On January 29, 2021, the staff of the SEC’s Division of Investment Management issued no-action relief permitting a registered fund to self-custody its loan interests consistent, but not in strict compliance, with Section 17(f) of and Rule 17f-2 under the Investment Company Act of 1940 subject to certain requirements.

Generally, Section 17(f) and Rule 17f-2 govern the conditions and procedures under which registered funds may maintain custody of their own investments. Particularly, Rule 17f-2(b) requires that documents evidencing a fund’s investments “shall be deposited in the safekeeping of, or in a vault or other depository maintained by, a bank or other company whose functions and physical facilities are supervised by Federal or State authority.” Additionally, Rule 17f-2(d) imposes restrictions on which persons may have access to a fund’s investments, and Rule 17f-2(e) requires that each person withdrawing or depositing a fund’s investments sign a notation confirming the transaction. In lieu of strictly complying with the foregoing requirements, the staff determined that it would not recommend enforcement action if a fund were to maintain custody of its own interests in corporate loans if the following conditions are met:

• The fund permits only a limited number of personnel to provide instructions to the fund’s custodian and the administrative agents for the loans;
• The fund requires passwords or other security procedures to ensure only properly authorized personnel can submit those instructions;
• The fund reconciles settled loan interests with the records of the applicable administrative agents on a regular basis;
• Loan interests are titled or recorded at the administrative agents in the name of the fund and not in the name of the fund’s investment adviser;
• The fund and its investment adviser are not affiliated with the administrative agents; and
• The fund adopts policies and procedures reasonably designed to prevent violations of provisions of the conditions set forth above.

In reaching this conclusion, the SEC staff recognized that the conditions set forth above are consistent with the protections that Section 17(f) and Rule 17f-2 were intended to provide. Particularly, the staff recognized that when Rule 17f-2 was adopted, nearly all loan interests were issued in certificated form, whereas now most loan interests are uncertificated and may not be held physically, rendering the physical safekeeping requirement under Rule 17f-2(b) largely inapplicable and burdensome.

Lastly, the SEC staff stated that it would not recommend enforcement action against a fund that does not comply with the requirement under Rule 17f-2(f) that a fund be subject to at least three annual examinations by an independent public accountant. The staff conditioned this relief on a representation that the fund be subject to one annual audit, conducted in accordance with applicable requirements, during which an independent public accountant confirms the fund’s loan interests and reconciles them to the fund’s account records.

The SEC staff’s no-action letter is available here.