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U.S. Securities and Exchange Commission

Investment Company Act of 1940 - Sections 10(f), 17(a) and 17(e) and Rules 10f-3, 17a-7 and 17e-1
Independent Directors Council

October 12, 2018


Your letter dated October 12, 2018 requests our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the “Commission”), for violations of Sections 10(f), 17(a) or 17(e) of the Investment Company Act of 1940 (the “Act”), if a fund’s[1] 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 Act (each, an “Exemptive Rule”) complied with the procedures adopted by the board pursuant to the relevant Exemptive Rule, instead of the board itself determining compliance.[2]  You state that the purpose of your request is to better align the director responsibilities under the Exemptive Rules with the oversight role that the Commission has assigned to fund boards with respect to compliance under Rule 38a-1 under the Act.

To protect shareholders, the Act requires that each fund be governed by a board that has a general oversight role over fund operations,[3] as well as other specific duties.[4]  The number and scope of director responsibilities have grown significantly as a result of market, regulatory and technological developments.  In light of these changes, 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 the shareholders’ best interests.[5]

In 2003, the Commission 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.[6]  As discussed in your letter, in adopting Rule 38a-1, the Commission expressed a view that the proper role of the board with respect to compliance matters is to oversee the fund’s compliance program without becoming involved in the day-to-day administration of the program.[7]

We agree that the position you are requesting from us is consistent with the Commission’s approach in adopting Rule 38a-1 and would allow boards to avoid duplicating certain functions commonly performed by, or under the supervision of, the CCO.  Our position would not change the board’s oversight role with respect to a fund’s overall compliance program.  However, it will facilitate the 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.  

Based on the facts and representations in your letter, we would not recommend enforcement action to the Commission for violations of Sections 10(f), 17(a) or 17(e) of the Act as described above.[8]  The statements in this letter represent the views of the Division of Investment Management.[9]  This letter is not a rule, regulation or statement of the Commission, and the Commission has neither approved nor disapproved its content.

Asen Parachkevov

Senior Counsel

cc:        Susan Wyderko


            Mutual Fund Directors Forum


[1] In your letter, a “fund” includes a registered management investment company or a separate series thereof, as the context requires.  The staff’s position expressed in this letter also extends to a business development company, as defined under Section 2(a)(48) of the Act.

[2] Each Exemptive Rule requires, among other things, a board to determine no less frequently than quarterly that all transactions made pursuant to the Exemptive Rule for the preceding quarter were effected in compliance with procedures that have been adopted by the board and that are reasonably designed to provide that the transactions comply with the conditions of the Exemptive Rule.  See Rules 10f-3(c)(10)(iii), 17a-7(e)(3) and 17e-1(b)(3).

[3] See Commission Guidance Regarding the Duties and Responsibilities of Investment Company Boards of Directors with Respect to Investment Adviser Portfolio Trading Practices, SEC Release No. IC-28345, 73 F.R. 45646 (July 30, 2008) at 45649, citing Report of the Senate Committee on Banking and Currency S. 2224, Investment Company Amendments Act of 1970, S. Rep. No. 91-184, 91st Cong., 2d. Sess. 32 (1969), at 6 (fund directors “have … overall fiduciary duties as directors for the supervision of all of the affairs of the fund”).

[4] See Sections 2(a)(41), 15, and 32 of the Act.

[5] See Dalia Blass, Director, Division of Investment Management, SEC, Keynote Address: ICI Securities Law Developments Conference (Dec. 7, 2017).

[6] See Compliance Programs of Investment Companies and Investment Advisers, SEC Release No. IC-26299, 68 F.R. 74714 (Dec. 24, 2003), at 74724.

[7]See Compliance Programs of Investment Companies and Investment Advisers, SEC Release No. IC-25925, 68 F.R. 7038 (Feb. 11, 2003), at 7041.

[8] In formulating its response, the staff has taken into consideration views expressed by the Mutual Fund Directors Forum (“MFDF”). See also Letter from Susan Wyderko, President, MFDF, to Jay Clayton, Chairman, SEC (June 20, 2017).

[9] In 2010, the Division of Investment Management issued a letter discussing how a board could make the determinations required under the Exemptive Rules in reliance on summary quarterly reports, prepared by the CCO or other designated persons, of transactions effected in reliance on the Exemptive Rules; but stating that the wording of each rule provides that the board itself must make such determinations.  See Letter from Michael S. Didiuk, Attorney-Adviser, Division of Investment Management, SEC, to Dorothy A. Berry, Independent Directors Council and Jameson A. Baxter, Mutual Fund Directors Forum (Nov. 2, 2010).  The no-enforcement position in the letter we are issuing today may be relied upon notwithstanding any inconsistent statements in the 2010 letter.

Incoming Letter

The Incoming Letter is in Acrobat format.


Modified: 10/12/18