SEC Issues No-Action Letter Allowing Fund Boards to Rely on CCO Representations to Comply with Certain Exemptive Rules

Investment Management Update

Date: October 22, 2018

Rules 10f-3, 17a-7 and 17e-1 (the “Exemptive Rules”)[1] under the Investment Company Act of 1940, as amended (1940 Act), permit a fund to execute certain affiliated transactions otherwise prohibited under the 1940 Act. Under each Exemptive Rule, a fund’s board must (i) adopt procedures that are reasonably designed to comply with the rule, (ii) amend such procedures as necessary and (iii) determine no less frequently than quarterly that all transactions made pursuant to the Exemptive Rule for the preceding quarter were effected in compliance with such procedures (such determinations, the “Board Determinations”).

On October 12, 2018, the staff of the SEC’s Division of Investment Management issued a no-action letter to the Independent Directors Council (IDC) stating its position that the staff would not recommend enforcement action if, instead of making the Board Determinations, a fund’s board receives from its chief compliance officer (CCO) a written representation that transactions entered into with reliance on any of the Exemptive Rules were effected in compliance with the related procedures adopted by the board.

In its letter requesting relief, the IDC noted that when the Exemptive Rules were initially adopted, it was the SEC’s position that the board was the “first line of responsibility for determining compliance” with the Exemptive Rules. However, the Exemptive Rules were adopted more than two decades before the SEC adopted Rule 38a-1 under the 1940 Act. Rule 38a-1 requires a fund to implement written compliance policies and procedures reasonably designed to prevent violations of the federal securities laws. The IDC’s principal argument was that the no-action position requested would (i) align the Board Determinations with the role that the SEC assigned to fund boards with respect to compliance when the agency adopted Rule 38a-1 and (ii) permit boards to avoid duplicating certain functions commonly performed by fund CCOs.

In its request for relief, the IDC noted that when the SEC adopted Rule 38a-1, the agency imposed on a fund’s board the responsibility for approving a CCO responsible for administration of the fund’s compliance program because doing so would give boards “direct access to a single person with overall compliance responsibilities for the fund.” The IDC also highlighted the SEC’s position that the proper role of a fund’s director is to “exercise oversight of the fund’s compliance program without becoming involved in the day-to-day administration of the program.”

The SEC staff agreed with the IDC that the no-action position was consistent with the agency’s approach in adopting Rule 38a-1, noting that the position (i) “would not change the board’s oversight role with respect to a fund’s overall compliance program” and (ii) was likely to “facilitate the directors’ ability to focus on conflict of interest concerns raised by affiliated transactions.”

Next Steps

Boards of investment companies relying on any Exemptive Rule should promptly review, together with the fund CCO, any necessary changes to the current compliance program to incorporate the no-action position taken by the staff. Among other things, boards should ensure that any reporting they receive appropriately details the number and types of transactions effected under each Exemptive Rule during a reporting period.


For more information, please contact:

Andrew J. Davalla

Donald S. Mendelsohn

Craig A. Foster

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[1]Rule 10f-3 permits funds to purchase certain securities during the existence of an underwriting syndicate of which an affiliated person is a member; Rule 17a-7 permits funds to engage in “cross?trades” under certain circumstances; and Rule 17e-1 permits brokers affiliated with a fund to effect transactions on behalf of the fund.