement ReleaseNo. 2426, 2006 Sec Lexis 1018, May 5, 2006.)66A # 454265 v.1

LIQUIDITYSEC policy, rather than the 1940 Act or any rule thereunder, governs money fundliquidity. (Letter dated December 9, 1992, from Marianne K. Smythe, Director of the SECDivision of Investment Management, to Matthew P. Fink, President, InvestmentCompany Institute.)A money market fund may not invest more than 10 percent of net assets in illiquidsecurities. The SEC applies a 15 percent limit to other types of funds. For purposes ofthese limits, the SEC defines “illiquid” assets as those that “may not be sold or disposedof in the ordinary course of business within seven days at approximately the value atwhich the mutual fund has valued the investment.” (Investment Company Institutereport, dated February 1997, on “Valuation and Liquidity Issues for Mutual Funds,”citing Guide 4 to Form N-1A, Fed. Sec. L. Rep (CCH) para. 51,208.) (the “ICI Report”)The SEC has advised that if the percentage of illiquid securities exceeds 10percent of net assets due to changes in the portfolio other than the purchase of anilliquid security, a fund need not necessarily dispose of an instrument to come withinthe limit. “In the event that changes in the portfolio or other external events cause theinvestments in illiquid instruments to exceed ten percent of the fund’s net assets, thefund must take steps to bring the aggregate amount of illiquid instruments back withinthe prescribed limitations as soon as reasonably practicable. However, this requirementgenerally would not force the fund to liquidate any portfolio instrument where the fundwould suffer a loss on the sale of that instrument.” (See Release IC-13380, dated July 11,1983, note 38.)The Rule does not directly regulate liquidity. The issue of liquidity arises under theRule in the provision permitting a fund to make a non-reliance determination withrespect to a Demand Feature or Guarantee if the fund is not relying on the feature forquality, maturity or liquidity of the security. If a fund needs a Demand Feature to render asecurity liquid in order to satisfy the 10 percent limit on illiquid securities, the fund isrelying on the Demand Feature and cannot make a determination not to rely on it in orderto avoid testing it under the Rule.67A # 454265 v.1

CHANGES IN CREDIT QUALITY:Required Action on Certain Negative EventsThe Rule sets forth actions a fund is required take upon the occurrence of twodifferent categories of negative credit events with respect to portfolio securities.Events in one category require more immediate (and non-delegable) Board review ifthe fund does not dispose of the security. This category includes defaults, Events ofInsolvency, and failures to satisfy the standards for an Eligible Security or minimal creditrisks. See “Default Events” below.Events in the second category require less immediate (and delegable) Board review.This category includes certain downgrades and new lower ratings of a security thatcontinues to be an Eligible Security. See “Downgrade Events” below.In addition to these two categories, upon certain other negative events, the Rulerequires reduction of investments (absent a non-delegable board finding that reductionwould not be in the best interests of the fund), notice to the SEC and reporting on FormN-SAR (the semi-annual report filed by a fund with the SEC).Default Events. Upon certain events – known as Default Events – with respect to aportfolio security, the fund must dispose of the portfolio security “as soon as practicableconsistent with achieving an orderly disposition of the security, by sale, exercise of anyDemand Feature or otherwise, absent a finding by the board of directors that disposal ofthe portfolio security would not be in the best interests of the money market fund(which determination may take into account, among other factors, market conditionsthat could affect the orderly disposition of the security) . . .” (c)(6)(ii) The Board’sresponsibility to make a finding cannot be delegated to the adviser or other party.These Default Events are:“(A) default with respect to a portfolio security (other than an immaterial defaultunrelated to the financial condition of the issuer);(B) a portfolio security ceases to be an Eligible Security;(C) a portfolio security has been determined to no longer present minimal creditrisks; or(D) an Event of Insolvency occurs with respect to the issuer of a portfolio security orthe provider of a Demand Feature or Guarantee.”The last Default Event – Default Event (D) – will have no effect if a fund has made anon-reliance determination for the Demand Feature or Guarantee under Rule 2a-7. (See68A # 454265 v.1

“Diversification As To Credit Supports – Four Exceptions to Diversification Testing forCredit Supports” on page 51.)With respect to parenthetical language in clause (A) above, it is not clear whatdefaults the SEC staff would view as “immaterial . . . unrelated to the financial conditionof the issuer.” The SEC gave as one example the failure by an issuer to give a requirednotice or other information on a timely basis. (February 27, 1991, Adopting Release, note75.)A security will not be considered to be in default (and an Event of Insolvency is notdeemed to have occurred) for purposes of the default paragraph of the Rule (and forpurposes of the paragraph described below relating to notice to the SEC) if the securityis subject to a Demand Feature or Guarantee and“(A) In the case of an instrument subject to a Demand Feature, the Demand Feature hasbeen exercised and the fund has recovered either the principal amount of the amortizedcost of the instrument, plus accrued interest; or(B) The provider of the Guarantee is continuing, without protest, to make paymentsas due on the instrument.” (c)(6)(iv)Downgrade Events. Upon certain other events – known as Downgrade Events –with respect to a portfolio security, “the board of directors of the money market fundshall reassess promptly whether such security continues to present minimal credit risksand shall cause the fund to take such action as the board of directors determines is in thebest interests of the money market fund and its shareholders . . .” (c)(6)(i)(A) However,the Rule provides an exception, so that a portfolio security need not be reassessed upona Downgrade Event “if, in accordance with the procedures adopted by the board ofdirectors, the security is disposed of (or matures) within five Business Days of thespecified event and, in the case of events specified in paragraph [B below], the board issubsequently notified of the adviser’s actions.” (c)(6)(i)(B)Downgrade Events are:(A) “A portfolio security of a money market fund ceases to be a First Tier Security(either because it no longer has the highest rating from the Requisite NRSROs, or, in thecase of an Unrated Security, the board of directors of the money market fund determinesthat it is no longer of comparable quality to a First Tier Security);” and(B) “The money market fund’s investment adviser (or any person to whom thefund’s board of directors has delegated portfolio management responsibilities) becomesaware that any Unrated Security or Second Tier Security held by the money market fundhas, since the security was Acquired by the fund, been given a rating by any NRSRObelow the NRSRO’s second highest short-term rating category.” (c)(6)(i)(A)(1) and (2)69A # 454265 v.1

Practice Point – Adviser’s Awareness of Subsequent Ratings: The SEChas stated that an investment adviser is expected to become aware of asubsequent rating if it is reported in the national financial press or inpublications to which the adviser subscribes. (February 27, 1991,Adopting Release, note 71.)Practice Point – New Rating of Security Originally Single-Rated: TheSEC has explained, “Where a First Tier Security is rated by only oneNRSRO when acquired, but is subsequently given lower ratings by otherNRSROs, it would continue to be a First Tier Security, and noreassessment would be required by the rule . . . However, for purposes ofacquiring an additional position in the security or, upon maturity, rollingit over, the security would not be a First Tier Security. If the NRSRO thathad rated the security at the time it was acquired reduces its rating, areassessment is required and, if it is no longer an Eligible Security, it mustbe disposed of as soon as practicable.” (February 27, 1991, AdoptingRelease, note 71.)Reduction in Investment for 5 Percent Exposure After Downgrade. If, following adowngrade, a fund’s exposure to a particular second tier Demand Feature providerexceeds 5 percent of Total Assets, the fund must reduce exposure to less than 5 percent,but only to the extent possible by exercising Demand Features, and not if the Board findsagainst such action. Specifically, “[i]n the event that after giving effect to a ratingdowngrade, more than five percent of the fund’s Total Assets are invested in securitiesissued by or subject to Demand Features from a single institution that are Second TierSecurities, the fund shall reduce its investment in securities issued by or subject toDemand Features from that institution to no more than five percent of its Total Assets byexercising the Demand Features at the next succeeding exercise date(s) absent a finding bythe board of directors that disposal of the portfolio security would not be in the bestinterests of the money market fund.” (c)(6)(i)(C) This board finding cannot be delegatedto the adviser or another party.Notice to SEC of Defaults and Events of Insolvency. In the event of a default orEvent of Insolvency of securities that constitute ½ of 1 percent or more of the fund’s TotalAssets valued at cost before a default or Event of Insolvency, the fund must give promptnotice to the SEC of that fact and the action the fund intends to take in response. Asdescribed in more detail above under the caption “Default Events,” this requirementdoes not apply to immaterial defaults unrelated to financial condition of the issuer, anda default or Event of Insolvency is not deemed to occur if payment has been made by aDemand Feature provider or is being made by a Guarantor.The Rule states: “In the event of a default with respect to one or more portfoliosecurities (other than an immaterial default unrelated to the financial condition of theissuer) or an Event of Insolvency with respect to the issuer of the security or any Demand70A # 454265 v.1

Feature or Guarantee to which it is subject, where immediately before default thesecurities (or the securities subject to the Demand Feature or Guarantee) accounted for ½ ofone percent or more of a money market fund’s Total Assets, the money market fund shallpromptly notify the Commission of such fact and the actions the money market fundintends to take in response to such situation. Notification under this paragraph shall bemade telephonically, or by means of a facsimile transmission or electronic mail, followedby letter sent by first class mail, directed to the attention of the Director of the Divisionof Investment Management.” (c)(6)(iii)Form N-SAR Reporting. The Rule requires a fund to report on its semiannualreport on Form N-SAR any action taken with respect to defaultedsecurities and events of insolvency or with respect to a deviation from the fund’sshare price of more than ½ of 1 percent and also any securities held on the finalday of the reporting period that are not Eligible Securities. (c)(10)(vii)71A # 454265 v.1

RECORDKEEPINGThe Rule includes certain recordkeeping requirements applicable to money marketfunds. Money market funds are also subject to the general recordkeeping rule under theInvestment Company Act, Rule 31a-1.The following records must be maintained for at least six years. The first twocategories of records must be maintained in an easily accessible place for the first twoyears:(1) Mark to Market. Records showing the determination of the deviation of thenet asset value per share of each money market fund based on amortizedcost from that based on market quotations. (c)(7)(ii)(A)(3)(2) Records Forming Basis for Financial Statements. Records forming the basisfor financial statements required to be filed pursuant to Section 30 of theInvestment Company Act. Rule 31a-1(a).The following records must be maintained in an easily accessible place for a periodof at least three years from the date of the most recent review or determination:(3) Minimal Credit Risks; Conditional Demand Features. Records of the ongoingreview of the continued minimal credit risks of each portfolio security. In the case of asecurity for which maturity is determined by reference to a Demand Feature, the reviewmust be based on, among other things, financial data for the most recent fiscal year ofthe issuer of the Demand Feature, and in the case of a security subject to a ConditionalDemand Feature, the issuer of the security whose financial condition must be monitoredunder Section (c)(3)(iv) of the Rule, whether such data is publicly available or providedunder the terms of the security’s governing documentation. The written record of thisreview will include the NRSRO ratings (if any) used to determine the status of thesecurity as an Eligible Security, First Tier Security or Second Tier Security. (c)(10)(iii) and(c)(9)(i) (See “Introduction – Procedures” on page 4 about required procedures relatingto this review.)(4) Guarantees and Demand Features Not Relied Upon. Records of the periodicevaluation of the determination that a Guarantee or Demand Feature is not being reliedupon to determine credit quality, maturity or liquidity. (c)(10)(vi) (See “Introduction –Procedures” on page 4 about required procedures relating to this determination.)(5) Market Value Approximates Amortized Cost for Adjustable Rate SecuritiesWithout Demand Features. Records of the periodic review of whether the interest rateformula of a Variable Rate or Floating Rate Security that does not have a Demand Featureand for which maturity is determined pursuant to paragraphs (d)(1), (2) or (4) of theRule, upon readjustment of its interest rate, can reasonably be expected to cause the72A # 454265 v.1

security to have a market value that approximates its amortized cost value. (c)(10) (See“Introduction – Procedures” on page 4 about required procedures relating to thisreview.)Practice Point – Record for Each Type of Security Adequate: The SEChas said that this provision does not “require a fund’s board of directorsto maintain a written determination for each individual adjustable ratesecurity in the fund’s portfolio – it is sufficient for the fund to maintainthe required record for each type of security (e.g., one record could bemaintained for several different adjustable rate securities of similar creditquality whose interest rate readjustment mechanisms are tied to LIBORplus or minus a number of basis points that make the securities similarlysensitive to interest rate changes).” (March 21, 1996, Adopting Release,note 163.)(6) Issuer of Asset Backed Securities. Records of the periodic determination of thenumber of Ten Percent Obligors deemed to be issuers of all or a portion of an Asset BackedSecurity for purposes of issuer diversification. However, such periodic determinationsare not required with respect to any Asset Backed Security that the Board or its delegatehas determined, at the time of Acquisition, will not have or is unlikely to have Ten PercentObligors that are deemed to be issuers of all or a portion of that Asset Backed Security, andmaintains a record of such determination. The written record of this determination mustinclude the identities of the Ten Percent Obligors; the percentage of the Qualifying Assetsconstituted by the securities of each Ten Percent Obligor; the percentage of the fund’sTotal Assets that are invested in securities of each Ten Percent Obligor; and anydetermination that an Asset Backed Security will not have or is unlikely to have TenPercent Obligors deemed to be issuers of all or a portion of that Asset Backed Security.(c)(10)(v) (See “Introduction – Procedures” on page 4 about required procedures relatingto this review.)The following records must be maintained permanently, with the most recent twoyears’ records being maintained in an easily accessible place:(7) Information About Guarantees and Demand Features. Records identifying theprovider of any Demand Feature or Guarantee with respect to a portfolio security and abrief description of the nature of the Demand Feature or Guarantee (e.g., unconditionaldemand feature, conditional demand feature, guarantee, letter of credit or bondinsurance). Rule 31a-1(b)(1)(8) Information About Portfolio Securities. Records providing the complete legalname and accounting and other information necessary to identify, value and account foreach investment (including sufficient information to calculate coupons, accruals,maturities, puts and calls). Rule 31a-1(b)(1)73A # 454265 v.1

BOARD REPORTINGThe Rule includes very few requirements as to the contents of reports to the Board.In fact, only two regularly recurring reports are required. Many Boards require reportsin addition to those specified in the Rule, in order to support that the Board is fulfillingits duty to oversee operation of the fund as required under Section (e) of the Rule. See“Introduction – Responsibilities of Fund Board and Delegation: Two Prerequisitesto Delegation“ on page 9 regarding Board responsibility and delegation. The regularlyrecurring reports specifically required by the Rule are:1. The Board must periodically compare the amortized cost and market–based valuesper share of each money market fund during the period since the previous report.(c)(7)(ii)(A)(2)2. The Board is required to periodically review the methods used to calculate thedeviation between the amortized cost and market-based values per share of each moneymarket fund. See “Introduction – Mark to Market“ on page 5 relating to reports onmatrix pricing. (A)(1) and (c)(7)(ii)(A)(2)Additional reports that a Board may want include:3. A representation that the fund had invested only in acceptable instruments sincethe prior report. Kathryn McGrath, Director of the SEC Division of InvestmentManagement, suggested that a Board may desire this report, in her letter datedDecember 6, 1989, addressed to Matthew P. Fink, General Counsel of the InvestmentCompany Institute. In that letter, she also suggested that a Board might desire a listingof instruments acquired.4. A list of any non-complying instruments held by the fund.5. A report on portfolio maturity.6. Review of illiquid securities held by the fund.7. Review of Second Tier Securities held by the fund.8. Review of the adviser’s approved repurchase agreement dealers list.In addition, a Board may wish to receive reports upon specific events, forexample, upon any change in procedures, upon significant deviations betweenamortized cost and market value and upon the negative events discussed under thecaption “Quality Tests: Minimal Credit Risks; Eligible Security Rating Quality; Limit onSecond Tier Securities – How to Apply the Eligible Quality Test for Specific Types ofSecurities – Changes in Credit Quality” on page 22.74A # 454265 v.1

Last, a Board may wish to review reports on the required procedures discussedunder “Introduction – Procedures” on page 4.75A # 454265 v.1

APPENDIX 1:Rule 2a-7 and Rule 5b-3 Under the Investment Company Act of 1940§ 270.2a-7 Money Market Ffunds.(a) Definitions.Rule 2a-717 CFR 270.2a-7(1) Acquisition (or Acquire) means any purchase or subsequent rollover (but doesnot include the failure to exercise a Demand Feature).(2) Amortized Cost Method of valuation means the method of calculating aninvestment company’s net asset value whereby portfolio securities are valued at thefund’s Acquisition cost as adjusted for amortization of premium or accretion of discountrather than at their value based on current market factors.(3) Asset Backed Security means a fixed income security (other than a GovernmentSecurity) issued by a Special Purpose Entity (as defined in this paragraph), substantiallyall of the assets which consist of Qualifying Assets (as defined in this paragraph). SpecialPurpose Entity means a trust, corporation, partnership or other entity organized for thesole purpose of issuing securities that entitle their holders to receive payments thatdepend primarily on the cash flow from Qualifying Assets, but does not include aregistered investment company. Qualifying Assets means financial assets, either fixed orrevolving, that by their terms convert into cash within a finite time period, plus anyrights or other assets designed to assure the servicing or timely distribution of proceedsto security holders.(4) Business Day means any day, other than Saturday, Sunday or any customarybusiness holiday.(5) Collateralized Fully means “Collateralized Fully” as defined in § 270.5b-3(c)(1).(6) Conditional Demand Feature means a Demand Feature that is not anUnconditional Demand Feature. A Conditional Demand Feature is not a Guarantee.(7) Conduit Security means a security issued by a Municipal Issuer (as defined inthis paragraph) involving an arrangement or agreement entered into, directly orindirectly, with a person other than a Municipal Issuer, which arrangement oragreement provides for or secures repayment of the security. Municipal Issuer means astate or territory of the United States (including the District of Columbia), or anypolitical subdivision or public instrumentality of a state or territory of the United States.A Conduit Security does not include a security that is:(i) Fully and unconditionally guaranteed by a Municipal Issuer; or76A # 454265 v.1

(ii) Payable from the general revenues of the Municipal Issuer or other MunicipalIssuers (other than those revenues derived from an agreement or arrangement with aperson who is not a Municipal Issuer that provides for or secures repayment of thesecurity issued by the Municipal Issuer); or(iii) Related to a project owned and operated by a Municipal Issuer; or(iv) Related to a facility leased to and under the control of an industrial orcommercial enterprise that is part of a public project which, as a whole, is owned andunder the control of a Municipal Issuer.(8) Demand Feature means:(i) A feature permitting the holder of a security to sell the security at an exerciseprice equal to the approximate amortized cost of the security plus accrued interest, ifany, at the time of exercise. A Demand Feature must be exercisable either:(A) At any time on no more than 30 calendar days’ notice; or(B) At specified intervals not exceeding 397 calendar days and upon no more than30 calendar days’ notice; or(ii) A feature permitting the holder of an Asset Backed Security unconditionally toreceive principal and interest within 397 calendar days of making demand.(9) Demand Feature Issued By A Non-Controlled Person means a Demand Featureissued by:(i) A person that, directly or indirectly, does not control, and is not controlled by orunder common control with the issuer of the security subject to the Demand Feature(control means “control” as defined in section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)); or(ii) A sponsor of a Special Purpose Entity with respect to an Asset Backed Security.(10) Eligible Security means:(i) A Rated Security with a remaining maturity of 397 calendar days or less that hasreceived a rating from the Requisite NRSROs in one of the two highest short-term ratingcategories (within which there may be sub-categories or gradations indicating relativestanding); or(ii) An Unrated Security that is of comparable quality to a security meeting therequirements for a Rated Security in paragraph (a)(10)(i) of this section, as determinedby the money market fund’s board of directors; Provided, however, that:(A) A security that at the time of issuance had a remaining maturity of more than397 calendar days but that has a remaining maturity of 397 calendar days or less andthat is an Unrated Security is not an Eligible Security if the security has received a longtermrating from any NRSRO that is not within the NRSRO’s three highest long-termratings categories (within which there may be sub-categories or gradations indicatingrelative standing), unless the security has received a long-term rating from the RequisiteNRSROs in one of the three highest rating categories;77A # 454265 v.1

(B) An Asset Backed Security (other than an Asset Backed Security substantially allof whose Qualifying Assets consist of obligations of one or more Municipal Issuers, asthat term is defined in paragraph (a)(7) of this section) shall not be an Eligible Securityunless it has received a rating from an NRSRO.(iii) In addition, in the case of a security that is subject to a Demand Feature orGuarantee:(A) The Guarantee has received a rating from an NRSRO or the Guarantee is issuedby a guarantor that has received a rating from an NRSRO with respect to a class of debtobligations (or any debt obligation within that class) that is comparable in priority andsecurity to the Guarantee, unless:(1) The Guarantee is issued by a person that, directly or indirectly, controls, iscontrolled by or is under common control with the issuer of the security subject to theGuarantee (other than a sponsor of a Special Purpose Entity with respect to an AssetBacked Security);(2) The security subject to the Guarantee is a repurchase agreement that isCollateralized Fully; or(3) The Guarantee is itself a Government Security; and(B) The issuer of the Demand Feature or Guarantee, or another institution, hasundertaken promptly to notify the holder of the security in the event the DemandFeature or Guarantee is substituted with another Demand Feature or Guarantee (if suchsubstitution is permissible under the terms of the Demand Feature or Guarantee).(11) Event of Insolvency means “Event of Insolvency” as defined in § 270.5b-3(c)(2).(12) First Tier Security means any Eligible Security that:(i) Is a Rated Security that has received a short-term rating from the RequisiteNRSROs in the highest short-term rating category for debt obligations (within whichthere may be sub-categories or gradations indicating relative standing); or(ii) Is an Unrated Security that is of comparable quality to a security meeting therequirements for a Rated Security in paragraph (a)(12)(i) of this section, as determinedby the fund’s board of directors; or(iii) Is a security issued by a registered investment company that is a money marketfund; or(iv) Is a Government Security.(13) Floating Rate Security means a security the terms of which provide for theadjustment of its interest rate whenever a specified interest rate changes and that, at anytime until the final maturity of the instrument or the period remaining until theprincipal amount can be recovered through demand, can reasonably be expected to havea market value that approximates its amortized cost.78A # 454265 v.1

(14) Government Security means any “Government security” as defined in section2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16)).(15) Guarantee means an unconditional obligation of a person other than the issuerof the security to undertake to pay, upon presentment by the holder of the Guarantee (ifrequired), the principal amount of the underlying security plus accrued interest whendue or upon default, or, in the case of an Unconditional Demand Feature, an obligationthat entitles the holder to receive upon exercise the approximate amortized cost of theunderlying security or securities, plus accrued interest, if any. A Guarantee includes aletter of credit, financial guaranty (bond) insurance, and an Unconditional DemandFeature (other than an Unconditional Demand Feature provided by the issuer of thesecurity).(16) Guarantee Issued By A Non-Controlled Person means a Guarantee issued by:(i) A person that, directly or indirectly, does not control, and is not controlled by orunder common control with the issuer of the security subject to the Guarantee (controlmeans “control” as defined in section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)); or(ii) A sponsor of a Special Purpose Entity with respect to an Asset Backed Security.(17) NRSRO means any nationally recognized statistical rating organization, as thatterm is used in paragraphs (c)(2)(vi)(E), (F) and (H) of § 240.15c3-1 of this Chapter, thatis not an “affiliated person,” as defined in section 2(a)(3)(C) of the Act (15 U.S.C. 80a-2(a)(3)(C)), of the issuer of, or any insurer or provider of credit support for, the security.(18) Penny-Rounding Method of pricing means the method of computing aninvestment company’s price per share for purposes of distribution, redemption andrepurchase whereby the current net asset value per share is rounded to the nearest onepercent.(19) Rated Security means a security that meets the requirements of paragraphs(a)(19)(i) or (ii) of this section, in each case subject to paragraph (a)(19)(iii) of this section:(i) The security has received a short-term rating from an NRSRO, or has been issuedby an issuer that has received a short-term rating from an NRSRO with respect to a classof debt obligations (or any debt obligation within that class) that is comparable inpriority and security with the security; or(ii) The security is subject to a Guarantee that has received a short-term rating froman NRSRO, or a Guarantee issued by a guarantor that has received a short-term ratingfrom an NRSRO with respect to a class of debt obligations (or any debt obligation withinthat class) that is comparable in priority and security with the Guarantee; but(iii) A security is not a Rated Security if it is subject to an external credit supportagreement (including an arrangement by which the security has become a RefundedSecurity) that was not in effect when the security was assigned its rating, unless thesecurity has received a short-term rating reflecting the existence of the credit supportagreement as provided in paragraph (a)(19)(i) of this section, or the credit support79A # 454265 v.1

agreement with respect to the security has received a short-term rating as provided inparagraph (a)(19)(ii) of this section.(20) Refunded Security means “Refunded Security” as defined in § 270.5b-3(c)(4).(21) Requisite NRSROs means:(i) Any two NRSROs that have issued a rating with respect to a security or class ofdebt obligations of an issuer; or(ii) If only one NRSRO has issued a rating with respect to such security or class ofdebt obligations of an issuer at the time the fund acquires the security, that NRSRO.(22) Second Tier Security means any Eligible Security that is not a First Tier Security.Second Tier Conduit Security means any Conduit Security that is an Eligible Securitythat is not a First Tier Security.(23) Single State Fund means a Tax Exempt Fund that holds itself out as seeking tomaximize the amount of its distributed income that is exempt from the income taxes orother taxes on investments of a particular state and, where applicable, subdivisionsthereof.(24) Tax Exempt Fund means any money market fund that holds itself out asdistributing income exempt from regular federal income tax.(25) Total Assets means, with respect to a money market fund using the AmortizedCost Method, the total amortized cost of its assets and, with respect to any other moneymarket fund, the total market-based value of its assets.(26) Unconditional Demand Feature means a Demand Feature that by its termswould be readily exercisable in the event of a default in payment of principal or intereston the underlying security or securities.(27) United States Dollar-Denominated means, with reference to a security, that allprincipal and interest payments on such security are payable to security holders inUnited States dollars under all circumstances and that the interest rate of, the principalamount to be repaid, and the timing of payments related to such security do not vary orfloat with the value of a foreign currency, the rate of interest payable on foreign currencyborrowings, or with any other interest rate or index expressed in a currency other thanUnited States dollars.(28) Unrated Security means a security that is not a Rated Security.(29) Variable Rate Security means a security the terms of which provide for theadjustment of its interest rate on set dates (such as the last day of a month or calendarquarter) and that, upon each adjustment until the final maturity of the instrument or theperiod remaining until the principal amount can be recovered through demand, canreasonably be expected to have a market value that approximates its amortized cost.(b) Holding Out and Use of Names and Titles. (1) It shall be an untrue statement ofmaterial fact within the meaning of section 34(b) of the Act (15 U.S.C. 80a-33(b)) for aregistered investment company, in any registration statement, application, report,80A # 454265 v.1

account, record, or other document filed or transmitted pursuant to the Act, includingany advertisement, pamphlet, circular, form letter, or other sales literature addressed toor intended for distribution to prospective investors that is required to be filed with theCommission by section 24(b) of the Act (15 U.S.C. 80a-24(b)), to hold itself out toinvestors as a money market fund or the equivalent of a money market fund, unlesssuch registered investment company meets the conditions of paragraphs (c)(2), (c)(3)and (c)(4) of this section.(2) It shall constitute the use of a materially deceptive or misleading name or titlewithin the meaning of section 35(d) of the Act (15 U.S.C. 80a-34(d)) for a registeredinvestment company to adopt the term “money market” as part of its name or title or thename or title of any redeemable securities of which it is the issuer, or to adopt a namethat suggests that it is a money market fund or the equivalent of a money market fund,unless such registered investment company meets the conditions of paragraphs (c)(2),(c)(3) and (c)(4) of this section.(3) For purposes of this paragraph, a name that suggests that a registeredinvestment company is a money market fund or the equivalent thereof shall include onethat uses such terms as “cash,” “liquid,” “money,” “ready assets” or similar terms.(c) Share Price Calculations. The current price per share, for purposes ofdistribution, redemption and repurchase, of any redeemable security issued by anyregistered investment company (“money market fund” or “fund”), notwithstanding therequirements of section 2(a)(41) of the Act (15 U.S.C. 80a-2(a)(41)) and of §§ 270.2a-4 and270.22c-1 thereunder, may be computed by use of the Amortized Cost Method or thePenny-Rounding Method; Provided, however, that:(1) Board Findings. The board of directors of the money market fund shalldetermine, in good faith, that it is in the best interests of the fund and its shareholders tomaintain a stable net asset value per share or stable price per share, by virtue of eitherthe Amortized Cost Method or the Penny-Rounding Method, and that the moneymarket fund will continue to use such method only so long as the board of directorsbelieves that it fairly reflects the market-based net asset value per share.(2) Portfolio Maturity. The money market fund shall maintain a dollar-weightedaverage portfolio maturity appropriate to its objective of maintaining a stable net assetvalue per share or price per share; Provided, however, that the money market fund willnot:(i) Except as provided in paragraph (c)(2)(ii) of this section, Acquire any instrumentwith a remaining maturity of greater than 397 calendar days; or(ii) In the case of a money market fund not using the Amortized Cost Method,Acquire a Government Security with a remaining maturity of greater than 762 calendardays; or(iii) Maintain a dollar-weighted average portfolio maturity that exceeds ninety days.81A # 454265 v.1

(3) Portfolio Quality – (i) General. The money market fund shall limit its portfolioinvestments to those United States Dollar-Denominated securities that the fund’s boardof directors determines present minimal credit risks (which determination must bebased on factors pertaining to credit quality in addition to any rating assigned to suchsecurities by an NRSRO) and that are at the time of Acquisition Eligible Securities.(ii) Second Tier Securities. Immediately after the Acquisition of any Second TierSecurity:(A) Taxable Funds. A money market fund that is not a Tax Exempt Fund shall nothave invested more than five percent of its Total Assets in securities that are Second TierSecurities; and(B) Tax Exempt Funds. A money market fund that is a Tax Exempt Fund shall nothave invested more than five percent of its Total Assets in Conduit Securities that areSecond Tier Conduit Securities.(iii) Securities Subject to Guarantees. A security that is subject to a Guarantee maybe determined to be an Eligible Security or a First Tier Security based solely on whetherthe Guarantee is an Eligible Security or First Tier Security, as the case may be.(iv) Securities Subject to Conditional Demand Features. A security that is subject to aConditional Demand Feature (“Underlying Security”) may be determined to be anEligible Security or a First Tier Security only if:(A) The Conditional Demand Feature is an Eligible Security or First Tier Security, asthe case may be;(B) At the time of the Acquisition of the Underlying Security, the money marketfund’s board of directors has determined that there is minimal risk that thecircumstances that would result in the Conditional Demand Feature not beingexercisable will occur; and(1) The conditions limiting exercise either can be monitored readily by the fund, orrelate to the taxability, under federal, state or local law, of the interest payments on thesecurity; or(2) The terms of the Conditional Demand Feature require that the fund will receivenotice of the occurrence of the condition and the opportunity to exercise the DemandFeature in accordance with its terms; and(C) The Underlying Security or any Guarantee of such security (or the debtsecurities of the issuer of the Underlying Security or Guarantee that are comparable inpriority and security with the Underlying Security or Guarantee) has received either ashort-term rating or a long-term rating, as the case may be, from the Requisite NRSROswithin the NRSROs’ two highest short-term or long-term rating categories (within whichthere may be sub-categories or gradations indicating relative standing) or, if unrated, isdetermined to be of comparable quality by the money market fund’s board of directorsto a security that has received a rating from the Requisite NRSROs within the NRSROs’two highest short-term or long-term rating categories, as the case may be.82A # 454265 v.1

(4) Portfolio Diversification. (i) Issuer Diversification. The money market fund shallbe diversified with respect to issuers of securities Acquired by the fund as provided inparagraphs (c)(4)(i) and (c)(4)(ii) of this section, other than with respect to GovernmentSecurities and securities subject to a Guarantee Issued By A Non-Controlled Person.(A) Taxable and National Funds. Immediately after the Acquisition of any security,a money market fund other than a Single State Fund shall not have invested more thanfive percent of its Total Assets in securities issued by the issuer of the security; Provided,however, that such a fund may invest up to twenty-five percent of its Total Assets in theFirst Tier Securities of a single issuer for a period of up to three Business Days after theAcquisition thereof; Provided, further, that the fund may not invest in the securities ofmore than one issuer in accordance with the foregoing proviso in this paragraph at anytime.(B) Single State Funds. With respect to seventy-five percent of its Total Assets,immediately after the Acquisition of any security, a Single State Fund shall not haveinvested more than five percent of its Total Assets in securities issued by the issuer ofthe security; Provided, however, that a Single State Fund shall not invest more than fivepercent of its Total Assets in securities issued by the issuer of the security unless thesecurities are First Tier Securities.(C) Second Tier Securities. (1) Taxable Funds. Immediately after the Acquisition ofany Second Tier Security, a money market fund that is not a Tax Exempt Fund shall nothave invested more than the greater of one percent of its Total Assets or one milliondollars in securities issued by that issuer that are Second Tier Securities.(2) Tax Exempt Funds. Immediately after the Acquisition of any Second TierConduit Security, a money market fund that is a Tax Exempt Fund shall not haveinvested more than the greater of one percent of its Total Assets or one million dollars insecurities issued by that issuer that are Second Tier Conduit Securities.(ii) Issuer Diversification Calculations. For purposes of making calculations underparagraph (c)(4)(i) of this section:(A) Repurchase Agreements. The Acquisition of a repurchase agreement may bedeemed to be an Acquisition of the underlying securities, provided the obligation of theseller to repurchase the securities from the money market fund is Collateralized Fully.(B) Refunded Securities. The Acquisition of a Refunded Security shall be deemed tobe an Acquisition of the escrowed Government Securities.(C) Conduit Securities. A Conduit Security shall be deemed to be issued by theperson (other than the Municipal Issuer) ultimately responsible for payments of interestand principal on the security.(D) Asset Backed Securities. (1) General. An Asset Backed Security Acquired by afund (“Primary ABS”) shall be deemed to be issued by the Special Purpose Entity thatissued the Asset Backed Security; Provided, however:83A # 454265 v.1

(i) Holdings of Primary ABS. Any person whose obligations constitute ten percentor more of the principal amount of the Qualifying Assets of the Primary ABS (“TenPercent Obligor”) shall be deemed to be an issuer of the portion of the Primary ABS suchobligations represent; and(ii) Holdings of Secondary ABS. If a Ten Percent Obligor of a Primary ABS is itself aSpecial Purpose Entity issuing Asset Backed Securities (“Secondary ABS”), any TenPercent Obligor of such Secondary ABS also shall be deemed to be an issuer of theportion of the Primary ABS that such Ten Percent Obligor represents.(2) Restricted Special Purpose Entities. A Ten Percent Obligor with respect to aPrimary or Secondary ABS shall not be deemed to have issued any portion of the assetsof a Primary ABS as provided in paragraph (c)(4)(ii)(D)(1) of this section if that TenPercent Obligor is itself a Special Purpose Entity issuing Asset Backed Securities(“Restricted Special Purpose Entity”), and the securities that it issues (other thansecurities issued to a company that controls, or is controlled by or under commoncontrol with, the Restricted Special Purpose Entity and which is not itself a SpecialPurpose Entity issuing Asset Backed Securities) are held by only one other SpecialPurpose Entity.(3) Demand Features and Guarantees. In the case of a Ten Percent Obligor deemedto be an issuer, the fund shall satisfy the diversification requirements of paragraph(c)(4)(iii) of this section with respect to any Demand Feature or Guarantee to which theTen Percent Obligor’s obligations are subject.(E) Shares of Other Money Market Funds. A money market fund that Acquiresshares issued by another money market fund in an amount that would otherwise beprohibited by paragraph (c)(4)(i) of this section shall nonetheless be deemed incompliance with this section if the board of directors of the Acquiring money marketfund reasonably believes that the fund in which it has invested is in compliance withthis section.(iii) Diversification Rules for Demand Features and Guarantees. The money marketfund shall be diversified with respect to Demand Features and Guarantees Acquired bythe fund as provided in paragraphs (c)(4)(iii) and (c)(4)(iv) of this section, other thanwith respect to a Demand Feature issued by the same institution that issued theunderlying security, or with respect to a Guarantee or Demand Feature that is itself aGovernment Security.(A) General. Immediately after the Acquisition of any Demand Feature or Guaranteeor security subject to a Demand Feature or Guarantee, a money market fund, withrespect to seventy-five percent of its Total Assets, shall not have invested more than tenpercent of its Total Assets in securities issued by or subject to Demand Features orGuarantees from the institution that issued the Demand Feature or Guarantee, subject toparagraphs (c)(4)(iii) (B) and (C) of this section.(B) Second Tier Demand Features or Guarantees. Immediately after the Acquisitionof any Demand Feature or Guarantee (or a security after giving effect to the Demand84A # 454265 v.1

Feature or Guarantee) that is a Second Tier Security, a money market fund shall not haveinvested more than five percent of its Total Assets in securities issued by or subject toDemand Features or Guarantees from the institution that issued the Demand Feature orGuarantee.(C) Demand Features or Guarantees Issued by Non-Controlled Persons.Immediately after the Acquisition of any security subject to a Demand Feature orGuarantee, a money market fund shall not have invested more than ten percent of itsTotal Assets in securities issued by, or subject to Demand Features or Guarantees fromthe institution that issued the Demand Feature or Guarantee, unless, with respect to anysecurity subject to Demand Features or Guarantees from that institution (other thansecurities issued by such institution), the Demand Feature or Guarantee is a DemandFeature or Guarantee Issued By A Non-Controlled Person.(iv) Demand Feature and Guarantee Diversification Calculations. (A) FractionalDemand Features or Guarantees. In the case of a security subject to a Demand Feature orGuarantee from an institution by which the institution guarantees a specified portion ofthe value of the security, the institution shall be deemed to guarantee the specifiedportion thereof.(B) Layered Demand Features or Guarantees. In the case of a security subject toDemand Features or Guarantees from multiple institutions that have not limited theextent of their obligations as described in paragraph (c)(4)(iv)(A) of this section, eachinstitution shall be deemed to have provided the Demand Feature or Guarantee withrespect to the entire principal amount of the security.(v) Diversification Safe Harbor. A money market fund that satisfies the applicablediversification requirements of paragraphs (c)(4) and (c)(5) of this section shall bedeemed to have satisfied the diversification requirements of section 5(b)(1) of the Act (15U.S.C. 80a-5(b)(1)) and the rules adopted thereunder.(5) Demand Features and Guarantees Not Relied Upon. If the fund’s board ofdirectors has determined that the fund is not relying on a Demand Feature or Guaranteeto determine the quality (pursuant to paragraph (c)(3) of this section), or maturity(pursuant to paragraph (d) of this section), or liquidity of a portfolio security, andmaintains a record of this determination (pursuant to paragraphs (c)(9)(ii) and (c)(10)(vi)of this section), then the fund may disregard such Demand Feature or Guarantee for allpurposes of this section.(6) Downgrades, Defaults and Other Events. (i) Downgrades. (A) General. Upon theoccurrence of either of the events specified in paragraphs (c)(6)(i)(A) (1) and (2) of thissection with respect to a portfolio security, the board of directors of the money marketfund shall reassess promptly whether such security continues to present minimal creditrisks and shall cause the fund to take such action as the board of directors determines isin the best interests of the money market fund and its shareholders:(1) A portfolio security of a money market fund ceases to be a First Tier Security(either because it no longer has the highest rating from the Requisite NRSROs or, in the85A # 454265 v.1

case of an Unrated Security, the board of directors of the money market fund determinesthat it is no longer of comparable quality to a First Tier Security); and(2) The money market fund’s investment adviser (or any person to whom the fund’sboard of directors has delegated portfolio management responsibilities) becomes awarethat any Unrated Security or Second Tier Security held by the money market fund has,since the security was Acquired by the fund, been given a rating by any NRSRO belowthe NRSRO’s second highest short-term rating category.(B) Securities to Be Disposed Of. The reassessments required by paragraph(c)(6)(i)(A) of this section shall not be required if, in accordance with the proceduresadopted by the board of directors, the security is disposed of (or matures) within fiveBusiness Days of the specified event and, in the case of events specified in paragraph(c)(6)(i)(A)(2) of this section, the board is subsequently notified of the adviser’s actions.(C) Special Rule for Certain Securities Subject to Demand Features. In the event thatafter giving effect to a rating downgrade, more than five percent of the fund’s TotalAssets are invested in securities issued by or subject to Demand Features from a singleinstitution that are Second Tier Securities, the fund shall reduce its investment insecurities issued by or subject to Demand Features from that institution to no more thanfive percent of its Total Assets by exercising the Demand Features at the next succeedingexercise date(s), absent a finding by the board of directors that disposal of the portfoliosecurity would not be in the best interests of the money market fund.(ii) Defaults and Other Events. Upon the occurrence of any of the events specified inparagraphs (c)(6)(ii)(A) through (D) of this section with respect to a portfolio security,the money market fund shall dispose of such security as soon as practicable consistentwith achieving an orderly disposition of the security, by sale, exercise of any DemandFeature or otherwise, absent a finding by the board of directors that disposal of theportfolio security would not be in the best interests of the money market fund (whichdetermination may take into account, among other factors, market conditions that couldaffect the orderly disposition of the portfolio security):(A) The default with respect to a portfolio security (other than an immaterial defaultunrelated to the financial condition of the issuer);(B) A portfolio security ceases to be an Eligible Security;(C) A portfolio security has been determined to no longer present minimal creditrisks; or(D) An Event of Insolvency occurs with respect to the issuer of a portfolio securityor the provider of any Demand Feature or Guarantee.(iii) Notice to the Commission. In the event of a default with respect to one or moreportfolio securities (other than an immaterial default unrelated to the financial conditionof the issuer) or an Event of Insolvency with respect to the issuer of the security or anyDemand Feature or Guarantee to which it is subject, where immediately before defaultthe securities (or the securities subject to the Demand Feature or Guarantee) accounted86A # 454265 v.1

for 1/2 of 1 percent or more of a money market fund’s Total Assets, the money marketfund shall promptly notify the Commission of such fact and the actions the moneymarket fund intends to take in response to such situation. Notification under thisparagraph shall be made telephonically, or by means of a facsimile transmission orelectronic mail, followed by letter sent by first class mail, directed to the attention of theDirector of the Division of Investment Management.(iv) Defaults for Purposes of Paragraphs (c)(6) (ii) and (iii). For purposes ofparagraphs (c)(6) (ii) and (iii) of this section, an instrument subject to a Demand Featureor Guarantee shall not be deemed to be in default (and an Event of Insolvency withrespect to the security shall not be deemed to have occurred) if:(A) In the case of an instrument subject to a Demand Feature, the Demand Featurehas been exercised and the fund has recovered either the principal amount or theamortized cost of the instrument, plus accrued interest; or(B) The provider of the Guarantee is continuing, without protest, to make paymentsas due on the instrument.(7) Required Procedures: Amortized Cost Method. In the case of a money marketfund using the Amortized Cost Method:(i) General. In supervising the money market fund’s operations and delegatingspecial responsibilities involving portfolio management to the money market fund’sinvestment adviser, the money market fund’s board of directors, as a particularresponsibility within the overall duty of care owed to its shareholders, shall establishwritten procedures reasonably designed, taking into account current market conditionsand the money market fund’s investment objectives, to stabilize the money marketfund’s net asset value per share, as computed for the purpose of distribution,redemption and repurchase, at a single value.(ii) Specific Procedures. Included within the procedures adopted by the board ofdirectors shall be the following:(A) Shadow Pricing. Written procedures shall provide:(1) That the extent of deviation, if any, of the current net asset value per sharecalculated using available market quotations (or an appropriate substitute that reflectscurrent market conditions) from the money market fund’s amortized cost price pershare, shall be calculated at such intervals as the board of directors determinesappropriate and reasonable in light of current market conditions;(2) For the periodic review by the board of directors of the amount of the deviationas well as the methods used to calculate the deviation; and(3) For the maintenance of records of the determination of deviation and the board’sreview thereof.(B) Prompt Consideration of Deviation. In the event such deviation from the moneymarket fund’s amortized cost price per share exceeds 1/2 of 1 percent, the board of87A # 454265 v.1

directors shall promptly consider what action, if any, should be initiated by the board ofdirectors.(C) Material Dilution or Unfair Results. Where the board of directors believes theextent of any deviation from the money market fund’s amortized cost price per sharemay result in material dilution or other unfair results to investors or existingshareholders, it shall cause the fund to take such action as it deems appropriate toeliminate or reduce to the extent reasonably practicable such dilution or unfair results.(8) Required Procedures: Penny-Rounding Method. In the case of a money marketfund using the Penny-Rounding Method, in supervising the money market fund’soperations and delegating special responsibilities involving portfolio management to themoney market fund’s investment adviser, the money market fund’s board of directorsundertakes, as a particular responsibility within the overall duty of care owed to itsshareholders, to assure to the extent reasonably practicable, taking into account currentmarket conditions affecting the money market fund’s investment objectives, that themoney market fund’s price per share as computed for the purpose of distribution,redemption and repurchase, rounded to the nearest one percent, will not deviate fromthe single price established by the board of directors.(9) Specific Procedures: Amortized Cost and Penny-Rounding Methods. Includedwithin the procedures adopted by the board of directors for money market funds usingeither the Amortized Cost or Penny-Rounding Methods shall be the following:(i) Securities for Which Maturity is Determined by Reference to Demand Features.In the case of a security for which maturity is determined by reference to a DemandFeature, written procedures shall require ongoing review of the security’s continuedminimal credit risks, and that review must be based on, among other things, financialdata for the most recent fiscal year of the issuer of the Demand Feature and, in the caseof a security subject to a Conditional Demand Feature, the issuer of the security whosefinancial condition must be monitored under paragraph (c)(3)(iv) of this section,whether such data is publicly available or provided under the terms of the security’sgoverning documentation.(ii) Securities Subject to Demand Features or Guarantees. In the case of a securitysubject to one or more Demand Features or Guarantees that the fund’s board of directorshas determined that the fund is not relying on to determine the quality (pursuant toparagraph (c)(3) of this section), maturity (pursuant to paragraph (d) of this section) orliquidity of the security subject to the Demand Feature or Guarantee, written proceduresshall require periodic evaluation of such determination.(iii) Adjustable Rate Securities Without Demand Features. In the case of a VariableRate or Floating Rate Security that is not subject to a Demand Feature and for whichmaturity is determined pursuant to paragraphs (d)(1), (d)(2) or (d)(4) of this section,written procedures shall require periodic review of whether the interest rate formula,upon readjustment of its interest rate, can reasonably be expected to cause the security tohave a market value that approximates its amortized cost value.88A # 454265 v.1

(iv) Asset Backed Securities. In the case of an Asset Backed Security, writtenprocedures shall require the fund to periodically determine the number of Ten PercentObligors (as that term is used in paragraph (c)(4)(ii)(D) of this section) deemed to be theissuers of all or a portion of the Asset Backed Security for purposes of paragraph(c)(4)(ii)(D) of this section; Provided, however, written procedures need not requireperiodic determinations with respect to any Asset Backed Security that a fund’s board ofdirectors has determined, at the time of Acquisition, will not have, or is unlikely to have,Ten Percent Obligors that are deemed to be issuers of all or a portion of that AssetBacked Security for purposes of paragraph (c)(4)(ii)(D) of this section, and maintains arecord of this determination.(10) Recordkeeping and Reporting. (i) Written Procedures. For a period of not lessthan six years following the replacement of such procedures with new procedures (thefirst two years in an easily accessible place), a written copy of the procedures (and anymodifications thereto) described in paragraphs (c)(6) through (c)(9) and (e) of thissection shall be maintained and preserved.(ii) Board Considerations and Actions. For a period of not less than six years (thefirst two years in an easily accessible place) a written record shall be maintained andpreserved of the board of directors’ considerations and actions taken in connection withthe discharge of its responsibilities, as set forth in this section, to be included in theminutes of the board of directors’ meetings.(iii) Credit Risk Analysis. For a period of not less than three years from the date thatthe credit risks of a portfolio security were most recently reviewed, a written record ofthe determination that a portfolio security presents minimal credit risks and the NRSROratings (if any) used to determine the status of the security as an Eligible Security, FirstTier Security or Second Tier Security shall be maintained and preserved in an easilyaccessible place.(iv) Determinations With Respect to Adjustable Rate Securities. For a period of notless than three years from the date when the determination was most recently made, awritten record shall be preserved and maintained, in an easily accessible place, of thedetermination required by paragraph (c)(9)(iii) of this section (that a Variable Rate orFloating Rate Security that is not subject to a Demand Feature and for which maturity isdetermined pursuant to paragraphs (d)(1), (d)(2) or (d)(4) of this section can reasonablybe expected, upon readjustment of its interest rate at all times during the life of theinstrument, to have a market value that approximates its amortized cost).(v) Determinations with Respect to Asset Backed Securities. For a period of not lessthan three years from the date when the determination was most recently made, awritten record shall be preserved and maintained, in an easily accessible place, of thedeterminations required by paragraph (c)(9)(iv) of this section (the number of TenPercent Obligors (as that term is used in paragraph (c)(4)(ii)(D) of this section) deemedto be the issuers of all or a portion of the Asset Backed Security for purposes ofparagraph (c)(4)(ii)(D) of this section). The written record shall include:89A # 454265 v.1

(A) The identities of the Ten Percent Obligors (as that term is used in paragraph(c)(4)(ii)(D) of this section), the percentage of the Qualifying Assets constituted by thesecurities of each Ten Percent Obligor and the percentage of the fund’s Total Assets thatare invested in securities of each Ten Percent Obligor; and(B) Any determination that an Asset Backed Security will not have, or is unlikely tohave, Ten Percent Obligors deemed to be issuers of all or a portion of that Asset BackedSecurity for purposes of paragraph (c)(4)(ii)(D) of this section.(vi) Evaluations with Respect to Securities Subject to Demand Features orGuarantees. For a period of not less than three years from the date when the evaluationwas most recently made, a written record shall be preserved and maintained, in aneasily accessible place, of the evaluation required by paragraph (c)(9)(ii) (regardingsecurities subject to one or more Demand Features or Guarantees) of this section.(vii) Inspection of Records. The documents preserved pursuant to this paragraph(c)(10) shall be subject to inspection by the Commission in accordance with section 31(b)of the Act (15 U.S.C. 80a-30(b)) as if such documents were records required to bemaintained pursuant to rules adopted under section 31(a) of the Act (15 U.S.C. 80a-30(a)). If any action was taken under paragraphs (c)(6)(ii) (with respect to defaultedsecurities and events of insolvency) or (c)(7)(ii) (with respect to a deviation from thefund’s share price of more than 1/2 of 1 percent) of this section, the money market fundwill file an exhibit to the Form N-SAR (17 CFR 274.101) filed for the period in which theaction was taken describing with specificity the nature and circumstances of such action.The money market fund will report in an exhibit to such Form any securities it holds onthe final day of the reporting period that are not Eligible Securities.(d) Maturity of Portfolio Securities. For purposes of this section, the maturity of aportfolio security shall be deemed to be the period remaining (calculated from the tradedate or such other date on which the fund’s interest in the security is subject to marketaction) until the date on which, in accordance with the terms of the security, theprincipal amount must unconditionally be paid, or in the case of a security called forredemption, the date on which the redemption payment must be made, except asprovided in paragraphs (d)(1) through (d)(8) of this section:(1) Adjustable Rate Government Securities. A Government Security that is aVariable Rate Security where the variable rate of interest is readjusted no less frequentlythan every 762 calendar days shall be deemed to have a maturity equal to the periodremaining until the next readjustment of the interest rate. A Government Security that isa Floating Rate Security shall be deemed to have a remaining maturity of one day.(2) Short-Term Variable Rate Securities. A Variable Rate Security, the principalamount of which, in accordance with the terms of the security, must unconditionally bepaid in 397 calendar days or less shall be deemed to have a maturity equal to the earlierof the period remaining until the next readjustment of the interest rate or the periodremaining until the principal amount can be recovered through demand.90A # 454265 v.1

(3) Long-Term Variable Rate Securities. A Variable Rate Security, the principalamount of which is scheduled to be paid in more than 397 calendar days, that is subjectto a Demand Feature, shall be deemed to have a maturity equal to the longer of theperiod remaining until the next readjustment of the interest rate or the period remaininguntil the principal amount can be recovered through demand.(4) Short-Term Floating Rate Securities. A Floating Rate Security, the principalamount of which, in accordance with the terms of the security, must unconditionally bepaid in 397 calendar days or less shall be deemed to have a maturity of one day.(5) Long-Term Floating Rate Securities. A Floating Rate Security, the principalamount of which is scheduled to be paid in more than 397 calendar days, that is subjectto a Demand Feature, shall be deemed to have a maturity equal to the period remaininguntil the principal amount can be recovered through demand.(6) Repurchase Agreements. A repurchase agreement shall be deemed to have amaturity equal to the period remaining until the date on which the repurchase of theunderlying securities is scheduled to occur, or, where the agreement is subject todemand, the notice period applicable to a demand for the repurchase of the securities.(7) Portfolio Lending Agreements. A portfolio lending agreement shall be treated ashaving a maturity equal to the period remaining until the date on which the loanedsecurities are scheduled to be returned, or where the agreement is subject to demand,the notice period applicable to a demand for the return of the loaned securities.(8) Money Market Fund Securities. An investment in a money market fund shall betreated as having a maturity equal to the period of time within which the Acquiredmoney market fund is required to make payment upon redemption, unless the Acquiredmoney market fund has agreed in writing to provide redemption proceeds to theinvesting money market fund within a shorter time period, in which case the maturity ofsuch investment shall be deemed to be the shorter period.(e) Delegation. The money market fund’s board of directors may delegate to thefund’s investment adviser or officers the responsibility to make any determinationrequired to be made by the board of directors under this section (other than thedeterminations required by paragraphs (c)(1) (board findings); (c)(6)(i)(C) (rule forcertain securities subject to second tier Demand Features); (c)(6)(ii) (defaults and otherevents); (c)(7)(i) (general required procedures: Amortized Cost Method); (c)(7)(ii)(A)(shadow pricing), (B) (prompt consideration of deviation), and (C) (material dilution orunfair results); and (c)(8) (required procedures: Penny Rounding Method) of thissection) provided:(1) Written Guidelines. The Board shall establish and periodically review writtenguidelines (including guidelines for determining whether securities present minimalcredit risks as required in paragraph (c)(3) of this section) and procedures under whichthe delegate makes such determinations:(2) Oversight. the board shall take any measures reasonably necessary (throughperiodic reviews of fund investments and the delegate’s procedures in connection with91A # 454265 v.1

investment decisions and prompt review of the adviser’s actions in the event of thedefault of a security or event of insolvency with respect to the issuer of the security orany Guarantee to which it is subject that requires notification of the Commission underparagraph (c)(6)(iii) of this section) to assure that the guidelines and procedures arebeing followed.Rule 5b-317 CFR 270.5b-3§ 270.5b-3 Acquisition of repurchase agreement or refunded security treated asacquisition of underlying securities.(a) Repurchase Agreements. For purposes of sections 5 and 12(d)(3) of the Act (15U.S.C. 80a-5 and 80a-12(d)(3)), the acquisition of a repurchase agreement may be deemedto be an acquisition of the underlying securities, provided the obligation of the seller torepurchase the securities from the investment company is Collateralized Fully.(b) Refunded Securities. For purposes of section 5 of the Act (15 U.S.C. 80a-5), theacquisition of a Refunded Security is deemed to be an acquisition of the escrowedGovernment Securities.(c) Definitions. As used in this section:(1) Collateralized Fully in the case of a repurchase agreement means that:(i) The value of the securities collateralizing the repurchase agreement (reduced bythe transaction costs (including loss of interest) that the investment company reasonablycould expect to incur if the seller defaults) is, and during the entire term of therepurchase agreement remains, at least equal to the Resale Price provided in theagreement;(ii) The investment company has perfected its security interest in the collateral;(iii) The collateral is maintained in an account of the investment company with itscustodian or a third party that qualifies as a custodian under the Act;(iv) The collateral consists entirely of:(A) Cash items;(B) Government Securities;(C) Securities that at the time the repurchase agreement is entered into are rated inthe highest rating category by the Requisite NRSROs; or92A # 454265 v.1

(D) Unrated Securities that are of comparable quality to securities that are rated inthe highest rating category by the Requisite NRSROs, as determined by the investmentcompany’s board of directors or its delegate; and(v) Upon an Event of Insolvency with respect to the seller, the repurchase agreementwould qualify under a provision of applicable insolvency law providing an exclusionfrom any automatic stay of creditors’ rights against the seller.(2) Event of Insolvency means, with respect to a person:(i) An admission of insolvency, the application by the person for the appointment ofa trustee, receiver, rehabilitator, or similar officer for all or substantially all of its assets, ageneral assignment for the benefit of creditors, the filing by the person of a voluntarypetition in bankruptcy or application for reorganization or an arrangement withcreditors; or(ii) The institution of similar proceedings by another person which proceedings arenot contested by the person; or(iii) The institution of similar proceedings by a government agency responsible forregulating the activities of the person, whether or not contested by the person.(3) Government Security means any “Government Security” as defined in section2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16)).(4) Refunded Security means a debt security the principal and interest payments ofwhich are to be paid by Government Securities (“deposited securities”) that have beenirrevocably placed in an escrow account pursuant to an agreement between the issuer ofthe debt security and an escrow agent that is not an “affiliated person,” as defined insection 2(a)(3)(C) of the Act (15 U.S.C. 80a-2(a)(3)(C)), of the issuer of the debt security,and, in accordance with such escrow agreement, are pledged only to the payment of thedebt security and, to the extent that excess proceeds are available after all payments ofprincipal, interest, and applicable premiums on the Refunded Securities, the expenses ofthe escrow agent and, thereafter, to the issuer or another party; provided that:(i) The deposited securities are not redeemable prior to their final maturity;(ii) The escrow agreement prohibits the substitution of the deposited securitiesunless the substituted securities are Government Securities; and(iii) At the time the deposited securities are placed in the escrow account, or at thetime a substitution of the deposited securities is made, an independent certified publicaccountant has certified to the escrow agent that the deposited securities will satisfy allscheduled payments of principal, interest and applicable premiums on the RefundedSecurities; “Provided,” “however,” an independent public accountant need not haveprovided the certification described in this paragraph (c)(4)(iii) if the security, as aRefunded Security, has received a rating from an NRSRO in the highest category fordebt obligations (within which there may be sub-categories or gradations indicatingrelative standing).93A # 454265 v.1

(5) NRSRO means any nationally recognized statistical rating organization, as thatterm is used in paragraphs (c)(2)(vi)(E), (F) and (H) of § 240.15c3-1 of this chapter, that isnot an “affiliated person,” as defined in section 2(a)(3)(C) of the Act (15 U.S.C.80a-2(a)(3)(C)), of the issuer of, or any insurer or provider of credit support for, thesecurity.(6) Requisite NRSROs means:(i) Any two NRSROs that have issued a rating with respect to a security or class ofdebt obligations of an issuer; or(ii) If only one NRSRO has issued a rating with respect to such security or class ofdebt obligations of an issuer at the time the investment company acquires the security,that NRSRO.(7) Resale Price means the acquisition price paid to the seller of the securities plus theaccrued resale premium on such acquisition price. The accrued resale premium is theamount specified in the repurchase agreement or the daily amortization of the differencebetween the acquisition price and the resale price specified in the repurchase agreement.(8) Unrated Securities means securities that have not received a rating from theRequisite NRSROs.94A # 454265 v.1

APPENDIX 2:Glossary of Defined TermsThis Glossary includes definitions of terms defined in Rule 2a-7, along withbackground information for some of the definitions. Some of the definitions also includereference to relevant sections of this guide that provide further information. In theguide, and in this glossary, capitalized terms are used with their meanings under theRule and terms specifically defined in the Rule are italicized.Acquisition (or Acquire) means “any purchase or subsequent rollover (but does notinclude the failure to exercise a Demand Feature).” (a)(1) This definition is significantbecause various tests under the Rule must be measured at “Acquisition.” For example,the diversification tests applicable to issuers and credit support providers apply upon“Acquisition.” (c)(4)(A), (B) and (C) (See “Diversification as to Issuer” on page 37 and“Diversification As To Credit Supports” on page 49.)In addition, the second tier quality test is applied upon Acquisition of a security.(c)(3)(ii) (See “Quality Tests: Minimal Credit Risks; Eligible Security Rating Quality; Limiton Second Tier Securities – Third of Three Basic Quality Tests: Limit on AggregateExposure to Second Tier Securities” on page 32.) (c)(3)(ii)Lastly, the maturity of a portfolio security is measured upon its Acquisition (andmaturity is measured thereafter as well, and it may change during the life of thesecurity). (c)(2)(ii) The qualification in parentheses in the definition means that if asecurity would fail one of these tests on the date that a Demand Feature on the securitymay be exercised, the fund is not required to exercise the Demand Feature on that date.Amortized Cost Method of valuation means “the method of calculating aninvestment company’s net asset value whereby portfolio securities are valued at thefund’s Acquisition cost as adjusted for amortization of premium or accretion of discountrather than at their value based on current market factors.” (a)(2) (See “Introduction” onpage 2.)Asset Backed Security means “a fixed income security (other than a GovernmentSecurity) issued by a Special Purpose Entity (as defined in this paragraph), substantiallyall of the assets of which consist of Qualifying Assets (as defined in this paragraph).Special Purpose Entity means a trust, corporation, partnership or other entity organizedfor the sole purpose of issuing securities that entitle their holders to receive paymentsthat depend primarily on the cash flow from Qualifying Assets, but does not include aregistered investment company. Qualifying Assets means financial assets, either fixed orrevolving, that by their terms convert into cash within a finite time period, plus anyrights or other assets designed to assure the servicing or timely distribution of proceedsto security holders.” (a)(3)95A # 454265 v.1

The SEC explained the basic structure of an Asset Backed Security in the December 17,1993, Proposing Release: “While the structure of ABSs vary, the ABSs that have beenmarketed to money market funds generally involve: (i) the trust, which issues the ABSs;(ii) the sponsor, which contributes the assets to the trust; (iii) the servicer, which isresponsible for administering the assets in the pool; (iv) the trustee, which monitors theactivities of the servicer; and (v) the bank, which provides some form of liquidity and/orcredit enhancement to assure that the trust will have sufficient funds to meet interestand amortization payments in the event that cash flow from the underlying assets isinsufficient to meet the payment schedule of the ABS.” (December 17, 1993, ProposingRelease, note 101.)The SEC also explained that the definition of “Special Purpose Entity” was designed toexclude issuers that are not typically considered to be direct issuers of ABSs, such asfinance companies. The SEC explains, “Typically, finance companies and similarenterprises are not organized for the sole purpose of owning qualifying assets andissuing ABSs and have some other purpose, such as providing financing for the sale ofan affiliate’s products.” (December 17, 1993, Proposing Release, note 107.) Carefulreview of the documentation creating an Asset Backed Security may be necessary toconfirm whether the security fits within the definition.Business Day means “any day, other than Saturday, Sunday or any customarybusiness holiday.” (a)(4) This term is used in the Rule’s discussion of downgrades (See“Changes in Credit Quality: Required Action on Certain Negative Events” on page 68.)The creditworthiness of certain downgraded securities need not be reassessed if thesecurity is disposed of or matures within five Business Days.Collateralized Fully. This definition sets forth the requirements for a repurchaseagreement that is eligible for “look-through” treatment for purposes of diversificationtesting. Look-through treatment permits a fund to treat as the issuer of the repurchaseagreement the issuer of the underlying collateral for the repurchase agreement. Thisdefinition is included in Rule 5b-3(c)(1), rather than in Rule 2a-7. Collateralized Fully inthe case of a repurchase agreement means:“(i) The value of the securities collateralizing the repurchase agreement(reduced by the transaction costs (including loss of interest) that the investmentcompany reasonably could expect to incur if the seller defaults) is, and duringthe entire term of the repurchase agreement remains, at least equal to the ResalePrice provided in the agreement;(ii) The investment company has perfected its security interest in thecollateral;96A # 454265 v.1

(iii) The collateral is maintained in an account of the investment company with itscustodian or a third party that qualifies as a custodian under the [Investment Company]Act;(iv) The collateral consists entirely of:(A) Cash items;(B) Government Securities;(C) Securities that at the time the repurchase agreement is entered into are rated inthe highest rating category by the Requisite NRSROs; or(D) Unrated Securities that are of comparable quality to securities that are rated in thehighest rating category by the Requisite NRSROs, as determined by theinvestment company’s board of directors or its delegate; and(v) Upon an Event of Insolvency with respect to the seller, the repurchase agreementwould qualify under a provision of applicable insolvency law providing an exclusionfrom any automatic stay of creditors’ rights against the seller.”Resale Price means the Acquisition price paid to the seller of the securities plus theaccrued resale premium on such Acquisition price. The accrued resale premium is theamount specified in the repurchase agreement or the daily amortization of the differencebetween the Acquisition price and the Resale Price specified in the repurchase agreement.(a)(5) and Rule 5b-3(c)(1)(See “Diversification as to Issuer – Look-Throughs” on page 42.)Conditional Demand Feature means “a Demand Feature that is not an UnconditionalDemand Feature. A Conditional Demand Feature is not a Guarantee.” (a)(6)Frequently, the Demand Feature on a tax exempt Asset Backed Security is conditional.The SEC explained the reason for this in the December 17, 1993, Proposing Release. “The[Demand Features] are conditional to address tax-related concerns.” . . . “For distributionsfrom the [asset backed] trust to be tax exempt, the owner of the trust interests must bedeemed the owner of the core securities for tax purposes. The conditions attached to the[Demand Features] are designed to assure that investors in the trust bear some of thecredit risks of the core securities, thus establishing some indicia of ownership.”(December 17, 1993, Proposing Release, note 103.)An Unconditional Demand Feature is a type of Guarantee, and a security with such afeature is eligible for more flexible treatment under the quality requirements. (See“Quality Tests: Minimal Credit Risks; Eligible Security Rating Quality; Limit on SecondTier Securities – How to Apply the Eligible Quality Test for Specific Types of Securities –97A # 454265 v.1

Determining Eligible Status for a Security with a Guarantee” on page 22 and“Diversification as to Issuer” on page 37.)Conduit Security means “a security issued by a Municipal Issuer (as defined in thisparagraph) involving an arrangement or agreement entered into, directly or indirectly,with a person other than a Municipal Issuer, which arrangement or agreement providesfor or secures repayment of the security. Municipal Issuer means a state or territory of theUnited States (including the District of Columbia), or any political subdivision or publicinstrumentality of a state or territory of the United States. A Conduit Security does notinclude a security that is:Fully and unconditionally guaranteed by a Municipal Issuer; orPayable from the general revenues of the Municipal Issuer or other Municipal Issuers(other than those revenues derived from an agreement or arrangement with a personwho is not a Municipal Issuer that provides for or secures repayment of the securityissued by the Municipal Issuer); orRelated to a project owned and operated by a Municipal Issuer; orRelated to a facility leased to and under the control of an industrial or commercialenterprise that is part of a public project which, as a whole, is owned and under thecontrol of a Municipal Issuer.” (c)(7)This definition is relevant to Tax Exempt Funds. For a Tax Exempt Fund, the SecondTier Security and second tier issuer diversification tests apply only to Conduit Securities.For non-Conduit Securities, these limits on second tier holdings do not apply. (See“Quality Tests: Minimal Credit Risks; Eligible Security Rating Quality; Limit on SecondTier Securities – Third of Three Basic Quality Tests: Limit on Aggregate Exposure toSecond Tier Securities” on page 32 and “Diversification as to Issuer – Additional MoreRestrictive Diversification Test for Second Tier Issuers: 1 Percent in Any One Issuer” onpage 39.)Generally, Conduit Securities are municipal securities where the ultimate creditsource is not a public entity. The SEC has concluded that applying the second tier teststo all securities held by a Tax Exempt Fund might be too disruptive of tax exemptportfolios, but these tests should be applied to second tier Conduit Securities. The SEChas explained, “A significant portion of tax exempt fund portfolios is also dependent onthe financial health of corporate issuers rather than state or local governments . . . Today,a significant percentage of tax exempt securities are so-called ‘conduit securities’ ― thatis, tax exempt instruments issued by a statutory authority or special purpose entity thathave as their ultimate obligor a corporation.” (December 17, 1993, Proposing Release.)“These types of securities are generally issued to finance business development(industrial development bonds), the construction of health care facilities and nursinghomes and housing development.” (December 17, 1993, Proposing Release, note 27.) The98A # 454265 v.1

SEC has noted that Conduit Securities are not backed by a revenue source from anyessential public facility or by the taxing authority of any state or municipality. As aresult, the risk of default for Conduit Securities is significantly higher than it is fortraditional state or municipal securities. (See March 21, 1996, Adopting Release, note 50.)Demand Feature means “A feature permitting the holder of a security to sell thesecurity at an exercise price equal to the approximate amortized cost of the security plusaccrued interest, if any, at the time of exercise. A Demand Feature must be exercisableeither:(i)(A) At any time on no more than 30 calendar days’ notice; or(B) At specified intervals not exceeding 397 calendar days and upon no more than 30calendar days’ notice; or(ii) A feature permitting the holder of an Asset Backed Security unconditionally toreceive principal and interest within 397 calendar days of making demand.” (c)(8)The definition of Demand Feature is significant, among other reasons, because if asecurity has a Demand Feature, the Demand Feature may be used to determine whether thesecurity is an Eligible Security for quality purposes (see “Quality Tests: Minimal CreditRisks; Eligible Security Rating Quality; Limit on Second Tier Securities – How to Apply theEligible Quality Test for Specific Types of Securities” on page 22), and might be used to“shorten” the maturity of the security under the maturity shortening provisions. (See“Maturity – Maturity Shortening Provisions for Variable Rate Securities and Floating RateSecurities” on page 62.)In addition, a Demand Feature must be tested under the credit support diversificationrules. (See “Diversification as to Credit Supports” on page 37.)The SEC has explained that the additional definition of Demand Feature available foran Asset Backed Security was included to allow a type of feature that is available oncertain Asset Backed Securities to be used under the maturity shortening provisions. TheSEC described “pass-through” Asset Backed Securities, in which the cash generated by theunderlying assets passes through directly to the Asset Backed Security holders, whoreceive a pro rata share of the cash flows, net of fees. “The ultimate maturity of theseinstruments depends upon the rate of repayment of the underlying assets . . . PassthroughABSs held by money market funds generally are not scheduled to return aholder’s principal for three to five years. They typically provide for periodic interest rateresets and for principal to be returned after some period (not exceeding thirteen months)after a demand for repayment is made.” (December 17, 1993, Proposing Release.) “Thesetypes of repayment elections [prior to the addition of the additional definition of DemandFeature for an Asset Backed Security] do not qualify as demand features because thedefinition of demand feature requires repayment no more than 30 days after demand.The Commission is proposing to revise Rule 2a-7 to clarify that the final maturity of99A # 454265 v.1

these instruments is the date on which principal is scheduled to be returned to theholder (regardless of whether demand has been made) . . .” (December 17, 1993,Proposing Release, note 114.)Demand Feature Issued by a Non-Controlled Person means “a Demand Feature issued by:(i) A person that, directly or indirectly, does not control, and is not controlled by orunder common control with the issuer of the security subject to the Demand Feature(control means ‘control’ as defined in section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)); or(ii) A sponsor of a Special Purpose Entity with respect to an Asset Backed Security.”(a)(9)This definition is significant for the credit support diversification requirements of theRule. The Rule provides that, with respect to 75 percent of its Total Assets, a fund maynot invest more than 10 percent of its Total Assets in securities issued by or subject toGuarantees or Demand Features from the same institution. A fund is not subject to the 10percent limitation with respect to the remaining 25 percent of its total assets if thesecurities held in the 25 percent “basket” are First Tier Securities and are issued by a noncontrolledperson. (See “Diversification As To Credit Supports” on page 49.)Clause (ii) of the definition allows this additional exposure to sponsor-providedcredit supports of an Asset Backed Security. A fund holding an Asset Backed Securitysubject to a Demand Feature from its sponsor is not able to include this investment in its25 percent basket if the sponsor is in a control relationship with the special purposeentity. (See December 2, 1997, Adopting Release, notes 62 through 64.) The SEC hasexplained, “The twenty–five percent basket is restricted to securities subject to puts fromnon-controlled persons in order to minimize a fund’s exposure to the credit risk of asingle economic enterprise and limit the aggregate exposure to the risks of the related,active businesses. Permitting a fund to invest more than ten percent of its total assets inan ABS subject to a demand feature or guarantee issued by a sponsor, however, wouldnot have this effect, because the special purpose entity, unlike an active enterprise, is alimited purpose vehicle related solely for the purpose of issuing fixed income securitiesbased on the cash flow of the qualifying assets.” (December 2, 1997, Adopting Release,note 66.) Therefore, the SEC amended the Rule to allow funds to treat a Demand Featureor Guarantee from an Asset Backed Security sponsor as a Demand Feature or GuaranteeIssued by a Non-Controlled Person. (See December 2, 1997, Adopting Release, text abovenote 66.)This definition also is relevant to the issuer diversification test. A security with aGuarantee Issued by a Non-Controlled Person, but not one with a Guarantee issued by acontrol entity, is excluded from the issuer diversification test. (An Unconditional DemandFeature is a type of Guarantee.) (See “Diversification as to Issuer” on page 37.)100A # 454265 v.1

Eligible Security. This definition is explained in detail under “Quality Tests: MinimalCredit Risks; Eligible Security Rating Quality; Limit on Second Tier Securities – Second ofThree Basic Quality Tests: Eligible Security” on page 20. Eligible Security means:“(i) A Rated Security with a remaining maturity of 397 calendar days or less that hasreceived a rating from the Requisite NRSROs in one of the two highest short-term ratingcategories (within which there may be sub-categories or gradations indicating relativestanding); or(ii) An Unrated Security that is of comparable quality to a security meeting therequirements for a Rated Security in paragraph (a)(10)(i) of this section, as determined bythe money market fund’s board of directors; Provided, however, that:(A) A security that at the time of issuance had a remaining maturity of more than 397calendar days but that has a remaining maturity of 397 calendar days or less and that isan Unrated Security is not an Eligible Security if the security has received a long-termrating from any NRSRO that is not within the NRSRO’s three highest long-term ratingscategories (within which there may be sub-categories or gradations indicating relativestanding), unless the security has received a long-term rating from the Requisite NRSROsin one of the three highest rating categories;(B) An Asset Backed Security (other than an Asset Backed Security substantially all ofwhose Qualifying Assets consist of obligations of one or more Municipal Issuers, as thatterm is defined in paragraph (a)(7) of this section) shall not be an Eligible Security unlessit has received a rating from an NRSRO.(iii) In addition, in the case of a security that is subject to a Demand Feature orGuarantee:(A) The Guarantee has received a rating from an NRSRO or the Guarantee is issued bya guarantor that has received a rating from an NRSRO with respect to a class of debtobligations (or any debt obligation within that class) that is comparable in priority andsecurity to the Guarantee, unless:(1) The Guarantee is issued by a person that, directly or indirectly, controls, iscontrolled by or is under common control with the issuer of the security subject to theGuarantee (other than a sponsor of a Special Purpose Entity with respect to an Asset BackedSecurity);(2) The security subject to the Guarantee is a repurchase agreement that isCollateralized Fully; or(3) The Guarantee is itself a Government Security; and101A # 454265 v.1

(B) The issuer of the Demand Feature or Guarantee, or another institution, hasundertaken promptly to notify the holder of the security in the event the Demand Featureor Guarantee is substituted with another Demand Feature or Guarantee (if such substitutionis permissible under the terms of the Demand Feature or Guarantee).” (a)(10)Event of Insolvency is a term used to describe a negative event relating to a portfoliosecurity that triggers specified required action by a fund. See “Changes in CreditQuality” on page 68. It means, with respect to a person:“(i) An admission of insolvency, the application by the person for theappointment of a trustee, receiver, rehabilitator, or similar officer for all orsubstantially all of its assets a general assignment for the benefit of creditors, thefiling by the person of a voluntary petition in bankruptcy or application forreorganization or an arrangement with creditors; or(ii) The institution of similar proceedings by another person whichproceedings are not contested by the person; or(iii) The institution of similar proceedings by a government agencyresponsible for regulating the activities of the person, whether or not contestedby the person.” (a)(11)First Tier Security. This term is explained in detail under “Quality Tests: MinimalCredit Risks; Eligible Security Rating Quality; Limit on Second Tier Securities – Second ofThree Basic Quality Tests: Eligible Security” on page 20. First Tier Security means: “anyEligible Security that:(i) Is a Rated Security that has received a short-term rating from the RequisiteNRSROs in the highest short-term rating category for debt obligations (withinwhich there may be sub-categories or gradations indicating relative standing); or(ii) Is an Unrated Security that is of comparable quality to a security meetingthe requirements for a Rated Security in paragraph (a)(12)(i) of this section, asdetermined by the fund’s board of directors; or(iii) Is a security issued by a registered investment company that is a moneymarket fund; or(iv) Is a Government Security.” (a)(12)Floating Rate Security. This definition is explained in detail under “Maturity –Typical Calculation of Maturity and Maturity Shortening Provisions” on page 58,relating to the maturity shortening provisions. Floating Rate Security means “a securitythe terms of which provide for the adjustment of its interest rate whenever a specifiedinterest rate changes and that, at any time until the final maturity of the instrument or102A # 454265 v.1

the period remaining until the principal amount can be recovered through demand, canreasonably be expected to have a market value that approximates its amortized cost.”(a)(13)Government Security means “any ’Government Security’ as defined in section2(a)(16) of the Investment Company Act.” (a)(14) Under Section 2(a)(16), a GovernmentSecurity means “any security issued or guaranteed as to principal or interest by theUnited States, or by a person controlled or supervised by and acting as aninstrumentality of the Government of the United States pursuant to authority granted bythe Congress of the United States; or any certificate of deposit for any of the foregoing.”Guarantee means “an unconditional obligation of a person other than the issuer ofthe security to undertake to pay, upon presentment by the holder of the Guarantee (ifrequired), the principal amount of the underlying security plus accrued interest whendue or upon default, or, in the case of an Unconditional Demand Feature, an obligation thatentitles the holder to receive upon exercise the approximate amortized cost of theunderlying security or securities, plus accrued interest, if any. A Guarantee includes aletter of credit, financial guaranty (bond) insurance, and an Unconditional Demand Feature(other than an Unconditional Demand Feature provided by the issuer of the security).”(a)(15)The effect on compliance testing of having a Guarantee is discussed in “Quality Tests:Minimal Credit Risks; Eligible Security Rating Quality; Limit on Second Tier Securities –Second of Three Basic Quality Tests: Eligible Security – How to Apply the Eligible QualityTest for Specific Types of Securities” on page 22.Guarantee Issued by a Non-Controlled Person means “a Guarantee issued by:(i) A person that, directly or indirectly, does not control, and is not controlled by orunder common control with the issuer of the security subject to the Guarantee (controlmeans ‘control’ as defined in section 2(a)(9) of the Act; or(ii) A sponsor of a Special Purpose Entity with respect to an Asset Backed Security.”(a)(16)This definition is relevant to the diversification test for credit supports, in particularthe 25 percent basket and the issuer diversification test. The 25 percent basket for thecredit support diversification test can be used only for credit supports from a noncontrolledperson. A Guarantee Issued by a Non-Controlled Person frees a security fromissuer diversification testing. (See the definition of “Demand Feature Issued by a Non-Controlled Person.”)Municipal Issuer. This definition is used in the definition of Conduit Security and alsoused to describe the issuers of underlying assets of an Asset Backed Security that qualifythe ABS for an exception from the requirement that it be rated. Municipal Issuer means103A # 454265 v.1

“means a state or territory of the United States (including the District of Columbia), orany political subdivision or public instrumentality of a state or territory of the UnitedStates.” (a)(7)NRSRO. This definition is used to describe the rating agencies whose ratings may beused as a basis to conclude that a security is eligible quality. It means “any nationallyrecognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E),(F) and (H) of Sec. 240.15c3-1 of this Chapter [the Securities Exchange Act of 1934], thatis not an ‘affiliated person,’ as defined in section 2(a)(3)(C) of the [Investment Company]Act (15 U.S.C. 80a-2(a)(3)(C)), of the issuer of, or any insurer or provider of creditsupport for, the security.” (a)(17)Technical Point – 2007 NRSRO Rule: During 2006, Congress enacted theCredit Agency Reform Act. On June 26, 2007, the SEC’s ruleimplementing the Act became effective, creating a new registrationregime for entities that wish to qualify as NRSROs. SEC ChairmanChristopher Cox said that the Act and the rule would enhance thereliability of credit ratings by fostering accountability, transparency andcompetition in the credit rating industry. On September 24, 2007, the SECissued orders granting the registrations of the first seven credit ratingagencies to register as NRSROs under the new rule. The seven firms areA.M. Best Company, Inc.; DBRS Ltd.; Fitch, Inc.; Japan Credit RatingAgency, Ltd.; Moody’s Investors Service, Inc.; Rating and InvestmentInformation, Inc.; and Standard & Poor’s Ratings Services. On December21, 2007, the SEC issued an order registering an additional new NRSRO,Egan-Jones Rating Company.The SEC has recognized that the rule could affect the number of NRSROsthat exist, and thus impact money market fund compliance. The SECplanned to monitor developments that may affect money market fundreliance on NRSROs under Rule 2a-7. The SEC said commenters on therule “suggested that requirements in Rule 2a-7 . . . under the InvestmentCompany Act of 1940, which regulates the operation of money marketfunds, may need to be modified depending on the number of credit ratingagencies that become registered as NRSROs [under the reformed NRSROprocedures] . . . For example, one commenter noted that Rule 2a-7(c)(6)(i)(A)(2) requires a money market fund to re-assess the minimalcredit risk of its portfolio whenever it becomes aware that any unrated orsecond tier security held by the fund has been given a credit rating by anyNRSRO below the NRSRO’s second highest category . . . Anothercommenter noted that Rule 2a-7 prescribes that money market fundsdetermine whether a security is eligible for purchase based on whether ithas received a credit rating in one of the two highest categories from any104A # 454265 v.1

NRSRO . . . This commenter was concerned that this might lead to moneymarket funds filling portfolios that most NRSROs consider third tier . . .One of the these commenters also expressed concern that the proposaldid not require that an NRSRO have a particular number of credit ratingcategories or that the categories of one NRSRO might not correspond tothose of another NRSRO. n24 Based on the uncertainty of how manycredit rating agencies ultimately will register as NRSROs, theCommission intends to monitor for now how the NRSRO regulatoryprogram impacts Rule 2a-7 and the Commission’s other rules using theterm ‘NRSRO.’ As the program develops, the Commission will evaluatewhether modifications to these rules would be appropriate.” (See“Oversight of Credit Rating Agencies Registered as NationallyRecognized Statistical Rating Organizations,” Release No. 34-55857 datedJune 18, 2007; footnotes omitted.)Penny-Rounding Method of pricing means “the method of computing an investmentcompany’s price per share for purposes of distribution, redemption and repurchasewhereby the current net asset value per shares is rounded to the nearest one percent.”(a)(18) This method is further explained under “Introduction“ on page 2.Qualifying Assets. This definition is used in the definition of Asset Backed Security todescribe the assets underlying the Asset Backed Security. See the definition of Asset BackedSecurity.Rated Security means “a security that meets the requirements of paragraphs(a)(19)(i) or (ii) of this section, in each case subject to paragraph (a)(19)(iii) of this section:(i) The security has received a short-term rating from an NRSRO, or has been issuedby an issuer that has received a short-term rating from an NRSRO with respect to a classof debt obligations (or any debt obligation within that class) that is comparable inpriority and security with the security; or(ii) The security is subject to a Guarantee that has received a short-term rating from anNRSRO, or a Guarantee issued by a guarantor that has received a short-term rating froman NRSRO with respect to a class of debt obligations (or any debt obligation within thatclass) that is comparable in priority and security with the Guarantee; but(iii) A security is not a Rated Security if it is subject to an external credit supportagreement (including an arrangement by which the security has become a RefundedSecurity) that was not in effect when the security was assigned its rating, unless thesecurity has received a short-term rating reflecting the existence of the credit supportagreement as provided in paragraph (a)(19)(i) of this section, or the credit supportagreement with respect to the security has received a short-term rating as provided inparagraph (a)(19)(ii) of this section.” (a)(19)105A # 454265 v.1

Refunded Security means “a debt security the principal and interest payments ofwhich are to be paid by Government Securities (‘deposited securities’) that have beenirrevocably placed in an escrow account pursuant to an agreement between the issuer ofthe debt security and an escrow agent that is not an ‘affiliated person,’ as defined insection 2(a)(3)(C) of the [Investment Company] Act, of the issuer of the debt security,and, in accordance with such escrow agreement, are pledged only to the payment of thedebt security and, to the extent that excess proceeds are available after all payments ofprincipal, interest, and applicable premiums on the Refunded Securities, the expenses ofthe escrow agent and, thereafter, to the issuer or another party; provided that:(i) The deposited securities are not redeemable prior to their final maturity;(ii) The escrow agreement prohibits the substitution of the deposited securitiesunless the substituted securities are Government Securities; and(iii) At the time the deposited securities are placed in the escrow account, or at thetime a substitution of the deposited securities is made, an independent certified publicaccountant has certified to the escrow agent that the deposited securities will satisfy allscheduled payments of principal, interest and applicable premiums on the RefundedSecurities; provided, however, an independent public accountant need not haveprovided the certification described in this paragraph (c)(4)(iii) if the security, as aRefunded Security, has received a rating from an NRSRO in the highest category for debtobligations (within which there may be sub-categories or gradations indicating relativestanding).” (a)(20) (See “Diversification As To Issuer – Look-Throughs” on page 42.)Requisite NRSROs means:“(i) Any two NRSROs that have issued a rating with respect to a security or class ofdebt obligations of an issuer; or(ii) If only one NRSRO has issued a rating with respect to such security or class ofdebt obligations of an issuer at the time the fund acquires the security, that NRSRO.”(a)(21) (See “Quality Tests: Minimal Credit Risks; Eligible Security Rating Quality; Limiton Second Tier Securities – Second of Three Basic Quality Tests: Eligible Security” onpage 20.)Second Tier Security means “any Eligible Security that is not a First Tier Security.”(a)(22) (See “Quality Tests: Minimal Credit Risks; Eligible Security Rating Quality; Limiton Second Tier Securities – Second of Three Basic Quality Tests: Eligible Security” onpage 20.)Single State Fund means “a Tax Exempt Fund that holds itself out as seeking tomaximize the amount of its distributed income that is exempt from the income taxes orother taxes on investments of a particular state and, where applicable, subdivisionsthereof.” (a)(23) (See “Portfolio Management – Quality, Diversification, Maturity for Tax106A # 454265 v.1

Exempt and Taxable Funds – Taxable and Tax Exempt Funds” on page 15, relating todiffering requirements for Single State Funds.)Special Purpose Entity. This definition is used in the definition of Asset BackedSecurity to describe the entity issuing the Asset Backed Security. See the definition of AssetBacked Security.Tax Exempt Fund means “any money market fund that holds itself out asdistributing income exempt from regular federal income tax.” (a)(24) (See “PortfolioManagement – Quality, Diversification, Maturity for Tax Exempt and Taxable Funds –Taxable and Tax Exempt Funds” on page 15, relating to differing requirements for TaxExempt Funds.)Total Assets means “with respect to a money market fund using the Amortized CostMethod, the total amortized cost of its assets and, with respect to any other moneymarket fund, the total market-based value of its assets.” (a)(25) (See “Diversification asto Issuer” on page 37 and “Diversification as to Credit Supports” on page 49, relating totests that apply to Total Assets.)Unconditional Demand Feature means “a Demand Feature that by its terms would bereadily exercisable in the event of a default in payment of principal or interest on theunderlying security or securities.” (a)(26) An Unconditional Demand Feature is a type ofGuarantee. (See “Quality Tests: Minimal Credit Risks; Eligible Security Rating Quality;Limit on Second Tier Securities – How to Apply the Eligible Quality Test for SpecificTypes of Securities” on page 22, relating to the effects of a security having a DemandFeature or Guarantee.)Underlying Security. This term is used in the section of the Rule describing theeligible status of a security with a Conditional Demand Feature, and describes a securitythat is supported by a Demand Feature. (See “Quality Tests: Minimal Credit Risks; EligibleSecurity Rating Quality; Limit on Second Tier Securities – How to Apply the EligibleQuality Test for Specific Types of Securities – Determining Eligible Status for a Securitywith a Conditional Demand Feature” on page 26.)United States Dollar-Denominated means “with reference to a security, that allprincipal and interest payments on such security are payable to security holders inUnited States dollars under all circumstances and that the interest rate of, the principalamount to be repaid, and the timing of payments related to such security do not vary orfloat with the value of a foreign currency, the rate of interest payable on foreign currencyborrowings, or with any other interest rate or index expressed in a currency other thanUnited States dollars.” (a)(27) (See “Quality Tests: Minimal Credit Risks; Eligible SecurityRating Quality; Limit on Second Tier Securities” on page 17.)107A # 454265 v.1

Unrated Security means “a security that is not a Rated Security.” (a)(28) (See “QualityTests: Minimal Credit Risks; Eligible Security Rating Quality; Limit on Second TierSecurities – Other Standards Governing the Quality of Portfolio Securities” on page 33.)Variable Rate Security means “a security the terms of which provide for theadjustment of its interest rate on set dates (such as the last day of a month or calendarquarter) and that, upon each adjustment until the final maturity of the instrument or theperiod remaining until the principal amount can be recovered through demand, canreasonably be expected to have a market value that approximates its amortized cost.”(a)(28) (See “Maturity – Typical Calculation of Maturity and Maturity ShorteningProvisions” on page 58.)108A # 454265 v.1

APPENDIX 3:Proposing, Adopting and Amending Releases for Rule 2a-71. Proposing Release No. IC-12206 (February 1, 1982; Published in Federal RegisterFebruary 5, 1982)2. Adopting Release No. IC-13380 (July 11, 1983; Published in Federal Register July 18,1983)3. Proposed Amending Release No. IC-14607 (July 1, 1985; Published in FederalRegister July 9, 1985)4. Amending Release No. IC-14983 (March 12, 1986; Published in Federal RegisterMarch 21, 1986)5. Proposed Amending Release No. IC-17589 (July 17, 1990; Published in FederalRegister July 25, 1990)6. Amending Release No. IC-18005 (February 20, 1991; Published in Federal RegisterFebruary 27, 1991)7. Proposed Amending Release No. IC-18080 (March 8, 1991; Published in FederalRegister April 12, 1991)8. Amending Release No. IC-18177 (May 31, 1991; Published in Federal Register June 6,1991)9. Proposed Amending Release No. IC-19959 (December 17, 1993; Published in FederalRegister December 28, 1993)10. Amending Release No. IC-21837 (March 21, 1996; Published in Federal Register June3, 1996)11. Suspension of Compliance Date for March 21, 1996, Amendments Release No. IC-22135 (August 13, 1996; Published in Federal Register August 19, 1996)12. Proposed Amending Release No. IC-22283 (December 10, 1996; Published in FederalRegister December 18, 1996)13. Amending Release No. IC-22921 (December 2, 1997; Published in Federal RegisterDecember 9, 1997)109A # 454265 v.1

14. Proposed Amending Release No. IC-24050 (September 23, 1999; Published in FederalRegister September 29, 1999)15. Amending Release No. IC-25058 (July 5, 2001; Published in Federal Register July 11,2001)110A # 454265 v.1

APPENDIX 4:Provisions Specifically Required to Be Reflected in Fund ProceduresUnder Rule 2a-7In addition to the general requirements that procedures be reasonably designed tostabilize value and provide for mark to market, the Rule sets forth several very specific,technical provisions required to be included in the fund’s procedures, for funds usingeither the Amortized Cost Method, the Penny-Rounding Method or both.Ongoing Credit Evaluation of Security Whose Maturity Is Determined byReference to a Demand Feature. To understand the first procedural requirement, onemust understand the concepts of the “maturity shortening” provisions under the Ruleand of a “Demand Feature.” The Rule limits the maturity of each portfolio holding andthe dollar-weighted average portfolio maturity. As explained under “MaturityShortening Provisions for Variable Rate Securities and Floating Rate Securities” on page 62,a Variable Rate Security or a Floating Rate Security may be treated, for purposes ofapplying these limits, as having a remaining maturity shorter than its nominalremaining maturity if it meets certain conditions.The “maturity shortening” provisions of the Rule, in summary, permit a fund totreat the security as maturing either on the date principal can be recovered throughdemand (that is, upon exercise of a “Demand Feature,” very generally, a feature thatpermits the fund to receive principal and interest upon demand) or the next interestreadjustment date, rather than on its nominal maturity date.The related procedural requirement of the Rule states that if a security’s maturity isbeing determined by reference to a Demand Feature, procedures must require ongoingreview of the security’s continued minimal credit risks. (c)(9)(i) The SEC has explainedthat this procedure is necessary because, otherwise, a nominally long-term security thathas a Demand Feature that is used to shorten its maturity to a permissible length may beheld in a money market fund’s portfolio without re-evaluation for a long period after theinitial credit risk determination that is made upon Acquisition of the security. 10(December 17, 1993, Proposing Release, notes 125 and 126.) (See “Quality Tests: MinimalCredit Risks; Eligible Security Rating Quality; Limit on Second Tier Securities – First ofThree Basic Quality Tests: Minimal Credit Risks” on page 17, relating to the minimalcredit risks determination.)10 In this regard, a security whose maturity is determined by reference to a Demand Feature can be contrasted to a shorttermsecurity without a Demand Feature that remains in a portfolio for a significant period because it rolls over periodically.Although the short-term security may remain in the portfolio for a long while, it does not raise the same problem ofhaving a “stale” credit record, because each rollover will trigger a new minimal credit risk review under the Rule, since arollover is included in the definition of “Acquisition,” and an Acquisition triggers a new minimal credit risksdetermination.) The security’s minimal credit risk status will be re-evaluated at short-term intervals, unlike a long-termsecurity that does not roll over.111A # 454265 v.1

Periodic Determination of Non-Reliance on Demand Features or Guarantees. TheRule permits a fund Board or its delegate (See “Introduction – Responsibilities of FundBoard and Delegation” on page 9, relating to delegation) to determine that a DemandFeature or Guarantee is not being relied upon under the Rule to shore up the creditquality of a security, shorten its maturity or for liquidity. In these cases, the DemandFeature or Guarantee is not subject to requirements that otherwise would apply to itunder the Rule. If a non-reliance determination is made, the fund’s written proceduresmust require periodic evaluation of such determination. (c)(9)(ii)The Rule also requires that the fund maintain for not less than three years a writtenrecord in an easily accessible place of the non-reliance determination. (See“Recordkeeping” on page 72 and “Diversification As To Credit Supports – FourExceptions to Diversification Testing for Credit Supports” on page 51, relating to thenon-reliance determination.) (c)(10)Periodic Review of Price Stability of Adjustable Rate Securities Without DemandFeatures. Under the “maturity shortening” provisions (mentioned above under“Ongoing Credit Evaluation . . .” in this Appendix and explained in more detail under“Maturity – Maturity Shortening Provisions for Variable Rate Securities and Floating RateSecurities” on page 62), certain Government Securities and short-term (maturing in 397calendar days or less) Variable Rate Securities or Floating Rate Securities without a DemandFeature may be deemed to have a remaining maturity shorter than their nominalremaining maturity. The related procedural requirement states that if the fund appliesthis provision, its written procedures must require periodic review of whether theinterest rate formula, upon readjustment of the interest rate, can reasonably be expectedto cause the security to have a market value that approximates its amortized cost.(c)(9)(iii) The Rule also requires that the record of this determination be preserved andmaintained in an easily accessible place for not less than three years. (See“Recordkeeping” on page 72.) (c)(10)Periodic Determination of Ten Percent Obligors of Asset Backed Securities. An AssetBacked Security generally is issued by a trust or other entity and pays interest andprincipal generated by assets held by the issuer. Certain Asset Backed Securities havewhat is referred to under the Rule as “Ten Percent Obligors,” that is, in summary, obligorswhose obligations constitute 10 percent or more of the underlying assets. As describedin more detail under “Diversification As To Issuer” on page 37, the Rule requires,generally, that any Ten Percent Obligor underlying an Asset Backed Security be treated asthe issuer of a portion of the Asset Backed Security.The related procedural requirement states the fund’s procedures must require itperiodically to determine the number of Ten Percent Obligors deemed to be issuers. TheRule provides an exception, such that the fund’s procedures need not require suchperiodic determination with respect to any Asset Backed Security that a fund Board or itsdelegate has determined, at the time of Acquisition, will not have, or is unlikely to have,112A # 454265 v.1

Ten Percent Obligors that are deemed to be issuers, and maintains a record of thisdetermination. (c)(9)(iv)The Rule also requires that a record be kept for not less than three years of thedetermination of the number of Ten Percent Obligors. (See “Recordkeeping” on page 72and “Diversification As To Issuer – Look-Throughs” on page 40.) (c)(10)113A # 454265 v.1

ABOUT THE AUTHOR...Joan Ohlbaum Swirsky, Esq.215.564.8015jswirsky@stradley.comJoan Ohlbaum Swirsky is of counsel in Stradley Ronon’sInvestment Management/Mutual Funds Practice Group. Ms.Swirsky has counseled clients for more than 25 years, includingmore than 15 years advising investment companies on regulatorycompliance and general corporate matters under the InvestmentCompany Act of 1940.Ms. Swirsky represents clients on a diverse range of investment company matters, with aspecialty in issues related to money market funds operated in accordance with Rule 2a-7under the Investment Company Act of 1940.About Stradley Ronon...Stradley Ronon’s history of mutual fund representation dates to 1928, when StradleyRonon name-partner Andrew Young helped to establish one of the first mutual fundsin the country, the Wellington Fund. The group has grown from seven people in1995 to 45 legal professionals today, serving more than 700 separate funds with over$1 trillion in assets under management, including several of the largest investmentcompany complexes in the country.WWW.STRADLEY.COMPhiladelphia, Pa. | Washington, D.C. | Harrisburg, Pa. | Malvern, Pa. | Cherry Hill, N.J. | Trenton, N.J. | Wilmington, Del.© 2008 Joan Ohlbaum Swirsky 2008

The Guide to Rule 2a-7A Map Through the Maze for theMoney Market ProfessionalJoan Ohlbaum Swirsky, Esq. | Stradley Ronon Stevens & Young, LLPBackground text is excerpted from Stradley Ronon’s archival copy of the report of the 1939 hearings on the legislation that became the Investment Company Act of 1940.Stradley Ronon name partner, Andrew B. Young, attended the hearings and the report bears his comments.Rule 2a-7 is a complex, often puzzling array of stringent requirements.This unique Guide will help you understand the impact of the recently troubled marketand help you achieve your goals relating to money market fund issues.This FREE GUIDE WILL HELP YOU:• Address troubled securities in a money marketportfolio.• Review new and revised products being offered forinvestment by money market funds for compliancewith Rule 2a-7.• Respond to inquiries from the SEC staff relatingto money market fund management.• Troubleshoot a money market fund’s compliancesystem.GET ANSWERS TO CHALLENGINGRULE 2a-7 QUESTIONS, INCLUDING:• Does your fund’s compliance system recognize thatwhen a fund purchases a security with a guaranteeor a demand feature, four provisions of Rule 2a-7are called into play?• Is your fund’s compliance system adequate toaddress the Rule 2a-7 requirement to reviewlong-term ratings of a security in two situations?• Are your funds using the four methods that areavailable to avoid the headaches of diversificationtesting for asset-backed securities?DISCOVER READER-FRIENDLY,JARGON-FREE GUIDANCE, including:• Practical interpretations useful in everydaypractice.• Crystallization of ideas scattered throughoutthe Rule.• Insight for structuring a portfolio and ensuringcompliance, enabling you to:– issue-spot as new products come to market;– be prepared to address SEC inquiries; and– maintain high standards of risk-managementassessment.WHO Should Read THE GUIDE:• Portfolio managers• Compliance professionals• Credit analysts• Fixed-income personnel• Money market fund administration/marketing staff• Legal practitioners• Accountantswww.stradley.com | Philadelphia, Pa. | Washington, D.C. | Harrisburg, Pa. | Malvern, Pa. | Cherry Hill, N.J. | Trenton, N.J. | Wilmington, Del.

ABOUT THE AUTHOR . . .Joan Ohlbaum Swirsky | Of Counsel215.564.8015jswirsky@stradley.comJoan Ohlbaum Swirsky is of counsel in Stradley Ronon’s Investment Management/Mutual Funds Practice Group. Ms. Swirsky has counseled clients for more than 25years, including more than 15 years advising investment companies on regulatorycompliance and general corporate matters under the Investment Company Actof 1940.Ms. Swirsky represents clients on a diverse range of investment company matters,with a specialty in issues related to money market funds operated in accordancewith Rule 2a-7 under the Investment Company Act of 1940.SAMPLE from TABLE OF CONTENTS:‣ Board Action Upon Signification Deviation;Material Dilution or Unfair Results‣ Portfolio Management – Quality, Diversification,Maturity for Tax-Exempt and Taxable Funds‣ Quality Tests – Minimal Credit Risks; EligibleSecurity Rating Quality; Limit on Second-TierSecurities‣ Diversification as to Issuer‣ Diversification as to Credit SupportsOUR EXPERIENCE:Stradley Ronon is nationally recognized for having oneof the premier investment management practices in theUnited States, representing investment company clientswith more than 700 separate mutual funds and assetsunder management totaling nearly $1 trillion.We have prepared the Guide based on our extensiveexperience with money market funds – analyzing theirinvestments and advising money market professionals.A major focus of our practice for more than 15 yearshas been advising money market professionals oncompliance issues.Our attorneys provide an experienced perspective andanalysis, and we are eager to share our knowledge withyou through the Guide.Please send me a free copy of:The Guide to Rule 2a-7:A Map Through the Maze for the Money Market ProfessionalName _______________________________________________________Title ________________________________________________________Company _ ___________________________________________________Address _ ________________________________________________________________________________________________________________City_ _______________________________________ State ____________Zip Code _____________________________________________________Country ______________________________________________________Telephone ____________________________________________________Fax _________________________________________________________Email _______________________________________________________Fax or e-mail your completed information to:Stradley Ronon Stevens & Young, LLPAttn: Cheryl JacksonFax: 215.564.8120Email: rule2a7@stradley.comWhen requesting additional copies, please supply contactinformation for each recipient.❑ Yes, I would also like to receive copies of Stradley Ronon’sInvestment Management Group’s newsletter, Fund Alert.© 2008 Stradley Ronon Stevens & Young, LLP