August 19, 1997

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Request for Comments on Rule 24f-2 and Form 24F-2
File No. S7-19-97

Dear Sir:

I am pleased to have this opportunity to comment on proposed amendments to Rule 24f-2 and Form 24F-2 under the Investment Company Act of 1940 (the "1940 Act"), as requested in Release No. IC-22747, dated July 14, 1997 ("Release"). I commend the Commission and its staff for their efforts in implementing the provisions of the National Securities Markets Improvement Act of 1996 ("1996 Amendments").

I am an attorney practicing in the investment management area. My law firm's clients, located in the United States and abroad, include open-end and closed-end funds, investment company boards of directors and independent directors, investment advisers, broker-dealers, insurance companies and investment company underwriters, administrators, custodians and transfer agents. In developing these comments I have, of course, been mindful of the experiences and needs of my firm's clients. My comments, however, reflect my personal views. They have not been reviewed by my firm or its clients and they do not necessarily reflect the opinions of my firm or its clients.

In short, I favor the proposed amendments as far as they go. I respectfully suggest, however, that the Commission examine, or reexamine, and address one additional issue: the waiver of registration fees for shares of investment companies sold to other registered investment companies as part of a two-tiered mutual fund structure, such as a fund of funds or master-feeder arrangement.
I. Shares Sold to a Fund of Funds

For the reasons discussed below, I believe the Commission should waive the registration fee for shares sold exclusively to a fund of funds. Although I understand that the staff has in the past opposed such a waiver, I believe that the issue should be reexamined in light of the public policy concerns discussed below and the intent of the 1996 Amendments.

A. Public Policy

Section 12(d)(1) of the 1940 Act reflects Congress' concern with, among other things, the layering of costs to investors and an unfavorable cost/benefit analysis which diminishes investor returns. / 1 The restriction on funds of funds arose in part due to Congress' concerns about investors paying duplicative expenses. / 2 Expenses are paid at the underlying fund level, as well as at the holding company (fund of funds) level. Such expenses include advisory, sales and distribution expenses, as well as SEC registration fees under the Securities Act of 1933 ("1933 Act").

Upon reexamination of the fund of funds restriction in 1995, Congress noted that advisory expenses where not being duplicated. / 3 In fact, rather than unnecessary duplication, a fund of funds provides the investor with an extra level of professional money management expertise. The Manager of a fund of funds actively allocates assets among the underlying funds. / 4

Furthermore, although investors in a fund of funds may be subject to a second layer of sales load or distribution expenses, the 1996 Amendments impose strict limits on such charges. Under the 1996 Amendments, either the acquiring fund does not pay sales load or distribution related fees with respect to shares of the acquired fund, or the aggregate of any sales load and distribution related fees charged by the acquiring fund and the acquired fund, must not exceed the limits prescribed by the National Association of Securities Dealers, Inc. ("NASD"), or the Securities and Exchange Commission. / 5 Consequently, sales and distribution charges in a fund of fund arrangement will never exceed the limit that otherwise could be charged at any single level. Thus, Congress determined that the duplicative sales and distribution expenses concerns underlying Section 12(d)(1) will not be violated.

In stark contrast to advisory expenses and sales/distribution fees, 1933 Act registration fees, are layered in a fund of funds arrangement. As a result, shareholders of a fund of funds are paying duplicative expenses, not to the fund's adviser, but to the SEC.

B. Legislative History

A second argument for abrogating the duplication of 1933 Act registration fees in a fund of funds arrangement arises from the legislative history of the 1996 Amendments. When proposing the 1996 Amendments, Congressman Jack Fields (R-Texas) noted that no prohibitions existed on an asset allocation program investing in funds. / 6 Yet, Section 12(d)(1) prior to the 1996 amendments, significantly inhibited the ability of an SEC registered investment company to invest in the securities of other investment companies. Congressman Fields argued that it was unfair to allow greater flexibility to the less regulated entity. / 7 This argument set the stage for the 1996 legislation that would liberalize the provision of Section 12(d) that prohibits one mutual fund from investing in another. / 8

Congressman Fields' argument that asset allocation programs should not be favored over registered investment companies lends support to the proposition that fund of funds investors should not pay duplicative registration fees. Although the similarities between an asset allocation program and a fund of funds arrangement are remarkable, the mutual fund investing in other funds is subjected to duplicative 1933 Act registration fees, whereas the less regulated asset allocation program is not. Since Congressman Fields' statement indicates that registered mutual funds should not be treated less favorably than unregistered asset allocation programs, it follows that shareholders of a registered fund of funds should not be subject to two layers of 1933 Act registration fees.

C. The Variable Insurance Product Exception

A third argument for not requiring a fund of funds to pay registration fees stems from the comparison of fund of funds to other two-tier structures. Specifically, a fund of funds arrangement is comparable to (1) an unregistered asset allocation program, as discussed above, (2) an arrangement in which insurance contract premiums are pooled in an insurance company separate account and invested in an underlying investment company; and (3) a master-feeder or "hub and spoke" arrangement.

Variable insurance contracts typically are offered through two tier arrangements in which contract premiums are pooled in a separate account and invested in an underlying company. / 9 The separate accounts are generally registered as investment companies. / 10 Pursuant to Investment Company Act Release No. 21332 (Sept. 1, 1995), underlying funds are not required to pay 1933 Act registration fees on securities that they sell to registered separate accounts. The purpose of not requiring registration fees is to prevent payment of registration fees under the 1933 Act for the same aggregate proceeds from investors in variable insurance products that results in "double counting" of assets upon which such fees are paid. / 11

Also similar to a variable insurance product and comparable to the fund of funds arrangement, a master-feeder structure involves the creation of a two-tier mutual fund arrangement. First, a master fund is established to invest in an array of portfolio securities. Then, the master fund offers its own securities to feeder or spoke funds. The feeder funds, in turn, offer their securities to investors. Traditionally, the master fund of a master-feeder arrangement does not register under the 1933 Act. Consequently, the master fund does not pay 1933 Act registration fees. Thus, in a typical master fund-feeder fund structure, unlike the fund of funds, there is no duplication of such fees. However, if a master fund were registered under the 1933 Act, its shares would arguably be subject to Section 6(b) registration fees. For the reasons discussed herein, I believe shares of a 1933 Act registered master fund sold to a feeder fund should always be exempt from 1933 Act registration fees.

Comparison of a fund of funds to the variable insurance product and master-feeder fund structure reveals the remarkable similarity between these two-tier arrangements. The aforementioned arrangements share similar structures, as well as uniform goals (diversification of fund investments through a single portfolio). / 12

II. Conclusion

In amending Section 12(d) of the 1940 Act, Congress neglected to address the issue of duplication of registration fees that arises in a fund of funds arrangement. Nonetheless, shareholders of a fund of funds should be relieved of duplicative registration fees. First, duplicative registration fees violate the public policy concerns of Section 12(d), namely the layering of costs. Second, the legislative history behind the 1996 Amendments to the 1940 Act indicates that Congress did not intend for registered mutual funds to be treated less favorably than unregistered asset allocation programs. Third, the reasoning that has persuaded the Commission to permit the waiver of fees in the variable products structure should similarly apply to both fund of funds and master-feeder arrangements. For your convenience, I have attached a suggested modification to the amendments to Form 24F-2.

I appreciate the opportunity to comment on this proposal.


W. John McGuire


Proposed Amendment to Form 24f-2


C. Computation of Registration Fee

2. Special Rule for Two-Tiered Arrangements - the sale price of securities sold to an unmanaged separate account, a feeder fund in a master-feeder arrangement, or a fund of funds operating pursuant to Section 12(d)(1)(G) or an order of the Commission (collectively, "Two-Tiered Arrangements"), that offers interests that are registered under the Securities Act and on which a registration fee has been or will be paid, may be excluded from the sale price of securities reported in Item 5(i). If the issuer chooses to exclude the sale price of these securities from Item 5(i), the issuer may not use securities redeemed or repurchased from those Two-Tiered Arrangements for purposes of determining the redemption or repurchase price of securities in Items 5(ii) and 5(iii).

1 / See Investment Company Act Rel. No. 17,357, [1989-1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 84,513 (Feb. 26, 1990); 141 Cong. Rec. E868 (daily ed. April 7, 1995) (statement of Rep. Fields).

2 / See Investment Company Act Rel. No. 17,357, [1989-1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 84,513 (Feb. 26, 1990); 141 Cong. Rec. E868 (daily ed. April 7, 1995) (statement of Rep. Fields).

3 / See 141 Cong. Rec. E868 (daily ed. April 7, 1995) (statement of Rep. Fields).

4 / See Report of the Securities and Exchange Commission on the Public Policy Implication of Investment Company Growth: Hearings on H.R. 2337 Before the House Comm. on Interstate and Foreign Commerce , 89th Cong., 2d Sess. 321 (1966) [hereinafter PPI Report] (noting that the review and supervision of the managers of a fund of funds over the profession management of their portfolio companies may seriously disrupt the action of the registered portfolio funds).

5 / See 15 U.S.C. § 80a-12(d)(1)(G)(i)(III)(bb).

6 / See Fields Outlines Congressional Rethinking of Mutual Fund Regulation, THE INVESTMENT LAWYER, March 1995, at 11. While Congressman Fields' statement is not entirely correct, the adoption of Rule 3a-4 under the 1940 Act has significantly lessened the restrictions on mutual fund asset allocation programs.

7 / See id.

8 / See id.

9 / See Investment Company Act Rel. No. 21332 at 5 (September 1, 1995).

10 / See id.

11 / See id.

12 / Obviously, I concede that there are differences between a fund of funds and the other two-tier structures, variable insurance products and master-feeder funds. For example, in both the variable insurance products and master-feeder arrangements, the acquiring fund invests in only one other fund. Conversely, a fund of funds invests in multiple underlying funds.