The SEC and the staff have applied the 1940 Act to separate series as separate investment companies in virtually all cases. The Guidance Update was issued to remind mutual funds and series investment companies to ensure that their compliance policies and procedures are reasonably designed to prevent violations of federal securities laws on a series-by-series basis. Mutual funds should devote particular attention in their compliance policies and procedures to transactions with “affiliated persons” that are prohibited by Section 17(a) of the 1940 Act. More specifically, Section 17(a) of the 1940 Act prohibits an “affiliated person” of a mutual fund or an affiliate of such affiliated person from selling any security or property to the mutual fund. Section 2(a)(3) of the 1940 Act defines an affiliated person as one who owns five percent or more of the outstanding voting securities of an entity. In a series investment company, a person who owns five percent or more of the shares of stock of a single series also would be considered an affiliated person. Compliance policies and procedures should not only provide for the identification of affiliated persons of the series investment company, but also for the identification of affiliated persons of each series separately, in light of the particular circumstances of the mutual fund.
To read the full text of the Guidance Update, click here.