SEC No-Action Letter Allowing Affiliate Merger

Mergers in the Mutual Fund Industry Addressed

By John M. Baker, Esq.

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

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, To subscribe to FundLaw, send a blank e-mail to

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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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.