SEC Grants Section 17a No-Action Relief to Open-End Funds

The SEC has taken many actions in the past month to provide relief to registrants and the financial services industry during the COVID-19 national emergency. Another recent action is the relief granted by the SEC to open-end investment companies that are not exchange-traded funds and are not considered money market funds (“Funds”). The relief, granted in a no-action letter to the Investment Company Institute (ICI), allows a Fund’s affiliated persons to purchase debt securities from a Fund under Section 17(a) of the Investment Company Act of 1940, as amended (the “Act”), and the rules thereunder. The ICI requested the relief to address the short-term market dislocation that has occurred with respect to debt securities held in Funds because of the COVID-19 pandemic. In essence, the relief broadens the scope of Rule 17a-9 benefits beyond money market funds to Funds.

The relief provided is conditioned upon:

  • Purchase price is paid in cash;
  • Price of the debt security purchased is the instrument’s fair market value;
  • Purchaser promptly paying the Fund the difference between the sale price and subsequent sale of the security if the Purchaser subsequently sells the security for a higher price than the purchase price;
  • Public notification on the Fund’s website and via email to the SEC within one day of the purchase of a security; and
  • The relief is effective during the COVID-19 national emergency and will end upon notice from the SEC.

As with all changes in regulatory requirements, CSS encourages Funds’ CCOs to develop policies and procedures to address compliance with these conditions if a Fund intends to avail itself of this relief. Such policies should address additional reporting to a Fund’s Board, monitoring and reporting by a service provider to the Fund and documenting compliance with the no-action relief. The “temporary” nature of this relief shouldn’t be an excuse to not document this component of a Fund’s compliance program.

As always, if you need help navigating this difficult time, reach out to us.

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