December 28, 2018
File No. S7-27-18
Thanks for your efforts on this long overdue rulemaking.
By biggest concerns relating to fund of funds is the layering of fees and recommend the following fixes.
If an underlying fund pays 12b-1 fees, service fees, or revenue sharing, these payments should be made into the assets of the fund of funds (and not directed to the advisor or other service providers).
Do not let funds use fund-of-funds to get around limits on 12b-1 fees and advisory fees. If the max advisory fee is 50 BPs, do not let the fund hold an affiliated underlying fund so that the advisory can circumvent that 50BPs limit.
Acquired fund fees and expenses (AFFE) should:
o Includes the fees associated with business development companies. Afterall, they charge exorbitant fees that should not be hidden from investors. (e.g., Shelton BDC Income Fund has AFFEE over 9.00%).
o Reflect any AFFE of the underlying fund. If a F-o-F is part of a multi-tier structure, all of the underlying funds should be reflected. You should not be permitted to bury fees using layers. This should be easy enough since the underlying funds prospectus records its own AFFE.
o Be reflected in the fund fees should in Shareholder Reports.
o Reflect synthetic fund of fund fees (such as SWAPs and future tied to the performance of underlying funds). Afterall, even if the Fund-of-fund does not bear the fees, it does feel the drag of those fees. It will also prevent funds from using a less efficient investment structure solely to avoid having fees appear in the fee table.
o Fix the formula to fairly reflect AFFE in year 1. (Why was this even a question?)
In addition, the Commission should establish clear requirements for controlled foreign corporations (a type of fund of funds) in the rulemaking. The Commission should also clarify how fund of funds operate with respect to the names rule (35d-1), diversification, concentration, leverage, and other fund policies.
Thank you.