The staff of the Securities and Exchange Commission’s (SEC) Division of Investment Management (Staff) issued a no-action letter regarding board determinations under the affiliated transaction rules.1 The Staff agreed not to recommend enforcement action to the SEC for violations of Sections 10(f), 17(a) or 17(e) of the Investment Company Act of 1940 (Act) if a fund’s board of directors receives, no less frequently than quarterly, a written representation from the chief compliance officer (CCO) that transactions effected in reliance on Rules 10f-3, 17a-7 or 17e-1 under the Act2 (Exemptive Rules) complied with the procedures adopted by the board pursuant to the relevant Exemptive Rule, instead of the board itself determining compliance.
The letter states that, in light of market, regulatory and technological developments, the Staff has continued to review existing director responsibilities and to consider whether they are appropriate and are carried out in a manner that serves shareholders’ best interests. The letter further states that the Staff’s position is consistent with the SEC’s approach in adopting Rule 38a-13 under the Act and would allow boards to avoid duplicating certain functions commonly performed by, or under the supervision of, the CCO. The letter notes that the Staff’s position will facilitate directors’ ability to focus on conflict of interest concerns raised by affiliated transactions, including whether a fund engaging in the types of affiliated transactions permitted by the Exemptive Rules is in the best interest of that fund and its shareholders.
1 See Independent Directors Council, SEC No-Action Letter (pub. avail. Oct. 12, 2018), available at https://www.sec.gov/divisions/investment/noaction/2018/independent-directors-council-101218.htm.
2 Section 10(f) of the Act prohibits a fund from purchasing any security during an underwriting or selling syndicate if the fund has certain affiliated relationships with a principal underwriter of the security. Rule 10f-3 provides an exemption from the prohibition in section 10(f) if certain conditions are satisfied. Rule 17a-7 permits registered investment companies that might be deemed affiliated persons by reason of common investment advisers, directors and/or officers to purchase securities from or sell securities to one another at an independently determined price, provided that certain conditions are met. Rule 17e-1 specifies conditions under which a fund may pay commissions to affiliated brokers in connection with the sale of securities on an exchange.
3 In 2003, the SEC adopted Rule 38a-1 to enhance the effectiveness of a fund’s compliance program by, among other things, assigning the responsibility for the administration of the program to the CCO. See Compliance Programs of Investment Companies and Investment Advisers, SEC Release No. IC-26299, 68 F.R. 74714 (Dec. 24, 2003), available at https://www.sec.gov/rules/final/ia-2204.htm.