How Rule 17d-1 Polices Joint Deals Between Funds and Their Insiders, and What the Exam Tests

Rule 17d-1 is an SEC rule under the Investment Company Act of 1940 that stops affiliated persons of a registered fund from taking part in a joint transaction or joint arrangement with the fund unless the SEC has approved it in advance. In practice, it prevents a fund’s adviser, directors, major shareholders and their affiliates from using the fund as a partner in a deal that could benefit them at the fund’s expense.

The rule implements Section 17(d) of the Act. It is why fund managers who want their funds to invest alongside other accounts they manage, known as co-investment, usually need an SEC exemptive order first.

This guide covers what the rule prohibits, who counts as an affiliated person, how co-investment relief works, the exceptions, worked examples, the exam traps and five practice questions with explanations. Preparing for your exam? Watch FRC’s Series 65 playlist on YouTube, with exam traps called out in every topic.

Why the Investment Company Act Restricts Affiliated Transactions

A mutual fund or other registered investment company holds money belonging to thousands of investors, but it is run by an outside adviser and overseen by a board. That structure creates an obvious risk: the people who control the fund could use its money to benefit themselves.

Congress addressed this risk in Section 17 of the Investment Company Act of 1940. Section 17(a) restricts principal transactions, where an affiliate buys from or sells to the fund, and Section 17(d) restricts joint transactions, where an affiliate and the fund take part in the same deal together.

Rule 17d-1 is the SEC’s rule under Section 17(d). It turns the general prohibition into a working process, requiring an application and an SEC order before an affiliate and a fund can enter a joint arrangement.

Where This Topic Appears on the Exams

The Investment Company Act appears in the investment vehicles and laws sections of the Series 65, where questions test how mutual funds are regulated and how investors are protected. Rule 17d-1 is one of the conflict-of-interest protections built into that law.

FRC’s Series 65 Exam Preparation course covers investment companies, the 1940 Act and the conflicts it controls, and the exam requires no sponsor. The SIE Examination Preparation course introduces investment companies and the laws that govern them.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. Fund regulation questions reward candidates who know which section of the 1940 Act handles which conflict.

What Rule 17d-1 Prohibits

Rule 17d-1 prohibits an affiliated person of a registered investment company, or an affiliated person of that affiliate, from participating in or effecting any transaction in connection with a joint enterprise, joint arrangement or profit-sharing plan in which the fund also participates. The prohibition applies when the affiliate is acting as principal, meaning for its own account.

The fund’s principal underwriter, and affiliates of the underwriter, are covered in the same way. The rule reaches arrangements of almost any kind, from investing in the same private company to sharing costs or profits.

The prohibition is not absolute. An affiliate can apply to the SEC, and the SEC can issue an order allowing the arrangement if the fund’s participation is consistent with the Act and not on a basis less advantageous than that of the other participants.

Who Counts as an Affiliated Person

Section 2(a)(3) of the Investment Company Act defines an affiliated person broadly. It includes anyone who owns, controls or holds 5% or more of the fund’s voting securities, and any company in which the fund owns 5% or more.

It also includes anyone directly or indirectly controlling, controlled by or under common control with the fund, and any officer, director, partner or employee of the fund. The fund’s investment adviser is an affiliated person too.

Because Rule 17d-1 also covers affiliates of affiliates, its reach extends to the adviser’s own affiliates, such as other funds and private accounts it manages. That second tier is what brings most co-investment arrangements within the rule.

Joint Transactions vs Principal Transactions

The exam often tests the difference between Section 17(a) and Section 17(d). Section 17(a) covers principal transactions, where an affiliate sells securities or property to the fund or buys them from the fund.

Section 17(d) and Rule 17d-1 cover joint transactions, where the affiliate and the fund are on the same side of a deal, participating together in an enterprise or arrangement. The risk is that the affiliate gets better terms, a larger share or an earlier exit.

A simple test helps. If the affiliate and the fund are trading with each other, think Section 17(a); if they are investing or acting together, think Section 17(d).

Co-Investment and Exemptive Orders

Many asset managers run registered funds, such as business development companies, closed-end funds and interval funds, alongside private funds and separate accounts. They often want all of these vehicles to invest in the same private deals.

Because the other vehicles are affiliates of the adviser, investing alongside the registered fund in a negotiated private deal is generally a joint arrangement under Rule 17d-1. The manager must obtain an SEC exemptive order, known as co-investment relief, before doing so.

Co-investment orders traditionally came with detailed conditions, such as board approval of individual deals and requirements that every participant invest on the same terms. In 2025, the SEC began granting more flexible co-investment relief, reducing the conditions for funds such as business development companies and closed-end funds while keeping the core protection that the registered fund must not be disadvantaged.

What the SEC Looks For in an Application

When deciding whether to grant an order, the SEC considers whether the fund’s participation is consistent with the provisions, policies and purposes of the Investment Company Act. It also considers whether the fund participates on a basis different from, or less advantageous than, the other participants.

In practice, applications describe how deals will be allocated, how terms will be set and how the fund’s independent directors will oversee the arrangement. The goal is to show that the fund will invest on equal terms and that conflicts will be managed.

The principle is the same throughout. The fund must never be the junior partner in a deal with its own insiders.

Exceptions in the Rule

Rule 17d-1 contains a number of limited exceptions for arrangements the SEC considers low risk. One allows a fund and its affiliates to buy joint liability insurance, such as directors and officers coverage, if set conditions are met and the fund’s board approves.

Other exceptions cover certain employee benefit and compensation plans of companies the fund invests in, and some arrangements involving portfolio companies. Each exception comes with conditions, and anything outside them still needs an order.

For the exam, remember the general rule and the route to an exemption. The detailed exceptions are rarely tested.

Rule 17d-1 and the Fund Board

Independent directors play a central role in policing joint transactions. Fund boards approve compliance policies that identify affiliated persons and flag arrangements that could fall within the rule.

Under co-investment orders, independent directors typically review the allocation process and, depending on the order’s conditions, specific transactions. Their job is to confirm the fund is being treated fairly compared with the affiliated participants.

Fund compliance programs, required under the Investment Company Act’s compliance rule, must include procedures to prevent violations of Section 17. A chief compliance officer reports to the board on how well those procedures work.

How the Rule Connects to an Adviser’s Fiduciary Duty

An investment adviser to a fund owes the fund a fiduciary duty, including a duty of loyalty. Rule 17d-1 is a specific, statutory application of that duty to joint deals.

An adviser that steers better terms to its own accounts at the fund’s expense breaches both the rule and its duty of loyalty. FRC’s guide to what conflicts of interest an investment adviser must disclose explains how disclosure works for conflicts outside the 1940 Act.

The difference is that disclosure alone does not satisfy Rule 17d-1. The arrangement needs an SEC order or an exception, whatever the fund’s investors have been told.

Worked Example: A Prohibited Co-Investment

An adviser manages a business development company and a private fund. A private company offers to sell $50 million of new debt, and the adviser arranges for the private fund to take $30 million and the business development company to take $20 million.

The private fund is an affiliate of the adviser, and the adviser is an affiliate of the business development company. Investing together in a negotiated private deal is a joint arrangement under Rule 17d-1.

Without co-investment relief, the transaction is prohibited. With relief, the adviser must follow the order’s conditions, such as investing on the same terms and allocating the deal fairly between the vehicles.

Worked Example: Unequal Terms

Suppose the adviser in the previous example had co-investment relief, but arranged for the private fund to receive warrants and a higher interest rate, while the business development company received neither. The total deal was the same size.

The business development company is participating on a less advantageous basis than an affiliated participant. That breaches the conditions of the order and the purpose of Rule 17d-1.

The adviser would also face a breach of fiduciary duty. Regulators treat this kind of unequal treatment as a serious conflict, because it moves value from the fund’s investors to the adviser’s other clients.

Worked Example: An Open Market Purchase

A mutual fund and a separate account managed by the same adviser both buy shares of a large listed company on a stock exchange on the same day, at market prices. Neither negotiated any terms with the company.

Buying a listed security in the open market on the same terms as everyone else is generally not treated as a joint arrangement requiring an order. The concern under Rule 17d-1 is negotiated deals where terms can differ.

The adviser must still allocate trades fairly between its accounts. That obligation comes from its fiduciary duty and its trade allocation policies, rather than from Rule 17d-1.

Consequences of a Violation

The SEC can bring enforcement actions against advisers and other affiliates that enter joint arrangements without an order, or that breach the conditions of one. Remedies can include censures, civil penalties, disgorgement and orders to repay the fund for any harm.

Advisers that hide such arrangements can also face antifraud charges. For individuals working at the firm, a finding can appear on public disclosure records and affect their future careers.

The Exam Traps

The first trap is confusing Section 17(a) with Section 17(d). Principal transactions, where an affiliate trades with the fund, fall under 17(a), while joint transactions, where an affiliate and the fund act together, fall under 17(d) and Rule 17d-1.

The second trap is the 5% threshold. Anyone owning 5% or more of a fund’s voting securities, or any company the fund owns 5% or more of, is an affiliated person.

The third trap is assuming disclosure cures the conflict. Rule 17d-1 requires an SEC order or a specific exception, and disclosure alone is not enough. The fourth is forgetting that affiliates of affiliates are covered.

For more traps like these, see FRC’s guide to Series 65 exam traps and common mistakes. The Series 65 investment vehicles questions guide covers investment companies and the other products on the exam.

A Memory Aid

Remember “17(a) is across the table, 17(d) is side by side.” In a principal transaction, the affiliate and the fund face each other; in a joint transaction, they sit on the same side.

For affiliation, remember “5% either way.” Owning 5% of the fund, or being 5% owned by it, makes you an affiliated person.

Practice Questions

Question one: under which law was Rule 17d-1 adopted? The Investment Company Act of 1940, under Section 17(d).

Question two: an adviser wants its private fund to invest alongside its registered closed-end fund in a negotiated private deal. What does it generally need first? An SEC exemptive order, known as co-investment relief.

Question three: a shareholder owns 6% of a fund’s voting securities. Is she an affiliated person? Yes, ownership of 5% or more makes her an affiliated person.

Question four: an affiliate sells a bond directly to the fund from its own inventory. Which provision primarily applies? Section 17(a), because this is a principal transaction.

Question five: can full disclosure to fund shareholders replace an SEC order under Rule 17d-1? No, the arrangement still needs an order or a specific exception.

Related Questions

Rule 17d-1 sits alongside the other rules that protect fund investors from conflicts. FRC’s guide to open-end vs closed-end funds explains the fund structures the 1940 Act regulates, and the guide to what Rule 10b-5 is covers the antifraud rule that applies to every securities transaction.

Get Exam-Ready

Investment company questions are among the most dependable marks on the exam once the sections of the 1940 Act are clear. The FRC Series 65 playlist linked at the top of this guide covers every exam section, with the traps to look out for in each one.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any term and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the SIE or both, structured exam preparation turns topics like Rule 17d-1 into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

Rule 17d-1 prohibits affiliated persons of a registered fund from taking part in joint transactions or arrangements with the fund unless the SEC grants an order, which is why co-investment usually requires exemptive relief. The fund must never participate on worse terms than its insiders.

Remember “17(a) is across the table, 17(d) is side by side” and “5% either way,” and you will be ready for every version of this question the exam can ask.