The SEC’s Division of Investment Management issued its latest IM Guidance Update, which reminds investment company registrants and their advisers about the 1940 Act’s prohibitions on affiliated transactions. Specifically, the Guidance Update states that “a mutual fund should review its compliance policies and procedures for the appropriate identification of ‘affiliated persons’ with respect to each series of the mutual fund for purposes of transactions that may be prohibited under the 1940 Act.” The Guidance Update further states that “to prevent violations of section 17(a) of the 1940 Act, a mutual fund’s compliance policies and procedures should provide for the identification of, among others, persons owning 5% or more of the outstanding voting securities of a series, in a manner that is appropriate to the circumstances of the particular mutual fund.”
The SEC staff did not reveal what prompted them to issue a Guidance Update that essentially repeats a statutory provision (Section 17(a) of the 1940 Act). One may speculate that OCIE examiners may be noticing 5% or more shareholders of individual series funds when reviewing fund complexes or fund filings but finding that those fund complexes are not monitoring those shareholders to prevent potential affiliated transactions. In addition, certain fund complexes with series funds (including so-called “umbrella funds”) have advisers or sub-advisers that are not affiliated with the sponsor of the fund complex. These advisers may bring a number of affiliations to the fund complex that must be tracked to prevent inadvertent Section 17(a) violations. It is considerably more challenging for compliance personnel at a fund complex to monitor those activities of unrelated advisers and sub-advisers that may lead to a Section 17(a) violation.
Click http://www.sec.gov/investment/im-guidance-2014-06.pdf to access the IM Guidance Update.