PRIA, Government Policy, Made Personal

Summary

Stops people closely tied to a registered investment company (a mutual fund) from doing certain self-dealing deals that could hurt the fund. People like affiliated persons, promoters, or the main underwriter must not, when acting for themselves, sell securities to the fund, buy securities from the fund, borrow from the fund, or lend to the fund except in narrow, allowed ways. Sales to the fund are allowed only in three limited cases (for example, when the fund or seller is the issuer or when securities are deposited into a unit investment trust). Borrowing or lending has strict limits and some exceptions in another rule (see section 80a–21(b)). A person can ask the Securities and Exchange Commission (SEC) for an exemption, and the SEC will grant it only if the deal’s terms are fair, match the fund’s own rules, and fit the law’s purposes. Ordinary business sales of goods or normal lessor‑lessee services are okay. Joint deals with the fund are restricted so the fund is not left with worse terms than the other party, though an affiliated person may manage an underwriting group and be paid for it. Limits also apply to pay and custody. An affiliated person acting as an agent can only get paid by others in the course of being an underwriter or broker. Broker fees may not exceed the usual exchange commission, or 2% in a secondary distribution, or 1% otherwise, unless the SEC allows more. A management fund must keep its securities with qualified banks, certain exchange members, or under strict SEC rules, and may use central securities systems. The SEC can require fidelity bonds for officers or employees who handle the fund’s money or securities. After one year from when the law took effect, no charter, by‑law, or contract may protect directors, officers, advisers, or underwriters from liability for willful wrongdoing, bad faith, gross negligence, or reckless disregard. The SEC may also ban fraudulent, deceptive, or manipulative practices and require codes of ethics to help prevent them. Definitions (one line each): affiliated person = someone closely connected to the fund; promoter = an organizer of the fund; principal underwriter = the main firm that distributes the fund’s shares.

Title 15, §80a–17

Commerce and Trade, Source: USLM XML via OLRC

(a)Prohibited transactions

It shall be unlawful for any affiliated person or promoter of or principal underwriter for a registered investment company (other than a company of the character described in section 80a–12(d)(3)(A) and (B) of this title), or any affiliated person of such a person, promoter, or principal underwriter, acting as principal—

(1)knowingly to sell any security or other property to such registered company or to any company controlled by such registered company, unless such sale involves solely (A) securities of which the buyer is the issuer, (B) securities of which the seller is the issuer and which are part of a general offering to the holders of a class of its securities, or (C) securities deposited with the trustee of a unit investment trust or periodic payment plan by the depositor thereof;

(2)knowingly to purchase from such registered company, or from any company controlled by such registered company, any security or other property (except securities of which the seller is the issuer);

(3)to borrow money or other property from such registered company or from any company controlled by such registered company (unless the borrower is controlled by the lender) except as permitted in section 80a–21(b) of this title; or

(4)to loan money or other property to such registered company, or to any company controlled by such registered company, in contravention of such rules, regulations, or orders as the Commission may, after consultation with and taking into consideration the views of the Federal banking agencies (as defined in section 1813 of title 12), prescribe or issue consistent with the protection of investors.

(b)Application for exemption of proposed transaction from certain restrictions

Notwithstanding subsection (a), any person may file with the Commission an application for an order exempting a proposed transaction of the applicant from one or more provisions of said subsection. The Commission shall grant such application and issue such order of exemption if evidence establishes that—

(1)the terms of the proposed transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned;

(2)the proposed transaction is consistent with the policy of each registered investment company concerned, as recited in its registration statement and reports filed under this subchapter; and

(3)the proposed transaction is consistent with the general purposes of this subchapter.

(c)Sale or purchase of merchandise from any company or furnishing of services incident to lessor-lessee relationship

Notwithstanding subsection (a), a person may, in the ordinary course of business, sell to or purchase from any company merchandise or may enter into a lessor-lessee relationship with any person and furnish the services incident thereto.

(d)Joint or joint and several participation with company in transactions

It shall be unlawful for any affiliated person of or principal underwriter for a registered investment company (other than a company of the character described in section 80a–12(d)(3) (A) and (B) of this title), or any affiliated person of such a person or principal underwriter, acting as principal to effect any transaction in which such registered company, or a company controlled by such registered company, is a joint or a joint and several participant with such person, principal underwriter, or affiliated person, in contravention of such rules and regulations as the Commission may prescribe for the purpose of limiting or preventing participation by such registered or controlled company on a basis different from or less advantageous than that of such other participant. Nothing contained in this subsection shall be deemed to preclude any affiliated person from acting as manager of any underwriting syndicate or other group in which such registered or controlled company is a participant and receiving compensation therefor.

(e)Acceptance of compensation, commissions, fees, etc.

It shall be unlawful for any affiliated person of a registered investment company, or any affiliated person of such person—

(1)acting as agent, to accept from any source any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any property to or for such registered company or any controlled company thereof, except in the course of such person’s business as an underwriter or broker; or

(2)acting as broker, in connection with the sale of securities to or by such registered company or any controlled company thereof, to receive from any source a commission, fee, or other remuneration for effecting such transaction which exceeds (A) the usual and customary broker’s commission if the sale is effected on a securities exchange, or (B) 2 per centum of the sales price if the sale is effected in connection with a secondary distribution of such securities, or (C) 1 per centum of the purchase or sale price of such securities if the sale is otherwise effected unless the Commission shall, by rules and regulations or order in the public interest and consistent with the protection of investors, permit a larger commission.

(f)Custody of securities

(1)Every registered management company shall place and maintain its securities and similar investments in the custody of (A) a bank or banks having the qualifications prescribed in paragraph (1) of section 80a–26(a) of this title for the trustees of unit investment trusts; or (B) a company which is a member of a national securities exchange as defined in the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.], subject to such rules and regulations as the Commission may from time to time prescribe for the protection of investors; or (C) such registered company, but only in accordance with such rules and regulations or orders as the Commission may from time to time prescribe for the protection of investors.

(2)Subject to such rules, regulations, and orders as the Commission may adopt as necessary or appropriate for the protection of investors, a registered management company or any such custodian, with the consent of the registered management company for which it acts as custodian, may deposit all or any part of the securities owned by such registered management company in a system for the central handling of securities established by a national securities exchange or national securities association registered with the Commission under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.], or such other person as may be permitted by the Commission, pursuant to which system all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping entry without physical delivery of such securities.

(3)Rules, regulations, and orders of the Commission under this subsection, among other things, may make appropriate provision with respect to such matters as the earmarking, segregation, and hypothecation of such securities and investments, and may provide for or require periodic or other inspections by any or all of the following: Independent public accountants, employees and agents of the Commission, and such other persons as the Commission may designate.

(4)No member of a national securities exchange which trades in securities for its own account may act as custodian except in accordance with rules and regulations prescribed by the Commission for the protection of investors.

(5)If a registered company maintains its securities and similar investments in the custody of a qualified bank or banks, the cash proceeds from the sale of such securities and similar investments and other cash assets of the company shall likewise be kept in the custody of such a bank or banks, or in accordance with such rules and regulations or orders as the Commission may from time to time prescribe for the protection of investors, except that such a registered company may maintain a checking account in a bank or banks having the qualifications prescribed in paragraph (1) of section 80a–26(a) of this title for the trustees of unit investment trusts with the balance of such account or the aggregate balances of such accounts at no time in excess of the amount of the fidelity bond, maintained pursuant to subsection (g) covering the officers or employees authorized to draw on such account or accounts.

(6)The Commission may, after consultation with and taking into consideration the views of the Federal banking agencies (as defined in section 1813 of title 12), adopt rules and regulations, and issue orders, consistent with the protection of investors, prescribing the conditions under which a bank, or an affiliated person of a bank, either of which is an affiliated person, promoter, organizer, or sponsor of, or principal underwriter for, a registered management company, may serve as custodian of that registered management company.

(g)Bonding of officers and employees having access to securities or funds

The Commission is authorized to require by rules and regulations or orders for the protection of investors that any officer or employee of a registered management investment company who may singly, or jointly with others, have access to securities or funds of any registered company, either directly or through authority to draw upon such funds or to direct generally the disposition of such securities (unless the officer or employee has such access solely through his position as an officer or employee of a bank) be bonded by a reputable fidelity insurance company against larceny and embezzlement in such reasonable minimum amounts as the Commission may prescribe.

(h)Provisions in charter, by-laws, etc., protecting against liability for willful misfeasance, etc.

After one year from the effective date of this subchapter, neither the charter, certificate of incorporation, articles of association, indenture of trust, nor the by-laws of any registered investment company, nor any other instrument pursuant to which such a company is organized or administered, shall contain any provision which protects or purports to protect any director or officer of such company against any liability to the company or to its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.

(i)Provisions in contracts protecting against willful misfeasance, etc.

After one year from the effective date of this subchapter no contract or agreement under which any person undertakes to act as investment adviser of, or principal underwriter for, a registered investment company shall contain any provision which protects or purports to protect such person against any liability to such company or its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence, in the performance of his duties, or by reason of his reckless disregard of his obligations and duties under such contract or agreement.

(j)Rules and regulations prohibiting fraudulent, deceptive or manipulative courses of conduct

It shall be unlawful for any affiliated person of or principal underwriter for a registered investment company or any affiliated person of an investment adviser of or principal underwriter for a registered investment company, to engage in any act, practice, or course of business in connection with the purchase or sale, directly or indirectly, by such person of any security held or to be acquired by such registered investment company in contravention of such rules and regulations as the Commission may adopt to define, and prescribe means reasonably necessary to prevent, such acts, practices, or courses of business as are fraudulent, deceptive or manipulative. Such rules and regulations may include requirements for the adoption of codes of ethics by registered investment companies and investment advisers of, and principal underwriters for, such investment companies establishing such standards as are reasonably necessary to prevent such acts, practices, or courses of business.

Notes & Related Subsidiaries

Editorial Notes

References in Text

The Securities Exchange Act of 1934, referred to in subsec. (f)(1)(B), (2), is act June 6, 1934, ch. 404, 48 Stat. 881, which is classified principally to chapter 2B (§ 78a et seq.) of this title. For complete classification of this Act to the Code, see section 78a of this title and Tables. For the

Effective Date

of this subchapter, referred to in subsecs. (h) and (i), see section 80a–52 of this title.

Amendments

2010—Subsec. (f)(4). Pub. L. 111–203, § 985(d)(4)(A), substituted “No member of a national securities exchange” for “No such member”. Subsec. (f)(6). Pub. L. 111–203, § 985(d)(4)(B), substituted “company, may serve” for “company may serve”. 1999—Subsec. (a)(4). Pub. L. 106–102, § 212, added par. (4). Subsec. (f). Pub. L. 106–102, § 211(a), inserted heading, designated first sentence as par. (1) and cls. (1) to (3) as (A) to (C), respectively, designated second through fifth sentences as pars. (2) to (5), respectively, and realigned margins, and added par. (6). 1987—Subsec. (h). Pub. L. 100–181 struck out second sentence which read as follows: “In the event that any such instrument does not at the

Effective Date

of this chapter comply with the requirements of this subsection and is not amended to comply therewith prior to the expiration of said one year, such company may nevertheless continue to be a registered investment company and shall not be deemed to violate this subsection if prior to said expiration date each such director or officer shall have filed with the Commission a waiver in writing of any protective provision of the instrument to the extent that it does not comply with this subsection, and each such person subsequently elected or appointed shall before assuming office file a similar waiver.” Subsec. (i). Pub. L. 100–181 struck out second sentence which read as follows: “In the event that any such contract or agreement does not at the

Effective Date

of this chapter comply with the requirements of this subsection and is not amended to comply therewith prior to the expiration of said one year, this subsection shall not be deemed to have been violated if prior to said expiration date each such investment adviser or principal underwriter shall have filed with the Commission a waiver in writing of any protective provision of the contract or agreement to the extent that it does not comply with this subsection.” 1970—Subsec. (f). Pub. L. 91–547, § 9(a), provided in cl. (1) for a registered investment company which is a collective fund maintained by a bank authority to keep its securities and similar investments in the custody of the sponsoring bank, authorized a registered management company or its custodian (with the consent of the management company), subject to the rulemaking power of the Commission, to deposit the securities of the management company in a central certificate depository established by a national securities exchange or a registered national securities association, and provided that if an investment company employs a bank as a custodian for securities and similar investments, then all of its cash assets, shall likewise be held by a bank, subject to direction as to expenditure and disposition by proper company officials, and provided for maintenance of a checking account or accounts in one or more banks in amounts not to exceed the amount of the fidelity bond covering persons authorized to draw on the accounts. Subsec. (g). Pub. L. 91–547, § 9(b), substituted “officer or employee” for “officer and employee” and inserted “(unless the officer or employee has such access solely through his position as an officer or employee of a bank)” before “be bonded”. Subsec. (j). Pub. L. 91–547, § 9(c), added subsec. (j).

Statutory Notes and Related Subsidiaries

Effective Date

of 2010 AmendmentAmendment by Pub. L. 111–203 effective 1 day after July 21, 2010, except as otherwise provided, see section 4 of Pub. L. 111–203, set out as an

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note under section 5301 of Title 12, Banks and Banking.

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of 1999 AmendmentAmendment by Pub. L. 106–102 effective 18 months after Nov. 12, 1999, see section 225 of Pub. L. 106–102, set out as a note under section 77c of this title.

Effective Date

of 1970 AmendmentAmendment by Pub. L. 91–547 effective Dec. 14, 1970, except that amendment by section 9(a) of Pub. L. 91–547 effective on expiration of one year after Dec. 14, 1970, see section 30 (introductory text and par. (1)) of Pub. L. 91–547, set out as a note under section 80a–52 of this title.

Executive Documents

Transfer of Functions

For

Transfer of Functions

of Securities and Exchange Commission, with certain exceptions, to Chairman of such Commission, see Reorg. Plan No. 10 of 1950, §§ 1, 2, eff. May 24, 1950, 15 F.R. 3175, 64 Stat. 1265, set out under section 78d of this title.

§80a–17 Transactions of Certain Affiliated Persons and Underwriters

Summary

Title 15, §80a–17

Notes & Related Subsidiaries

Editorial Notes

References in Text

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Amendments

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Statutory Notes and Related Subsidiaries

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Executive Documents

Transfer of Functions

Transfer of Functions

Citations & Metadata