The staff of the SEC issued a no-action letter to Old Mutual Advisor Funds ("OMAF I") and Old Mutual Advisor Funds II ("OMAF II") allowing certain portfolios of OMAF I to sell their portfolio securities and other assets to certain portfolios of OMAF I and OMAF II in exchange for shares of those portfolios. Such sales would otherwise be prohibited by Section 17(a) of the Investment Company Act of 1940, as amended (the "1940 Act").

Seven portfolios of OMAF I are asset allocation portfolios (the "Asset Allocation Portfolios"), each of which allocates its assets to various "sleeves." Each sleeve is managed by one of 12 affiliated subadvisers. Old Mutual Capital, Inc. ("OMCAP"), the adviser to OMAF I and OMAF II, with the assistance of an unaffiliated subadviser, Ibbotson Associate Advisors, LLC ("Ibbotson"), serves as "manager of managers" to each Asset Allocation Portfolio and allocates and rebalances the assets within each of these sleeves based on the sleeves' investment styles.

Each sleeve is effectively treated as a separate portfolio with segregated assets that track its cash separately, although cash currently is swept into a common money market sweep vehicle. The portfolio securities in each sleeve are segregated on the books of the custodian, the fund accounting agent and the sub-administrator, including to the extent that one subadviser manages more than one sleeve for an Asset Allocation Portfolio.

OMAF I sought no-action relief to restructure the management of the Asset Allocation Portfolios into a fund-of-funds structure in reliance on section 12(d)(1)(G) of the 1940 Act, so that each Asset Allocation Portfolio would invest directly in other funds of OMAF I and OMAF II that have substantially similar mandates to the sleeves currently utilized under the manager-of-managers structure ("Target Portfolios"). Specifically, the investment objectives and policies of each Target Portfolio would be substantially similar to the mandate of its corresponding sleeve in the Asset Allocation Portfolios, and that each Target Portfolio would be managed in a substantially similar manner as each corresponding sleeve. The purpose of the restructuring was to allow the Asset Allocation Portfolios to save proxy solicitation costs associated with selecting new subadvisers or investment sleeves, to timely add investment options, and to increase the diversification of assets.

OMCAP proposed to effect such a restructuring by having each Asset Allocation Portfolio deliver assets, excluding cash, of a particular sleeve in kind (the "in-kind consideration") to acquire shares of its corresponding Target Portfolios (the "in-kind purchases").

The Asset Allocation Portfolios and the Target Portfolios (together, the "Participating Funds") would engage in an in-kind purchase under the following circumstances: 

  1. An in-kind purchase will not dilute the interests of the shareholders of either Participating Fund; 
  2. The in-kind consideration accepted by a Target Portfolio will consist of assets that are appropriate, in type and amount, for investment by the Target Portfolio in light of its investment objectives and policies, and current holdings; 
  3. Each sleeve of each Asset Allocation Portfolio will transfer all of its assets in consideration for the purchase of shares of one corresponding Target Portfolio(s); 
  4. An Asset Allocation Portfolio and its corresponding Target Portfolio has the same policies and procedures for determining their net asset values, and will follow those policies and procedures in determining the amount of Target Portfolio shares to sell to an Asset Allocation Portfolio. An Asset Allocation Portfolio and its corresponding Target Portfolio will ascribe the same value to the in-kind consideration; 
  5. The transfer of the in-kind consideration from an Asset Allocation Portfolio will be effected simultaneously with the transfer of the shares from the Target Portfolios; 
  6. The Participating Funds will effect the in-kind purchases pursuant to procedures adopted by the Board on behalf of each Participating Fund, including a majority of the Independent Trustees, that are reasonably designed to provide that the purchases in-kind are effected in a manner consistent with (1) through (5) above; 
  7. Within the seven days following the 40-day period immediately after completion of the in-kind purchases, the Board, including a majority of Independent Trustees, on behalf of each Participating Fund, will determine that all of the in-kind purchases involving the Participating Funds:
  • were effected in accordance with these procedures;
  • did not favor an Asset Allocation Portfolio to the detriment of any other shareholder of the corresponding Target Portfolio or favor the Target Portfolio to the detriment of the Asset Allocation Portfolio; and
  • were in the best interests of each Participating Fund.

        8. OMAF I and OMAF II will maintain and preserve certain records about the transaction for a period of not less than six years from the end of the fiscal year in which the purchase occurred.

The proposed restructuring is similar to the in-kind purchase transactions described in Gartmore Variable Insurance Trust (pub. avail. Dec. 29, 2006) (the "Gartmore Letter"). The Gartmore Letter provided no-action assurances under section 17(a) of the 1940 Act in connection with in-kind purchase transactions between certain funds and their affiliated funds. The consideration involved in the in-kind purchase transactions in the Gartmore Letter came entirely from simultaneous in-kind redemption transactions. Unlike the arrangement in the Gartmore Letter, the facts in this no-action letter do not involve a simultaneous in-kind redemption.

OMCAP successfully argued that no Asset Allocation Portfolio (or its affiliate) would overreach a Target Portfolio by causing the Target Portfolio to accept unwanted portfolio securities as in-kind consideration because, pursuant to the Proposed Representations, the in-kind consideration would be consistent with each Target Portfolio's investment objectives, policies, and current holdings. OMCAP further argued that the ability of an Asset Allocation Portfolio (or its affiliate) to overreach a Target Portfolio in this manner is limited because each sleeve of each Asset Allocation Portfolio will transfer all of its assets to its corresponding Target Portfolio, which has investment objectives and policies that are substantially similar to the mandate of the sleeve, and is managed in a substantially similar manner as the sleeve.

Please click for a copy of the no-action letter.