Investment Company Act of 1940 — Section 12(d)(1)
Dechert LLP

August 24, 2009

RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 20098241028

This letter replaces the letter that we issued to you on August 4, 2009 ("Original Letter").¹ We are replacing the Original Letter to make an addition to footnote 7 of that letter (which corresponds to footnote 8 of this letter). This letter does not, however, alter the relief granted in the Original Letter. This letter should be deemed to be issued as of the date of the Original Letter, August 4, 2009.

In your letter dated August 3, 2009, you request our assurance that we would not recommend enforcement action to the Securities and Exchange Commission (the "Commission") under Sections 12(d)(1)(A)(ii) and (iii) of the Investment Company Act of 1940 (the "1940 Act") against a foreign investment company, as described further below (a "Foreign Fund"), if a Foreign Fund acquires shares of a U.S. investment company registered under the 1940 Act (a "U.S. Fund") in excess of the limitations of Sections 12(d)(1)(A)(ii) and (iii) of the 1940 Act.

FACTS

You state that you represent various investment advisers and sponsors to U.S. Funds. You state that these U.S. Funds have been approached by a number of Foreign Funds seeking to invest in the U.S. Funds in excess of the limits imposed by Sections 12(d)(1)(A)(ii) and (iii). You state that the Foreign Funds are investment companies as defined in Section 3(a)(1)(A) of the 1940 Act. You state that the Foreign Funds are organized outside of the United States. You represent that they will not offer or sell their securities in the United States or to any U.S. Person, as that term is defined in Rule 902(k) under Regulation S under the Securities Act of 1933 (the "1933 Act").² You represent that the Foreign Funds' transactions with their shareholders will be consistent with the definition of "offshore transactions" in Regulation S.³ You represent that the Foreign Funds would comply with Section 12(d)(1)(A)(i) and the U.S. Funds would continue to comply with all of the provisions of Section 12(d)(1)(B). You seek relief to permit investments by the Foreign Funds in the U.S. Funds in excess of the limits of Sections 12(d)(1)(A)(ii) and (iii) of the 1940 Act.

ANALYSIS

Section 12(d)(1)(A) of the 1940 Act, in relevant part, generally prohibits an investment company and companies it controls (including unregistered funds) from: (i) acquiring more than three percent of a registered investment company's outstanding voting securities; (ii) investing more than five percent of its total assets in any one acquired registered investment company; or (iii) investing more than ten percent of its total assets in all acquired investment companies.

Similarly, Section 12(d)(1)(B) of the 1940 Act, in relevant part, generally prohibits a registered open-end investment company, its principal underwriter and any other broker-dealer from selling securities to any investment company or companies it controls (including unregistered funds) if the sale will cause: (i) the acquiring investment company, together with companies it controls, to own more than three percent of the acquired registered investment company's outstanding voting securities; or (ii) more than ten percent of the acquired registered investment company's voting securities to be owned by investment companies generally.

You note that Congress enacted Section 12(d)(1) of the 1940 Act to prevent the abuses inherent in the pyramiding of ownership caused by one investment company owning the shares of another.⁴ As originally enacted, the proscriptions of Section 12(d)(1) did not apply to an unregistered investment company or foreign investment company's purchase of securities of domestic registered investment companies. You state that Congress amended Section 12(d)(1) in 1970 to limit further the pyramiding of investment companies and to apply new limitations on investments by unregistered investment companies, including unregistered foreign investment companies.⁵ You note that the Commission's 1966 report to Congress, analyzing the public policy implications of fund holding companies ("PPI Report"), described the Commission's concerns about the rapid growth and abusive practices of Fund of Funds, Ltd., an unregistered fund operated in Geneva, Switzerland, which was marketed to members of the U.S. military stationed overseas and had controlling interests in U.S. registered funds.⁶

You note that the PPI Report described a number of abuses relating to fund holding companies. The abuses included: (1) the pyramiding of voting control in the hands of persons that owned only a nominal stake in the acquired company; (2) the ability of the acquiring company to exercise undue influence over the adviser of the acquired company through the threat of large-scale redemptions and the concomitant loss of advisory fees received by that adviser;⁷ (3) the difficulty of investors appraising the true value of their investments due to the complex structures involved; and (4) the layering of sales charges, advisory fees, and administrative costs.

You believe, however, that permitting the Foreign Funds to invest in U.S. Funds beyond the restrictions imposed by Sections 12(d)(1)(A)(ii) and (iii) of the 1940 Act under the facts and representations in your letter does not present the potential for harm that Congress sought to address in its 1970 amendments to Section 12(d)(1). You believe that the first two concerns described above, the improper exercise of voting control and undue influence through the threat of redemptions, involve overreaching of an acquired fund and its shareholders. You argue that these concerns are addressed adequately with respect to the U.S. Funds and their shareholders under your facts by compliance with Sections 12(d)(1)(A)(i) and (B).⁸

You argue that the other concerns described above, duplicative fees and unnecessary complexity, involve harm to an acquiring fund and its shareholders. You assert that the Commission has no significant regulatory interest in protecting the acquiring funds and their shareholders from such abuses in this case. In support of your contention, you represent that the Foreign Funds will not offer or sell their shares in the United States or to U.S. Persons and that the Foreign Funds' transactions with their shareholders will be consistent with the definition of "offshore transactions" in Regulation S.

We agree. Based upon the facts and representations that are set forth in your letter, we would not recommend enforcement action to the Commission against the Foreign Funds under Sections 12(d)(1)(A)(ii) and (iii) of the 1940 Act if the Foreign Funds purchase securities issued by U.S. Funds in excess of the limitations imposed by Sections 12(d)(1)(A)(ii) and (iii). In particular, we rely on your representations that:

• each Foreign Fund will comply with the restrictions of Section 12(d)(1)(A)(i) of the 1940 Act;

• each Foreign Fund will not offer or sell securities in the United States or to any U.S. Person;

• each Foreign Fund's transactions with its shareholders will be consistent with the definition of "offshore transactions" in Regulation S under the 1933 Act; and

• each U.S. Fund will comply with the restrictions of Section 12(d)(1)(B) of the 1940 Act.

Our letter provides our position on enforcement action only, and does not provide any legal conclusions on the issues presented. Because our position is based on all of the facts and representations made in your letter, you should note that any different facts or circumstances might require a different conclusion.

Holly Hunter-Ceci
Senior Counsel

Endnotes

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1 Dechert LLP, IM Ref. No. 2008251626 (pub. avail. Aug. 4, 2009).

2 Rule 902(k) under Regulation S defines "U.S. Person" to include: (i) any natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. person; (iv) any trust of which any trustee is a U.S. person; (v) any agency or branch of a foreign entity located in the United States; (vi) any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and (viii) any partnership or corporation if: (a) organized or incorporated under the laws of any foreign jurisdiction; and (b) formed by a U.S. person principally for the purpose of investing in securities not registered under the 1933 Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) under Regulation D under the 1933 Act) who are not natural persons, estates or trusts.

3 Rule 902(h) under Regulation S defines "offshore transaction." Under Rule 902(h)(2), offers and sales of securities specifically targeted at identifiable groups of U.S. citizens abroad, such as members of the U.S. armed forces serving overseas, shall not be deemed to be made in offshore transactions.

4 See Investment Trusts and Investment Companies: Hearings Before House Subcomm. of the Comm. on Interstate and Foreign Commerce on H.R. 10065, 76th Cong., 3d Sess. 112-14 (1940) (statement of David Schenker, Chief Counsel, Investment Trust Study, Commission).

5 See Investment Company Amendments of 1970, H.R. Rep. No. 1382, 91st Cong., 2d Sess., 4111-4206 at 4120. See also Investment Company Amendments Act of 1970, Pub. L. No. 91-547, §7, 84 Stat. 1417 (codified at 15 U.S.C. 80a-12(d)(1)(a)).

6 See Public Policy Implications of Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d Sess. 312-324 (1966) (the "PPI Report").

7 The PPI Report specifically discussed potential redemption issues for funds which, like the Foreign Funds at issue here, were organized outside of the United States and had shareholders residing outside of the United States. See the PPI Report, id. at p. 318.

8 Compare Sections 3(c)(1) and 3(c)(7)(D) of the 1940 Act (generally requiring compliance with Sections 12(d)(1)(A)(i) and (B)(i) for funds that rely on the exclusion from the definition of investment company set forth in Sections 3(c)(1) or 3(c)(7) of the 1940 Act with respect to their investments in U.S. registered investment companies). Under certain circumstances, a foreign fund may make a private U.S. offer in reliance on the exclusion from the definition of "investment company" in Sections 3(c)(1) or 3(c)(7) of the 1940 Act. Investment Advisers Act Rel. No. 1710 (Mar. 23, 1998); see also Investment Advisers Act Rel. No. 2333, at footnote 226 (Dec. 2, 2004) (apparently vacated on other grounds by Goldstein v. S.E.C., 451 F.3d 873 (D.C. Cir. 2006)). Such a foreign fund is subject to Section 12(d)(1) to the same extent as a U.S. 3(c)(1) or 3(c)(7) fund.

Incoming Letter

The Incoming Letter is in Acrobat format.