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SEC Allows Cross-Border Fund-of-Funds Structure

The staff of the Division of Investment Management has granted conditional no-action relief that allows a foreign feeder fund to invest in an affiliated U.S. registered master fund.  The arrangement is intended to allow broader global distribution of U.S. investment products.  Without no-action relief, such a structure would be prohibited by Section 12(d) of the Investment Company Act, which significantly limits fund-of-funds schemes.  The no-action relief allows the foreign feeder fund to engage in limited currency and index hedging.  Conditions include the following: (a) the foreign feeder manager will make its books and records available for SEC examination; (b) the foreign feeder fund must be organized in a jurisdiction that has entered into an SEC cooperation agreement; (c) the feeder fund cannot sell securities to U.S. investors; and (d) the hedging activities will only be permitted for currency and index hedging related to the master fund’s index strategy.

OUR TAKE: This no-action letter offers significant structuring flexibility for global distribution of U.S. based mutual funds.  It also provides a good primer on the limits of cross-border fund-of-funds structures under the Investment Company Act.


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