Additional SEC Exemptive Relief in Response to COVID-19

25.03.2020 | Client Alert

Temporary Exemptive Relief for Open-End Investment Management Companies to Engage in Certain Borrowing Transactions

In light of the continuing disruptions that the COVID-19 pandemic is inflicting on financial markets, the Securities and Exchange Commission (“SEC”) on March 23, 2020 issued a temporary exemptive order (the “Temporary Order”)[1] to provide additional flexibility for (1) registered open-end investment management companies, other than money market funds (“open-end funds”) and (2) insurance company separate accounts registered as unit investment trusts (“separate accounts”) to obtain short-term funding by entering into certain borrowing transactions.  This Temporary Order will be in effect until at least June 30, 2020.

I.  The Temporary Order provides the following relief to allow open-end funds and separate accounts to borrow from an affiliated person and for an affiliated person to make collateralized loans to such open-end fund or separate account:

  • Exemption from Section 12(d)(3) and Section 17(a) of the Investment Company Act of 1940, as amended (“1940 Act”) to allow an open-end fund or separate account to borrow money from any affiliated person, or affiliated person of such affiliated person, that is not itself a registered investment company, and to allow such affiliated person to make a collateralized loan to such investment company or separate account.
  • Exemption from Section 18(f)(1) of the 1940 Act to the extent necessary to permit an open-end fund to borrow money from any affiliated person, or affiliated person of such affiliated person, that is not a bank and is not itself a registered investment company.

     Conditions:

  1. The Board of Directors of the open-end fund, including a majority of the Independent Directors, or the insurance company on behalf of the separate account, reasonably determines that such borrowing:i. is in the best interests of the open-end fund and its shareholders or unitholders; and

    ii. will be for the purposes of satisfying shareholder redemptions.

  2. Prior to relying on the relief for the first time, the open-end fund or separate account notifies the SEC staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the Temporary Order.

II.  The Temporary Relief provides the following relief for open-end funds currently able to rely on an existing interfund lending and borrowing facility order (“existing IFL order”) from the SEC:

  • Such open-end fund may make loans through an existing facility in an aggregate amount up to 25% of its current net assets at the time of the loan notwithstanding the fact that their existing IFL order limits loans to an amount less than 25%;
  • Such open-end fund may borrow (if permitted under the existing IFL order to be a borrower) or make loans through the facility for any term notwithstanding any limitations in their existing IFL order limiting the term of such loans, provided that (i) the term of any such interfund loan does not extend beyond the expiration of the Temporary Order, (ii) the Board of Directors of the open-end fund, including a majority of the Independent Directors, reasonably determines that the maximum term for interfund loans to be made in reliance on the Temporary Order is appropriate, and (iii) the loans will remain callable and subject to early repayment on the terms described in the existing IFL order;
  • Such open-end fund may also avail itself of the relief provided in IV below notwithstanding any condition of the existing IFL order to the contrary;Provided that, in each case,
    • Any loan under the facility is otherwise made in accordance with the terms and conditions of the existing IFL order;
    • Prior to relying on the relief for the first time, the open-end fund notifies the SEC staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the Temporary Order; and
    • Prior to relying on the Temporary Order for the first time, the open-end fund discloses on its public website that it is relying on a SEC exemptive order that modifies the terms of its existing IFL order to permit additional flexibility to provide or obtain short-term funding from its interfund lending and borrowing facility.

III.  The Temporary Relief further provides the following relief for open-end funds that are not currently able to rely on a SEC order permitting interfund lending and borrowing arrangements.

  • Such open-end fund may establish and participate in an interfund lending and borrowing facility that is consistent with an exemptive order that the SEC has issued within the last twelve months; provided that:
    • The open-end fund must satisfy the terms and conditions for relief in the recent IFL precedent (including with respect to whether it may participate as a borrower), except:
      • It may also rely on the relief provided in Section II above with respect to the amount of any such loan, subject to its terms and conditions (other than the notice requirement of condition (c) in Section II;
      • It need not satisfy the condition in the recent IFL precedent requiring prior disclosure in its registration statement or shareholder report; and
      • Money market funds may not participate as borrowers in the interfund facility.
    • Prior to relying on the relief for the first time, the open-end fund notifies the SEC staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the Temporary Order and identifies the recent IFL precedent on which it is relying; and
    • Prior to relying on the Temporary Order for the first time, the open-end fund discloses on its public website that it is relying on a SEC exemptive order to utilize an interfund lending and borrowing facility. Additionally, if the open-end fund files a prospectus supplement or a new or amended registration statement or shareholder report, while relying on the relief, updates its disclosure regarding material facts about its participation or intended participation in the facility.

IV.  Lastly the Temporary Relief allows an open-end fund to deviate from its fundamental policy with respect to lending or borrowing to the extent necessary to permit it to enter into otherwise lawful lending or borrowing transactions that deviate from any relevant policy recited in its registration statement without prior shareholder approval, provided that:

  • The Board of Directors, including a majority of the Independent Directors, reasonably determines that such lending or borrowing is in the best interests of the open-end fund and its shareholders;
  • The open-end fund promptly notifies shareholders of the deviation by filing a prospectus supplement and including a statement on the fund’s public website; and
  • Prior to relying on the relief for the first time, the open-end fund notifies the SEC staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the Temporary Order.

Investment advisers should consider whether it would be in the best interests of their funds and shareholders to utilize any of the provided relief and, if so, should discuss with their boards so that these short-term funding arrangements are available to be used if needed.

[1] IC Release No. 33821 (March 23, 2020).

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