## Facts

- American Investors Fund, Inc. was a registered investment company, and Talley Industries, Inc. held a substantial ownership interest in the Fund (about 9%).
- Talley Industries sought to acquire control of General Time Corporation and discussed General Time with the Fund’s investment adviser, Chestnutt Corporation.
- The adviser obtained legal advice indicating the Fund could purchase General Time shares if it acted independently and avoided any promises or arrangements regarding voting or disposition.
- The Fund purchased nearly 10% of General Time’s shares while Talley Industries also accumulated General Time stock (eventually about 12%) as part of a control/merger effort.
- After General Time’s board rejected a merger proposal, Talley Industries pursued a proxy contest and sought SEC clearance of proxy materials.
- The SEC took the position that Talley Industries and the Fund had engaged in a “joint arrangement” covered by Investment Company Act § 17(d) and SEC Rule 17d-1, which generally requires prior Commission approval.
- Talley Industries sought retroactive approval; after an administrative proceeding, the SEC denied the application and found a violation of § 17(d) and Rule 17d-1.
- The SEC then sued in federal district court to enjoin further acquisitions and to require withdrawal of votes cast at General Time’s shareholders’ meeting; the district court dismissed the complaint.

## Issues

1. Whether parallel and mutually beneficial stock acquisitions by a registered investment company and an affiliate can constitute a “joint enterprise or other joint arrangement” under Investment Company Act § 17(d) and Rule 17d-1 without a formal written agreement.
2. Whether the district court construed § 17(d) and Rule 17d-1 too narrowly in dismissing the SEC’s enforcement action.

## Decision

- The Second Circuit reversed the district court’s dismissal and remanded for further proceedings.
- The court held that § 17(d) and Rule 17d-1 must be construed broadly to reach informal or de facto joint arrangements between an investment company and affiliates.
- The court concluded that the SEC’s view that the conduct could fall within § 17(d)/Rule 17d-1 was consistent with the statute’s protective purpose and should not be displaced by an unduly restrictive judicial construction.

## Legal Principles

- Investment Company Act § 17(d) is a prophylactic measure designed to prevent affiliates from involving a registered investment company in transactions where the fund may participate on a basis different from or less advantageous than the affiliate.
- Rule 17d-1’s reference to “any joint enterprise or other joint arrangement” extends beyond classic joint ventures and can cover informal coordination aimed at a common objective.
- A “joint arrangement” may be found based on economic reality, including a close identity of interests and cooperative action, even absent an explicit contract addressing voting or disposition.
- Courts should give substantial weight to the SEC’s administration of § 17(d) and its judgment about when conduct presents the risks the statute targets, so long as the agency’s interpretation fits the statutory text and purpose.

## Conclusion

The Second Circuit held that § 17(d) and Rule 17d-1 can apply to informal coordinated conduct between a registered investment company and an affiliated person in a control contest, reversed the dismissal of the SEC’s complaint, and remanded for proceedings under a broader construction of the statute and rule.


Sec. & Exch. Comm’n v. Talley Indus., Inc., 399 F.2d 396 (2d Cir. 1968)