March 27, 2020 - On March 26, 2020, the Securities and Exchange Commission’s Division of Investment Management issued a no-action letter providing emergency relief to registered open-end investment companies (mutual funds) that allows affiliated persons of the mutual funds (i.e., the fund adviser and other affiliates but NOT other funds) to purchase debt securities from the funds. This relief applies to loan funds and funds of other debt instruments. Importantly, this relief is not available to ETFs or money market funds at the current time.
These conditions include:
- The purchase price must be paid in cash.
- The price of the purchased debt security is its fair market value under Section 2(a)(41) of the Investment Company Act, and cannot be materially different from the fair market value of the security indicated by a reliable third-party pricing service.
- If the affiliated purchaser thereafter sells the security for a higher price than the purchased price paid to the fund, the purchaser shall promptly pay to the fund the amount by which the subsequent sale price exceeds the purchase price paid to the fund. Thus, effectively, the affiliate may not profit from the transaction.
- If the purchaser is a bank or banking entity subject to Regulation W (Sections 23A and 23B) of the Federal Reserve Act and the mutual fund is a Regulation W affiliate, the purchaser does not have to remit the mutual fund the amount that a subsequent sale exceeds the purchase price paid to the mutual fund unless the Federal Reserve issues an exemption permitting the bank purchase to remit the excess amount.
- Within one business day of the purchase of the security, the fund publicly posts on its website and informs the staff via email to IM-EmergencyRelief@sec.gov stating the name of the fund, the name of the purchaser, the security(s) purchased (including a legal identifier if available), the amount purchased, and the total price paid.
- The relief shall 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 will cease to be in effect upon notice from the staff.
Reflecting the extraordinary nature of the current COVID-19 situation, this relief is extraordinary in that it provides virtually a wholesale exemption from one of the core provisions of the Investment Company Act – the prohibition against affiliated transactions under Section 17. SEC exemptive orders from these provisions are rarely granted, typically apply to only one industry member, and often take months if not years to obtain. Please contact LSTA General Counsel Elliot Ganz if you have any questions.