On March 23, 2020, the Securities and Exchange Commission (SEC) issued an order (1940 Act Borrowing Order) providing for temporary additional borrowing flexibility to certain registered investment companies (funds) affected by the outbreak of COVID-19 (Coronavirus).¹ The 1940 Act Borrowing Order provides exemptions from certain requirements of the Investment Company Act of 1940 (1940 Act) for (1) funds and (2) insurance company separate accounts registered as unit investment trusts (separate accounts) to obtain short-term funding. The temporary relief provided for in the 1940 Act Borrowing Order began on March 23, 2020 and will remain in effect until at least June 30, 2020.²

Relief Permitting Open-End Funds and Separate Accounts to Borrow from Affiliates³

The 1940 Act Borrowing Order provides that an open-end fund or a separate account may borrow money from its affiliated persons (or affiliated persons of affiliated persons, other than funds) and such affiliated persons may make collateralized loans to such open-end fund or separate account, provided that:

1. the board of directors of the open-end fund, including a majority of the directors who are not interested persons, or the insurance company on behalf of the separate account, reasonably determines that such borrowing:
   1. is in the best interests of fund and its shareholders or unit holders;
   2. will be for the purpose of satisfying shareholder redemptions; and
2. the open-end fund or separate account that is relying on this relief for the first time notifies the SEC staff (Staff) via email at IM-EmergencyRelief@sec.gov that it is relying on the 1940 Act Borrowing Order (the email requirement).

Interfund Lending Arrangements for Funds Without Existing Interfund Lending Orders

The 1940 Act Borrowing Order provides that any fund that is not currently able to rely on an existing SEC order permitting the use of an interfund lending and borrowing facility (existing IFL order) has the ability to establish and participate in such a facility as set forth in an exemptive order that the SEC has issued within the twelve months preceding the date of the 1940 Act Borrowing Order (recent IFL precedent), provided that:

1. the fund satisfies the terms and conditions for relief in the recent IFL precedent, except that:
   1. it may rely on the relief provided to any fund that has an existing IFL order, subject to the terms and conditions described below for funds with existing IFL orders, except that it will comply with the modified condition described in 3.a. below with respect to required disclosure on the fund’s website;
   2. it need not satisfy the condition in the recent IFL precedent requiring prior disclosure in its registration statement or shareholder report; and
   3. money market funds may not participate as borrowers in the interfund facility;
2. the fund identifies in the email requirement the recent IFL precedent it is relying on; and
3. the fund:
   1. discloses on its public website, prior to relying on this relief for the first time, that it is relying on the relief to utilize an interfund lending and borrowing facility; and
   2. updates disclosure regarding the material facts about its participation or intended participation in the facility in any prospectus supplement or new or amended registration statement or shareholder report.

Interfund Lending Arrangements for Funds with Existing Interfund Lending Orders

The 1940 Act Borrowing Order provides that any fund that is currently able to rely on an existing IFL order has additional flexibility to:

1. make loans through the facility in an aggregate amount that does not exceed 25% of its current net assets at the time of the loan;
2. borrow, if permitted under the existing IFL order to be a borrower, or make loans through the facility for any term, provided that:
   1. the term of any interfund loan made in reliance on the 1940 Act Borrowing Order does not extend beyond the expiration of the temporary relief granted under the 1940 Act Borrowing Order;
   2. the board of directors, including a majority of the directors who are not interested persons of the fund, reasonably determines that the maximum term for interfund loans to be made in reliance on the 1940 Act Borrowing Order is appropriate; and
   3. the loans will remain callable and subject to early repayment on the terms described in the existing IFL order; and
3. avail itself of the relief provided by the 1940 Act Borrowing Order related to deviations from fundamental policies discussed below.

The relief in this section of the 1940 Act Borrowing Order is conditioned on the following:

1. any loan under the facility is otherwise made in accordance with the terms and conditions of the existing IFL order;
2. the fund complies with the email requirement; and
3. prior to relying on this relief for the first time, the fund discloses on its public website that it is relying on a SEC exemptive order that modifies the terms of its existing IFL order to permit additional flexibility to provide or obtain short-term funding from its interfund lending and borrowing facility.

Relief from Certain Fundamental Policies with Respect to Lending or Borrowing

Under the 1940 Act Borrowing Order, an open-end fund may deviate from any fundamental policies that ordinarily would preclude the open-end fund from participating in interfund borrowing or lending arrangements without obtaining prior shareholder approval^,4 provided that:

1. the board of directors, including a majority of the directors who are not interested persons of the open-end fund, reasonably determines that such lending or borrowing is in the best interests of the open-end fund and its shareholders;
2. the open-end fund promptly notifies its shareholders of the deviation by filing a prospectus supplement and including a statement on the applicable fund’s public website; and
3. the open-end fund complies with the email requirement.

Seward & Kissel LLP will continue to provide updates and insights on any Coronavirus-related developments. If you have any questions concerning the 1940 Act Borrowing Order, please contact any member of our Registered Funds Group.

Seward & Kissel has established a COVID-19 Resource Center on our web site to access all relevant alerts that we distribute. We also have a COVID-19 dedicated page on our ’40 Act Blog.

______________________________________________________

¹ Order under Sections 6(c), 12(d)(1)(J), 17(b), 17(d) and 38(a) of the Investment Company Act of 1940 and Rule 17d-1 Thereunder Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder, SEC Rel. No. IC-33821 (March 23, 2020), available at https://www.sec.gov/rules/other/2020/ic-33821.pdf.

² The temporary relief provided in the 1940 Act Borrowing Order will terminate on the date to be specified in a public notice from the Staff stating that the relief will terminate, which date will be at least two weeks from the date of the notice and no earlier than June 30, 2020.

³ This section of the 1940 Act Order exempts open-end funds and separate accounts from Section 12(d)(3), affiliated persons (or an affiliated person of an affiliated person) other than funds from Section 17(a) and open-end funds from Section 18(f)(1). This section does not provide relief to money market funds.

⁴ Normally, a change to a fund’s fundamental policy would require prior shareholder approval.