On March 23, 2020, the SEC issued an order1 (the "Order") granting registered open-end funds and insurance company variable annuity separate accounts expanded capability to borrow from their affiliates to satisfy redemption requests resulting from the current COVID-19 market disruptions.
Time Period Covered by Order
The Order covers the period from March 23, 2020, to at least June 30, 2020. Thereafter, it continues until the SEC staff provides at least two weeks' advance notice that the relief will terminate.
As described below, the relief allows funds experiencing redemption pressure to borrow from certain affiliates or to make collateralized loans to affiliated funds and separate accounts experiencing such distribution pressure.
Importantly, however, the SEC's order expressly excludes registered money market funds from relying on the temporary relief.2
A. Funds Borrowing from Nonfund Affiliates; Collateralized Loans to Funds
Under the relief, open-end funds and separate accounts are permitted to borrow money from any affiliated person, or an affiliated person of such affiliated person3, that is not itself a registered investment company or a bank4 (and, correspondingly, an affiliated person of an open-end fund or a separate account, or an affiliated person of such affiliated person, is permitted to make collateralized loans to such open-end fund or separate account), provided that the conditions below are satisfied.
The relief is subject to the following conditions:
- The fund's board of directors, including a majority of the noninterested directors, or, in the case of a separate account, the insurance company on behalf of the separate account, "reasonably determines" that such borrowing: (i) is in the best interests of the fund and its shareholders; and (ii) will be for the purpose of satisfying shareholder redemptions.
- Prior to relying on the relief for the first time, the fund or separate account notifies the SEC staff via email at IM-EmergencyRelief@sec.gov that it is relying on the Order.
B. Interfund Lending Relief
The relief from interfund lending restrictions is bifurcated to address separately those fund families that have existing "inter-fund lending" exemptive orders ("IFL Orders") and those that do not.
Funds with IFL Orders – Under the relief, a fund in a fund family with an IFL Order, regardless of the lending limits in the IFL Order, may:
- Lend up to 25 percent of its current net assets; or
- Borrow or lend for any term not extending beyond the length of this temporary relief provided that: (i) the term of any interfund loan made in reliance on the SEC order does not extend beyond the expiration of this temporary relief, (ii) the fund's board of directors, including a majority of the noninterested directors, "reasonably determines" that the maximum term for the loan is appropriate, and (iii) the loans will remain callable and subject to early repayment on the terms described in the existing IFL Order.
- The relief is available to such funds provided that: (i) Any loan under the facility is otherwise made in accordance with the terms and conditions of the fund's existing IFL Order; (ii) Prior to relying on the relief for the first time, the fund notifies the SEC staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the Order; and (iii) Prior to relying on the relief for the first time, the fund discloses on its public website that it is relying on an 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.
Funds Without IFL Orders – The SEC relief allows fund families without IFL Orders to establish and participate in an interfund lending facility under the terms of any IFL Order that the SEC has issued within the past 12 months with the same temporary expanded borrowing and lending authority afforded to those fund families with IFL Orders, provided that:
- The fund satisfies the terms and conditions for relief in the applicable IFL precedent (including with respect to whether it may participate as a borrower), except it need not satisfy the condition in the recent IFL precedent requiring prior disclosure in its registration statement or shareholder reports;
- Prior to relying on the relief for the first time, the fund notifies the SEC staff via email at IM-EmergencyRelief@sec.gov that it is relying on the Order and identifies the specific IFL precedent that it is relying upon;
- The fund discloses on its website, prior to relying on the relief for the first time, that it is relying on the Order to utilize an interfund lending and borrowing facility; and
- To the extent the fund files a prospectus supplement, or a new or amended registration statement or shareholder report, while it is relying on this relief, it updates its disclosure regarding the material facts about its participation or intended participation in the facility.
C. Relief from Fundamental Investment Restrictions
The temporary relief also allows funds with a fundamental investment policy prohibiting borrowing to deviate from that restriction without prior shareholder approval, provided that:
- The fund's board of directors, including a majority of the noninterested directors, "reasonably determines" that the borrowing is in the best interests of the fund and its shareholders;
- The fund promptly notifies its shareholders of the deviation by filing a prospectus supplement and including a statement on the applicable fund's public website; and
- Prior to relying on the relief for the first time, the fund notifies the SEC staff via email at IM-EmergencyRelief@sec.gov that it is relying on the Order.
1 Order Under Sections 6(c), 12(d)(1)(J), 17(b), 17(d) and 38(a) of the Investment Company Act of 1940 (the "Act") and Rule 17d-1 Thereunder Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder, SEC Release No. IC-33821 (March 23, 2020) (the "Order"), available at www.sec.gov/rules/other/2020/ic-33821.pdf.
2 However, registered money market funds have access to the Money Market Fund Liquidity Facility established by the Federal Reserve on March 18, 2020. See, https://www.federalreserve.gov/monetarypolicy/mmlf.htm.
3 The Order provides registered open-end funds with an exemption under Section 12(d)(3) of the Act (which generally prohibits funds, and companies controlled by funds, from purchasing securities issued by securities-related businesses) and from Section 17(a) of the Act (which generally prohibits first- and second-tier affiliates of a fund from borrowing money or other property from, or selling or buying securities or other property to or from the fund, or any company that the fund controls).
4 The Order also provides an exemption from the restrictions on issuing senior securities under Section 18(f)(1) to affiliates, but such relief does not extend to other registered funds or banks, and therefore it does not provide relief from Section 18(f)(1) with respect to the 300% asset coverage test applicable to open-end funds borrowing from banks.
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