COVID-19: SEC Staff Permits Affiliates to Purchase Debt Securities from a Mutual Fund

March 30, 2020

The staff of the US Securities and Exchange Commission (SEC) has given registered open-end management companies (mutual funds) an additional tool in the wake of the coronavirus (COVID-19) crisis to combat the potentially deleterious effects of dislocations in the debt markets.

The relief provides a mutual fund the ability to access additional sources of liquidity by allowing affiliated persons of the fund (as well as affiliated persons of such persons) to purchase a wide variety of debt securities from the fund. Such a transaction ordinarily would be restricted by Section 17(a) of the Investment Company Act of 1940 (Act). The SEC staff’s position does not extend to money market funds, which already have similar relief through Rule 17a-9 under the Act, or to exchange-traded funds organized as open-end companies.

The relief comes in the form of an SEC staff no-action letter issued to the Investment Company Institute (ICI) on March 26, 2020 and is available to all mutual funds and their affiliated persons (other than a registered investment company) that seek to purchase debt securities from their affiliated funds (such affiliated persons, Purchasers). The SEC staff made clear in its letter to the ICI that the term “debt security” encompasses a broad array of instruments including commercial paper, corporate debt securities, certificates of deposit, asset-backed debt securities, and municipal obligations. The relief is subject to the following conditions:

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 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. In the event that the Purchaser thereafter sells the purchased security for a higher price than the purchase price paid to the mutual fund, the Purchaser shall promptly pay to the mutual fund the amount by which the subsequent sale price exceeds the purchase price paid to the mutual fund. If the Purchaser is subject to Sections 23A and 23B of the Federal Reserve Act (which limit transactions among member banks and their affiliates), this condition does not apply to the extent that it would otherwise conflict with (i) applicable banking regulations or (ii) 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 mutual fund publicly posts on its website and informs the SEC staff via email to stating the name of the mutual 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 relief is 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 SEC staff.

This relief is another step in a series of actions taken by the SEC and its staff to ensure that funds have the tools and flexibility necessary to manage their portfolios for the benefit of shareholders and continue operations in the current market environment. Other relevant significant actions taken to date by the SEC and its staff include the following:


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


[1]  Investment Company Act Rel. Nos. 33817 (March 13, 2020) and 33824 (March 25, 2020).

[2]  Investment Company Act Rel. No. 33821 (March 23, 2020).

[3]  Investment Company Institute (pub. avail. March 19, 2020).