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Fund Administrator Liable for Miscalculating Fund NAV

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.


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.