The SEC fined and censured a fund administrator for causing a money market fund’s violations of the Investment Company Act. The SEC asserts that the administrator used a flawed valuation methodology that resulted in violations of Rule 2a-7. The fund was used as a vehicle to invest securities lending collateral for the benefit of affiliated mutual funds. Because the fund failed Rule 2a-7, the investments by the registered funds violated the affiliated transaction rules.
OUR TAKE: As was the case with another recent case against a fund administrator, the SEC will broadly interpret the securities laws to hold non-registrant service providers accountable as gatekeepers of the securities markets.
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.