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Section 17 of the 1940 Act contains certain enumerated restrictions on principal and agency transactions between registered investment companies and their affiliated persons. These restrictions are intended to prevent conflicts of interest. As noted above, Section 2(a) (3) of the 1940 Act defines "affiliated person" to include any investment adviser of an investment company. Section 17(j) of the 1940 Act prohibits affiliated persons of a registered investment company from engaging in fraudulent acts and practices in connection with personal transactions

in securities that are held or to be acquired by the fund. To prevent such fraud, Rule 173-1 under the 1940 Act requires every registered investment company to adopt a code of ethics containing provisions reasonably designed to prevent such fraudulent activities. Further, certain insiders of the investment company and its investment adviser must submit to the fund





periodic reports

their personal securities transactions. Section 17(b) of the 1940 Act permits a registered investment company to maintain custody of its assets with any bank. If a fund's custodian bank is affiliated person of the fund, however, the Commission's staff requires that the custody arrangement comply with Rule 178 2 under the 1940 Act, which sets forth the conditions that investment company must meet if it has custody of its own assets. Among other things, the rule requires that an independent public accountant perform at least three audits per year of the fund's assets held by the custodian, at least two of which must be surprise audits. I. RECORDKEEPING REQUIREMENTS

Investment advisers to registered investment companies are required to maintain certain books and records.


As noted above, baak lavestment advisors are generally not required by Lederal banking law to keep particular records rospecting their lovestment advisory activities. (seg additional discussion, supra, at II.D.)

Investment advisers to registered investment companies are subfect to the recordkeeping requirements applicable to registered investment advisers under Rule 204-2 of the IAA. (1940 Act Rule 31a-1(f))

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