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SEC looking to allow corporate debt funds as crisis response

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By Denise A. Valdez, Reporter

THE Securities and Exchange Commission (SEC) is seeking to launch corporate debt funds (CDF) that will invest in debt papers of large corporations and medium-sized enterprises.

The regulator released a draft memorandum circular on Wednesday proposing to introduce the new investment vehicle as a means to cope with the coronavirus disease 2019 (COVID-19) pandemic.

Through CDFs, the SEC said it hopes the mutual fund industry may help avert credit and liquidity crises emerging from the dampened economy.

The proposed guidelines classifies a CDF as a closed-end investment company that offers shares to invest in portfolios of corporate debt papers. An investment company may register as a CDF by completing an application with the SEC.

Subscription to a CDF must be done only on initial public offering and redemption at maturity. A CDF may offer several shares or unit classes managed as separate asset pools but with the same investment objectives.

Unlike in public listings, a CDF is not required to be listed or traded in an exchange. The underlying corporate debt portfolio will follow a hold-to-collect business model, meaning investments are held to the maturity.

CDF shares or units may be issued in tranches once the SEC approves the securities, with the first tranche issued within six months from the date of the approval. The securities must be sold on a cash basis and only by a registered mutual fund distributor and certified investment solicitor.

Proceeds from the issuance of CDF securities must be invested in corporate debts of large corporations and medium-sized enterprises. But pending deployment of CDF according to its investment objectives, it can invest in deposits and money market instruments.

The proposed rules limit the value of a CDF’s investments in corporate debt. If it is issued by a single enterprise, it should not exceed 25% of the funds net asset value and 50% in single group entities. This will be computed based on total proceeds of securities sold within the initial offering period.

Total operating expenses of a CDF is also limited to 10% of its average investment fund or net worth as indicated in its latest audited financial statement.

The draft memorandum circular is accessible through the SEC website. The corporate regulator is accepting comments from stakeholders until July 17 through snail mail and e-mail.





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