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SEC Grants No-Action to Registered Fund for Utilizing Non-Bank to Custody Certain Assets




by:
Peter D. Fetzer
Foley & Lardner LLP - Milwaukee Office

Terry D. Nelson
Foley & Lardner LLP - Madison Office

 
March 6, 2014

Previously published on February 28, 2014

In a recent no-action request filed with the SEC, a fund registered under the Investment Company Act of 1940 asked if the SEC would take a nonenforcement action if the fund engaged an entity (the Brinks Company or its subsidiaries in the U.S. or in the UK) to maintain custody of the fund’s gold bullion and other precious metals in a vault or other secured custody facility although Section 17(f)(1) under the Investment Company Act requires that a registered fund maintain custody of its assets with a bank or other qualified custodian. Brinks is neither a bank nor a qualified custodian as required under Section 17(f) of the Investment Company Act.

In spite of Brinks not being either a bank or qualified custodian, the SEC stated in its letter to the fund dated February 11, 2014 that it would take a non-enforcement or no-action position if the fund engaged Brinks to act as custodian of the fund’s gold bullion and other precious metals based on certain assurances provided by the fund as to the appropriateness for Brinks to serve as custodian under the circumstances.

In order to convince the SEC to take the no-action position, the fund pointed to the fact that each Brinks’ facility which would maintain custody of such assets is subject to registration under the rules of the NYMEX/COMEX as a licensed depository. In addition, Brinks is a member of the London Bullion Market Association which imposes on its members various requirements for maintaining custody of such assets.

The fund also supported its request by citing that Brinks is a reporting company under the Securities and Exchange Act of 1934 which requires financial and other public disclosures in the U.S. In addition, the fund pointed to the fact that Brinks maintains over $1 billion of insurance coverage, which is available to cover any losses of assets it maintains on behalf of its customers.

The SEC apparently determined it appropriate to grant the no-action request based on: the amount and degree of regulation imposed upon Brinks; the fact that it is a reporting company under the Exchange Act; the amount of insurance coverage it maintains (at least $1 billion); and provided, a majority of the funds’ board members, who are not “interested persons” under Section 2(a)(9) of the Investment Company Act, determine that Brinks’ custody services are in the best interests of the fund and its shareholders. In making this determination, the SEC stated that the board or its delegate should also consider whether the fund’s assets would be subject to reasonable care and if Brinks could provide custodial services at least equal in nature and quality to the services that could be provided by a bank or qualified custodian serving the same market(s).



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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