This month the SEC issued new guidance for mutual funds. The guidance from the Division of Investment Management (IM) focuses on mutual fund series trusts and affiliated transactions under section 17(a) of the Investment Company Act of 1940. Section 17(a) is the general prohibition on transactions with affiliates. Most fund companies follow the exemption under Rule 17(a)-7 of the 1940 Act that allows for certain types of affiliated transactions if certain conditions are met.
The purpose behind the recent guidance appears to be a reminder to fund companies that a series company structure means that the rules and regulations under the 1940 Act apply to each series of that company, separately. So, the prohibitions under section 17(a) must be reviewed and monitored for in each series of the company/trust.
IM states in its guidance that a fund company’s written policies and procedures should contain the actual identification of persons and entities owning 5% or more of the outstanding voting securities of each series within the company/trust. Based on the guidance, fund companies should take regular inventory of all affiliated entities/persons and update their written policies and procedures accordingly.