In a no-action letter (the Relief) issued on Oct. 12, 2018, to the Independent Directors Council, the Securities and Exchange Commission staff (the Staff) confirmed that they would not recommend enforcement if a fund’s board relies on quarterly written representations by the fund’s chief compliance officer (CCO) that any fund transactions involving (implicating Rules 17a-7, 10f-3 and 17e-1, respectively, under the Investment Company Act of 1940) were carried out in compliance with the applicable procedures adopted by the board. Prior to the Relief, fund boards were required to make their own quarterly findings that such transactions were carried out in compliance with procedures adopted by the board pursuant to the applicable rules. Importantly, the Staff suggested that the Relief arose out of their ongoing review of director responsibilities under the 1940 Act in light of the fact that “director responsibilities have grown significantly as a result of market, regulatory and technological developments.” The Staff also emphasized that the proper role of fund boards is to “exercise oversight of the fund’s compliance program without becoming involved in the day-to-day administration of the program.” The Staff pointed out that boards should remain focused on overseeing conflict of interest concerns raised by affiliated transactions and on whether such transactions are in the best interest of shareholders.

In light of the Relief, boards should review existing Rules 17a-7, 10f-3 and 17e-1 policies and determine what changes need to be made to implement the Relief, including potentially modifying the level of quarterly reporting of transaction information to the board. The Relief may also be a harbinger of additional areas of relaxation of director regulatory duties, particularly where reliance on the fund CCO is appropriate.

The complete text of the Relief can be accessed here.

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