IM Staff Says that Boards Cannot Delegate Review of Affiliate Transactions to CCO
The Staff of the Division of Investment Management has indicated that Fund Boards may not delegate their responsibility to review 17e-1, 17a-7, or 10f-3 transactions to the Chief Compliance Officer. In a letter to the Independent Directors Council and the Mutual Fund Directors Forum, the Staff indicated that many directors incorrectly believe that Rule 38a-1 (the compliance rule) allows delegation of transaction review responsibility to the CCO. Although directors may rely on summary reports prepared by the CCO, the directors “retain ultimate responsibility for making the quarterly determinations required” and must use vigilance “to ensure that they have sufficient information to be alerted to issues raised by these conflict transactions.” Rule 17e-1, 17a-7, and 10f-3 allow certain otherwise prohibited affiliated transactions upon findings by the Board that the transactions complied with policies and procedures reasonably designed to ensure that the transaction complied with the rules.
OUR TAKE: Boards continue to wrestle with how much due diligence they must undertake themselves versus relying on information provided by service providers. While it is tempting to rely on the findings of a CCO, who reports directly to the Board, directors cannot abdicate their fiduciary responsibility. We believe that Boards should utilize the CCO and other service providers as fact finders while retaining decision-making authority.
Posted by Todd Cipperman at 11/3/2010 6:10 AM 
Categories: Funds
Tags: funds affiliate transaction board review delegation
Categories: Funds
Tags: funds affiliate transaction board review delegation
Comments