No-Action for Master-(Middle)-Feeder Structure

WASHINGTON ( U.S. Securities and Exchange Commission's division of investment management has issued no-action relief assuring a Caymans company that its involvement as the middle tier in a three-tier master-feeder arrangement won't cause that unit to recommend that the SEC take enforcement action under the Investment Company Act of 1940.

Richard Horowitz, a partner at New York-based Clifford Chance LLP, wrote the division requesting this relief July 7. He explained that the purpose of the three tiers is to enable retirement plans and other tax-exempt or tax-deferred entities to invest in the Master Fund via the Cayman Fund without incurring unrelated business taxable income.

AIP Absolute Return Fund STS is the "top tier" fund. It will invest only in AIP Absolute Return Fund LDC Company, the Caymans fund, "which will, in turn, invest substantially all its assets in, and acquire securities of, Alternative Investment Partners Absolute Return Fund," which Mr. Horowitz through the remainder of the letter simply called the Master Fund, a closed-end investment company that is registered under the 1940 act, and that is advised by Morgan Stanley AIP GP LP.

Mr. Horowitz pointed out that a somewhat similar three-tier master-feeder structure received a no-action letter two years ago, with regard to Man-Glenwood Lexington TEI LLC and Man-Glenwood Lexington TEI LDC. This case was a bit different, though, in that the top-tier fund won't necessarily be the only investor in the Cayman Fund, which may also sell interests in itself to non-U.S. investors.

The no-action letter was signed on July 10 by Susan M. Olson, senior counsel at the division of investment management, but only posted on the SEC web site on July 26. She invoked Sect. 12(d)(1)(E) of the 1940 Act, which is the federal law's primer on master-feeder funds and their structures.

She also wrote that the division believes the proposed arrangement will comply with that section so long as it operates within the following parameters:

?? 1/2 The principal underwriter of both the master fund and the top-tier fund, Morgan Stanley Distribution Inc., is a broker or dealer registered as such with the SEC;

?? 1/2 The securities issued by the middle-tier offshore fund will be the only securities help by the top-tier fund and, in turn, the securities issued by the master fund will be the only investment securities held by the middle tier;

?? 1/2 The middle tier fund is "required to seek instructions from the shareholders of the Top-Tier Fund and the Non-U.S. Investors, with regard to the voting of all proxies with respect to the AIP Master Fund's securities that are held by the [middle tier] Fund and to vote such proxies only in accordance with such instructions;"

?? 1/2 Likewise, the top-tier fund will be required to seek instructions from its own shareholders with regard to the voting of all proxies in connection with the middle-tier fund's securities that it holds;

?? 1/2 Any substitution of securities of the master fund by the middle-tier fund shall require SEC approval.

Ms. Olson cautioned, as is customary for such letters, that "any different facts and representations" than those already spelled out in Mr. Horowitz's nine-page letter "might require a different conclusion."

Contact Bob Keane with questions or comments at

Reprints Discuss this story
We welcome your thoughts. Please allow time for your contribution to be approved and posted. Thank you.

Most Recent Videos

Video Library ››