[co-author: Genna Garver]*

On March 26, the Staff of the Securities and Exchange Commission (SEC) granted a request for no-action relief to permit certain affiliated purchase transactions involving registered open-end investment companies. The relief, in effect, temporarily extends Rule 17a-9 under the Investment Company Act of 1940 (1940 Act) to all open-end investment companies (each a “Fund”), except for exchange-traded funds, in order to enhance access to liquidity during the market volatility accompanying the COVID-19 pandemic. Rule 17a-9 provides an exemption from the prohibitions under section 17(a) of the 1940 Act 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 is explicitly limited to open-end investment companies that hold themselves out as money market funds.

The no-action relief comes in response to a request from the Investment Company Institute (ICI) seeking to broaden the applicability of Rule 17a-9 to Funds that are not money market funds or exchange-traded funds. The ICI explained that, due to the national emergency caused by the COVID-19 pandemic, “there is a short-term dislocation in the market for a variety of debt securities” and that “advisers (directly or through affiliates) may wish to purchase these securities from Funds to enhance the Funds’ liquidity and to fund shareholder redemptions, in light of the significant securities market disruptions related to the COVID-19 [pandemic].” The ICI’s request specifically sought relief only for as long as the COVID-19 crisis continues.

The relief permitting Funds to engage in affiliated purchase transactions of their portfolio securities is conditioned upon the following:

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.
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 (1) applicable banking regulations or (2) 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 SEC 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 SEC’s no-action 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 no-action relief was granted one day after the incoming request from the ICI, and it reflects the numerous steps the SEC is taking to modify some of its rules or otherwise respond to the market disruptions resulting from the COVID-19 pandemic. The SEC has published on its website a list of many of the actions it is undertaking to respond to the pandemic, which it continues to update regularly.

Although many of the conditions to this no-action relief track the conditions required by Rule 17a-9, including the requirement that securities be purchased with cash and the claw back provisions under prong 3 above, there is a notable difference. To take advantage of this no-action relief, a Fund must publicly disclose the fact of, and the details of, such an affiliated purchase transaction on its website (see prong 4 above). Funds presumably will be reluctant to publicly disclose these details because doing so could indicate problems with liquidity. So while this relief is welcome in the face of the ongoing COVID-19 crisis and may be necessary for some Funds to meet their liquidity requirements and satisfy shareholder redemption requests, we expect the majority of Funds will take advantage of this relief as a matter of last resort.

* Partner, Troutman Sanders