SEC staff acquiesce to rebate rate plea
14 April 2014 New York
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In a February 2014 letter, SEC staff granted relief requested by Nuveen Advisors for its lending agent, U.S. Bank National Association, to negotiate rebate rates.
In a short article commenting on the decision, law firm Ropes & Gray quoted section 17(e)(1) of the 1940 Act, which prevents persons who are affiliated with a fund from accepting compensation for the purchase or sale of any property to or for a fund.
A bank that provides custody of fund assets may be deemed to be an affiliated person of that fund if it acquires ownership or control of specified amounts of the voting securities of that fund through its other investment management activities.
In the 1995 case of Norwest Bank Minnesota, SEC staff granted relief that permitted an affiliated custodian to receive compensation for providing certain services as a lending agent. Among other things, the Norwest letter allowed a fund’s investment adviser to delegate to the securities lending agent the task of entering into loans with pre-approved borrowers on pre-approved terms.
In its application letter, Nuveen stated that it is generally not practicable for the bank, in its capacity as securities lending agent, to submit the rebate rates to the adviser for pre-approval as required under the Norwest letter, and that it is not industry practice to do so.
Nuveen argued that pre-approval of the rebate rates from the adviser is not needed to protect the funds’ shareholders due to the protections afforded by securities lending procedures that have been put in place to ensure that the rebate rates are being set by the custodian in line with prevailing market conditions, said the article.
The SEC indicated that it generally agreed with Nuveen’s position and granted the relief requested, subject to the conditions described in the Nuveen no-action letter. In addition, SEC staff affirmed its view that relief from Section 17(e)(1) of the 1940 Act is “inappropriate” when the lending agent retains full discretion to negotiate loan terms.
In a short article commenting on the decision, law firm Ropes & Gray quoted section 17(e)(1) of the 1940 Act, which prevents persons who are affiliated with a fund from accepting compensation for the purchase or sale of any property to or for a fund.
A bank that provides custody of fund assets may be deemed to be an affiliated person of that fund if it acquires ownership or control of specified amounts of the voting securities of that fund through its other investment management activities.
In the 1995 case of Norwest Bank Minnesota, SEC staff granted relief that permitted an affiliated custodian to receive compensation for providing certain services as a lending agent. Among other things, the Norwest letter allowed a fund’s investment adviser to delegate to the securities lending agent the task of entering into loans with pre-approved borrowers on pre-approved terms.
In its application letter, Nuveen stated that it is generally not practicable for the bank, in its capacity as securities lending agent, to submit the rebate rates to the adviser for pre-approval as required under the Norwest letter, and that it is not industry practice to do so.
Nuveen argued that pre-approval of the rebate rates from the adviser is not needed to protect the funds’ shareholders due to the protections afforded by securities lending procedures that have been put in place to ensure that the rebate rates are being set by the custodian in line with prevailing market conditions, said the article.
The SEC indicated that it generally agreed with Nuveen’s position and granted the relief requested, subject to the conditions described in the Nuveen no-action letter. In addition, SEC staff affirmed its view that relief from Section 17(e)(1) of the 1940 Act is “inappropriate” when the lending agent retains full discretion to negotiate loan terms.
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