SEC Grants No-Action Relief to Permit Purchase of Debt Securities from Affiliated Mutual Fund*

COVID-19 Update

Date: March 27, 2020

Key Notes:

  • SEC staff grants temporary relief permitting fund advisers to purchase debt securities from affiliated funds.
  • The relief does not apply to exchange traded funds.
  • The relief is temporary and will cease upon notice from the SEC staff.

On March 26, 2020, the Division of Investment Management of the Securities and Exchange Commission (SEC) issued a no-action letter to the Investment Company Institute (ICI) stating that it would not recommend enforcement action against a registered open-end investment company (Fund) if an affiliated person of the Fund, other than a registered investment company, purchases debt securities from the Fund in accordance with Rule 17a-9 under the Investment Company Act of 1940 (1940 Act). The no-action relief does not apply to exchange traded funds or funds that hold themselves out as money market funds. The relief is temporary and will cease upon notice from the SEC staff.

Rule 17a-9 provides an exemption from the prohibitions under Section 17(a) to permit affiliated persons of a money market fund (or affiliated persons of such persons) to purchase securities from the money market fund. The rule applies only to purchases by affiliated persons from a money market fund. Consequently, other types of Funds cannot benefit from the relief provided by the rule.

The ICI argued that the COVID-19 outbreak caused a short-term dislocation in the market for a variety of debt securities held by Funds that are not money market funds. Because these Funds cannot rely on Rule 17a-9, investment advisers to these Funds cannot purchase securities from the Funds to enhance the Funds’ liquidity and fund shareholder redemptions considering the significant market disruptions related to the COVID-19 outbreak.

The SEC staff granted the no-action request based on the following conditions:

  1. The purchase price is paid in cash.
  2. The price of the purchased debt security is its fair market value under Section 2(a)(41) of the 1940 Act, provided that this price is not materially different from the fair market value of the security indicated by a reliable third-party pricing service (Purchase Price). 
  3. If the purchaser thereafter sells the purchased security for a higher price than the Purchase 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. If the purchaser is subject to Sections 23A and 23B of the Federal Reserve Act, this condition does not apply to the extent that it would otherwise conflict with (i) applicable banking regulations or (ii) any applicable exemption from such regulations issued by the Board of Governors of the Federal Reserve System.
  4. 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.
  5. 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.


This relief complements the relief issued on March 19, 2020 permitting certain bank affiliates to purchase securities directly from their affiliated money market funds.

FOR MORE INFORMATION

For more information, please contact:

Michael V. Wible
614.469.3297
Michael.Wible@ThompsonHine.com

Additional Resources

We have assembled a firmwide multidisciplinary task force to address clients’ business and legal concerns and needs related to the COVID-19 pandemic. Please see our COVID-19 Task Force page for additional information and resources.

*Money market funds may rely on Rule 17a-9 without the requested relief.

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