Keen on SEC FAQs
Stephen Keen, Senior Counsel at Perkins Coie, posted two pieces on the SEC's updated FAQs. The first is entitled, "Good News for Retail Funds," while the other is, "Why Gating Would be an Emergency." In the first, Keen writes, "In Question 16 (formerly 15) of the FAQs, the staff clarified that it would look to the definition of "beneficial owner" in Rule 13d-3 when interpreting the definition of a "retail money market fund." Keen explains, "Rule 13d-3 uses voting, as well as investment, power to determine beneficial ownership. Voting power has nothing to do with the ability "to redeem quickly in times of market stress." Accordingly, the revised answer to Question 16 states that: "in the staff's view and notwithstanding Rule 13d-3, policies and procedures would be deemed 'reasonably designed to limit all beneficial owners of the fund to natural persons' even if they do not use voting power as a basis for identifying beneficial owners of the fund." He tells us, "Putting Question 16 together with Rule 13d-3, it appears that a retail fund's policies and procedures should be reasonably designed to confirm, for each shareholder’s account, that at least one natural person has investment power (as defined in Rule 13d-3) to redeem the shares held in the account." In his blog post on "Gating," Keen explains, "Section 22(e) of the Investment Company Act of 1940 prohibits mutual funds from suspending the right of redemption except in specified circumstances. These circumstances include: any period during which an emergency exists as a result of which (A) disposal by the company of securities owned by it is not reasonably practicable or (B) it is not reasonably practicable for such company fairly to determine the value of its net assets." Keen concludes, "It is important to note that the "extraordinary circumstances" include the board's determination that suspension of redemptions is in the best interests of the fund. So weekly liquidity assets falling below 30% of total assets should not always be considered, by itself, to constitute an emergency. The SEC does not have authority over the interpretation of fund organizational documents, which are governed by state laws. However, insofar as provisions of organizational documents permitting suspensions of redemptions are designed to conform to section 22(e), it makes sense to interpret "emergency” consistently in both contexts. Thus, the staff's response to new Question 31 should provide persuasive authority for directors and trustees to conclude that they have authority to gate a money market fund under its current organizational documents."
