The SEC’s Division of Investment Management (the “staff”) issued a letter to the Independent Directors Council and the Mutual Fund Directors Forum in which the staff provided guidance regarding the responsibilities of registered fund directors to make certain quarterly determinations under Rules 10f-3 (purchases from an affiliated underwriting syndicates), 17a-7 (securities transactions with affiliates) and 17e-1 (payment of brokerage commissions to affiliates) under the Investment Company Act of 1940, as amended. The staff provided the guidance to correct a perceived misperception on the part of some fund boards that a fund board may delegate the responsibility to make the determinations required under Rules 10f-3, 17a-7 and 17e-1. The staff stated that such a delegation is not permissible. Acknowledging that the rules do not specify how fund boards are supposed to make such determinations, the staff noted the rules in question do not specifically require fund directors to review each transaction in order to make the required determinations. In terms of how fund boards might properly fulfill their duties under these rules, the staff observed that:
. . . fund boards may, where consistent with the prudent discharge of their fiduciary duties, make these determinations in reliance on summary quarterly reports of the transactions effected in reliance on one or all of these rules in the prior quarter. Consistent with this guidance, some fund boards may decide that it is necessary or appropriate to review each transaction in order to make the required determinations under each relevant rule. For example, boards to those funds with fewer transactions may determine to review each transaction. Other fund boards may decide to make the required determinations based on summary quarterly reports (prepared by the fund’s chief compliance officer (“CCO”) or other designated persons) of the transactions effected in reliance on one or all of these rules in the prior quarter. For some boards, the fund’s CCO may be the appropriate person to provide the boards with such summary reports. In addition, under appropriate circumstances, fund boards also would have the flexibility to tap other relevant expertise to assist in the quarterly review process (e.g., some combination of fund counsel, counsel to the independent directors, investment adviser personnel, and/or independent third parties).
Concerned that various commenters have characterized the quarterly review process under these rules as mechanical, the staff cautioned that “even if the directors rely on others to investigate the details of each transaction, they need to be appropriately vigilant to ensure that they have sufficient information to be alerted to issues raised by these conflict transactions. In addition, because directors may be heavily reliant on others with respect to these transactions, it is essential that all involved in reviewing these conflicts transactions and in preparing summary reports do so diligently. [footnotes omitted]”