Alert June 14, 2011

SEC Staff Issues No-Action Letter Providing Relief to Investment Adviser and Mutual Funds Seeking to Invest in Certain Foreign Funds in Excess of the Limits of Section 12(d)(1)(A) of the Investment Company Act of 1940

The staff of the SEC’s Division of Investment Management (the “staff”) issued a no-action letter indicating that it would not recommend enforcement action under Section 12(d)(1)(A) of the Investment Company Act of 1940, as amended (the “1940 Act”) against a registered investment adviser (the “Adviser”) or the registered investment companies it advises or subadvises (each a “Fund” and together, the “Funds”) if a Fund invests in excess of the limits prescribed by Section 12(d)(1)(A) of the 1940 Act in shares of certain foreign investment companies that do not rely on an exclusion from the definition of investment company in the 1940 Act (the “Foreign Funds”).  The Funds focus on investments in listed private equity companies, i.e., companies that (a) have a substantial portion of their assets invested in or exposed to private companies or (b) have a stated intention of doing so.  Because of the limited number of listed private equity companies, the Adviser believes that allowing the Funds to invest in Foreign Funds in excess of the Section 12(d)(1)(A) limits will give the Funds greater flexibility to pursue their investment objectives.  The Foreign Funds are organized outside the U.S. and are traded on one or more organized securities exchanges located outside the U.S.  The Funds acquire shares of Foreign Funds exclusively through secondary market transactions that are “offshore transactions” as defined in Regulation S under the Securities Act of 1933.

Section 12(d)(1)(A) of the 1940 Act prohibits a registered investment company, and any companies controlled by such company, from purchasing or otherwise acquiring any security issued by any other investment company if, immediately after such purchase, (i) the fund owns in the aggregate more than three percent of the outstanding voting stock of the acquired company, (ii) securities of the acquired company represent more than five percent of the assets of the acquiring company, or (iii) securities issued by investment companies represent more than ten percent of the assets of the acquiring company.

In its request for relief, the Adviser noted that the Funds that invest in shares of the Foreign Funds currently comply with the provisions of Section 12(d)(1)(F) of the 1940 Act with respect to such investments.  Section 12(d)(1)(F) of the 1940 Act provides that the limits of Section 12(d)(1) shall not apply to securities of other investment companies purchased or otherwise acquired by a registered investment company if (i) immediately after such purchase or other acquisition not more than three percent of the outstanding voting stock of such issuer is owned by such registered investment company and all affiliated persons of such registered investment company, (ii) certain criteria regarding sales loads are met, and (iii) voting rights are exercised in a manner consistent with Section 12(d)(1)(E). 

In granting the requested relief, the staff cited representations from the Adviser that each Fund will comply with Rule 12d1-3 of the 1940 Act as if it were relying on Section 12(d)(1)(F) with respect to its investments in the Foreign Funds.  Rule 12d1-3 provides that a registered investment company that relies on Section 12(d)(1)(F) of the 1940 Act to acquire shares of an investment company may offer or sell its shares at a price that includes a sales load of more than 1.5 percent if any sales charges and service fees charged with respect to the acquiring investment company’s shares do not exceed the limits set forth in Rule 2830 of the Conduct Rules of the NASD applicable to a fund of funds.