Funds May Use Any Independent Pricing Service for Cross Trades Involving Municipal Securities; SEC Staff Provides Guidance on Best Execution Duty in Cross Trades
The SEC staff recently issued a no-action letter that allows a fund, subject to the approval of its board of directors, to use any appropriate independent pricing service when engaging in Rule 17a-7 transactions involving municipal securities for which market quotations are not readily available. The no-action relief is significant in that it extends a prior staff no-action position, which limited the use of independent pricing services to the one service that was specifically named in a prior no-action letter. The noaction letter also provides general guidance concerning best execution and the duty of loyalty as well as the staff’s view on the use of the Nasdaq Official Closing Price in Rule 17a-7 transactions.
The staff noted that an adviser’s best execution duty requires that both the selling fund’s total proceeds and the buying fund’s total cost are the most favorable under the circumstances. Therefore, if the selling fund can obtain a better price by selling the security in the market, rather than selling it to the affiliated fund in a Rule 17a-7 transaction, the adviser should sell the security in the market. The same principle applies to the buying fund’s participation in a Rule 17a-7 transaction. Also, an adviser, consistent with its duty of loyalty, should not cause affiliated funds to enter into a Rule 17a-7 transaction unless doing so would be in the best interests of each fund.
The staff also noted that the use of another pricing methodology for Nasdaq trades, the Nasdaq Official Closing Price (NOCP), in Rule 17a-7 transactions is consistent with the policies underlying Section 17(a) and Rule 17a-7 because the NOCP prices are independently determined. Nasdaq began calculating the NOCP in 2003 as an alternative to the consolidated last sale price. Accordingly, the staff stated that it also would not recommend an enforcement action to the SEC if affiliated funds use the NOCP price when engaging in Rule 17a-7 transactions.
View the SEC Staff No-Action Letter
View the Incoming Request for No-Action Relief
Investment Management FYI is a service of the Investment Management Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact either of the following Morgan Lewis attorneys:
Washington, D.C.
Thomas S. Harman
202.739.5662
tharman@morganlewis.com
Magda El GuindiRosenbaum
202.739.5778
mer@morganlewis.com