The SEC’s Division of Investment Management on April 3, 2015, said that it will not recommend enforcement proceedings against an investment adviser that structures a three-tier fund allowing certain funds to invest in a “Central Fund” established to create operational efficiencies.
Under the proposed structure, the investment adviser will establish a fund of funds that invests in shares of other funds in the same complex that, in turn, invest assets in a Central Fund. Ordinarily, this arrangement would violate the antipyramiding provisions of Section 12(d)(1) and 17(a) of the 1940 Act, which were designed to prevent potential abuses of control, fee layering, and investor confusion.
The staff said that it would not recommend an enforcement action under the following conditions:
- Shares of the Central Fund would only be sold to other funds within the same complex for reasons of efficient portfolio management;
- The underlying funds’ manager will waive the management fees otherwise payable by the underlying funds in an amount equal to any management fees paid by the Central Fund;
- Shares of the Central Fund would not be subject to a sales load, redemption fee, or distribution fee;
- The underlying funds would have to otherwise comply with Section 12(d)(1)(G) of the 1940 Act; and
- An underlying fund cannot invest more than 5 percent of its assets in the Central Fund, or more than 10 percent of its assets in investment companies, generally.
The staff also required the boards of each fund of fund and underlying fund that invests in the Central Fund (including a majority of the disinterested board members) to consider (i) the reasons for the underlying fund’s proposed investment in the Central Fund, and (ii) the benefits expected to be realized from the investment by the fund of funds or the underlying fund, and by their shareholders.