SEC Comments on Legality of Security Interest in Mutual Fund Assets
by Bibb L. Strench, Esquire
In a letter to the Federal Reserve Bank of Boston dated January 8, 1999, the SEC staff confirmed that a mutual fund would not violate Section 18(f) of the Investment Company Act of 1940 (the "1940 Act") if it pledged its assets to a bank as security for a loan extended by the bank. Section 18(f) of the 1940 Act prohibits an investment company from issuing any class of senior security with certain exceptions. Section 18(g) of the 1940 Act generally defines "senior security" to mean any security evidencing indebtedness and any stock of a class having priority over any other class as to distribution of assets or payment of dividends.
