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SEC Staff No-Action Letter Permits Funds to Self-Custody Certain Loan Interests

On January 29, 2021, the staff of the SEC’s Division of Investment Management issued no-action relief permitting a registered fund to self-custody its loan interests consistent, but not in strict compliance, with Section 17(f) of and Rule 17f-2 under the Investment Company Act of 1940 subject to certain requirements.

Generally, Section 17(f) and Rule 17f-2 govern the conditions and procedures under which registered funds may maintain custody of their own investments. Particularly, Rule 17f-2(b) requires that documents evidencing a fund’s investments “shall be deposited in the safekeeping of, or in a vault or other depository maintained by, a bank or other company whose functions and physical facilities are supervised by Federal or State authority.” Additionally, Rule 17f-2(d) imposes restrictions on which persons may have access to a fund’s investments, and Rule 17f-2(e) requires that each person withdrawing or depositing a fund’s investments sign a notation confirming the transaction. In lieu of strictly complying with the foregoing requirements, the staff determined that it would not recommend enforcement action if a fund were to maintain custody of its own interests in corporate loans if the following conditions are met:

  • The fund permits only a limited number of personnel to provide instructions to the fund’s custodian and the administrative agents for the loans;

  • The fund requires passwords or other security procedures to ensure only properly authorized personnel can submit those instructions;

  • The fund reconciles settled loan interests with the records of the applicable administrative agents on a regular basis;

  • Loan interests are titled or recorded at the administrative agents in the name of the fund and not in the name of the fund’s investment adviser;

  • The fund and its investment adviser are not affiliated with the administrative agents; and

  • The fund adopts policies and procedures reasonably designed to prevent violations of provisions of the conditions set forth above.

In reaching this conclusion, the SEC staff recognized that the conditions set forth above are consistent with the protections that Section 17(f) and Rule 17f-2 were intended to provide. Particularly, the staff recognized that when Rule 17f-2 was adopted, nearly all loan interests were issued in certificated form, whereas now most loan interests are uncertificated and may not be held physically, rendering the physical safekeeping requirement under Rule 17f-2(b) largely inapplicable and burdensome.

Lastly, the SEC staff stated that it would not recommend enforcement action against a fund that does not comply with the requirement under Rule 17f-2(f) that a fund be subject to at least three annual examinations by an independent public accountant. The staff conditioned this relief on a representation that the fund be subject to one annual audit, conducted in accordance with applicable requirements, during which an independent public accountant confirms the fund’s loan interests and reconciles them to the fund’s account records.

The SEC staff’s no-action letter is available here.

© 2021 Vedder PriceNational Law Review, Volume XI, Number 109



About this Author

John Marten Investment Attorney Vedder Price Law FIrm

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

Tyrique Wilson Investment Attorney Vedder Price Law Firm

Tyrique J. Wilson is an Associate in the Chicago office of Vedder Price and a member of the firm’s Investment Services group.

Mr. Wilson received his law degree from the Washington University School of Law in St. Louis and his undergraduate degree from The George Washington University. While in law school, Mr. Wilson was Treasurer of the Black Law Students Association, received an award for Excellence in Oral Advocacy and earned a Certificate in Business Law.