July 15, 2019

July 15, 2019

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SEC Staff No-Action Letter Allows Fund Boards to Rely on CCO Representations for Affiliated Transactions

In a no-action letter to the Independent Directors Council (IDC) dated October 12, 2018, the staff of the SEC’s Division of Investment Management stated it would not recommend enforcement action for violations of Sections 10(f), 17(a) or 17(e) of the Investment Company Act of 1940, if a fund’s board of directors receives, no less frequently than quarterly, a written representation from the fund’s chief compliance officer that transactions effected in reliance on Rules 10f-3,1 17a-72 or 17e-13 under the 1940 Act complied with procedures adopted by the board pursuant to the relevant exemptive rule, instead of the board itself determining compliance. In providing no-action assurance, the SEC staff noted the significant growth in the number and scope of director responsibilities resulting from market, regulatory and technological developments. With this backdrop, the SEC staff has undertaken a review of existing director responsibilities to consider whether they are appropriate and exercised in a manner that serves the shareholders’ best interests.4

According to the SEC staff, its no-action position regarding board oversight of affiliated transactions is consistent with the SEC’s approach in adopting Rule 38a-1 under the 1940 Act—the fund compliance program rule—which, among other things, assigns responsibility for the administration of the compliance program to the fund CCO. The proper role of the board, in contrast, is to oversee the fund’s compliance program without becoming involved in the day-to-day administration of the program. Further to this point, the SEC staff agreed with the IDC’s assertion that the no-action position would allow fund boards to avoid duplicating certain functions commonly performed by, or under the supervision of, fund CCOs.

The SEC staff’s no-action letter to the IDC is available at: https://www.sec.gov/divisions/investment/noaction/2018/ independent-directors-council-101218.htm

The IDC’s request for the no-action position is available at: https://www.sec.gov/divisions/investment/noaction/2018/ independent-directors-council-101218-incoming.pdf

1 Rule 10f-3 exempts from the prohibitions of Section 10(f) of the 1940 Act certain securities purchases during the existence of an underwriting syndicate of which an affiliated person is a member.  Section 10(f) generally prohibits any fund from knowingly purchasing or otherwise acquiring, during the existence of an underwriting or selling syndicate, any security (other than a security of which the fund is the issuer) a principal underwriter of which is one of the certain affiliated persons (as that term is defined in Section 2(a)(3) of the 1940 Act) of the fund, or affiliated persons of such affiliated persons of the fund.

2 Rule 17a-7 provides exemptive relief for funds seeking to engage in “cross trades”—i.e., purchase or sale transactions between affiliated funds, or between funds and other advisory accounts affiliated solely by reason of having a common investment adviser, common directors and/or officers—which are otherwise prohibited by Section 17(a) of the 1940 Act.

3 Rule 17e-1 defines when commissions or fees paid to affiliated brokers will be deemed not to exceed the usual and customary brokerage commission for purposes of Section 17(e)(2) (A) of the 1940 Act.  Section 17(e)(2)(A) generally prohibits an affiliated person of a fund, or an affiliated person of such affiliated person, acting as broker, in connection with the sale of securities to or by such fund or any controlled company thereof, from receiving from any source a commission, fee, or other remuneration for effecting such transaction, which exceeds the usual and customary broker’s commission if the sale is effected on a securities exchange.

4 See Dalia Blass, Director, Division of Investment Management, SEC, Keynote Address: ICI Securities Law Developments Conference (Dec. 7, 2017), available at: https://www.sec.gov/ news/speech/blass-keynote-ici-securities-law-developments-conference-2017.

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Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...