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Seven Options for Investment Adviser and Investment Company COVID-19 Relief

Jennifer R. Trowbridge, Esq.
06.26.2020

Since March 2020, the Securities Exchange Commission (“SEC”) has been responding to the unexpected COVID-19 global pandemic by quickly issuing guidance, orders, FAQ’s and No-Action letters addressing the hardships that face investment companies and investment advisers. The relief from certain requirements under both the Investment Advisers Act of 1940, as amended (the “Advisers Act”) and the Investment Company Act of 1940 (the “1940 Act”) is welcome and much needed. Relief from COVID-19 related difficulties and complications are important, because, with over 40 million people having applied for unemployment benefits in the United States,[1] financial professionals are facing upheaval at a time when their clients need them the most. Advisers and funds[2] have taken sometimes drastic measures to keep their businesses running including applying for the Paycheck Protection Program loans. There are other forms of relief available as well.  Taking advantage of available options might allow funds and advisers to protect the assets of their clients today, through the eventual adviser transition and during all phases of a succession plan.   Here are seven of the forms of relief currently available:

1. Filing Deadlines Extended for Form N-CEN and N-Port

Form N-Port is filed by registered management investment companies and exchange-traded funds (ETFs) to report on a fund’s portfolio. Form N-CEN is filed by almost all registered investment companies including money market funds on an annual basis to provide basic fund information.  Forms N-CEN and N-Port due prior to June 30, 2020 may be filed no later than 45 days after the original due date. In order to rely on this relief, a fund must notify the SEC staff that it is unable to file. Also, the filing, when filed, must include a statement as to why the fund was unable to file on a timely basis.[3] The full Order can be found here.

2. In Person Meeting Requirements

The 1940 Act generally requires in-person meetings where when investment company boards vote for (i) approval or renewal of investment advisory agreements, (ii) approval of temporary advisory agreements, (iii) approval of an independent accountant, (iv) approval or renewal of a distribution agreement, and (v) approval of a distribution plan under 12b-1 of the 1940 Act. These meetings may now be held telephonically or through videoconferencing technology as long as the board members have the capability of communicating with each other simultaneously. Also, any motions approved, or votes taken must be ratified at the next in-person meeting of the board.  This relief applies to all investment company board meetings until December 31, 2020.[4]  The full Order can be found here and the Press Release extending the date can be found here.

3. Annual and Semi-Annual Reports transmission

A registered investment company that is required to transmit annual or semi-annual reports to investors on a date that falls between March 13, 2020 and June 30, 2020 is temporarily exempt from these requirements if the registered fund is unable to prepare or transmit such report(s) due to COVID-19 related circumstances. The fund is required to notify the SEC via email (IM-EmergencyRelief@sec.gov) and post a statement on the fund’s website(s) stating that it is relying on the SEC’s relief. The registered fund is required to file the report(s) as soon as possible, but no later than 45 days after the original due date.[5]

4. Delivery of Prospectus

If a registered fund fails to delivery its current prospectus to investors between March 13, 2020 and June 30, 2020, as a result of COVID-19 related circumstances, the SEC will not initiate an enforcement action. However, the fund is required to email the SEC (IM-EmergencyRelief@sec.gov) (i) that it is relying on this SEC position; (ii) the reasons why it could not deliver the prospectus to investors on a timely basis; and (iii) the estimated date by which it expects to deliver the prospectus.  The fund is required to deliver the prospectus as soon as possible, but no later than 45 days after the date originally required.[6] The full Order can be found here.

5. Extensions for Form ADV and Form PF Filings

In response to COVID-19, the SEC offered extended filing dates for Form ADV and Form PF. Investment advisers (including exempt reporting advisers) are able to have an additional 45 days from the original due date to file forms if they met certain conditions. This relief is still available to those with a fiscal year end in March or June.  To qualify for an extension a registered investment advisers must be unable to (i) file or deliver the annual amendment to their Form ADV and deliver Part 2 of Form ADV to existing clients due to circumstances related to COVID-19, (ii) notify the SEC staff of such, (iii) post a statement on their website(s) explaining the inability to file, and (iv) file the report within ten days of its transmission to clients. Advisers required to file Form PF are granted similar relief under the same conditions. The full Order can be found here.

6. Affiliate Lending and Borrowing

The SEC issued an Order granting temporary relief permitting registered open-ended management investment companies (other than money-market funds and insurance company separate accounts registered as unit investment trusts) to obtain short-term funding from any first or second tier affiliate that is not itself a registered investment company.[7]  This temporary relief is applicable from March 23, 2020 to a date to be specified in a public notice terminating this relief; but no earlier than June 30, 2020. Additionally, the Board of Directors is required to reasonably determine that such funding is in the best interest of the shareholders or unit holders and the funds borrowed must be used for the purpose of satisfying shareholder redemptions.  Also, prior to entering into any such arrangement, an email must be sent to the SEC at IM-EmergencyRelief@sec.gov stating that it is relying on this order.  The full Order can be found here.

7. No-Action Letters

In two No-Action Letters[8] issued to the Investment Company Institute, the SEC extended relief to money market funds and other open-end funds (non-exchange traded funds) allowing them to participate in securities purchase transactions where affiliates purchase debt securities from such funds in order to enhance liquidity and meet redemption requests. The SEC explained that as long as the purchase price is fair market value, and certain other conditions are met (including filing a Form N-CR) to report this transaction, no enforcement action will be taken.  The No-Action Letters are in effect until further staff notice.

Conclusion

Additionally, the SEC’s Division of Investment Management has developed a set of Frequently Asked Questions that cover a variety of topics that relate to funds, advisers, and COVID-19 including how to contact staff, disclosures required and how relief may affect future examinations.  You can find the FAQs here

Advisers and funds that have been affected by COVID-19 have an obligation to administer operation in accordance with their fiduciary duties. Fully considering all forms of relief available to them is of the upmost importance.  For more information on these and other considerations relating to fund and investment adviser requirements and COVID-19, please contact us at info@jackolg.com or at (619) 298-2880. We are here to support you.

Author: Jennifer R. Trowbridge, Jr. Partner; Editor: Robert D. Conca, Esq., Partner, Jacko Law Group, PC (“JLG”). JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters.  For more information, please visit https://www.jackolg.com/.

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[1] See Department of Labor News Release https://www.dol.gov/newsroom/releases.

[2] The term “fund” here refers to any mutual fund, registered fund, investment company, exchange traded fund, etc. as specified in each order, letter or guidance.

[3] See Order Under Section 6(c) and Section 38(a) of the Investment Company Act of 1940 Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder; Commission Statement Regarding Prospectus Delivery, SEC Rel. No. IC-33817 (Mar. 13, 2020) and Order Under Section 6(c) and Section 38(a) of the Investment Company Act of 1940 Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder; Commission Statement Regarding Prospectus Delivery, SEC Rel. No. IC-33824 (Mar. 25, 2020).

[4] Ibid.

[5] Ibid

[6] Ibid

[7] See 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 (Mar. 23, 2020).

[8] See Investment Company Institute, SEC Staff No-Action Letter (March 19, 2020) and Investment Company Institute, SEC Staff No-Action Letter (March 26, 2020).

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