SEC Staff Greenlights 3-Tier Fund-of-Funds Structure
The SEC staff has issued no-action relief allowing a 3-tier fund-of-funds structure. The relief allows the underlying funds in a fund-of-funds structure to invest in a third-tier central fund created to invest in certain floating rate instruments. The applicant intends the structure for more efficient portfolio management so that the investing funds would not have to engage in direct investing in the instruments. All three tiers would be part of the same family of investment companies but the structure would not otherwise qualify for the exemption described in Section 12(d)(1)(G) of the Investment Company Act. To utilize the three-tier structure, the manager will waive management fees so that it does not take management fees on the same assets for all 3 tiers and will limit investments by each investing fund such that no more than 5% of its assets will be invested in the central fund and no more than 10% of its assets will be invested in all investment companies.
OUR TAKE: The staff has generally resisted three-tier fund-of-funds structures due to fee-layering concerns. This is a bit of a breakthrough for affiliated fund-of-funds structures.