On March 23, 2020, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued an order providing exemptions from various provisions of the Investment Company Act of 1940 (the “1940 Act”) to provide flexibility to open-end investment companies other than money market funds (“open end funds”) and insurance company separate accounts registered as unit investment trusts (“separate accounts”) to obtain short-term funding (the “Temporary Order”). Each of the exemptions requires conditions to be met. The terms of the Temporary Order will apply from March 23, 2020 until notice from the SEC staff stating when it will terminate, which will be at least two weeks from the date of that notice and no earlier than June 30, 2020 (the “Time Period”).
I. Temporary Relief to Open-End Funds or Separate Accounts to Borrow from an Affiliated Person; Ability of an Affiliated Person to make Collateralized Loans
Temporary relief has been granted from the prohibitions in Section 17(a) and Section 18(f)(1) of the 1940 Act, during the Time Period, to allow affiliates of open-end funds and separate accounts that are not themselves registered funds to make collateralized loans to such funds and separate accounts, and for those funds and separate accounts to borrow money from such affiliates that are neither banks nor registered investment companies, subject to the following conditions:
a) The board of directors of the open-end fund, including a majority of the directors who are not interested persons of the open-end fund, or the insurance company on behalf of the separate account, reasonably determines that such borrowing:
i. is in the best interests of the registered investment company and its shareholders or unit holders; and
ii. will be for the purpose of satisfying shareholder redemptions.
b) Prior to relying on the relief for the first time, the open-end fund or separate account notifies the Commission staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the Temporary Order.
II. Interfund Lending Arrangements for Registered Funds with Existing Interfund Lending Exemptive Orders
Temporary relief has been granted, during the Time Period, permitting a registered fund currently relying upon a Commission exemptive order that permits an interfund lending and borrowing facility (an “IFL order”) to:
• Make loans through the facility in an aggregate amount that does not exceed 25% of its current net assets at the time of the loan, notwithstanding a lower limitation that might exist in an IFL order;
• Borrow (if the IFL order so permits) or make loans through the facility for any term, notwithstanding conditions in the IFL order limiting the terms of such loans, provided that (i) the term of any interfund loan does not extend beyond the Time Period, (ii) the board of directors, including a majority who are not interested persons, reasonably determines that the maximum term for interfund loans to be made in reliance on the Temporary Order is appropriate, and (iii) the loans remain callable and subject to early repayment on the terms described in the IFL order; and
• Avail themselves of the relief below (related to deviations from fundamental policies regarding lending or borrowing), notwithstanding conditions in any existing IFL order that incorporate limits set forth in fundamental restrictions, limitations or non-fundamental policies.
Relying on any of the foregoing deviations from existing IFL orders is conditioned upon the following:
a) Any loan under the facility is otherwise made in accordance with the terms and conditions of the existing IFL order;
b) Prior to relying on the relief for the first time, the registered fund notifies the Commission staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the Temporary Order; and
c) Prior to relying on the relief for the first time, the registered fund discloses on its public website that it is relying on a Commission 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. Interfund Lending Arrangements for Registered Funds without Existing Interfund Lending Orders
During the Time Period, registered funds that have not obtained an IFL order may establish and participate in such a facility pursuant to an IFL order precedent that has been issued within the past 12 months (based on the date of the Temporary Order); provided:
• The registered fund satisfies the terms and conditions for relief in the recent IFL precedent (including with respect to whether it may participate as a borrower), except:
i. It may rely on the relief discussed in Section II above subject to its terms and conditions (other than the notice requirement of condition (c) in Section II above);
ii. It need not satisfy the condition in the recent IFL precedent requiring prior disclosure in its registration statement or shareholder report; and
iii. Money market funds may not participate as borrowers in the interfund facility;
• Prior to relying on the relief for the first time, the registered fund notifies the Commission staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the Temporary Order and identifying the recent IFL precedent that it is relying on; and
• The registered fund:
i. Discloses on its public website, prior to relying on the relief for the first time, that it is relying on the relief to utilize an interfund lending and borrowing facility.
ii. To the extent it files a prospectus supplement, or a new or amended registration statement or shareholder report, while it is relying on this relief, updates its disclosure regarding the material facts about its participation or intended participation in the facility.
IV. Ability of an Open-End Fund to Deviate from its Fundamental Policy with respect to Lending or Borrowing
During the Time Period, open-end funds are exempt from Sections 13(a)(2) and (3) of the 1940 Act to the extent necessary to permit them to enter into otherwise lawful lending or borrowing transactions that deviate from any relevant policy in a registration statement without prior shareholder approval; provided that:
a) The board of directors of the open-end fund, including a majority of its disinterested directors, reasonably determines that such lending or borrowing is in the best interests of the fund and its shareholders;
b) The open-end fund promptly notifies its shareholders of the deviation by filing a prospectus supplement and including a statement on the fund’s public website; and
c) Prior to relying on the relief for the first time, the fund notifies the Commission staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the Temporary Order.
If you have any questions about the Temporary Order, or about the SEC’s or its staff’s responses to COVID-19 more generally, please contact Stephanie Monaco, Larry Hamilton or any member of our Investment Management practice. We will continue to keep our clients updated on any future significant SEC or staff announcements regarding COVID-19.
The Temporary Order is part of an evolving COVID-19 response that is moving across regulatory agencies. Please visit our website to learn more.
1 Order under Sections 6(c), 12(d)(1)(J), 17(b), 17(d) and 38(a) of the Investment Company Act of 1940 and Rile 17d-1 thereunder Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules thereunder, Investment Company Act Release No. 33821 (March 23, 2020), available at https://www.sec.gov/rules/other/2020/ic-33821.pdf.
2 Section 8(b) of the 1940 Act requires a fund to recite in its registration statement its policies relating to various matters, including borrowing money and making loans to other persons, as well as any other policies that are changeable only if authorized by shareholder vote and any other policies that it deems fundamental. Sections 13(a)(2) and (3) of the 1940 Act require a fund to obtain shareholder approval in order to deviate from any of the foregoing types of policies recited in its registration statement.