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Conflicts of Interest

Affiliated Transactions

An important responsibility of a fund’s board is to oversee potential conflicts of interest. Because conflicts may arise in arrangements or transactions between a fund and its “affiliates” (very broadly, the fund’s investment adviser, other entities or people or businesses with whom it has close relationships, and other funds managed by the same adviser), some transactions with affiliates are prohibited. In other cases, the transactions are permitted only in accordance with SEC rules and orders, which impose conditions designed to protect investors and require fund directors to adopt and review procedures designed to ensure compliance with those conditions.

For example, the fund’s board of directors, including a majority of the independent directors, must adopt procedures before a fund may engage in:

  • Transactions in which the fund purchases a security from an underwriting syndicate of which the fund’s adviser (or its affiliate) is a member;
  • Purchases and sales of securities between the fund and other funds in the same complex; and
  • Purchases and sales of securities for which a broker affiliated with the fund receives commissions.

In each of these examples, the board must approve changes to the procedures when necessary, and determine at least quarterly that any transactions subject to the procedures that were made during the preceding quarter complied with those procedures. The SEC staff has expressed its belief that fund boards may make the required quarterly determinations about the transactions effected under the rules without reviewing each transaction, but may not delegate the required quarterly determinations. Instead, directors may rely on summary quarterly reports, which may be prepared by the fund’s chief compliance officer or other designated persons.

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