The staff of the Division of Investment Management (the “Staff”) issued a no-action letter stating that it would not recommend enforcement action for violations of Section 10(f) of the Investment Company Act of 1940, as amended (the “1940 Act”), against certain registered investment companies (each a “Fund” and collectively, the “Funds”) if they purchase certain loan assignments and participations (each a “Participation” and collectively, the “Participations”) in a primary offering, when a Fund director (the “Director”) is an independent director of a participant (the “Principal Underwriter”) in an underwriting or selling syndicate for the offering. Section 10(f) of the 1940 Act, with certain limited exceptions, prohibits a registered investment company from purchasing any security during the existence of any underwriting or selling syndicate, when a director of the company is an affiliated person of a principal underwriter.
The Director. In the request for relief, the Funds represented that the Director is “independent” of the Funds’ investment adviser, subadvisers and their respective affiliates (collectively, the “Advisers”), but is an “interested person” of the Funds and the Advisers because the Director serves as an independent director of the Principal Underwriter, which may provide brokerage services to, and engage in principal transactions and lending relationships with the Funds or other funds or accounts of the Advisers.
The Principal Underwriter. The Funds represented that the Principal Underwriter, which has a significant presence in the placement of loan assignments and participations, is not an affiliated person of the Funds or the Advisers.
Section 10(f). The Funds asserted that there is some uncertainty as to whether Section 10(f) is applicable to Participations contending, among other things, that although offerings of Participations resemble underwritings or selling syndicates in certain respects, the offering process for Participations does not constitute an “underwriting” within the meaning of the Securities Act of 1933 (the “1933 Act”) because a Participation is not a security under the 1933 Act. Without conceding the applicability of Section 10(f), the Funds proposed to follow certain conditions (the “Conditions”) modeled on those in Rule 10f-3 under the 1940 Act. Rule 10f-3 exempts from the Section 10(f) prohibition the purchase of certain types of securities, including (i) securities that are registered under the Securities Act of 1933 and (ii) securities that are exempt from such registration pursuant to Rule 144A of the 1933 Act, provided certain conditions regarding purchase time and price and certain conditions regarding the issuer are met.
Among other things, the Conditions require that the Boards of the Funds, including a majority of the directors who are not interested persons of the Funds, (i) will approve procedures governing the purchase of a Participation by a Fund, that are reasonably designed to provide that the purchases comply with timing, price and commission Conditions; (ii) will approve such changes to the procedures as they may deem necessary; and (iii) will determine no less frequently than quarterly that all purchases of Participations made during the preceding quarter were effected in compliance with the foregoing procedures. The Director will recuse himself from any voting matters related to purchases of the Participations, including ensuring compliance with the Conditions. Each Fund will maintain and preserve, in an easily accessible place, (i) written copies of procedures related to the purchase of any Participations and (ii) a written record of each such transaction that demonstrates satisfaction of the Conditions.
* * * Goodwin Procter represented the Funds in this matter. * * *
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Consumer Financial Services
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