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Ownership: Form 40-17F2

As an investor, your primary concern is just to make sure that your fund is filing this form and following the rules.

by MoneyWatch.com | Feb 12, 2010 | Comments

MoneyWatch Ratings:

  • Timeliness: 3
  • Ease of Translation: 3
  • Brevity: 4
  • Don’t miss: The auditor’s letter, which should flag any potential problems with the custodial arrangement.

Mutual funds and other investment management companies sometimes rely on another investment management company to hold their stocks, bonds or other securities. The SEC requires an audit take place three times a year to make sure that the company with custody of the securities keeps them separate from its own accounts, and doesn't trade or otherwise distribute them. The filing is really just a way for the SEC to ensure that these custodial arrangements are on the level. As an investor, your primary concern is just to make sure that your fund is filing the form and following the rules.

The Rules

As part of the Investment Company Act of 1940, a post-Depression law written to boost investor confidence, Congress set up strict procedures to ensure the safety of securities held by investment companies. Audits occur at least three times a year—one scheduled and two unscheduled—and the main focus of the filings is the letter from the auditing firm certifying the compliance of the custodial arrangement. Depending on who an investment company relies on to hold its securities, it may be required to file a 40-17F1 instead of a 40-17F2.

What to Look For

The very existence of the form is reassuring. “The absence of these forms would be a sign that you'd want to get out fast,” explains John Heine, deputy director of the SEC Office of Public Affairs. “But that would be an exceedingly rare event.”

Key parts of the filing are the assertion by management that it is in compliance with SEC regulations for the custodial arrangement and a statement by the independent auditor that the assertion is valid. You can skip down to the auditor's letter to make sure everything checks out.

*Footnote:
Firms occasionally file a 40-17F2/A (an amendment to the original 40-17F2), so check to make sure you're looking at the most current information.
 
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    mageyoulook

    05/31/11 | Report as spam

    RE: Ownership: Form 40-17F2

    This sounds like a useful thing to be familiar with in my mission to master investing. Ownership forms are a must.

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