On August 4, 2009, the staff of the SEC granted no-action relief to a group of foreign investment companies (Foreign Funds) in connection with purchases of shares of registered U.S. investment companies (U.S. Funds) in excess of the amounts limited by Sections 12(d)(1)(A)(ii) and (iii) of the 1940 Act. Dechert LLP, SEC No-Action Letter (pub. avail. Aug. 4, 2009) (No-Action Letter). Sections 12(d)(1)(A)(ii) and (iii) prohibit an investment company and companies it controls from investing more than 5 percent of its total assets in any one acquired registered investment company and more than 10 percent of its total assets in all acquired investment companies. Congress enacted Section 12(d)(1) to prevent abuses inherent with the pyramiding of ownership caused by one investment company owning shares in another.
The Foreign Funds argued, and the SEC agreed, that the acquired U.S. Funds and their shareholders remain protected from the abuses of pyramiding ownership, specifically the improper exercise of voting control and undue influence from the threat of redemptions, by Sections 12(d)(1)(A)(i) and (B), which restrict an acquiring fund from owning more than 3 percent of any one investment company and restrict a fund from knowingly selling more than 3 percent of its shares to any one investment company and more than 10 percent to investment companies generally. The Foreign Funds contended that the SEC has no regulatory interest in enforcing the provisions of Section 12(d)(1) from which the Funds sought no-action relief, because these provisions are intended solely to protect U.S. funds and their shareholders, and not foreign funds and their shareholders, from duplicative fees and unnecessary complexity. In this case, the Foreign Funds represented that they would not offer any interests in the U.S. or to U.S. persons.
The SEC granted relief relying on the Foreign Funds’ representations that:
1) Each Foreign Fund will not offer to sell securities to any “U.S. Persons” as defined in Rule 902(k) under Regulation S of the Securities Act of 1933 (Regulation S);
2) Each Foreign Fund will sell securities only in the United States consistent with the definition of “Offshore Transactions” as defined in Regulation S;
3) Each Foreign Fund will hold no more than 3 percent ownership of any one U.S. Fund after acquisition pursuant to Section 12(d)(1)(A)(i); and
4) Each U.S. Fund will not knowingly sell more than 3 percent of its outstanding voting stock to any single investment company or more than 10 percent to investment companies generally pursuant to Section 12(d)(1)(B).
The SEC’s ruling presents an opportunity for U.S. registered investment companies to seek investments from foreign funds that have previously been unable to gain significant exposure to the U.S. securities markets through a single investment vehicle because of the limitations of Sections 12(d)(1)(A)(ii) and (iii). Domestic registered investment companies seeking investments from foreign funds must still comply with Section 12(d) (1)(B) and should monitor closely the amount of their voting securities that will be held by investment companies, including foreign investment companies, after the sale of their securities.
A copy of the No-Action Letter is available at http://www.sec.gov/divisions/investment/noaction/2009/dechert080409.htm.