SEC Relief for Registered Investment Companies

March 27, 2020 by Chris Kemp


The unprecedented coronavirus (COVID-19) pandemic has created many hardships that could make it difficult for registered investment companies (“funds”) to meet certain regulatory requirements. Given this, the Securities and Exchange Commission (“SEC”) has issued emergency relief funds can take advantage of, if necessary, during this period of unrest. We recap this relief below.

Filing Extensions

The SEC issued an exemptive order on March 4, 2020 allowing reporting companies affected by COVID-19 an additional 45 days to file certain disclosure reports that would ordinarily be due between March 1, 2020 and April 30, 2020. This relief applies to certain closed-end funds and business development companies (“BDCs”), that are required to file Form 10-Ks, 10-Qs, or current reports on Form 8-K during the noted period. To take advantage of the relief, the company must furnish a Form 8-K to the SEC, by the original deadline of the form, that:

  1. States the company is relying on this exemptive order
  2. Provides a brief description of why it could not file such a report on a timely basis
  3. Estimates the date the report is expected to be filed
  4. If material, provides a risk factor explaining the impact of COVID-19 on the business

The SEC issued another exemptive order on March 13, 2020 allowing closed-end funds and BDCs to file Form N-23C-2 notifying the SEC about their intention to call or redeem securities fewer than the 30 days required by Rule 23C-2 under the Investment Company Act of 1940 (“IC Act”). However, the following conditions need to be met to take advantage of this exemptive order:

  1. The company notifies the SEC staff via email at IM-EmergencyRelief@sec.gov stating the company is relying ont he exemptive order.
  2. The company confirms that filing the form on an abbreviated time frame is permitted under relevant state law and the company’s governing documents
  3. The form must contain all information required by Rule 23c-2 prior to:
    • Any call or redemption of existing securities
    • The commencement of any offering of replacement securities
    • Providing notification to the existing shareholders whose securities are being called or redeemed

This relief is limited to March 13, 2020 through August 15, 2020.1

The March 13, 2020 exemptive order also provides some relief from meeting the required filing deadlines for Form N-PORT and N-CEN, and the transmittal and delivery deadlines of annual and semi-annual reports, and the current prospectus, respectively. This relief is applicable for filing, transmittal, and delivery obligations where the original due date is on or after March 13, 2020 but on or prior to June 30, 2020.2 The fund may rely on this exemption provided certain conditions are met:

  1. The fund is unable to meet a filing deadline due to circumstances related to the potential effects of COVID-19
  2. The fund notifies the SEC staff via email at IM-EmergencyRelief@sec.gov and discloses on its public website that it is taking advantage of the exemptive order.
  3. The fund must file the required forms as soon as practicable, but no later than 45 days after the original due date.
  4. Each form has an additional condition:
    • Form N-Port and N-CEN – When filing the form, the fund must include that it relied on this exemption and the reasons why it was unable to transmit the report on a timely basis
    • Annual and Semi-Annual Reports – The fund must file the report within 10 days of transmitting the reports to its shareholders
    • Current Prospectus – The fund must publish the current prospectus on its public website

In-Person Board Voting Relief

The exemptive order issued on March 13, 2020, as well as the SEC staff’s prior statement on March 4, 2020, extended the no-action position previously expressed in the February 28, 2019 letter issued to the Independent Directors Council. In the original letter, the staff noted that they would not recommend enforcement action if funds’ and BDCs’ boards do not adhere to certain in-person voting requirements in the event of unforeseen or emergency circumstances affecting some or all of the directors. This allows boards to make certain approvals that normally require in-person meetings via telephone or video conferencing with respect to the engagement of an independent public accountant, an investment advisory agreement, and a 12b-1 plan. This relief is granted from March 13, 2020 through August 15, 2020.3

Shareholder Meetings

The SEC’s Division of Corporate Finance and Division of Investment Management staff published guidance regarding shareholder meetings held by public companies and funds. The SEC staff provides companies flexibility to change the date and location of in-person meetings and allow virtual shareholder meetings, provided the companies announce changes in the meeting date or location, or the use of virtual meetings in filings made with the SEC. In addition, companies are encouraged to provide shareholders alternative means to present their proposals at the annual meetings.

Securities Purchases

Money Market Funds

The SEC staff issued a no-action letter on March 19, 2020 to the Investment Company Institute permitting affiliated persons of a money market fund regulated under Rule 2a-7 under the IC Act, and who are subject to Section 23A and 23B of the Federal Reserve Act, to purchase securities from the fund in reliance on Rule 17a-9 under the IC Act, provided:

  1. The purchase price of the security would be the fair market value price as determined by a reliable third-party pricing service
  2. The purchase transaction satisfies the conditions of Rule 17a-9, except if the terms would otherwise conflict with applicable banking regulations or the exemption issued by the Board of Governors of the Federal Reserve System on March 17, 2020 that clarified a “covered transaction” does not include the purchase of assets from an affiliated money market fund
  3. The fund files Form N-CR, reports the transactions under Part C, and discloses in Part H that the transactions were conducted in reliance of this no-action letter in a timely manner

This is temporary relief that will cease to be in effect upon notification from the SEC.

Open-end Funds

The SEC staff issued a no-action letter on March 26, 2020 to the Investment Company Institute permitting affiliated persons of an open-end investment company that is not an exchange-traded fund and that does not hold itself out as a money market fund, to purchase debt securities from the fund, provided:

  1. The purchase price is paid in cash
  2. The price of the purchased debt security is its fair market value
  3. In the event that the affiliated person subsequently sells the purchased security for a higher price than the purchase price paid to the fund, the affiliated person shall promptly pay to the fund the amount by which the subsequent sale price exceeds the purchase price paid to the fund.

Within one business day of the security purchase, the fund publicly posts on its website and informs the SEC staff via email at IM-EmergencyRelief@sec.gov the name of the fund, the name of the affiliated person, the security(ies) purchased (including a legal identifier if available), the amount purchased, and the total price paid.

This is temporary relief that will cease to be in effect upon notification from the SEC.

Short-term Funding

The SEC issued an exemptive order on March 24, 2020 granting temporary relief to open-end funds, other than money market funds and insurance company separate accounts registered as unit investment trusts, to obtain short-term funding. The temporary relief will be in effect until the SEC releases a public notice of termination, but will extend through at least June 30, 2020. Details of this relief are below.

Borrowing

Open-end funds and separate accounts are temporarily permitted to borrow money from certain first- and second-tier affiliated persons, provided:

  1. The board of directors of the open-end fund, including a majority of the uninterested persons of the open-end fund, or the insurance company on behalf of the separate account, reasonably determines that such borrowing:
    • Is in the best interests of the fund and its shareholders or unit holders
    • Will be for the purpose of satisfying shareholder redemptions
  2. Prior to relying on the relief for the first time, the open-end fund or separate account notifies the SEC that it is relying on this exemptive order

Interfund Lending

Open-end funds that currently have interfund lending orders may:

  1. Make loans in an amount that does not exceed 25% of its net assets at the time of the loan
  2. Borrow or make loans, provided that:
    • The term of any interfund loan made in reliance of the exemptive order does not extend beyond the expiration of the temporary relief
    • The board of directors, including a majority of the independent directors, reasonably determines that the maximum term for interfund loans is appropriate
    • The loans will remain callable, and subject to early repayment on the terms as described in the existing interfund lending order

To rely on this relief, any other loan under the interfund lending facility must be done in accordance with the terms and conditions of the existing interfund lending order, and prior to relying on the relief for the first time, the fund must notify the SEC via email at IM-EmergencyRelief@sec.gov and disclose on its website that they are relying on the exemptive order.

For open-end funds that do not have an interfund lending order, the exemptive order permits these funds to establish and participate in an interfund lending and borrowing facility, provided:

  1. The fund satisfies the terms and conditions for relief in the most recent interfund lending order precedent, other than disclosing the arrangement in its shareholder report or registration statement
  2. Prior to relying on the relief, the fund:
    • Notifies the SEC that it is relying on the exemptive order and identifies the recent interfund lending order it is relying on
    • Discloses its reliance of the exemptive order on its public website
  3. The fund updates its disclosure regarding the material facts about its participation or intended participation in the interfund lending facility if the fund files a prospectus supplement or amendment, or a shareholder report, while relying on the relief.

Deviation from Fundamental Policy

The exemptive order permits open-end funds to deviate from its fundamental policy on lending and borrowing, as described in its registration statement, without shareholder approval, provided that:

  1. The board of directors, including a majority of the independent directors, reasonably determines that such lending or borrowing is in the best interests of the registered investment company and its shareholders
  2. 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
  3. Prior to relying on the relief for the first time, the fund notifies the SEC via email at IM-EmergencyRelief@sec.gov that it is relying on the exemptive order

ACA’s Guidance

We are living and working through unprecedented times. It is imperative that asset managers and funds pay extra attention to detail and ensure all regulatory requirements are met as expected, especially as things can change fast and unexpectantly in this new environment. With regards to filings, funds should work closely with their fund administrator and other filing vendors to ensure timely filings can continue to be produced. With regards to board meetings, shareholder meetings, and short-term funding, funds should work with legal counsel, compliance and operations to ensure proper mechanics are considered and followed. Asset managers and funds should further monitor SEC pronouncements very closely and how they may impact operations. ACA would expect potentially more staff guidance and SEC relief to come as we navigate our way through the COVID-19 pandemic.

We Are Here For You

ACA is closely monitoring the COVID-19 pandemic and the new and emerging risks our clients are facing during this uncertain time. If you need assistance meeting your compliance obligations during these uncertain times, please contact us.

Contact Us

ACA’s COVID-19 Resources

Visit our COVID-19 Resource page to access all of ACA’s resources to help your firm manage the new and emerging risks created by the pandemic.

Learn More

 

1 On March 25, 2020, the SEC extended their relief from the original June 15th deadline to August 15th while also making amendments to certain conditions for reliance on prior relief. See IC-33844 (March 25, 3030).

2 Ibid.  

3 Ibid.