SEC Staff Allows More Flexible Fund-of-Funds Structures
The staff of the SEC’s Division of Investment Management has provided no-action relief that allows open-end investment companies to invest in closed-end investment companies that hold themselves out as part of the same investment group. Without the no-action relief, a narrow reading of Section 12(d)(1)(G) and Rule 12d1-2 of the Investment Company Act would only allow open-end funds to invest in related funds only if such funds were open-end. In general, Section 12(d)(1) limits fund-of-funds structures, absent specific conditions, because fund-of-funds have the potential to create complex products with layered fees and conflicts of interest.
OUR TAKE: This no-action relief provides practical flexibility to create fund-of-funds structures within the same group of companies, which should save costs and avoid artificial product engineering.