Alert December 02, 2008

SEC Staff Grants No-Action Relief Allowing Non-U.S. Funds to Participate with Affiliated U.S. Mutual Funds in Joint Credit Facility

The staff of the SEC’s Division of Investment Management (the “Staff”) issued a no-action letter in which it provided assurances that it would not recommend enforcement action under Section 17(d) of the Investment Company Act of 1940, as amended (the “1940 Act”), and Rule 17d-1 thereunder, if U.S. open-end investment companies registered under the 1940 Act (the “U.S. Funds”) and certain foreign open-end investment funds (the “Foreign Funds,” and together with the U.S. Funds, the “Funds”), all managed by affiliated advisers, entered into a joint global, unsecured, senior committed line of credit with a syndicate of global banks (the “Global Credit Facility”) designed to provide the Funds with a source of cash for temporary and emergency purposes to meet unanticipated or unusually large redemption requests by shareholders.  Relief was sought out of concern that because each Fund would pay a portion of the fees associated with the Global Credit Facility, it could run afoul of the prohibitions in Section 17(d) and Rule 17d-1, which in general terms do not permit an affiliated person of a mutual fund acting as principal to effect any transaction in which the fund is a joint or joint and several participant. 

The structure of the Global Credit Facility would be in all material respects the same as joint credit facilities for which the Staff has previously given no-action relief, except for the participation of Foreign Funds.  The Staff observed that the Foreign Funds’ participation did not materially change the analysis of the Global Credit Facility under Section 17(d) and Rule 17d-1.  It therefore conditioned the requested relief on receipt of the representations provided with respect to prior no-action relief regarding joint credit facilities.  The Staff also required the following representations with respect to the Foreign Funds: (i) in making their initial and subsequent annual best interest determinations about participation in the Global Credit Facility, each U.S. Fund’s board of trustees, including a majority of the independent trustees, will consider any unique issues presented by participating in the facility with Foreign Funds and (ii) regardless of whether the law of any foreign jurisdiction imposes any limits on borrowing by a Foreign Fund, at a minimum, no Foreign Fund will be permitted to borrow under the Global Credit Facility in excess of the limit imposed on a U.S. Fund under Section 18 of the 1940 Act.  While admitting that the participation of Foreign Funds was arguably a novel issue, the Staff reiterated that it will no longer respond to requests for no-action relief regarding the status of committed line of credit arrangements under Section 17(d) and Rule 17d-1 unless they present novel or unusual issues.