The staff of the SEC’s Division of Investment Management (the “Staff”) recently provided a further extension of the no-action relief that it has provided in the past from the affiliated transaction prohibitions of Section 17(a) of the Investment Company Act of 1940, as amended (the “1940 Act”), for in-kind transactions undertaken as part of mutual fund restructurings. (For a discussion of the past relief, see the December 4, 2007 Alert discussing Old Mutual Advisor Funds (pub. avail. Nov. 16, 2007) (“Old Mutual”) and the January 16, 2007 Alert discussing Gartmore Variable Insurance Trusts (pub. avail. Dec. 29, 2006)). The most recent no–action relief was provided to permit restructuring transactions in which certain asset allocation funds (the “Asset Allocation Funds”) sought to convert to a fund-of-funds structure relying on Section 12(d)(1)(G) of the 1940 Act through in-kind transfers of their portfolio securities, rather than cash transactions, to avoid the additional costs associated with the latter. (Section 12(d)(1)(G) permits a fund-of-funds structure where the underlying funds are part of the same “group of investment companies.”) The Asset Allocation Funds operate by allocating their assets among various sleeves (each, a “Sleeve”) representing different investment mandates. The proposed conversion of the Asset Allocation Funds to a fund-of-funds structure would result in the Asset Allocation Funds’ various Sleeves investing directly in certain affiliated mutual funds with the same or substantially similar mandates (the “Transferee Funds,” and, together with the Asset Allocation Funds, the “Participating Funds”), in lieu of investing directly in securities. Although similar in many respects to Old Mutual, the Participating Funds’ circumstances also presented several factual differences, including that the portfolio securities in each Sleeve had not been segregated on the books of the Asset Allocation Fund’s custodian, fund accounting agent and sub-administrator.
Conditions. The latest no-action relief is subject to a number of conditions that track those in the Staff’s past no-action letters providing Section 17(a) relief for fund restructuring transactions, including conditions addressing (a) the lack of dilution of shareholder interests, (b) the appropriateness, in type and amount, of the in-kind consideration for investment by a Transferee Fund, (c) valuation procedures, (d) the making of specified findings by the boards of the Participating Funds, (e) the maintenance of certain records, and (f) the investment adviser’s disclosure of any conflicts of interest.Goodwin Procter LLP represented the Participating Funds seeking the no-action relief.