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Digital Subscriptions > The Hedge Fund Journal > Issue 122 - May 2017 > SEC Permits Certain “Master-Feeder” Arrangements

SEC Permits Certain “Master-Feeder” Arrangements

Although obstacles remain


The Staff of the US Securities and Exchange Commission (SEC) on March 8, 2017 issued a no-action letter (Staff Letter) in response to a request from Dechert LLP for assurance under Section 12(d)(1) of the Investment Company Act of 1940 (1940 Act).1 The Staff Letter provides no-action assurance to global investment managers and sponsors seeking to offer investment products across non-US jurisdictions using a “master-feeder” arrangement that may conflict with certain “fund of funds” restrictions under the 1940 Act. More specifically, the Staff Letter contemplates non-US feeder funds (Non-US Feeder Funds) investing in a single US open-end investment company registered under the 1940 Act (US Master Fund), in excess of the investment restrictions under Section 12(d)(1) of the 1940 Act. The Non-US Feeder Funds would also be permitted to invest in Foreign Currency Instruments (as defined below) that could, among other things, enable the shareholders of a Non-US Feeder Fund to achieve a return on their investment, as measured in the Designated Currency (as defined below), similar to that of the other shareholders of the US Master Fund, as measured in US Dollars, by reducing the impact of currency fluctuations between the Designated Currency and the US Dollar.

The Staff Letter is significant because it removes obstacles under the 1940 Act to efficiently offering a “master-feeder” investment product across non-US jurisdictions, with off-shore feeder funds and a single US registered master fund. However, a number of other obstacles remain. These include legal restrictions in non-US jurisdictions that may limit certain types of Non-US Feeder Funds with respect to investing in other investment funds (including US Master Funds). An investment in a US Master Fund by a Non-US Feeder Fund may also have adverse tax consequences under the Internal Revenue Code (Code), depending on the structure and investment strategy of the US Master Fund.


Section 12(d)(1) of the 1940 Act is designed to address potential abuses and concerns arising from certain “fund of funds” arrangements.2 Generally, under Section 12(d)(1)(A), the acquisition by a registered or unregistered investment company (acquiring fund) of shares of any registered investment company (underlying fund) is limited, at the time of purchase, to:

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