SEC Staff: Measure Percentage Ownership By Fund, Not By Complex

In its June 2014 Guidance Update, the SEC's Division of Investment Management said that series funds are individual investment companies for purposes of compliance with certain investor protections, including the 1940 Act's restrictions on principal transactions.

Section 17(a) of the 1940 Act generally prohibits an "affiliated person" of a mutual fund, or an affiliated person of an affiliated person (a so-called "second-tier affiliate") from selling any security or other property to the fund. This prohibition can cause compliance headaches when evaluating certain transactions such as repos and swaps.

Here's why: an affiliated person includes any 5 percent shareholder of a fund, so that any financial institution owning 5 percent or more of the fund cannot be a repo or swap counterparty. An affiliated person of that financial institution (the second-tier affiliate) also would be prohibited from acting as a counterparty. Small funds, in particular, can violate Section