Investment Company Act of 1940 - Section 17(e)(1)
February 13, 2014
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.
You state the following:
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:
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. 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.
 Our response, set forth below, confirms our prior oral assurance provided to you on November 28, 2011.
 You state that Nuveen Advisors has provided to the Board, among other things, a description of the oversight responsibilities of Nuveen Advisors with respect to the securities lending activities of the Lending Funds. You also state that in supervising the activities of the Bank as securities lending agent for the Lending Funds, Nuveen Advisors acts through personnel who have the experience and expertise to evaluate the information provided by the Bank to Nuveen Advisors and the Board, and to make informed determinations regarding the Bank’s performance as securities lending agent.
 The Rebate Rate for any loan is determined at the time of each loan by agreement between the Borrower and the Bank (as agent for the Lending Fund) based upon market factors that include, but are not limited to (i) the supply of the particular security, (ii) demand by Borrowers for the particular security, (iii) the prevailing rates of interest in the market on overnight cash, (iv) the return that can reasonably be expected from the investment of the Cash Collateral, (v) the creditworthiness of the Borrower and (vi) the level of collateralization for the loan. During the term of a loan, the Bank (as agent for the Lending Fund) and the Borrower may agree to modify the Rebate Rate, based on market and other factors.
 You state that, for purposes of applying the Spread Guidelines, any renegotiation of the Rebate Rate with respect to an outstanding securities loan would be treated under the Spread Guidelines as if it were a new securities loan.
 Our response does not address any issues under section 15(a) or 17(d) of the 1940 Act discussed in the Norwest Letter, or compliance with any other Commission or staff positions or guidelines concerning securities lending by funds.
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