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In response to the COVID-19 pandemic’s disruptive effect on global markets, the Securities and Exchange Commission (SEC) issued a temporary order (Order) exempting registered open-end management investment companies (other than money market funds) and unit investment trusts (collectively, “open-end funds”) from certain requirements for short-term funding under the Investment Company Act of 1940, as amended (1940 Act). The Order permits open-end funds to borrow or lend to any affiliate, or affiliate of an affiliate, that is not a registered investment company. It also allows open-end funds to participate in interfund lending and borrowing with greater flexibility. Finally, the Order allows open-end funds to deviate from fundamental borrowing and lending policies without prior shareholder approval. The Order remains in effect until further notice, which will not be before June 30, 2020.

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Borrowing from or Lending to An Affiliate

The Order exempts open-end funds and their affiliates from compliance with Sections 12(d)(3) and 17(a) of the 1940 Act, permitting them to borrow from, or lend to, any affiliate that is not a registered investment company or bank. A fund’s board of trustees must first determine that such borrowing or lending is in the best interests of the fund and its shareholders and is necessary to satisfy shareholder redemptions. The fund must also give notice to the SEC before invoking the Order.

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The Order permits an open-end fund with an existing interfund lending order to make loans that do not exceed 25% of its current net assets despite any lower limitations in its interfund lending order. The Order also allows an open-fund to borrow (if permitted under its interfund lending order) and make loans for any duration so long as the loan’s term falls within the Order’s expiration date. The fund’s board of trustees must determine that the term is appropriate and that the loan remains callable and subject to early repayment pursuant to the fund’s interfund lending order. A fund relying on this exemption must notify the SEC before doing so and provide adequate disclosures on its website.

A fund without an interfund lending order may rely on any interfund lending order issued since March 24, 2019, as long as it satisfies that order’s conditions. The fund must first provide notice to the SEC and disclose its intention to use interfund lending on its website and in any prospectus supplements or registration statements made during the period of the Order.

Deviations from Fundamental Lending or Borrowing Policies

The SEC is also exempting open-end funds from compliance with Sections 13(a)(2) and 13(a)(3) of the 1940 Act to the extent necessary, allowing them to relax their fundamental lending and borrowing policies without shareholder approval. Before diverging from its policies, the fund’s board of trustees must determine that its alternate plan is in the best interests of the fund and its shareholders. The fund must also file a prospectus supplement, update its website and notify the SEC of its intentions.

Andrew J. Davalla 614.469.3353 <a href="mailto:Andrew.Davalla@ThompsonHine.com">Andrew.Davalla@ThompsonHine.com</a>

Philip B. Sineneng 614.469.3217 <a href="mailto:Philip.Sineneng@ThompsonHine.com">Philip.Sineneng@ThompsonHine.com</a>

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 <a href="https://www.thompsonhine.com/services/covid-19-task-force" target="_blank" rel="noopener">COVID-19 Task Force</a> page for additional information and resources.

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

SEC Temporarily Exempts Open-End Funds from Some Short-Term Funding Requirements

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