The Securities and Exchange Commission has noticed a proposed exemptive order that would liberalize the ability of mutual funds and unit investment trusts to invest in other funds and UITs in the same group of investment companies. Release No. 28009, 72 Fed. Reg. 56813 (Sept. 28, 2007). Prior to 2006, mutual funds and UITs could invest unlimited amounts in other mutual funds and UITs in the same group of investment companies under an exemption in the Investment Company Act of 1940, but the only other investments that the funds and UITs could hold was Government securities and short-term paper. The SEC last year adopted Rule 12d1-2 under the 1940 Act, generally allowing mutual funds and UITs that invest under this exemption to hold securities of all types. But the rule's limitation of fund holdings to "securities" meant that the acquiring funds might not be able to invest in futures contracts, swap agreements, and other derivatives and financial instruments that are not "securities." The inability to invest in these instruments made Rule 12d1-2 much less attractive for many funds. The SEC's adopting release gave no explanation of the reason for excluding instruments that are not securities, and some securities lawyers speculated that the omission was an oversight.
The proposed exemptive order would allow mutual funds and UITs investing in reliance on Rule 12d1-2 to include derivatives and other financial instruments that are not "securities" in their portfolios. The proposed order shows that the SEC recognizes the concern and is willing to grant exemptive orders to address it. Significantly, the SEC did not amend its rule or provide no-action guidance that would have been applicable to all funds. Instead, each group of investment companies that is interested in this relief will have to seek and obtain its own exemptive order. However, that should not be difficult to do, now that there is an existing exemptive order application that can be used as a blueprint.
The SEC notice is available in the Federal Register or on the SEC website at
John M. Baker <JMB@...
Stradley Ronon Stevens & Young, LLP http://www.stradley.com
1220 19th Street NW, Suite 600
Washington DC 20036
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