Exemptions ease restrictions on funds' ability to borrow and lend

By Rodney F. Tonkovic, J.D.

The SEC has provided funds with the temporary flexibility to borrow funds from certain affiliates and to enter into certain other lending arrangements. Subject to various conditions, the order provides exemptive relief allowing: registered open-end funds and insurance company separate accounts to borrow money from certain affiliates; more flexibility under existing interfund arrangements; and, lending arrangements that deviate from policies recited in an investment company's registration statement (Order Under Sections 6(c), 12(d)(1)(J), 17(b), 17(d) AND 38(a) of the Investment Company Act of 1940 and Rule 17d-1 Thereunder Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder, Release No. IC-33821, March 23, 2020).

The announcement notes that this relief is the latest in a series of steps taken by the Commission to assist financial market participants in addressing the impact of the coronavirus. Chairman Jay Clayton said: "Today's temporary action will provide an additional tool that funds can use to manage their portfolios for the benefit of their investors in the current market environment." And, "This action provides funds with additional flexibility to navigate volatile markets while meeting their obligations to investor." Firms and financial professionals affected by the coronavirus are encouraged to contact the staff with questions and concerns. 

Exemptive relief. The order provides the following temporary relief: 

• Open-end fund or insurance company separate accounts may borrow from certain affiliates. The exemptions from sections 12(d)(3) and 18(f)(1) permit an open-end fund to borrow money from any affiliated person, or affiliated person of such affiliated person, that is not a bank and/or registered investment company. An exemption from section 17(a) allows that affiliate to make collateralized loans to the open end-fund or separate account;
• Additional flexibility under existing interfund lending arrangements. Any registered investment company currently able to rely on a Commission order permitting an interfund lending and borrowing facility has been given more flexibility to make loans or borrow, notwithstanding limitations in the existing orders, provided that the loans are otherwise in accordance with the terms and conditions of the orders;
• The extension of the ability to use interfund lending arrangements to funds that do not currently have exemptive relief. Any registered management investment company that is not currently able to rely on an order permitting an interfund lending and borrowing facility may establish and participate in such a facility as set forth in an exemptive order issued by the Commission within the twelve months preceding March 23, 2020. Money market funds, however, may not participate as borrowers in the interfund facility; and 

Registered open-end funds may enter into lending arrangements or borrowings that deviate from fundamental policies, subject to prior board approval. An open-end fund is provided with an exemption from sections 13(a)(2) and 13(a)(3) to permit entry into otherwise lawful lending or borrowing transactions that deviate from relevant policies in its registration statement without prior shareholder approval; provided that the board determines that this action is in the company's best interest and that shareholders are promptly notified.

The relief is effective from the date of the order (March 23, 2020) until at least two weeks from the date to be specified in a public notice from Commission staff, but no earlier than June 30, 2020. Entities seeking to rely on the order are subject to certain conditions, including notifying Commission staff that they are relying on this order.

The release is No. IC-33821.