On March 23, 2020, in response to business disruptions caused by the spread of the coronavirus (“COVID-19”), the Securities and Exchange Commission (“SEC”) issued an exemptive order (the “Order”) under the Investment Company Act of 1940 (“1940 Act”) granting registered investment companies and insurance company separate accounts registered as unit investment trusts (“separate accounts”) regulatory flexibility to obtain short term funding by (1) borrowing money from affiliated persons, (2) engaging in interfund lending outside the scope of existing interfund lending orders, and (3) deviating from fundamental policies. The Order provides this relief until at least June 30, 2020, but the SEC may extend the time period if necessary (the “relief period”).
The Order provides temporary relief from the following provisions of the 1940 Act that generally prohibit lending between affiliated parties, including “second tier” affiliates):
Importantly, the Order does not exempt all activities prohibited by sections 12(d)(3), 17(a), and 18(f)(1), only those activities necessary to facilitate borrowing from affiliates and second tier affiliates. As a condition of the relief, a Fund’s board of trustees, or the insurance company on behalf of the separate accounts, must reasonably determine that such borrowing is in the best interests of the Fund or the separate account and that the money borrowed will be used to satisfy shareholder redemptions. Prior to relying on the Order, Funds and separate account must notify the SEC’s Division of Investment Management (via email at IM-EmergencyRelief@sec.gov) of their intent to do so.
Section 17(d) of the 1940 Act, and Rule 17d-1 thereunder, generally prohibit joint transactions between Funds and their affiliated persons. However, Section 17(b) of the 1940 Act gives the SEC the authority to grant an order exempting certain classes of transactions. In recent years, the SEC has issued orders to many Fund complexes to allow them to loan assets among different Funds. The Order expands existing relief by allowing Funds that currently rely on an interfund lending order to:
To rely on the relief above, Funds must ensure that any loan made in reliance on the Order is otherwise in accordance with the terms and conditions of their existing interfund lending order. They must also notify the SEC’s Division of Investment Management (via email at IM-EmergencyRelief@sec.gov) before relying on the Order, and disclose on their public website that they are relying on the Order, and that the Order modifies the terms of their existing interfund lending order to permit additional flexibility to provide or obtain short-term funding from an interfund lending and borrowing facility.
In addition to providing relief to Funds that already rely on interfund lending orders, the Order enables Funds without existing interfund lending orders to engage in interfund lending provided that any such Fund:
Finally, the Order provides relief from Sections 13(a)(2)-(3) of the 1940 Act, which prohibit Funds from (a) borrowing/lending money, issuing bonds and notes, underwriting securities, or purchasing or selling real estate and commodities, or (b) deviating from policies concerning the concentration of investments in any particular industry or group of industries as contained in their registration statement, unless authorized by the vote of a majority of their outstanding voting securities. The Order allows funds to enter into lending and borrowing transactions that deviate from their stated policies without obtaining prior shareholder approval, provided that:
The SEC, like other federal and state regulators, will continue monitoring the current situation and may, if necessary, extend the time period for this and other relief granted under the 1940 Act. Registered investment companies and insurance company separate accounts registered as unit investment trusts should consider how COVID-19 is affecting their operations and whether their reliance on the relief provided in the Order is in the best interest of the Fund or separate account and its shareholders.