March 31, 2020

SEC Grants Emergency Liquidity Relief to Mutual Funds in Light of COVID-19

On March 26, 2020, the Securities and Exchange Commission (SEC) issued No-Action Relief that allows an affiliated person of an open-ended investment company other than a money market fund or an exchange-traded fund to purchase debt securities from the fund subject to the conditions outlined below. This relief is a part of the continuing series of actions from the SEC in light of the coronavirus disease (COVID-19) outbreak.

Background

Rule 17a-9 provides an exemption for money market funds from certain affiliated transactions otherwise prohibited under Section 17(a) of the Investment Company Act of 1940 (the Act). On March 25, 2020, in its Request for No-Action Relief, the Investment Company Institute (ICI) requested that Rule 17a-9 be temporarily extended to most non-money market funds in light of the securities market disruptions related to COVID-19. The ICI sought assurances from the staff of the Division of Investment Management (Staff) that it will not recommend enforcement action to the SEC against any fund under Section 17(a) of the Act if an affiliated person of the fund or an affiliate of such affiliate purchases debt securities from the fund in accordance with the requirements of Rule 17a-9.

The ICI stated that this relief is appropriate because there is a short-term dislocation in the market for a variety of debt securities, which include, without limitation, commercial paper, corporate debt securities, certificates of deposit, asset-backed debt securities and municipal obligations, some of which are held by non-money market funds. Moreover, affiliates may wish to purchase these securities from funds to enhance the funds’ liquidity and to fund shareholder redemptions. The ICI requested that this relief last for as long as this national emergency persists.

The relief is comparable to other measures taken by the United States government and its agencies to address temporary market disruptions caused by COVID-19. For example, on March 17, 2020, the Board of the Governors of the Federal Reserve System granted exemptions for certain banks from the quantitative limits of Section 23A of the Federal Reserve Act and Regulation W. Under the exemption, certain banks are permitted to purchase assets from affiliated money market mutual funds subject to certain conditions, including that the purchase be at a fair market price determined by a reliable third-party source.

No-Action Relief

Any affiliated purchases under this relief are subject to the following conditions:

  1. The purchase price must be paid in cash.
  2. The price of the purchased debt security must be its fair market value under Section 2(a)(41) of the Act and not materially different from the fair market value of the security indicated by a reliable third-party pricing service.
  3. In the event that the purchaser thereafter sells the purchased security for a higher price than the purchase price paid to the fund, the purchaser must promptly pay to the fund the amount by which the subsequent sale price exceeds the purchase price. If the purchaser is subject to Sections 23A and 23B of the Federal Reserve Act, this condition does not apply to the extent that it would otherwise conflict with applicable banking regulations or any applicable exemption therefrom.
  4. Within one business day of the purchase of the security, the fund must publicly post on its website and inform the SEC staff via email to IM-EmergencyRelief@sec.gov of the name of the fund, the name of the purchaser, the security(ies) purchased (including a legal identifier if available), the amount purchased and the total price paid.
  5. The relief must be in effect on a temporary basis in response to the national emergency concerning the COVID-19 outbreak, which was proclaimed by the President of the United States on March 13, 2020, and must cease to be in effect upon notice from the SEC staff.

Practice Points

Funds that wish to take advantage of this relief should consider drafting fund policies and procedures that comply with the conditions described above.

As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.

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