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May 8, 1991
TO: TAX MEMBERS NO. 13-91
RE: PRIVATE LETTER RULING ON "HUB AND SPOKE" STRUCTURE
__________________________________________________________
Enclosed is a copy of one of thirteen virtually identical
Private Letter Rulings regarding what is believed to be the
Signature Financial "Hub and Spoke" structure. Hub and Spoke is
intended as a way for banks to launch a family of funds for
different customer bases without needing a Securities and
Exchange Commission exemptive order.
The hub in this type of structure is the central portfolio,
at which level all investment advisory, management and custodial
fees are charged. The spokes are the separate funds for each
market segment, each of which invests substantially all of its
assets in the hub. Shareholder servicing and distribution
charges are assessed against each spoke. The hub will invest its
assets as if Internal Revenue Code ("Code") section 851(b)
applied at the Fund level, even though the hub is not a regulated
investment company.
The hub is a state-law business trust registered under the
Investment Company Act of 1940 (referred to in the ruling as the
"Fund"). The spokes include a series regulated investment
company with eleven portfolios, each of which will invest at
least 90% of its assets in the Fund. (The series company parent
is referred to in the ruling as "B", and one of the eleven series
is referred to as "D".) A subsidiary of the investment
adviser/sponsor also invests in the hub.
The taxpayer made several representations relating to the
Fund's classification under Code section 7701 as a partnership or
as an association taxable as a corporation. First, the interests
in the Fund are nontransferable. Second, all the holders of
interests in the Fund are jointly and severally liable for the
Fund's liabilities and obligations, although they are indemnified
by the Fund to the extent of the Fund's assets for claims in
excess of the holder's proportionate interest in the Fund.
Third, the Fund can be terminated at any time upon the two-thirds
vote of the holders. Finally, the retirement, withdrawal,
resignation, bankruptcy or expulsion of any holder will terminate
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the Fund unless the remaining holders unanimously agree to
continue the Fund.
The Fund also represented, with regard to its request for a
ruling that it would not be a publicly traded partnership under
Code section 7704, that the Fund would have fewer than 500
shareholders and that its interests will not be traded on an
established securities market or issued in a transaction
registered under the Securities Act of 1933.
Based on the above facts, the Service ruled that the Fund
is a partnership for federal income tax purposes, and that it
will not be considered a publicly traded partnership.
We will keep you informed of further developments.
David J. Mangefrida, Jr.
Assistant Counsel - Tax
Attachment
DJM:bmb