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SEC OKs ‘Breakthrough’ 3-Tier Fund-of-Funds Structure

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The Securities and Exchange Commission issued a no-action letter recently allowing a three-tier fund-of-funds structure, a move that one compliance firm says is a “breakthrough.”

In its April 3 no-action letter to Franklin Templeton Investments, SEC staff in the agency’s Investment Management Division 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.   

Cipperman Compliance Services notes that the SEC “has generally resisted three-tier fund-of-funds structures due to fee-layering concerns.” The no-action letter relief is “a bit of a breakthrough for affiliated fund-of-funds structures.”

According to the letter, Franklin Templeton 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,” Cipperman explains. “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.”


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