washington, d.c. - Although it is a vital part of the Investment Company Act of 1940, section 17, which prohibits transactions between affiliates, should be revised in order to allow greater efficiencies in the operations of mutual funds, according to fund executives.

"Section 17 of the 1940 Act is premised on the notion that all transactions between a fund and its affiliates are prohibited unless there is an exemption that is given or a rule that is given," said Robert C. Pozen, president of Fidelity Investments of Boston, at an SEC conference here earlier this month.

Currently, an affiliate is defined as any entity that has more than a five percent interest in a fund, he said.

"The combination of this very broad definition of an affiliate and this very prophylactic approach - that is all transactions are presumptively prohibited unless exempted - does raise many, many operational issues," he said.

For instance, if a bank trust department owns more than six percent of a money market fund, affiliated funds must file with the SEC for an exemption if they want to conduct business with any part of that bank, he said. The problem will become more common as consolidation continues with the repeal of the Glass Stegall Act, he said.

"There are many, many technical affiliates that are not in a position to have a controlling influence over a fund," he said. "And I think those really needed to be treated in a much more lenient way."

The SEC is reviewing section 17, said Cindy Fornelli, senior advisor to Paul Roye, director of the SEC's division of investment management.

"It's at the heart of the 40 Act, it's the pearl designed to prevent conflict of interest," she said. "The challenge for us is to craft any kind of modification to allow flexibility but also protect investors."

Pozen also called for a more streamlined process for exemptions to the rule.

"A lot of times, people get exemptions and then other people come in with exemptions that are very similar but they still take a long time," he said.

The SEC staff needs to work on this area because there are inconsistencies in the amount of time it takes for an exemption to be granted, said Geoff Bobroff, president of Bobroff Consulting of East Greenwich, R.I. Some exemptions are granted within a few months while one exemption that was granted recently was under consideration for five years, he said.

"That was a more complex issue, but the point being that it takes potentially much longer than it should to get certain things through the commission," he said.

The SEC's inconsistency in granting exemptions often results in companies not filing for exemptions at all because they do not know how long it will take to hear back from the commission, said Pamela Wilson, a mutual fund lawyer with Hale & Dorr LLP of Boston.

"They usually deal with it by not doing the transaction," she said. "It's not stopping the industry from functioning, but around the margins its prohibiting innocent transactions from happening. And most people don't find it worth their while to go to the SEC to get no-action relief for every transaction of this nature."

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