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|  |  | Investment Company Act of 1940 – Section 17(d) / Rule 17d-1
**October 26, 2017**

RESPONSE OF THE OFFICE OF CHIEF COUNSELDIVISION OF INVESTMENT MANAGEMENT

MUTUAL OF AMERICA CAPITAL MANAGEMENT LLC

Your letter of August 14, 2017, on behalf of Mutual of America Capital Management LLC (the "Adviser"), requests that the staff of the Division of Investment Management confirm that it would not recommend enforcement action to the Securities and Exchange Commission ("Commission") under section 17(d) of the Investment Company Act of 1940 ("Act") and Rule 17d-1 thereunder if the Adviser makes a proposed allocation of certain operating expenses of a registered open-end investment company ("fund") for which the Adviser serves as investment adviser (a "Fund of Funds") to other funds also advised by the Adviser ("Underlying Funds," and together with the Fund of Funds, "Funds") in which the Fund of Funds may or may not invest, without first obtaining a Commission order under rule 17d-1 permitting such allocation.

After consultation with the Division of Enforcement, we are issuing this letter denying your request as a caution to you and others against creating an arrangement such as the one described in your letter outside of the parameters and conditions of a Commission order under rule 17d-1.  The Adviser had effected the expense allocation described in your letter[1] without first obtaining a Commission order under rule 17d-1, subsequently terminated this practice,[2] and now seeks our assurance that we would not recommend enforcement action to the Commission if it were to resume the same practice without obtaining a Commission order under rule 17d-1.  For the reasons discussed below, we are unwilling to provide such assurance.      

Facts

According to your letter, "[t]he Funds of Funds are primarily a means of distributing the Underlying Funds in that each of the Funds of Funds provides a more convenient means of investing in a number of the Underlying Funds."  Your letter further claims that the independent directors of the Funds believe that "by attracting new assets to the entire Fund complex, the Funds of Funds would reduce the expense ratios of all of the Funds, including all of the Underlying Funds, by an amount that exceeds the extra expenses that would be borne by the Underlying Funds under the possible expense allocation arrangement."  Accordingly, some of the operating expenses proposed to be allocated to the Underlying Funds would not be incurred by, or otherwise attributable to, the Underlying Funds, but rather would be incurred by or attributable solely to the Fund of Funds.

Section 17(d) and Rule 17d-1

Section 17(d) of the Act, in relevant part, states that it shall be unlawful for any affiliated person of a fund or any affiliated person of such person ("second tier affiliate"), acting as principal, to effect any transaction in which the fund is a joint or a joint and several participant with such person, in contravention of such rules and regulations as the Commission may prescribe for the purpose of limiting or preventing participation by the fund on a basis different from or less advantageous than that of such other participant.

Rule 17d-1(a) under the Act, in relevant part, states that no affiliated person of a fund or second tier affiliate, acting as principal, shall participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement or profit-sharing plan ("joint arrangement") in which the fund is a participant, unless an application regarding such joint arrangement has been filed with the Commission and has been granted by an order. 

Rule 17d-1(c) defines "joint enterprise or other joint arrangement or profit sharing plan," in relevant part, as any written or oral plan, contract, authorization or arrangement, or any practice or understanding concerning an enterprise or undertaking whereby a fund and any affiliated person thereof or second tier affiliate, have a joint or a joint and several participation, or share in the profits of such enterprise or undertaking.

Under section 2(a)(3)(E) of the Act, the Adviser is an affiliated person of the Fund of Funds and the Underlying Funds by virtue of serving as their investment adviser.  The Fund of Funds and the Underlying Funds may be affiliated persons of each other (or second tier affiliates) under section 2(a)(3) by virtue of being under common control of the Adviser,[3] having common officers or directors, or the Fund of Funds' owning, controlling, or holding with power to vote five percent or more of the outstanding voting securities of an Underlying Fund. [4] 

Legal Analysis

The industry practice over the past 30 years with respect to arrangements such as the proposed expense allocation among the Fund of Funds and the Underlying Funds has been to seek Commission orders under rule 17d-1 prior to implementing the arrangements.[5]  As in these numerous prior instances, we view the proposed allocation of the Fund of Funds' expenses among the Underlying Funds as an arrangement effected by the Adviser[6] in which the Fund of Funds and the Underlying Funds have a joint participation within the meaning of rule 17d-1(c)[7] and which requires a Commission order pursuant to rule 17d-1(a) under the Act.[8]  In reaching our conclusion, we note in particular the fact that some of the operating expenses proposed to be allocated to the Underlying Funds would not be incurred by, or otherwise attributable to, the Underlying Funds, but rather would be incurred by or attributable solely to the Fund of Funds.  We believe that this fact creates the potential for conflicts of interest and for participation by a Fund on a basis less advantageous than that of other participants, that is not present (or present to a much lesser degree) in the typical industry practice of allocating certain shared expenses among the relevant funds in a fund family without an order under rule 17d-1.

A review of the terms and conditions of the Adviser's and the Funds' proposed expense allocation in the context of an application seeking an order under rule 17d-1 would guard against such conflicts to help ensure that each Fund's participation is consistent with the provisions, policies and purposes of the Act and no less advantageous than that of other participants.  For these reasons, we cannot assure you that we would not recommend enforcement action to the Commission if the Adviser effects the proposed allocation of the Fund of Funds' expenses to the Underlying Funds without first obtaining a Commission order under rule 17d-1 permitting such allocation. 

Jean E. MinarickSenior Counsel
 
[1]*See, e.g.,*Post-Effective Amendment No. 30 to Registration Statement on Form N-1A for Mutual of America Investment Corporation, dated April 30, 2007 (File Nos. 033-06486 and 811-05084).

[2]*See* Certified Shareholder Report for year ended December 31, 2014 filed on Form N-CSR for Mutual of America Investment Corporation, dated March 5, 2015 (File No. 811-05084). 

[3]*See, e.g*., In the Matter of Steadman Security Corporation, *et al.*, 46 S.E.C. 896 (June 29, 1977) (the Commission stating that ". . . the investment adviser almost always controls the fund"); Investment Company Act Release No. 25259, n. 11 (Nov. 8, 2001) (proposing amendments to rule 17a-8) ("Rule 17a-8 Amendments Proposing Release"); Investment Company Act Release No. 10886, n. 5 (Oct. 2, 1979) (proposing rule 17a-8); Investment Company Act Release No. 11053, n. 2 (Feb. 19, 1980) (adopting rule 17a-8) and Investment Company Act Release No. 11676, n. 5 (Mar. 10, 1981) (amending rule 17a-7) ("The rule does not represent a Commission finding that investment companies having common officers, directors or investment advisers are always affiliated persons or affiliated persons of an affiliated person.  They may or may not be, depending on the facts."); FundTrust, SEC No-Action Letter (May 26, 1987) (staff summary of the Commission views).

[4]*See, e.g*., Rule 17a-8 Amendments Proposing Release, n. 8 (describing possible affiliations between funds in a fund complex).

[5]*See, e.g.,*ING Investments, LLC,*et al*., Investment Company Act Release Nos. 30295 (Dec. 6, 2012) (notice) and 30337 (Jan. 2, 2013) (order); TIAA-CREF Funds, *et al*., Investment Company Act Release Nos. 29707 (June 24, 2011) (notice) and 29728 (July 19, 2011) (order); Franklin Templeton Fund Allocator Series, *et al*., Investment Company Act Release Nos. 28574 (Dec. 29, 2008) (notice) and 28608 (Jan. 26, 2009) (order); Frank Russell Investment Company, *et al*., Investment Company Act Release Nos. 23635 (Jan. 7, 1999) (notice) and 23676 (Feb. 2, 1999) (order); Daily Money Fund, *et al*., Investment Company Act Release Nos. 22107 (July 29, 1996) (notice) and 22171 (Aug. 26, 1996) (order); Scudder Global Fund Inc., *et al*., Investment Company Act Release Nos. 22104 (July 26, 1996) (notice) and 22168 (Aug. 23, 1996) (order); T. Rowe Price Spectrum Fund, Inc., *et al*., Investment Company Act Release Nos. 17198 (Oct. 31, 1989) (notice) and 17242 (Nov. 29, 1989) (order).

[6] Rule 17d-1(a), in relevant part, prohibits the Adviser, as an affiliated person of a Fund, from effecting any transaction in connection with any joint arrangement in which the Fund is a participant.  Depending on the particular facts and circumstances, the Adviser also may be participating in a joint arrangement among the Funds, but whether it does so or not does not affect the existence of a joint arrangement among the Funds.  In this respect, we note that the characterization in your letter of our position in Massachusetts Mutual Life Insurance Company, SEC No-Action Letter (July 28, 2000) is inaccurate (the staff merely stated in Massachusetts Mutual Life Insurance Company, SEC No-Action Letter (June 7, 2000) that Massachusetts Mutual Life Insurance Company did not request no-action relief, and the staff did not express its views, with respect to aggregated transactions in which a fund's investment adviser does not participate or have a material pecuniary interest in an entity that does participate).  

[7] Although the Fund of Funds and the Underlying Funds have a joint participation in the proposed expense sharing among them within the literal wording of rule 17(d)-1(c), a joint arrangement under rule 17d-1 generally requires "some element of combination."  *See, e.g*., Investment Company Act Release No. 24083 (Oct. 14, 1999), n. 52 and accompanying text.  We believe such element of combination would be present in the proposed expense sharing arrangement because, among other things, some of the operating expenses proposed to be allocated to the Underlying Funds would not be incurred by, or otherwise attributable to, the Underlying Funds, but rather would be incurred by or attributable solely to the Fund of Funds.  

[8] The view expressed in this letter extends solely to the particular facts and circumstances presented by the Adviser and the Funds and is not intended to reflect upon the applicability of section 17(d) or rule 17d-1 to any other type of arrangement.  
Incoming Letter
The Incoming Letter is in Acrobat format.

*http://www.sec.gov/divisions/investment/noaction/2017/mutualamericacapitalmanagement102617.htm*Home | Previous PageModified: 10/26/2017   |
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