Background. Nuveen Investment Funds, Inc., a registered management investment company (Nuveen), each portfolio series thereof, Nuveen Fund Advisors, LLC, a registered investment adviser (Nuveen Advisors), and U.S. Bank National Association (the Bank) requested relief from the Division of Investment Management under Section 17(e)(1) of the Investment Company Act.

Under a securities lending agreement, the Bank serves as the custodian and securities lending agent for the Nuveen funds. The Bank, in its capacity as trustee or discretionary investment manager of fiduciary accounts, may own, control, or hold with power to vote 5% or more, or even more than 25%, of the outstanding voting securities of a Nuveen fund and, therefore, may be deemed an affiliated person under Section 2(a)(3) of the Investment Company Act.

Section 17(e)(1) of the Investment Company Act prohibits any affiliated person of a registered investment company (or affiliated persons of such a person) from accepting compensation from any source for the purchase or sale of any property to or for the investment company, except in certain circumstances not relevant in this discussion. Under Section 17(e)(1), the Nuveen funds could not compensate the Bank for its services as securities lending agent.

Precedent. In Norwest Bank Minnesota, N.A., SEC No-Action Letter (May 25, 1995), the staff concluded that an affiliated securities lending agent could receive compensation for "administrative lending services," which in contrast with "other lending services" that involved the exercise of discretion and fall within the meaning of Section 17(e)(1), did not fall within the scope of Section 17(e)(1). Nonetheless, the staff in Norwest determined that not all "other lending services" would trigger the types of conflicts that Section 17(e)(1) was designed to prevent.

Effecting Loans. Nuveen explained that all securities loans made by the Nuveen funds are collateralized with cash at least equal to 100% of the market value of the securities loaned. A Nuveen fund lending the securities may invest (acting through the Bank) the cash collateral and retain the proceeds from the investment, less a predetermined amount of such proceeds (the Borrower Rebate Rate). In some instances, when securities may be difficult to borrow, the borrower may pay the lender an additional amount as consideration (the Negative Rebate Rate). The Bank and the borrower determine the Borrower Rebate Rate and the Negative Rebate Rate (together, the "Rebate Rate") at the time of each loan.

No-Action Relief. In deciding to provide no-action relief, the SEC staff noted the following specific securities lending procedures that Nuveen implemented and that limited the concerns that Section 17(e)(1) was designed to prevent:

• Nuveen Advisors adopted, and the board of directors of Nuveen (the Board) approved, spread guidelines that required a Nuveen fund’s rate of return on lending securities, or "spread," to be at least (i) four basis points for loans of U.S. government and agency securities or (ii) six basis points for all other securities (the Spread Guidelines).

• Nuveen Advisors established monitoring and reporting requirements that require the Bank to promptly notify Nuveen Advisors on any day that a loan earns a spread that is less than the required minimum spread under the Spread Guidelines. Additionally, the Bank monitors daily market information on Rebate Rates that is compiled by a third party and reports to Nuveen Advisors any amount paid to or received from a borrower that is materially more favorable to the borrower than the rates that are generally available in the market for loans of the same securities to similar borrowers.

• The Bank also provides daily, monthly, and quarterly reports to Nuveen Advisors and annually provides the Board with materials to review the securities lending arrangement. Nuveen Advisors uses such reports to make recommendations to the Board regarding whether the Nuveen funds should continue to participate in the Bank’s securities lending program.

In granting relief, the staff agreed that the procedures set forth above provide the appropriate monitoring, oversight, and after-the-fact review of the Rebate Rates by Nuveen Advisors and the Board to limit the Bank’s discretion and to address any conflicts of interest that Section 17(e)(1) was designed to prevent.

Source: Nuveen Investment Funds, Inc., SEC No-Action Letter (February 13, 2014).