Expertise Beyond the Numbers

Related Party and Interfund Transactions

Investors are looking for clarity and transparency in your financial statement disclosures, and the rules and regulations surrounding the investment fund industry certainly support these expectations.  Fund management should assess whether they are properly disclosing related party and interfund transactions and relationships.

Provided that a list of conditions are met, Rule 17a-7 of the 1940 Act (§ 270.17a-7) permits purchases and sales between (a) registered investment companies that are affiliated with each other, (b) separate series of a registered investment company, and (c) a registered investment company (or separate series) and an entity that is an affiliate solely by reason of having a common investment adviser. Nonregistered investment companies can execute trades with affiliated nonregistered investment companies without being subject to Rule 17a-7.

FASB Codification defines an affiliate to be a party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity. Control is defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an entity through ownership, by contract, or otherwise. Interfund transactions such as two funds with a common investment advisor, or two series within an investment company, would generally meet the definition of a related party transaction, and should be disclosed unless immaterial. Fund management should consider other relationships and transactions to ensure proper disclosures are provided. Many would say it is safer to be more conservative and disclose when in doubt.  If there is hesitation to disclose because of questions it may raise from investors, or a transaction may be particularly confusing to explain, that is most likely all the more reason to disclose.

Disclosure would include the related parties involved and the existence and nature of the transactions.  Quantitative disclosure might include the aggregate purchases and sales between the fund and other related funds, related realized gains and losses of such transactions, and other relevant transactional amounts. A registered investment company should disclose the Board’s oversight of the Rule 17a-7 compliance.

If you have any questions on your fund relationships and disclosures, Contact Us to discuss.