By Amy Leisinger, J.D.
The SEC’s Division of Investment Management has reaffirmed certain no-action relief for registered investment companies made over a decade ago. The positions taken in 2009 letters to Franklin Templeton Investments and T. Rowe Price Associates regarding the Term Asset-Backed Securities Loan Facility (TALF) in connection with the financial crisis relate to participation of funds and business development companies in TALF 2020, according to the staff. As such, the staff stated that it would not object if a family of funds participates in the TALF without treating the borrowings as senior securities representing indebtedness and if a group of affiliated funds pools assets by investing in one larger fund for the purpose of obtaining loans under the TALF.
Previous relief. In June 2009, the Division of Investment Management informed Franklin Templeton Investments that it would not recommend enforcement action to the Commission if a family of funds participated in TALF 2008 (created to provide financing through non-recourse loans to facilitate purchases of collateralized asset-backed securities) without treating the borrowings as senior securities representing indebtedness. The parties had expressed concern that borrowing under the 2008 TALF program could implicate the provisions of Investment Company Act Section 18, which restricts funds’ ability to issue or sell senior securities unless certain asset-coverage requirements are met. The staff agreed that in combination with the collateralization requirement of the TALF program, the segregation of assets proposed by the parties would result in sufficient asset coverage.
In an October 2009 response to T. Rowe Price, the Division explained that it would not object if a group of affiliated funds pooled their assets by investing in one larger fund for the purpose of obtaining loans under TALF 2008. Because no individual fund had the ability to meet the TALF minimum loan requirement of $10 million, separate funds decided to gain indirect access to the TALF program by jointly investing in a pooled vehicle to obtain a TALF loan but expressed concern that the funds’ investment could implicate the restrictions on affiliate transactions found in Investment Company Act Section 17 and Rule 17d-1 thereunder. The parties explained that the transactions would not raise conflict-of-interest concerns and that each fund would use the same pricing and valuation measures and have identical rights and obligations. The staff accepted the parties’ representations and granted the requested relief.
Recent no-action position. In the IM staff’s current view, the terms and conditions of TALF 2020 are substantially similar to those of TALF 2008 for the purposes of its previous no-action positions. However, the staff determined to expand the T. Rowe Price letter, making the relief available to third parties and stating that, with respect to Investment Company Act Section 57(a), the staff will not recommend enforcement action against a BDC if the facts and circumstances of a transaction are substantially similar to those described in the earlier relief. In addition, to the extent that a registered investment company’s or BDC’s facts and circumstances are substantially similar to those described in the underlying requests of the earlier letters, the staff will not recommend enforcement action if an entity acts consistently with the stated positions.
The staff concluded by noting that its letter represents only the views of the Division of Investment Management and is not a rule, regulation, or statement of the Commission.