SEC Provides Certain Conditional, Temporary Regulatory Relief for Registered Funds Due to COVID-19

• Relief relating to Form N-CEN and Form N-PORT filings. The March 13 Order, as modified by the March 25 Order, also provides, during the March 25 Order Specified Period, relief for registered funds that are unable to timely file Form N-CEN or Form N-PORT. To rely on this relief, a registered fund must satisfy the following conditions: 
  
  • The registered fund is unable to meet a filing deadline due to circumstances related to current or potential effects of COVID-19;
  • The registered fund promptly notifies the SEC staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the March 25 Order;
  • The registered fund relying on the March 25 Order include a statement on its public website briefly stating that it is relying on the March 25 Order;
  • The registered fund required to file such Form N-CEN or Form N-PORT report files such report as soon as practicable but no later than 45 days after the original due date for such filing; and 
  • Any Form N-CEN or Form N-PORT filed pursuant to the March 25 Order must include a statement that the filer relied on the March 25 Order and the reasons it was unable to file the report on a timely basis.

• Annual and Semiannual Reports. The March 25 Order also provides that for the March 25 Order Specified Period, a registered fund is exempt from requirements of Section 30(e) of the 1940 Act and Rule 30e-1 thereunder with respect to transmitting annual and semiannual reports to investors if the following conditions are satisfied: (i) the registered fund is unable to prepare or transmit the report due to circumstances related to the current or potential effects of COVID-19, (ii) the registered fund relying on the March 25 Order promptly notifies the SEC staff by email at IM-EmergencyRelief@sec.gov stating that it is relying on the March 25 Order; (iii) the registered fund relying on the March 25 Order includes a statement on its public website briefly stating that it is relying on the March 25 Order, and (iv) the registered fund transmits the reports to shareholders as soon as practicable (and no later than 45 days after the original due date) and must file the report within 10 days of its transmission to shareholders.  

• Borrowing From Affiliated Persons; Ability of Affiliated Person to Make Collateralized Loans. On March 23, the SEC issued an exemptive order (March 23 Order) that (i) permits registered funds to — on a temporary basis during the period from and including March 23 to a date to be specified in a public SEC staff notice stating that the relief will terminate on a specified date, which date will be at least two weeks from the date of such notice and no earlier than June 30, 2020 (March 23 Order Specified Period) — borrow money from an affiliated person, or an affiliated person of such person, that itself is not a bank or a registered investment company and (ii) permits affiliated persons to make collateralized loans to such registered fund, provided that certain conditions are satisfied, including that the board of the registered fund, including a majority of the noninterested directors, reasonably determines that the borrowing is in the best interests of the registered fund and its shareholders and that the borrowing will be for the purpose of satisfying shareholder redemptions.
  
  Prior to relying on this relief for the first time, the registered fund must notify the SEC by sending an email to IM-EmergencyRelief@sec.gov stating that it is relying on the March 23 Order. 

• Interfund Lending and Borrowing Pursuant to an Existing IFL Order. The March 23 Order also allows a registered fund that can currently rely on an SEC exemptive order permitting interfund lending and borrowing (an Existing IFL Order) to, for the March 23 Order Specified Period, (i) make loans through the interfund facility in an aggregate amount not exceeding 25 percent of its current net assets at the time of the loan (without regard to a lower limitation in the registered fund’s Existing IFL Order) and to (ii) borrow (if permitted to borrow under the Existing IFL Order), notwithstanding conditions in the Existing IFL Order limiting the term of such loans, provided that the term of the loan does not extend beyond the termination of the March 23 Order Specified Period. 

• Interfund Lending Without an Existing IFL Order. The March 23 Order also provides that for the March 23 Order Specified Period, a registered fund that currently is not able to rely on an Existing IFL Order may establish and participate in interfund lending and borrowing using an exemptive order permitting interfund lending and borrowing that has been issued by the SEC within the 12 months prior to March 23, 2020, provided that the registered fund satisfies certain requirements, including that it satisfy many of the terms and conditions for relief set forth in such exemptive order. Money market funds would not be permitted to participate as borrowers. Before relying on this relief, the registered fund must notify the SEC by email that it is relying on the March 23 Order and identify the existing IFL exemptive order precedent it is relying on at IM-EmergencyRelief@sec.gov. Before relying on this relief, the registered fund must also disclose on its public website that it is relying on the relief to utilize an interfund lending and borrowing facility. Any prospectus supplement, registration statement or shareholder report filed while the fund is relying on the relief must disclose the material facts regarding the fund’s participation or intended participation.  

• Limited Exemption From Compliance With Fundamental Policies Regarding Lending or Borrowing
  
  The March 23 Order also provides that for the March 23 Order Specified Period, a registered fund is exempt from Sections 13(a)(2) and 13(a)(3) of the 1940 Act to the extent necessary to permit it to enter into otherwise lawful lending or borrowing transactions that are not consistent with the registered fund’s relevant fundamental policy set forth in its registration statement, without obtaining prior shareholder approval; provided that the following hold true:
  •  (a) The board of directors of the registered fund, including a majority of the directors who are not interested persons of the investment company, reasonably determines that such lending or borrowing is in the best interests of the registered investment company and its shareholders. 
  • (b) The registered fund promptly notifies its shareholders of the deviation by filing a prospectus supplement and including a statement on the applicable fund’s public website.
  • (c) Before relying on the relief for the first time, the registered investment company notifies the SEC staff via email at IM-EmergencyRelief@sec.gov stating that it is relying on the March 23 Order.   

Relief regarding delivery of fund prospectuses

The March 25 Order also provides that subject to certain conditions, if a prospectus is not able to be timely delivered due to circumstances related to COVID-19 and delivery was due on or after March 25, 2020 and on or before June 30, 2020, it would not be a basis for an SEC enforcement action provided that the sale of shares to the investor was not an initial purchase by such investor of shares of the registered fund and (i) the registered fund notifies the Division of Investment Management staff via email at IM-EmergencyRelief@sec.gov that it is relying on this SEC position, (ii) the registered fund publishes on its public website that it intends to rely on the SEC’s position, and (iii) the registered fund publishes its current prospectus on its public website. In addition, the prospectus must be delivered to investors as soon as practicable, and not later than 45 days after the date originally required.   

Money Market Funds

Below are descriptions of federal actions to assist money market mutual funds (Funds) as of March 24, 2020.

Money Market Mutual Fund Liquidity Facility
On March 18, 2020, the U.S. Federal Reserve (the Fed) established the Money Market Mutual Fund Liquidity Facility (MMLF) to assist Funds in meeting demands for redemptions, to enhance overall market functioning and to provide credit to the broader economy. According to a term sheet released by the Fed,² the Federal Reserve Bank of Boston (Reserve Bank) will lend to eligible borrowers, taking as collateral certain types of assets purchased by the borrower from Funds.  

Eligible borrowers under the MMLF include all U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries) or U.S. branches and agencies of foreign banks. To participate in the MMLF, a Fund must identify itself as a prime, single state, or other tax-exempt money market fund under Item A.10 of SEC Form N-MFP.  

Securities eligible for sale to eligible borrowers under the MMLF include certain U.S. government securities. Also eligible are certain issuances of highly rated asset-backed commercial paper, unsecured commercial paper, negotiable certificates of deposit, U.S. municipal short-term debt and variable rate demand notes. According to a FAQ relating to the MMLF by the Fed,³ to be eligible collateral, securities purchased from a Fund must be purchased at a price consistent with their valuation. The collateral valuation will either be the Fund’s amortized cost or the fair value. For asset-backed commercial paper, unsecured commercial paper and U.S. municipal short-term debt, the valuation will be the Fund’s amortized cost. Prior to receiving an advance, a borrower must provide written certifications that it and the Fund are not “insolvent,” as such term is used in Regulation A of the Board of Governors of the Federal Reserve System.

On March 19, 2020, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effects of purchasing assets through the MMLF on risk-based and leveraged capital ratios.⁴

No new credit extensions to eligible borrowers will be made after September 30, 2020, unless the MMLF is extended by the Board of Governors of the Federal Reserve System.

Rule 17a-9 No-Action Letter
Due to short-term liquidity problems for certain securities held by Rule 2a-7 Funds, Fund affiliates may wish to purchase such securities from a Fund in reliance on Rule 17a-9 under the 1940 Act but may be unable to do so because of conflicting banking regulations to which they are subject (e.g., Sections 23A and 23B of the Federal Reserve Act and Regulation W).

In a letter addressed to the Investment Company Institute dated March 19, 2020 (the Letter),⁵ the staff of the Division of Investment Management (Division staff) explained that they will not recommend enforcement action to the SEC against any Fund or any affiliated person of such Fund (or any affiliated person of such person) that is subject to Sections 23A and 23B of the Federal Reserve Act and that purchases a security from a Fund (each, an Affiliated Purchaser), under Section 17(a) of the 1940 Act or Rule 17a-9 thereunder, if an Affiliated Purchaser purchases securities from a Fund subject to the following conditions:  

• The purchase price of the purchased security would be its fair market value as determined by a reliable third-party pricing service.
• The purchase satisfies the conditions of Rule 17a-9 under the 1940 Act except to the extent that the terms of such purchase would otherwise conflict with (i) applicable banking regulations or (ii) the exemption issued by the Board of Governors of the Federal Reserve System on March 17, 2020, defining “covered transaction” for purposes of section 23A of the Federal Reserve Act to not include the purchase of assets from an affiliated money market fund.
• The Fund timely files Form N-CR reporting such transaction under Part C of such form and reports in Part H of such form that the purchase was conducted in reliance on the Letter.

The relief set forth in the Letter is temporary and will cease to be in effect upon notice from the Division staff.

 

---

 

¹ The March 13 Order also provides certain relief for business development companies.  
² See term sheet available at https://www.federalreserve.gov/monetarypolicy/mmlf.htm.
³ See Money Market Mutual Fund Liquidity Facility FAQs available at https://www.federalreserve.gov/monetarypolicy/mmlf.htm.
⁴ See https://www.federalregister.gov/documents/2020/03/23/2020-06156/regulatory-capital-rule-money-market-mutual-fund-liquidity-facility.
⁵ See Letter dated March 19, 2020, available at https://www.sec.gov/investment/investment-company-institute-031920-17a.