Liquidity, Fair Value and Transactions with Affiliates

As part of the continuing series of actions from the SEC in light of the COVID-19 pandemic, on March 26, 2020, the SEC staff issued no-action relief that allows an affiliated person of an open-ended investment company, other than a money market fund or an exchange-traded fund, to purchase debt securities from the fund.

The relief, effective from March 23, 2020 through at least June 30, 2020, is designed to provide funds and separate accounts with additional tools to address liquidity issues that may arise as investors request withdrawals and transfers. The practical effect of these exemptions is subject to certain conditions, funds and separate accounts will be permitted to borrow through collateralized loans from affiliates for the purpose of satisfying redemptions.

Any affiliated purchases under this relief are subject to certain conditions, including that the price of the purchased debt security must be its fair market value under Section 2(a)(41) of the Investment Company Act of 1940 and not materially different from the fair market value of the security indicated by a reliable third-party pricing service.

Duff & Phelps is the largest independent valuation firm in the world and we actively assist our clients with the design and implementation of best-in-class valuation policies and processes, including on-going review of valuation procedures and conclusions to ensure best practices. In the context of debt valuation, it is important to recognize that fair value does not necessarily represent what an investment manager ultimately expects to receive when holding a debt security to maturity (i.e., par unless impaired). Rather, fair value represents the amount that the investment manager would receive in a hypothetical trade with a market participant as of the measurement date.

Duff & Phelps’ valuation and SEC regulatory experts stand ready to help fund managers ensure that the adviser satisfies the SEC’s condition to obtain fair market pricing from a reliable source that is not affiliated with the adviser. Our regulatory experts can also help managers design, implement, test and document appropriate policies, procedures and controls to satisfy regulatory scrutiny.

We welcome the opportunity to set up a call to discuss how we can assist.