Investment Company Act of 1940 — Section 17(f)(1) and Section 26(a)
The Brink's Company

February 11, 2014

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT

IM Ref. No. 20142101038

Your letter dated February 3, 2014 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission ("Commission") under Section 17(f)(1) of the Investment Company Act of 1940 ("1940 Act") against any registered investment company ("Fund") if the Fund places and maintains custody of its gold bullion and other precious metals in a vault or other secure custody facility owned and operated by The Brink's Company or its subsidiaries ("Brink's") in the United States or in the United Kingdom.

FACTS

You state the following: Brink's provides gold bullion and other precious metals ("Precious Metals")[1] vault services to banks and other financial institutions, retailers, government agencies and central banks, mints, jewelers and other commercial operations. Within its New York and London vaults, Brink's currently has secure custody of, respectively, more than $1.5 billion and $4 billion of its customers' gold bullion.

Many banks have exited the business of providing vault services for gold bullion, which requires significant investments in secure, state-of-the-art vaults large enough to hold large quantities of gold bullion.[2] A provider of gold bullion vault services and other precious metals also must provide secure transportation services to settle transactions by delivering gold bullion to or from its vaults. Accordingly, in the United States and London, in particular, many of Brink's vault and transportation customers are banks, although Brink's is not a bank.[3]

In the United States, New York City is a prominent market for Precious Metals. Transactions in Precious Metals occur under the rules of NYMEX/COMEX ("NYMEX/COMEX Rules"), of which Brink's is a licensed depository.[4] As a NYMEX/COMEX Licensed Depository ("Licensed Depository"), Brink's must: (i) have in force insurance against loss of Precious Metals, in an amount satisfactory to NYMEX/COMEX;[5] (ii) provide NYMEX/COMEX with annual audited financial statements, as they become available;[6] (iii) at its own expense, have an independent auditor annually audit the Licensed Depository's inventory in compliance with procedures established by NYMEX/COMEX and provide the resulting audit report to NYMEX/COMEX within thirty days of the date of the completion of the audit;[7]and (iv) permit NYMEX/COMEX, at any time, to examine any and all books and records of the Licensed Depository, for the purpose of ascertaining the stocks relating to Precious Metals on hand.[8]

Each of NYMEX and COMEX is a "designated contract market" ("DCM"), i.e., an exchange that operates under the regulatory oversight of the Commodity Futures Trading Commission ("CFTC") pursuant to Section 5 of the Commodity Exchange Act ("CEA").[9] DCMs are like traditional futures exchanges, which may allow access to their facilities by all types of traders, including retail customers.[10] To obtain and maintain its designation, a DCM also must comply, on an initial and ongoing basis, with the twenty-three "Core Principles" established in Section 5(d) of the CEA, 7 U.S.C. § 7, and Part 38 of the CFTC's regulations.[11] The CFTC's Division of Market Oversight's Market Compliance Section conducts regular reviews of each designated DCM's ongoing compliance with core principles through the self-regulatory programs operated by the exchange in order to enforce its rules (e.g., the NYMEX/COMEX Rules).[12]

Therefore, within the United States, in order to qualify as a NYMEX/COMEX Licensed Depository, each Brink's facility is subject to approval by NYMEX/COMEX and, thereafter, is subject to the continuing oversight of NYMEX/COMEX. The same approval and continuing oversight applies to each bank Licensed Depository. Further, the CFTC's Division of Market Oversight Market Compliance Section's regular RERs of NYMEX and COMEX's compliance with core principles (through the self-regulatory programs operated by NYMEX and COMEX the exchange to enforce the NYMEX/COMEX Rules) provide a layer of regulatory oversight of each Licensed Depository. That is, both NYMEX and COMEX are inspected by the CFTC staff to confirm that, among other things, NYMEX and COMEX assure that each Licensed Depository whether Brink's or a bank complies with applicable NYMEX/COMEX Rules.

In London, which is the principal gold bullion market in the world, transactions in gold bullion occur under the rules of the London Bullion Market Association ("LBMA"), of which Brink's is a member. The LBMA provides general guidance concerning the requirements that a vault should consider. You believe that the NYMEX/COMEX Rules concerning Licensed Depositories and, to a lesser extent, the LBMA best practices, help to ensure that vaults and Licensed Depositories maintain state-of-the-art secure facilities for Precious Metals.

Brink's also is a reporting company under the Securities and Exchange Act of 1934, as amended ("Exchange Act"). Accordingly, Brink's is subject to the periodic disclosure requirements, including the financial disclosure and internal control requirements, mandated by the Exchange Act. In addition, Brink's shareholder equity and surplus exceeded $500 million as of December 31, 2013. Brink's also maintains over $1 billion of insurance coverage, which is available to cover any Precious Metals losses sustained by Brink's customers while the Precious Metals are in the custody of Brink's. This amount of insurance coverage is available for each and every claim, which means that previous claims do not reduce the amount of insurance coverage available for future claims. The insurance also covers mysterious disappearance and employee infidelity, without an exclusion for officers and senior managers.

You believe that permitting Brink's to serve as a Fund's Precious Metals custodian in the United States or the United Kingdom satisfies the concerns Congress sought to address in adopting Section 17(f)(1) of the 1940 Act, even though Brink's is not a bank or other qualified custodian under Section 17(f) of the 1940 Act and the rules thereunder, as described below.

ANALYSIS

Section 17(f) of the 1940 Act and the rules thereunder govern the safekeeping of Fund assets, and generally provide that a Fund must place and maintain its securities and similar investments only with certain qualified custodians. These qualified custodians include, for example, banks satisfying the qualification specified within Section 26(a)(1) of the 1940 Act, a member of a national securities exchange, or other entities that Commission has prescribed by rule, regulation, or order for the protection of investors. Section 26(a)(1) provides that a bank's "aggregate capital, surplus, and undivided profits... not be less than $500,000." The legislative history and requirements of Section 17(f) indicate that Congress intended Fund assets to be kept by financially secure entities that have sufficient safeguards against misappropriation.[13]

Brink's is not a bank, a member of a national securities exchange or any of the other entities permitted to serve as a custodian to a Fund pursuant to rules and regulations adopted by the Commission under Section 17(f) of the 1940 Act. Nonetheless, you argue that Brink's safekeeping of Precious Metals is at least as secure and competent as the same services available through any entity that would qualify under Section 17(f) of the 1940 Act.

In support of your contention, you represent that Brink's shareholder equity and surplus exceeded $500 million (i.e., approximately 1,000 times greater than required under Sections 17(f)(1) and 26(a)(1) of the 1940 Act). You further represent that Brink's maintains over $1 billion of insurance coverage, which is available to cover any Precious Metals losses sustained by Brink's customers, including Funds, while in the custody of Brink's. You note that this amount of insurance coverage is available for each and every claim, which means that previous claims do not reduce the amount of insurance coverage available for future claims. You contend that the vault facilities owned and operated by Brink's to store Precious Metals are indistinguishable from the analogous vault facilities used by banks. Therefore, you believe that Brink's vault facilities and related transportation services provide an equally secure storage location and means of transport for Precious Metals. Moreover, you believe that permitting Funds to place and maintain custody of their Precious Metals with Brink's would enhance competition in this market, resulting in greater efficiencies and lower costs with respect to Precious Metals custody services for Funds.[14]

Based upon the facts and representations that are set forth in your letter, we would not recommend enforcement action to the Commission under Section 17(f)(1) of the 1940 Act against a Fund if the Fund places and maintains custody of its Precious Metals in a vault or other secure custody facility owned and operated by Brink's in the United States or in the United Kingdom, provided that a majority of the Fund's board members, including a majority of the board members who are not "interested persons" under Section 2(a)(19) of the 1940 Act, determines that Brink's custody services for Precious Metals are in the best interest of the Fund and its shareholders.[15] In making these determinations, the board or its delegate also should consider whether the Precious Metals will be subject to reasonable care and can provide services at least equal in nature and quality to the services that could be provided by bank custodians in the same market(s) after consideration of all of the relevant factors.[16]

In particular, we rely on your representations that:

• Brink's remains a reporting company under the Exchange Act, a majority-owned subsidiary of a reporting company or continues to provide financial disclosure about its operations substantively equivalent in all material respects to the information that Brink's currently is required to disclose;

• In the United States, with respect to each such vault or secure facility, Brink's remains a NYMEX/COMEX-approved Licensed Depository and, in the United Kingdom, Brink's remains an LMBA-member providing Precious Metals vaults and secure facilities;

• Brink's vaults - whether located in the United States or in London - provide substantially equivalent protections against misappropriation; and

• Brink's continues to maintain insurance coverage of at least $1 billion with respect to each such vault or secure facility to cover any custody-related losses incurred by its customers, including Funds. The insurance coverage must be available for each and every claim, which means that previous claims do not reduce the $1 billion of insurance coverage per vault or secure facility available for future claims.

Our letter provides our position on enforcement action only, and does not provide any legal conclusions on the issues presented. Because our position is based on all of the facts and representations made in your letter, you should note that any different facts or circumstances might require a different conclusion.

Holly Hunter-Ceci
Acting Branch Chief

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