COVID-19 Market Impact: SEC Provides Short-Term Funding, Affiliated Purchase Flexibility to Funds

March 25, 2020

The US Securities and Exchange Commission is providing increased flexibility to certain open-end funds and insurance company separate accounts, plus no-action relief to money market funds and their affiliates amid the coronavirus (COVID-19) pandemic.

Through an exemptive order, certain open-end funds and insurance company separate accounts will have increased flexibility to borrow from and lend to affiliates subject to certain shareholder and US Securities and Exchange Commission (SEC or Commission) notification requirements and board approvals until at least June 30, 2020.

Through no-action relief, money market funds and their affiliates that are subject to banking regulations will be able to have those affiliates purchase securities from their affiliated money market funds under certain conditions until further notice.

These actions are the latest in a series of steps taken by the SEC to address the various ongoing market effects related to COVID-19 and associated disruptions.

Exemptive Order

In light of current market conditions and disruptions caused by the global COVID-19 pandemic, the SEC issued a temporary exemptive order on March 23, 2020, effective as of that date. The Order will remain in effect until two weeks after the SEC issues a notice terminating the order, which date will be no earlier than June 30, 2020. Additional relief will be granted as the SEC deems necessary or appropriate. The order applies to registered open-end funds (excluding money market funds) and insurance company separate accounts registered as unit investment trusts (separate accounts).

The order provides exemptions from a number of provisions of the Investment Company Act of 1940 (the Act), and allows for enhancements to existing interfund lending (IFL) exemptive orders; the ability of funds without existing IFL orders to rely on recent IFL precedent; and deviation from policies in registration statements, all subject to certain conditions.

Relief for Affiliated Borrowing Arrangements

While the order is in effect:

  • open-end funds and separate accounts are exempt from Section 12(d)(3) of the Act to permit borrowing from first- and second-tier affiliates,
  • first- and second-tier affiliates are exempt from Section 17(a) of the Act to permit collateralized loans to open-end funds and separate accounts, and
  • open-end funds are exempt from Section 18(f)(1) of the Act to permit borrowing money from any first- or second-tier affiliate that is not a bank.

In order to rely on these exemptions, the board of directors of an open-end fund, including a majority of the independent directors, or the insurance company on behalf of the separate account, must reasonably determine a borrowing is in the best interests of the fund and shareholders, and will be for the purposes of satisfying shareholder redemptions. Prior to relying on this relief for the first time, a fund or separate account must notify SEC staff by email to

Relief for Funds With Existing Interfund Lending Exemptive Orders

The order enables an open-end fund with an existing IFL order to make loans, in aggregate, through its IFL facility up to 25% of the fund’s current net assets. This limit supersedes any lower limitation in a fund’s existing IFL order. The order also extends the time period of any permitted loan under a fund’s existing IFL order to the full term of the temporary relief, subject to a board determination that such time period is appropriate and subject to loans remaining callable per the terms of the IFL order.

Reliance on this provision of the order is conditioned on (1) loans being made in accordance with all other terms of a fund’s existing IFL order, (2) the fund notifying Commission staff by email to prior to relying on the relief for the first time, and (3) disclosure of reliance on the order on the fund’s public website.

Relief for Funds Without Interfund Lending Exemptive Orders

For funds without existing IFL orders, the order permits such funds to establish an interfund lending and borrowing facility, as set forth in “recent IFL precedent,” which the order defines as IFL exemptive orders the Commission has issued within the last 12 months. In order to do so, a fund must satisfy the terms and conditions of the recent IFL precedent, except it (1) may rely on the relief granted to funds with existing IFL orders (above), and (2) need not satisfy the prior registration statement disclosure requirement in recent IFL precedent. The order also notes that money market funds may not be borrowers in the IFL facility.

Reliance on this part of the order requires a fund to notify the Commission via emergency relief email of (1) the fund’s intent to rely on the order, and (2) the recent IFL precedent on which the fund is relying.

Relief Related to Deviation from Fundamental Policies

The order permits an open-end fund, without prior shareholder approval, to enter into any lawful lending or borrowing transactions, including those permitted by the order, that deviate from any relevant policy in the fund’s registration statement.

This relief requires a board determination that a lending or borrowing transaction is in the best interests of the fund and its shareholders. Additionally, reliance on this relief requires the fund to “promptly” notify shareholders via prospectus supplement and notice on the fund’s public website. Finally, prior to reliance, the fund must notice the Commission via emergency relief email.

No-Action Relief Granted

Staff from the Division of Investment Management issued a no-action letter on March 19, 2020, to the Investment Company Institute (ICI) in light of the COVID-19 outbreak and associated market dislocations impacting money market funds. The staff stated in the letter that, on a temporary basis, they would not recommend enforcement action to the Commission for “Affiliated Purchases” of money market fund securities.

The relief allows first- and second-tier affiliates of money market funds that are subject to certain banking regulations to help bolster liquidity in these funds by purchasing securities issued by the funds. The relief will be in effect until further notice from the staff.

Reliance on the no-action relief requires (1) the purchase price of all Affiliated Purchases to be at fair market value; (2) all Affiliated Purchases to comply with Rule 17a-9 under the Act, except to the extent such purchase would conflict with banking regulations or an exemption issued by the Federal Reserve on March 17, 2020; and (3) the money market fund to file Form N-CR to report these transactions. The staff also notes the relief is conditioned on information provided in the ICI’s request letter and that any different facts may require separate relief.

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge, which includes a Financial Services COVID-19 Task Force to focus on the issues specifically impacting our financial services industry clients.

We also have launched a resource page to help keep you on top of developments as they unfold. Please check this resource page for additional information and the latest updates on the SEC’s response to COVID-19, as well as guidance from our lawyers relating to employment matters, data privacy concerns, supply chain disruption, immigration status requirements, remote work opportunities and challenges, and ongoing federal and state updates. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Lea Anne Copenhefer
Barry N. Hurwitz
Roger P. Joseph
Jeremy B. Kantrowitz
Paul B. Raymond
Toby R. Serkin

Washington, DC
Laura E. Flores
Thomas S. Harman
W. John McGuire
Christopher D. Menconi

Sean Graber
Timothy W. Levin
John J. O’Brien

New York
Christine M. Lombardo
Elizabeth L. Belanger

Orange County
Laurie A. Dee