In a recent no-action letter, the US Securities and Exchange Commission staff relieved fund boards of directors of the responsibility for determining compliance with key affiliated transaction exemptive rules. Boards will now be able to rely on written representations from the fund’s chief compliance officer that transactions are in compliance with the relevant rule.
The staff of the Division of Investment Management of the US Securities and Exchange Commission issued a no-action letter on October 12 relieving fund boards of directors of the responsibility for determining compliance with key affiliated transaction exemptive rules. In order to rely on this no-action relief, a board would need to receive, at least quarterly, a written representation from the fund’s chief compliance officer that transactions under the relevant exemptive rule complied with procedures adopted by the board. In issuing the no-action letter, the SEC staff agreed that the relief better aligns director responsibilities under those exemptive rules with the oversight role that the SEC has assigned to fund boards with respect to compliance under Rule 38a-1 under the Investment Company Act.
The exemptive rules covered by the no-action letter are ones on which funds and boards commonly rely: Rule 10f-3 (relating to underwritings in which a fund affiliate is a member of the underwriting syndicate); Rule 17a-7 (relating to “in-house cross” securities transactions between a fund and other clients of its investment adviser); and Rule 17e-1 (related to fund brokerage transactions effected by affiliates). Each of those exemptive rules, by its terms, requires that the board determine no less frequently than quarterly that all transactions pursuant to the rule for the preceding quarter were effected in compliance with procedures adopted by the board and reasonably designed to provide that the transactions comply with the conditions of the rule. In granting the relief, the staff expressly overruled a prior letter in which the staff had indicated that a board could rely on reports prepared by the CCO or other designated persons in making the determinations required by the exemptive rules, but the board could not delegate the determination of compliance required by the rule.
Boards will no doubt welcome the relief now provided by the staff. Boards previously had to make compliance determinations, potentially with respect to numerous transactions as to which they would have no direct knowledge, based primarily on representations from a fund’s management company that the transactions met the relevant conditions. But boards will not be relieved of all responsibilities with respect to transactions under the exemptive rules. Consistent with Rule 38a-1, a board will not need to become involved in the day-to-day administration of compliance with these exemptive rules, but it will still need to approve and oversee the compliance program as it relates to these exemptive rules. In so doing, boards may wish to revisit their procedures for compliance with the exemptive rules to confirm that they are sufficiently fulsome as to meet the “reasonably designed” standard of Rule 38a-1. Boards may also want to understand the process undertaken by the CCO to get comfortable making the representation that transactions effected in reliance on the exemptive rules complied with the relevant board procedures.
In no-action letters, it has been common for the SEC staff to state that the letter merely represents the position of the staff as to whether it would recommend enforcement action in a given set of circumstances. This no-action letter went beyond that normal disclaimer, noting that the letter is “not a rule, regulation, or statement of the Commission, and the Commission has neither approved or disapproved its content.” This language undoubtedly reflects SEC Chairman Clayton’s recent remarks regarding staff guidance. (Those comments, although expressed as a general observation, were made in the context of discussing staff no-action relief relating to proxy voting, where some of the relevant no-action letters were then expressly withdrawn by the staff.) Despite the disclaimer in the no-action letter relating to the exemptive rules, there would appear to be little risk for boards in relying on the no-action letter, and we expect that most boards will do so.
In the no-action letter, the staff acknowledges the “general oversight” nature of the board’s role with regard to fund operations, but also refers to specific board duties mandated by statute. The staff notes that it has continued to review existing director responsibilities and to consider whether they are appropriate and carried out in a manner that serves shareholders’ best interests. It remains to be seen what further relief may be afforded by the staff, or perhaps by the SEC itself, to relieve directors of some other determinations that may not be consistent with the board’s appropriate “general oversight” role.
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Laurie A. Dee
 Independent Directors Council (pub. avail. Oct. 12, 2018).
 Independent Directors Council and Mutual Fund Directors Forum (pub. avail. Nov. 2, 2010).
 Some letters are not limited to a position as to an enforcement recommendation, but indicate that the letter reflects the staff’s interpretive view as to a law or rule.
 Statement Regarding SEC Staff Views (Sept. 13, 2018).
 Statement Regarding Staff Proxy Advisory Letters (Sept. 13, 2018).
 In footnote 4 of the no-action letter, the staff refers specifically to Investment Company Act Section 2(a)(41) (relating to valuation of securities for which market quotations are not readily available), Section 15 (relating to approval of investment advisory agreements) and Section 32 (relating to the appointment of independent auditors).