IM Guidance Update

J U N E 2014 | No. 2014- 0 6

US Securities and Exchange Commission

Division of Investment Management

SERIES INVESTMENT COMPANIES: AFFILIATED TRANSACTIONS

A typical mutual fund today operates as a “series company,” or a single corporation or 

state business trust established under one set of organizational documents and a board 

of directors or trustees, but offering investors several investment portfolios (series). 

Organization as a “series company” affords the mutual fund various operational cost 

savings. Each series, however, has its own investment objectives and policies, and its 

own set of shareholders separate from those of any other series. Each series also is a 

separate investment company for purposes of the investor protections afforded by 

the Investment Company Act of 1940 (1940 Act). 

Protections for Each Series’ Shareholders 

The 1940 Act generally provides for the use of series, but does not specifically address 

all of the different aspects of applying its requirements to series as such. In administering 

the 1940 Act, the Commission and the staff have applied its requirements to a series as 

a separate investment company in virtually all circumstances.1

 By doing so, the Commission and the staff seek to ensure that investors receive the same protections under 

the 1940 Act regardless of whether they invest in a mutual fund organized as a series 

company or a mutual fund that has a single investment portfolio.

Some of the key provisions of the 1940 Act govern transactions involving a mutual fund 

and its “affiliated persons.” The staff is issuing this guidance to remind mutual funds that 

are series companies about the importance of ensuring that their compliance policies 

and procedures are reasonably designed to prevent violations of the federal securities 

laws as they apply to each series.2 In particular, a mutual fund should review its compliance policies and procedures for the appropriate identification of “affiliated persons” 

with respect to each series of the mutual fund for purposes of transactions that may 

be prohibited under the 1940 Act.3
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An Example

For example, section 17(a) of the 1940 Act generally prohibits an “affiliated person” of 

a mutual fund or an affiliated person of such person from selling any security or other 

property to the mutual fund. This prohibition applies to transactions with each series of 

the mutual fund,4 so that not only does the prohibition in section 17(a) apply when a 

series is a party to the purchase or sale transaction, but the series also is a relevant 

person for purposes of determining whether the counterparty to a mutual fund’s transaction is an “affiliated person.” Specifically, under the 1940 Act, an “affiliated person” 

of another person includes, among others, a person who owns 5% or more of the outstanding voting securities of such other person.5 When a person owns 5% or more of 

the outstanding voting securities of a series, that person is an affiliated person of that 

series and thus subject to the prohibitions in section 17(a) of the 1940 Act. Thus, to prevent violations of section 17(a) of the 1940 Act, a mutual fund’s compliance policies and 

procedures should provide for the identification of, among others, persons owning 5% 

or more of the outstanding voting securities of a series, in a manner that is appropriate 

to the circumstances of the particular mutual fund.6 

Endnotes

1 See, e.g., Fair and Equitable Treatment of Series Type Investment Company Shareholders, Rel. No. IC-7276 (Aug. 8, 1972). See also J.R. Fleming, Regulation of Series 

Investment Companies under the Investment Company Act of 1940, 44 Bus. Law. 

1179 (Aug. 1989). In registering under section 8 of the 1940 Act, however, the multiple 

series of a series company may use a single registration statement. See Form N-1A, 

available at www.sec.gov/about/forms/formn-1a.pdf. 

2 Rule 38a-1 under the 1940 Act, in relevant part, requires a mutual fund to adopt and 

implement written policies and procedures reasonably designed to prevent violation 

of the federal securities laws by the mutual fund, including policies and procedures 

that provide for the oversight of compliance by each investment adviser, principal 

underwriter, administrator, and transfer agent of the mutual fund. 

3 The Commission’s Release adopting rule 38a-1 under the 1940 Act states that “[t]o 

prevent self-dealing and overreaching by persons in a position to take advantage 

of the fund, the [1940 Act] prohibits funds from entering into certain transactions 

with affiliated persons. Funds should have policies and procedures in place to 

identify these persons and to prevent unlawful transactions with them.” Compliance 

Programs of Investment Companies and Investment Advisers, Rel. IC-26299 (Dec. 17, 

2003) at text accompanying note 53. Section 17(a) is one of the 1940 Act’s provisions 

setting forth these prohibitions. Id. at note 53.
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4 See, e.g., rule 17a-7 under the 1940 Act (exempting from the prohibition in section 

17(a), among other things, certain transactions between an affiliated person and 

a series). 

5 See section 2(a)(3) of the 1940 Act. 

6 Each share of stock issued by a series of a mutual fund is a voting security, as 

required under section 18(i) of the 1940 Act. The term “voting security” is defined in 

section 2(a)(42) of the 1940 Act to mean any security presently entitling the owner 

or holder thereof to vote for the election of directors of a company. Also under 

section 2(a)(42) of the 1940 Act, “[a] specified percentage of the outstanding 

voting securities of a company means such amount of its outstanding voting 

securities as entitles the holder . . . thereof to cast said specific percentage of 

aggregate votes which the holders of all the outstanding voting securities of such 

company are entitled to cast.” Section 2(a)(8) of the 1940 Act defines “company,” 

in relevant part, to mean “any organized group of persons whether incorporated or 

not,” so that a series is a “company” for purposes of section 2(a)(42) of the 1940 

Act. See rules 17a-8(a)(3) and 18f-2(h) under the 1940 Act. See also Exemption of 

Certain Purchase or Sale Transactions Between a Registered investment Company 

and Certain Affiliated Persons Thereof, Rel. IC-11676 (Mar. 10, 1981) at note 1. Therefore, the calculation of the percentage ownership of the outstanding voting securities of a series is based on the total outstanding voting securities of that series. 

A mutual fund’s compliance policies and procedures also should provide for the 

identification of entities owning 5% or more of the outstanding voting securities 

of the series company to which the series belongs for purposes of monitoring 

transactions with affiliated persons of the series company and preventing violations 

of, among others, section 17(a) of the 1940 Act. In that respect, the calculation is 

based on the total outstanding voting securities of the series company. 
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This IM Guidance Update summarizes the views of the Division of Investment Management 

regarding various requirements of the federal securities laws. Future changes in laws or 

regulations may supersede some of the discussion or issues raised herein. This IM Guidance 

Update is not a rule, regulation or statement of the Commission, and the Commission has 

neither approved nor disapproved of this IM Guidance Update.

The Investment Management Division works to:

s protect investors

s promote informed investment decisions and 

s facilitate appropriate innovation in investment products and services 

through regulating the asset management industry.

If you have any questions about this IM Guidance Update, please contact:

Daniele Marchesani or Bruce MacNeil

Chief Counsel’s Office/Public Inquiry

Phone: 202.551.6825

Email: IMOCC@sec.gov