A no-action letter issued by the Securities and Exchange Commission last month gives some evidence of how the SEC views affiliated transactions with regard to fund companies, according to Alan Rosenblat, a lawyer with Dechert of Philadelphia. The issue of affiliated transactions is one the Investment Company Institute of Washington D.C. has sought guidance on from the SEC for some time, according to Rosenblat.
An affiliate is a company which has five percent or more of its stock owned by one person (or fund), according to the Investment Company Act of 1940. If a mutual fund owns five percent of a company's stock, that company is an affiliate of the fund. Section 17(a) of the 1940 Act imposes restrictions on sales between companies and affiliates. In the case prompting the recent no-action letter, two funds of Southeastern Asset Management of Memphis, Tenn. each owned more than five percent of two companies, respectively, according to a letter from Rosenblat, whose firm represents Southeastern, the investment adviser to the Longleaf Partner Funds. The Longleaf Partners Small-Cap Fund owned 12.3 percent of Bay View Capital Corporation of San Mateo, Calif. and the Longleaf Partners Realty Fund owned 8.6 percent of Franchise Mortgage Acceptance Company of Dallas, according to the letter. When Bay View announced that it was going to purchase FMAC, Southeastern was concerned that it might be violating section 17(a) of the 1940 Act because Bay View was purchasing stock that the Reality fund owned in FMAC, according to Rosenblat.