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One of the problems arising from time to time under the Investment Company Act of 1940 is the application of the broad prohibition on affiliate transactions to mergers between a portfolio company in which a mutual fund holds a 5% interest and another company in which the mutual fund’s affiliates hold a 5% interest.
Under some circumstances, such a merger arguably is prohibited by section 17(a) of the 1940 Act, even though the mutual fund and its control affiliates have no power to prevent it. Sometimes Rule 17a-6 provides an exemption, but that exemption is not always available.
The SEC staff recently issued a no-action letter analyzing the problem in detail (it would make a good law school exam) and taking a no-action position, subject to certain conditions. Longleaf Partners Funds Trust (Apr. 9, 2001).
The merger actually was allowed to close prior to the issuance of the no-action letter, based upon the staff’s oral assurance that the letter would be forthcoming.
I have placed the letter on the Yahoo Groups web site, and it can be accessed in Word format from http://groups.yahoo.com/group/fundlaw/files/
Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, http://www.egroups.com/group/fundlaw. To subscribe to FundLaw, send a blank e-mail to firstname.lastname@example.org
Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.
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