SEC Allows Fund Boards to Rely on CCO for Exemptive Rule Compliance
The staff of the SEC’s Division of Investment Management has issued no-action relief allowing fund boards to rely on the representations of the Chief Compliance Officer for Rule 10f-3, 17a-7 and 17e-1 transactions. Rather than duplicate the due diligence performed by the CCO, the no-action letter allows fund boards to rely on quarterly CCO representations that transactions effected under exemptive Rules 10f-3 (affiliated underwriting), 17a-7 (cross-trades) and 17e-1 (affiliated brokerage) complied with the applicable fund procedures. The SEC opines that this reliance will allow fund boards to more efficiently exercise its oversight role with respect to conflicts of interest. The no action letter reverses a 2010 staff position.
OUR TAKE: The no-action position reflects the reality of how most funds operate. The Board has very little ability to perform due diligence independent of the work performed by the Chief Compliance Officer, so it makes sense to rely on the representations. The big open question is whether this position increases CCO liability, thereby creating additional due diligence requirements.