February 13, 2014

RESPONSE OF THE CHIEF COUNSEL’S OFFICE DIVISION OF INVESTMENT MANAGEMENT

IM Ref. No. 20134121358 Nuveen Investment Funds, Inc.

Your letter dated February 12, 2014 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the “Commission”) under section 17(e)(1) of the Investment Company Act of 1940 (the “1940 Act”) against U.S. Bank National Association (the “Bank”), which may be deemed an affiliated person of Nuveen Investment Funds, Inc. (“NIF”), if the Bank serves as securities lending agent for certain series of NIF (the “Lending Funds”) and, in its capacity as lending agent, negotiates Rebate Rates (as defined below) on behalf of each Lending Fund, under the circumstances described in this letter, including pursuant to the Spread Guidelines and subject to the Rebate Monitoring Procedures, as detailed below.

Background

You state the following:

• NIF is a management investment company registered under the 1940 Act. Nuveen Fund Advisors, LLC (“Nuveen Advisors”), an investment adviser registered under the Investment Advisers Act of 1940, serves as investment adviser to each Lending Fund.  Each Lending Fund is permitted under its investment objectives, policies and restrictions to engage in securities lending.

• The Bank, in its capacity as trustee or discretionary investment manager of various fiduciary accounts, may own, control or hold with power to vote 5% or more, or more than 25%, of the outstanding voting securities of a Lending Fund and may, therefore, be deemed an affiliated person of the Lending Funds within the meaning of section 2(a)(3) of the 1940 Act.  The Bank serves as the custodian for the Lending Funds.

• In reliance on Norwest Bank Minnesota, N.A., SEC Staff No-Action Letter (pub. avail. May 25, 1995) (the “Norwest Letter”) and prior staff oral assurance, [1] as well as pursuant to a securities lending agreement between the Bank and NIF on behalf of each Lending Fund that has been approved by the board of directors of NIF (the “Board”), acting on behalf of each Lending Fund, the Bank also serves as securities lending agent for the Lending Funds.  In its capacity as securities lending agent, the Bank provides a variety of services that facilitate each Lending Fund’s loans of portfolio securities to borrowers (typically, broker-dealers) that have been pre-approved by Nuveen Advisors or the Board (each, a “Borrower”).[2]

• All securities loans made by the Lending Funds are collateralized with cash (“Cash Collateral”), equal to not less than 100% of the market value of the securities loaned, pledged by the Borrowers.  A Lending Fund (acting through the Bank) invests the Cash Collateral during the term of the loan consistent with terms that have been approved by the Board, acting on behalf of each Lending Fund.  Depending on the demand for the lent security, the Lending Fund may pay the Borrower a fee based on a specified rate of interest on the Cash Collateral (“Borrower Rebate Rate”) or, if the lent securities are in high enough demand, the Borrower may pay the Lending Fund a fee based on a specified rate of interest (“Negative Rebate Rate,” and together with Borrower Rebate Rate, “Rebate Rates”).[3]  The rate of return to the Lending Fund from the investment of the Cash Collateral, reduced by any Borrower Rebate Rate (or increased by any Negative Rebate Rate), is referred to as the “Spread.”

Legal Analysis

Section 17(e)(1) of the 1940 Act, in relevant part, makes it unlawful for any affiliated person of a registered investment company, or any affiliated person of such a person, acting as agent, to accept from any source any compensation for the purchase or sale of any property to or for the investment company, except in the course of such person’s business as an underwriter or broker.  Under the definition of “affiliated person” in Section 2(a)(3) of the 1940 Act, an affiliated person of a registered investment company (a “fund”) includes, among others, any person who directly or indirectly owns, controls, or holds with power to vote, 5 percent or more of the outstanding voting securities of the fund and any person who directly or indirectly controls the fund.  Section 2(a)(9) of the 1940 Act provides that any person who owns beneficially, either directly or through one or more controlled companies, more than 25 percent of the voting securities of a company shall be presumed to control such company.

In the Norwest Letter, the staff stated, in relevant part, that it would not recommend enforcement action to the Commission under section 17(e)(1) of the 1940 Act against an affiliated custodian of a fund if the affiliated custodian was compensated by the fund for providing certain services in connection with a securities lending program.  The Norwest Letter stated that “[s]pecifically, the Custodian would perform the following tasks: deliver loaned securities from the Fund to the borrowers; arrange for the return of loaned securities to the Fund at the termination of the loans; monitor daily the value of the loaned securities and collateral; request that borrowers add to the collateral when required by the loan agreement; and provide recordkeeping and accounting services necessary for the operation of the Program.  In addition, a Fund’s adviser could delegate to the Custodian the tasks of entering into loans with pre-approved borrowers on pre-approved terms, and investing cash received as collateral for the loans in instruments pre-approved by the adviser.  The adviser’s delegation of authority to the Custodian, as well as the borrowers, loan terms, and investment instruments pre-approved by the adviser, would be detailed in writing.”  The Norwest Letter also stated that “[b]ecause a Custodian would select borrowers, execute loan agreements, and invest cash collateral only in accordance with guidelines specified by the Fund’s adviser and under the adviser’s supervision, we believe that these activities would present little opportunity for the types of conflicts that Section 17(e)(1) was designed to prevent.”  

The Rebate Rate is one of the terms of a securities loan.  You state that it is generally not practicable for the Bank to submit the Rebate Rates to Nuveen Advisors for pre-approval, and that the industry practice generally does not involve such pre-approval.  You request our assurance that we would not recommend enforcement action to the Commission under section 17(e)(1) of the 1940 Act against the Bank if the Bank negotiates the Rebate Rates on behalf of each Lending Fund under the circumstances described in your letter, including pursuant to Spread Guidelines and subject to Rebate Monitoring Procedures.

In support of your request, among other things, you state that the securities lending procedures that are described in your letter direct Nuveen Advisors to establish the Spread Guidelines and that Nuveen Advisors has also established monitoring and reporting requirements (“Rebate Monitoring Procedures”) reasonably designed to provide Nuveen Advisors with a meaningful basis for evaluating the quality of the Bank’s negotiation of the Rebate Rates on behalf of the Lending Funds.  You state that the Spread Guidelines and the Rebate Monitoring Procedures provide as follows:

• Under the Spread Guidelines, the Bank may not enter into a securities loan on behalf of a Lending Fund if the Spread at the inception of the loan is expected to be less than (i) 4 basis points, for loans of U.S. government and agency securities (including agency mortgage-backed securities) or (ii) 6 basis points, for all other securities.[4]  Nuveen Advisors is responsible for monitoring the continuing appropriateness of the Spread Guidelines and may modify the Spread Guidelines at any time, upon which it will promptly notify the Board, or a designated committee of the Board, of any material changes to the Spread Guidelines, together with an explanation of the reasons for the changes.  The Spread Guidelines have been reviewed and found to be appropriate by the Board, including a majority of the disinterested members, on behalf of each Lending Fund.

• Under the Rebate Monitoring Procedures, the Bank is required to promptly notify Nuveen Advisors in the event that a loan on any day earns a Spread that is less than the required minimum Spread under the Spread Guidelines.  In such event, Nuveen Advisors determines how to proceed with respect to such loan, taking into account relevant factors, including: the magnitude of the difference between the actual Spread and the required Spread under the Spread Guidelines; whether the failure to achieve the minimum Spread is temporary or is expected to persist; and whether the minimum Spread is expected to be realized over the life of the securities loan.  In addition, the Bank monitors on a daily basis market information on Rebate Rates that is compiled by an independent third party using information it receives from multiple securities lending agents, to the extent such information is available, and reports to Nuveen Advisors on a daily basis any amount (“Rebate Amount”) paid to or received from a Borrower that is materially more favorable to the Borrower than the Rebate Amount that would be paid based on Rebate Rates (including negative Rebate Rates) that are generally available in the market for loans of the same securities to similar borrowers on an agency basis.  Each report will include an explanation of any such discrepancy.  With respect to such report, Nuveen Advisors will take such action that it deems appropriate under the circumstances.  Nuveen Advisors has described the Rebate Monitoring Procedures to the Board.  Nuveen Advisors provides quarterly reports to the Board (or a designated committee thereof) listing any exceptions identified under the Rebate Monitoring Procedures during the prior quarter and explaining the actions taken by Nuveen Advisors and the Bank in connection therewith. 

• In addition to its reporting under the Rebate Monitoring Procedures described above, the Bank makes the following information and reports available to Nuveen Advisors with respect to each Lending Fund:  (i) daily information on the terms of each outstanding loan, including Borrower, loan amount, Rebate Rate, cash reinvestment rate, and Spread, each with respect to the previous business day; (ii) monthly reports showing, on a Borrower by Borrower basis, earnings from cash collateral reinvestment, Rebate Amounts paid to or received from the Borrower, fees paid to the Bank, and net earnings to the Lending Fund; and (iii) quarterly reports (which are also provided to the Board) showing, on a Lending Fund by Lending Fund basis, weighted average Spreads, quarterly earnings information, and the percentage of available securities that were on loan during the period.  The Bank also provides, on an annual basis, such information as may be requested in connection with the Board’s annual review of the securities lending arrangement with the Bank.  Nuveen Advisors uses the reports and any other information provided to it by the Bank to evaluate the overall quality of the Bank’s securities lending program.  If the reports or other information indicate that the program is not producing risk-adjusted returns that are, in the opinion of Nuveen Advisors, reasonable to the Lending Funds, Nuveen Advisors will investigate the reasons for this result and make recommendations to the Board regarding whether the Lending Funds should continue to participate in the Bank’s securities lending program. 

Conclusion

The Norwest Letter continues to represent the staff’s views concerning the issues raised by a fund’s use of an affiliated lending agent, including the staff’s view that relief from the prohibition in Section 17(e)(1) of the 1940 Act is inappropriate when the lending agent has unfettered discretion to negotiate loan terms.  With respect to the particular issue of pre-approval by the fund’s investment adviser of the Rebate Rate as one of the terms of a fund’s securities loan, however, the staff understands both from your letter and suggestions made by other industry participants in the past, that pre-approval may not be practicable and does not appear consistent with industry practice.

Your letter argues that appropriate monitoring, oversight and after-the-fact review of the Rebate Rates by the fund’s investment adviser and board of directors curb the lending agent’s discretion and address the conflicts that Section 17(e)(1) of the 1940 Act was designed to prevent.  On balance, we agree.  Therefore, based on the facts and representations set forth in your letter, and in particular those noted in our response, we would not recommend enforcement action to the Commission under section 17(e)(1) of the 1940 Act against the Bank if the Bank serves as securities lending agent for the Lending Funds and, as such, negotiates the Rebate Rates on behalf of each lending Fund under the circumstances described in your letter, including in accordance with the Spread Guidelines and subject to the Rebate Monitoring Procedures.[5]  Our response expresses our view on enforcement only, and does not purport to express any legal conclusions on the issues presented.  Because our position is based upon facts and representations in your letter, any different facts or representations may require a different conclusion.

Incoming Letters

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The Incoming Letter is in Acrobat format.