Investment Company Act of 1940
Section 17(f) and Rule 17f-2

Maxim Series Fund Inc.

January 15, 2004

Your letter dated October 22, 2003, requests our assurance that we would not recommend enforcement action to the Commission under section 17(f) of the Investment Company Act of 1940 (the "1940 Act"), or rule 17f-2 thereunder, if the Bank of New York, Inc., (the "Bank") provides custodial services for certain series of the Maxim Series Fund, Inc. (the "Fund") that will not comply with the requirements of rule 17f-2.

Facts

You state that the Fund is a Maryland corporation, registered with the Commission as an open-end management investment company under the 1940 Act. The Fund, a series investment company, offers shares in forty separate investment portfolios (the "Portfolios"), each with its own investment objectives and strategies. The Portfolios are available as investment options under variable annuity contracts and variable life insurance policies offered by Great-West Life & Annuity Insurance Company ("GWL&A") and other life insurance companies. The Portfolios are also available as investment options under certain qualified retirement plans. You state that shares of the Portfolios are offered for sale pursuant to an effective registration statement under the Securities Act of 1933 and the 1940 Act.

You state that GW Capital Management, LLC, d/b/a Maxim Capital Management, LLC ("MCM") serves as investment adviser to each of the Portfolios. You state that MCM is a Colorado limited liability company and a wholly owned subsidiary of GWL&A that is registered with the Commission as an investment adviser under the Investment Advisers Act of 1940 (the "Advisers Act"). You state that the Fund has twelve subadvisers, each of which is a registered investment adviser under the Advisers Act. Each subadviser provides day-to-day investment management services to one or more of the Portfolios, subject to review and supervision by MCM and the Board of Directors of the Fund. You state that the Bank is a New York State chartered bank that provides custodial services for 28 of the Portfolios. You state that BNY Investment Advisors ("BNY"), a separately identifiable division of the Bank, serves as subadviser to eight of the Portfolios, including six Portfolios for which the Bank also serves as custodian ("BNY-subadvised Portfolios"). The Portfolios for which the Bank provides custodial services, and for which BNY does not provide advisory services, are referred to herein as "the Bank Custodial Portfolios."

You state that under the Fund's custody arrangements with the Bank, the assets of each individual Portfolio are segregated and maintained separately from the assets of the other Portfolios.¹ You represent that the Bank is not an affiliated person (a "first-tier affiliate") of MCM or of any subadviser to the Bank Custodial Portfolios, nor of any affiliated person of such persons (a "second-tier affiliate").² You also represent that there are no common officers, employees, or directors between the Bank and the subadvisers to the Bank Custodial Portfolios, or between the Bank and either MCM or GWL&A. You believe, however, that the Bank Custodial Portfolios may be required to comply with rule 17f-2 because the Bank may be deemed to be a second-tier affiliate of these Portfolios.

Analysis

Section 17(f) of the 1940 Act sets forth the custody requirements that apply to registered management investment companies.³ Section 17(f)(1)(C) of the 1940 Act provides that an investment company may place and maintain securities and similar investments in its own custody, but only in accordance with rules or orders that the Commission may prescribe for the protection of investors. In 1941, the Commission adopted rule 17f 2 under the 1940 Act to govern arrangements in which a fund maintains its securities and similar investments in its own custody.⁴

The staff interprets rule 17f 2 as applying not only when a fund maintains assets in its own custody, but also when the fund uses custody arrangements in which the fund's custodian or subcustodian is affiliated with the fund in certain ways. In particular, we interpret rule 17f-2 as applying when a fund's custodian is affiliated with the fund's investment adviser.⁵ Inherent in those "affiliated custody arrangements" is the risk that an employee of the affiliated investment adviser would have access to a fund's assets in connection with the provision of custody services, and could then have the ability to take advantage of the fund by misappropriating fund assets.⁶ These arrangements also present the risk that the fund's assets will not be maintained in such a manner that they will be subject to adequate independent scrutiny.⁷ The Bank's custodial arrangements with the Bank Custodial Portfolios may be subject to the requirements of rule 17f-2 because the Bank could be deemed to be a second-tier affiliate of the Bank Custodial Portfolios.⁸ You argue that, nevertheless, the Bank Custodial Portfolios should not be required to comply with rule 17f-2 solely because their custodian also serves as subadviser to other Portfolios of the Fund.

You essentially argue that the staff has not previously addressed whether a fund must comply with the requirements of rule 17f-2 under the facts presented in your letter. You essentially assert that the Bank provides adequate independent scrutiny of the assets of the Bank Custodial Portfolios because it is independent of MCM and the subadvisers of the Bank Custodial Portfolios. In particular, the Bank is not a first- or second-tier affiliate of MCM or of any subadviser to the Bank Custodial Portfolios. In addition, you state that there are no common officers, employees, or directors between the Bank and the Bank Custodial Portfolios' subadvisers or between the Bank and either MCM or GWL&A.⁹ You also represent that, under the custody arrangements with the Bank, the assets of each Portfolio are segregated and maintained separately from the assets of the other Portfolios. Consequently, the Bank's access to the assets of the Bank Custodial Portfolios is solely related to the Bank's custodial functions.

On the basis of the facts and representations set forth in your letter, we will not recommend enforcement action to the Commission under section 17(f) of the 1940 Act, or rule 17f-2 thereunder, if the Bank Custodial Portfolios do not comply with the requirements of rule 17f 2. This conclusion is based in particular on your representations that: (1) the Bank is not a first- or second-tier affiliate of MCM or any subadviser to the Bank Custodial Portfolios; (2) there are no common officers, employees, or directors between the Bank and the subadvisers to the Bank Custodial Portfolios, or between the Bank and either MCM or GWL&A; and (3) the assets of each Portfolio for which the Bank provides custodial services are segregated and maintained separately from the assets of any other Portfolio.

This response expresses our views on enforcement action only and does not express any legal conclusions on the questions presented. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion.

Robin S. Gross
Senior Counsel

Endnotes

---

¹ In addition, you state that no director, officer employee or agent of the Fund is authorized or permitted on behalf of any Portfolio to withdraw such assets "upon their mere receipt."

² Section 2(a)(3) of the 1940 Act defines affiliated person. See also note 8, infra.

³ Section 17(f) of the 1940 Act generally permits a fund to use four types of custody facilities: U.S. banks (and their foreign branches); members of U.S. securities exchanges; the fund itself; and U.S. securities depositories. Rules issued by the Commission permit various custody arrangements including those with U.S. futures commission merchants, foreign banks, and foreign securities depositories. See rules 17f 6, 17f 5, and 17f 7 under the 1940 Act, respectively.

⁴ See Custody of Securities by Management Companies, Investment Company Act Release No. 172 (July 31, 1941). The rule has not been significantly amended since 1947. See Revision of rule N-17f 2, Investment Company Act Release No. 1112 (Oct. 3, 1947). The rule also provides that a fund maintains its securities and similar investments in its own custody if directors, officers, or employees or agents of the fund are authorized or permitted to withdraw the fund's securities and similar investments from a bank (or certain other companies) "upon their mere receipt" (i.e., by withdrawing such investments and replacing them with a written receipt, and without depositing cash or other assets in exchange for the investments). See rule 17f-2(a).

⁵ Under section 2(a)(3)(E) of the 1940 Act an investment adviser of a fund is an affiliated person of the fund. See Pegasus Income and Capital Fund, Inc. (pub. avail. Dec. 31, 1977) (rule 17f 2 applies when an investment adviser renders custodial services) ("Pegasus"); The Mutual Fund Group (pub. avail. Dec. 12, 1989) (rule 17f-2 applies when subcustodian acts as investment adviser); IPI-Income & Price Index Fund (pub. avail. Dec. 12, 1980) (rule 17f 2 applies when custodian and investment adviser are under common control); Composite Group of Funds (pub. avail. Mar. 2, 1987) (rule 17f-2 applies when custodian controls investment adviser). See also Rodney Square Fund (pub. avail. June 15, 1987). You acknowledge that rule 17f 2 applies to the Bank's custodial arrangements with the BNY-subadvised Portfolios and you represent that those arrangements are maintained in compliance with the requirements of the rule.

⁶ See note 7, infra.

⁷ See generally Pegasus, supra note 5 (as expressed generally in section 1(b)(5) and section 17(f), it is a principal policy under the 1940 Act to ensure that securities owned by funds are maintained in such a manner that they will be subject to adequate independent scrutiny; this policy would be frustrated if an adviser rendering custodial services were not subject to additional safeguards, such as those of rule 17f 2).

⁸ The Bank may be deemed to be a second-tier affiliate of the Bank Custodial Portfolios because the Bank may be a first-tier affiliate of the BNY-subadvised Portfolios which may be a first-tier affiliate of the Bank Custodial Portfolios. The Bank (through BNY, which is a division of the Bank) may be a first-tier affiliate of the BNY-subadvised Portfolios because an investment adviser of a fund is an affiliated person of the fund. See section 2(a)(3)(E) of the 1940 Act. Each BNY-subadvised Portfolio may be an affiliated person of each Bank Custodial Portfolio if all of the Portfolios are deemed to be under the common control of MCM (the Portfolios are separate series of a fund and, therefore, also share officers and directors). An affiliated person of another person includes any person directly or indirectly under common control with such other person. See section 2(a)(3)(C) of the 1940 Act.

⁹ Telephone conversation on December 15, 2003, between Robin S. Gross of the staff and Ann Furman of Jordan Burt, counsel to the Fund.

Incoming Letter

The Incoming Letter is in PDF format.

http://www.sec.gov/divisions/investment/noaction/maxim011504.htm