During a recent webinar, Steve explained that the market and trading conditions caused by the COVID-19 pandemic might be “reasonably expected to materially affect one or more of [a mutual fund’s] investments’ classifications” for purposes of the fund’s liquidity risk management program (its “LRM Program”). In this circumstance, Rule 22e-4 under the Investment Company Act of 1940 requires more frequent review of these classifications. This post describes how a rough market may require a mutual fund (other than a money market fund or in-kind exchange traded fund) to reclassify an investment’s liquidity classification. Continue Reading Navigating Mutual Funds in Rough Markets—Liquidity

In the midst of the COVID-19 pandemic, the financial markets have experienced significant volatility. During the course of this volatility, exchanges have halted trading multiple times after declines in trading trigged circuit breakers. In addition, trading floors are transitioning to electronic trading in efforts to prevent the transmission of COVID-19 on physical trading floors. With the recent turmoil, this post provides a high-level summary of the various types of circuit breakers and what can be expected. Continue Reading Understanding Circuit Breakers, Our New Reality, in the Time of COVID-19

Another day, another expansion of the Money Market Mutual Fund Liquidity Facility (the “Facility”) from the Federal Reserve Bank of Boston (“FRBB”). As before, I’ve updated my original post to conform to the current program. There is now a website with a full set of documents, so I’ve updated the link to that website. The biggest change is the inclusion of certificates of deposit and variable rate demand obligations as Eligible Collateral. FRBB has also provided FAQs for the Facility.

Yesterday I posted a summary of the Federal Reserve Bank of Boston’s Money Market Mutual Fund Liquidity Facility (the “Facility”). Today it expanded the Facility to include tax exempt money market funds and municipal securities. Rather than write a separate post, I updated my original post so all the information is in one place and up to date. The blog editor does not have search functions, so forgive me if I haven’t removed every reference to “Prime” or inserted “Muni” in every appropriate spot.

A favorite client has also furnished me with a companion no-action letter obtained by the Investment Company Institute (“ICI”). I cannot link to the letter because I have not found it on either the SEC’s or ICI’s website. The letter is summarized below. Continue Reading Update on Money Market Mutual Fund Liquidity Facility & Related No-Action Letter

The Federal Reserve Bank of Boston (“FRBB”) has established a new Money Market Mutual Fund Liquidity Facility. (I’m not sure what acronym to use here; “mmm … Fund Liquidity” would work. Let’s just call it the “Facility.”) The Facility opened on March 23, 2020. This post summarizes the significant terms of the Facility and suggests an idea for fund boards to consider. Continue Reading Information on the Prime and Tax Exempt Money Market Fund Liquidity Facility (Updated 3/23)

On March 9, 2020, FINRA released Regulatory Notice 20-08 (the “Regulatory Notice”) providing guidance and limited relief to its member broker-dealers during the COVID-19 pandemic. In particular, the Regulatory Notice requests that broker-dealers evaluate their compliance with FINRA Rule 4370, which requires broker-dealers to create, maintain, and update upon any material change, BCPs (Business Continuity Plans) identifying procedures relating to emergency or significant business disruption. Continue Reading FINRA Issues Notice Regarding Business Continuity Planning During COVID-19 Outbreak

I. DERIVATIVES ISSUES

1. Inventory “relationship level” considerations in legal documentation that governs your derivatives trading relationships (ISDA Master Agreements, Futures Customer Agreements, Master Securities Forward Transaction Agreements, etc.)

a. Example: Decline in Net Asset Value Provisions (Common in ISDAs)

i. Identify the trigger decline levels and time frames at which transactions under the agreement can be terminated (25% over a 1-month period – is that measured on a rolling basis or by reference to the prior month’s end?)

ii. Confirm whether all or only some transactions can be terminated (typically, it is all transactions)

iii. Identify the notice requirements that apply when a threshold is crossed

iv. Identify whether the agreement includes a “fish or cut bait clause” that restricts the ability of the other party to designate the termination of the transactions under the trading agreement

Continue Reading Market Volatility Regulatory Outline for Asset Managers

On March 25, 2020, the Securities and Exchange Commission (“SEC”) issued an order granting temporary relief for filing and delivery obligations of Form ADV and Form PF for investment advisers whose operations may be affected by the coronavirus. This relief supersedes the SEC’s previous order from March 13. The March 25 order extends the time of the relief to June 30, 2020, and eliminates the requirement for the adviser to provide the SEC and clients with a description of the reasons why the adviser is relying on the order and an estimated date by which the required filing will occur.

The relief applies to both registered investment advisers and exempt reporting advisers. In providing the relief, the SEC explained that it is necessary “[i]n light of our current understanding of the nationwide scope of COVID-19’s disruptions to businesses and everyday activities, and the uncertainty as to the duration of these disruptions.”

Continue Reading SEC Provides Relief For Form ADV and Form PF Filing and Delivery Obligations in Response to COVID-19 (Updated 4/2)

On two separate days last week and again this morning, markets hit critical circuit breaker levels triggering U.S. exchanges to halt trading. Such large market declines remind us of the prospect of an early close if the S&P 500 falls more than 20% from the previous day’s close. If such an event occurs, open-end investment companies (“mutual funds”) will need to either (1) calculate their net asset values (“NAVs”) at the time of the early close or (2) find alternative pricing sources for calculating their NAVs as of 4:00 pm (ET). The options available will depend in part on the mutual fund’s prospectus disclosure. Continue Reading Navigating Mutual Funds in Rough Markets—Preparing for an Early Close