SEC ALLOWS ETF FUND-OF-FUNDS
The SEC granted no-action relief to allow an exchange traded fund to seek its investment objective by purchasing shares of underlying ETFs rather than individual securities to achieve its stated investment objective. The underlying ETFs would represent subsets of the stated fund’s index. One significant limitation is that an investment company that invests in the fund-of-funds must do so in compliance with Section 12(d)(1) of the Investment Company Act, which limits purchases in other investment companies based on the 3/5/10 formula. The Applicant argued that the requested relief would help investors by reducing clearing and settlement transactions and ensure a more efficient secondary market.
OUR TAKE: This no-action relief involved investments in affiliated ETFs. We see no principled reason why the same flexibility should not be granted to investments in unaffiliated ETFs.
http://www.sec.gov/divisions/investment/noaction/2008/ishares102208.pdf
In the Our Take comment above you indicate that the relief applies to affiliated investment companies. However, it appears as though the opposite would be true as the 1940 act already provides exemptive relief to allow investment companies to invest an unlimited amount of its assets in other affiliated investment companies under section 12(d)(1)(G)(1)(I). Also, why wouldn’t an investment company that is investing in unaffiliated investment companies be subject to 12d(1)(F) in lieu of 12d-1 limits?